ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING

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Module for

ACC203

Conceptual Framework
and Presentation of Financial
Statements
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Module 1
Conceptual Framework and Presentation of Financial
Statements Week 2 - 3

Introduction

This module tackles the new Conceptual Framework for Financial Reporting and PAS
1 for the Financial Statements Presentation. This discusses the concepts that
underlies the preparation and presentation of financial statements. The Conceptual
Framework sets the concepts and objectives of the general purpose financial
reporting. PAS 1 - Presentation of Financial Statements discusses the specific
accounting standards that are provided by the IASB in presenting the financial
statements.

Learning Objectives

After studying this module, students should be able to:

1. Understand the purpose and content of the Conceptual Framework for
Financial Reporting.
2. Acquire the knowledge and concepts about the Philippine Accounting
Standards (PAS) 1 - Presentation of Financial Statements.

Discussion:

The Conceptual Framework for Financial Reporting

The Conceptual Framework for Financial Reporting is a basic document that

sets objectives and the concepts for general purpose financial reporting. Its
predecessor, Framework for the preparation and presentation of the financial
statements was issued back in 1989. Then in 2010, IASB published the new
document, Conceptual Framework for Financial Reporting.

Content of Conceptual Framework for Financial Reporting

1. The Objective of General Purpose Financial Reporting.
2. Qualitative Characteristics of Useful Financial Information.
3. Financial Statements and the Reporting Entity.
4. The Elements of Financial Statements.
 5. Recognition and Derecognition.
6. Measurement
7. Presentation and Disclosure

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8. Concepts of capital and capital maintenance.

Is the Framework equivalent to the Standard?

Let me please make one point clear: Framework is NOT a Standard itself. Thus if
you wish to decide on the financial reporting of certain transaction, you need to look
into the appropriate standard – IFRS or IAS. Sometimes, it may even happen that the
rules in that IFRS or IAS standard will be contrary to what the Framework says. In this
case, you need to apply the standard, not the Framework.

When should you apply the Framework? In most cases, when there are no specific
rules for your transaction and you need to develop your accounting policy, then you
would look to the Framework as you cannot depart from its basic principles and
definitions.

The objective of general purpose financial reporting

The main objective of general purpose financial reports is to provide the

financial information about the reporting entity that is useful to existing and potential:

● Investors,
● Lenders, and
● Other creditors

to help them make various decisions (e.g. about trading with debt or equity
instruments of a reporting entity).

The objective is NOT about the financial statements itself, instead, this describes
more general purpose reports that should contain the following information about the
reporting entity:
 ● Economic resources and claims (this refers to the financial position); ● The
changes in economic resources and claims resulting from the entity's
financial performance and from other events.

This puts an emphasis on accrual accounting to reflect the financial performance of

an entity. It means that the events should be reflected in the reports in the periods
when the effects of transactions occur, regardless of the related cash flows.
However, the information about past cash flows is very important to
assess management‟s ability to generate future cash flows.

Qualitative characteristics of useful financial information

The Framework describes 2 types of characteristics for financial information to be

useful:

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1. Fundamental, and
2. Enhancing.

Fundamental qualitative characteristics

● Relevance: capable of making a difference in the users‟ decisions. The
financial information is relevant when it has predictive value, confirmatory value,
or both. Materiality is closely related to relevance.
● Faithful representation: The information is faithfully represented when it
is complete, neutral and free from error.

Enhancing qualitative characteristics

● Comparability: Information should be comparable between different entities or
time periods;
● Verifiability: Independent and knowledgeable observers are able to verify
the information;
● Timeliness: Information is available in time to influence the decisions of users; ●
Understandability: Information shall be classified, presented clearly and
concisely.

Financial Statements and the Reporting Entity

Financial Statements
The financial statements should provide the useful information about the reporting entity:
1. In the statement of financial position, by recognizing
 ○ Assets,
○ Liabilities,
○ Equity
2. In the statements of financial performance, by recognizing
○ Income, and
○ Expenses
3. In other statements, by presenting and disclosing information about ○ recognized and
unrecognized assets, liabilities, equity, income and expenses, their nature and
associated risks;
○ Cash flows;
○ Contributions from and distributions to equity holders, and
○ Methods, assumptions, judgements used, and their changes.
Financial statements are always prepared for a specified period of time, or the
reporting period. Normally, the financial statements are prepared on the going
concern assumption. It means that an entity will continue to operate for the
foreseeable future (usually 12 months after the reporting date).

Reporting Entity

Although the term “reporting entity” has been used throughout IFRS for some time,
the Framework introduced it and “made it official” only in 2018. Reporting entity is an
entity who must or chooses to prepare the financial statements. It can be: ● A single
entity – for example, one company;

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● A portion of an entity – for example, a division of one company;

● More than one entity – for example, a parent and its subsidiaries reporting as
a group.

As a result, we have a few types of financial statements:

● Consolidated: a parent and subsidiaries report as a single reporting
entity; ● Unconsolidated: e.g. a parent alone provides reports, or
● Combined: e.g. reporting entity comprises two or more entities not linked by parent-
subsidiary relationship.

Elements of the financial statements

This extensively deals with the definitions of individual elements of the

financial statements. There are five basic elements:
1. Asset = a present economic resource controlled by the entity as a result of
past events;
2. Liability = a present obligation of the entity to transfer an economic resource as
a result of past events;
3. Equity = the residual interest in the assets of the entity after deducting all
its liabilities;
4. Income = increases in assets or decreases in liabilities resulting in increases
in equity, other than contributions from equity holders;
5. Expenses = decreases in assets or increases in liabilities resulting in decreases
in equity, other than distributions to equity holders;

The Framework then discusses each aspect of these definitions and provides
wide guidance on how to decide what element you are dealing with.

Recognition and derecognition

Recognition Simply speaking, recognition means including an element of

financial statements in the financial statements. In other words, if you decide on
recognition, you decide on whether to show this item in the financial statements.
Recognition process links the elements in the financial statements according to the
following formula: Please let me stress here that not all items that meet the definition
of one of the elements listed above are recognized in the financial statements.

The Framework requires recognizing the elements only when the recognition
provides useful information – relevant with faithful representation. Then, the
Framework discusses the relevance, faithful representation, cost constraints and
other aspects in a detail.

Derecognition. it means removal of an asset or liability from the statement of

financial position and normally it happens when the item no longer meets the
definition of an asset or a liability. Again, the Framework discusses the derecognition
in a greater detail.

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Measurement

Measurement means in what amount to recognize asset, liability, piece of equity,

income or expense in your financial statements. Thus, you need to select the
 measurement basis, or the method of quantifying monetary amounts for elements in
the financial statements.

The Framework discusses two basic measurement basis:

1. Historical cost – this measurement is based on the transaction price at the time
of recognition of the element;
2. Current value – it measures the element updated to reflect the conditions at
the measurement date. Here, several methods are included:
○ Fair value;
○ Value in use;
○ Current cost.

Each of these measurement bases is discussed in a greater detail. The Framework

then gives guidance on how to select the appropriate measurement basis and what
factors to consider (especially relevance and faithful representation). What I
personally find really useful is the guidance on measurement of equity. The issue
here is that the equity is defined as “residual after deducting liabilities from assets”
and therefore total carrying amount of equity is not measured directly. Instead, it is
measured exactly by the formula:
● Total carrying amount of all assets, less
● Total carrying amount of all liabilities.

The Framework points out that it can be appropriate to measure some components
of equity directly (e.g. share capital), but it is not possible to measure total equity
directly.

Presentation and disclosure

The main aim of presentation and disclosures is to provide an effective

communication tool in the financial statements.
Effective communication of information in the financial statements requires: ● Focus
on objectives and principles of presentation and disclosure, not on the rules;
● Group similar items and separate dissimilar items;
● Aggregate information, but do not provide unnecessary detail or the opposite –
excessive aggregation to obscure the information.

The Framework discusses classification of assets, liabilities, equity, income

and expenses in greater detail with describing offsetting, aggregation, distinguishing
between profit or loss and other comprehensive income and other related areas.

Concepts of capital and capital maintenance

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The Framework explains two concepts of capital:

1. Financial capital – this is synonymous with the net assets or equity of the entity.
Under the financial maintenance concept, the profit is earned only when
the amount of net assets at the end of the period is greater than the amount of
net assets in the beginning, after excluding contributions from and distributions
to equity holders.
The financial capital maintenance can be measured either in
a. Nominal monetary units, or
b. Units of constant purchasing power.
2. Physical capital – this is the productive capacity of the entity based on,
for example, units of output per day.
Here the profit is earned if physical productive capacity increases during
the period, after excluding the movements with equity holders.

The main difference between these concepts is how the entity treats the effects
of changes in prices in assets and liabilities.

PAS 1: Presentation of Financial Statements

Statement of Financial Position

1. Statement of Profit or Loss and Other Comprehensive Income
2. Statement of Changes in Equity
3. Statement of Cash Flow
4. Notes to the Financial Statement

Terms to Remember:
1. Financial Statements are written records that convey the business activities
and the financial performance of a company.
2. General Purpose Financial Statements are those intended to meet the needs
of users who are not in a position to require an entity to prepare reports tailored
to their particular information needs.
3. Objective of Financial Statements is to provide information about the
financial position, financial performance and cash flows of an entity that is useful
to a wide range of users in making economic decisions.
4. Frequency of Reporting states that financial statements shall be presented at
least annually.
5. Judgement is used to determine the best method of presenting information. 6.
Statement of Financial Position is a formal statement showing the three
elements comprising financial position, namely assets, liabilities and equity. It is
 used to evaluate such factors as liquidity, solvency and the need of the entity for
additional financing.

Asset

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- is a present economic resource controlled by the entity as a result of past

events. An economic resource is a right that has the potential to produce
economic benefits.

Classification of assets

Current Assets
1. Cash and cash equivalents
2. Financial assets at fair value such as trading securities and other investment
in quoted equity instruments
3. Trade and other receivables
4. Inventories
5. Prepaid expense

Non-Current Assets
1. Property, plant and equipment
2. Long-term investments
3. Intangible assets
4. Deferred tax assets
5. Other non-current assets

Liabilities
- are present obligations of the entity to transfer an economic resource as a result of
past events. An obligation is a duty of responsibility that the entity has no practical
ability to avoid.

Classification of liabilities

Current Liabilities
1. Trade and other payables
2. Current provisions
3. Short-term borrowing
4. Current portion of long-term debt
5. Current tax liability
Non-current Liabilities
1. Non-current portion of long-term debt
2. Finance lease liability
3. Deferred tax liability
4. Long-term obligations to company officers
5. Long-term deferred revenue

Currently maturing long-term debt

The original term was for a period longer than twelve months.

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An agreement to refinance or to reschedule payment on a long-term basis is

completed after the reporting period and before the financial statement are authorized
for issue.

Discretion to refinance
- Or roll over an obligation for at least twelve months after the reporting period
under an existing loan facility, the obligation is classified as noncurrent.

Covenants
- is often attached to borrowing agreements which represent undertakings by
the borrower.
- Actual restriction on the borrower.

Effect of breach of covenant

IAS 1, paragraph 74: The liability is classified as current even if the lender has
agreed, after the reporting period and before the statements are authorized for issue,
not to demand payment as a consequence of the breach.

Equity
is the residual interest in the assets of the enterprise after deducting all its
liabilities. IAS 1, paragraph 7: The holders of instruments classified as equity are
simply known as owner. Shareholders‟ equity is the residual interest of owners in the
assets of a corporation measured by the excess of assets over liabilities.

The Statement of Profit or Loss and Other Comprehensive Income

Profit or Loss
1. Revenue
2. Finance cost
3. Share of profits and losses of associates and joint ventures accounted for using the
equity method
4. A single amount for the total of discontinued operation
5. Tax expense

Other Comprehensive Income

1. Unrealized gain/loss on equity investment measured at fair value through
OCI 2. Unrealized gain/loss on debt investment measure at fair value through
OCI 3. Gain/Loss from translation of the financial statements of a foreign
operation 4. Revaluation surplus during the year
5. Unrealized gain/loss from derivative contracts designated as cash flow hedge 6.
“Remeasurements” of defined benefit plan, including actuarial gain/loss 7. Change
in fair value attributable to credit risk of a financial liability designated at fair value
through profit/loss

Statement of Changes in Equity

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Comprehensive income for the period

1. The effects of changes in accounting policies and corrections of error 2. A
reconciliation between carrying amount at the beginning and end of the period

Notes to the Financial Statement

Present information about the basis on which the financial statements were prepared
and which specific accounting policies were chosen and applied to significant
transaction 1. Disclose any information which is required by IFRSs
2. Show any additional information that is relevant to understanding which is
not shown elsewhere in the financial statement

Assessments
Answer the following requirements:
1. Describe the Conceptual Framework for Financial Reporting
2. Enumerate the Objectives of a general purpose financial reporting?
3. Identify the Qualitative characteristics of a useful financial statement,
 4. Find the relationship between financial statements and reporting
entity 5. Enumerate the elements of financial statements.
6. Explain the concept of recognition, derecognition and
measurement 7. Explain the presentation of financial
8. Explain the concept of capital and capital maintenance.
9. Enumerate the complete set of financial statements.
10. Define the elements of financial statements.
11.Explain the classification of assets and liabilities/
12.Identify the content of statement of comprehensive income
13.Explain the importance of notes to financial statements.

References
APA style

Source:
Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017),
Financial Accounting Volume Two. Manila, Philippines. GIC Enterprises
& Co.,Inc.

Asuncion, Darrell Joe O. CPA,MBA, Escala, Raymund Francis A. CPA, MBA,

Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora
Hill, Baguio City. Real Excellence Publishing and Nation‟s Foremost CPA Review
Inc.

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Silvia.M.,2019.https://www.ifrsbox.com/ifrs-conceptual-framework
2018/#:~:text=The%20Conceptual%20Framework%20for%20the,was%20issued%20
ba ck%20in%201989.

IFRS Community (2018). Retrieved From:

https://ifrscommunity.com/knowledge-base/ifrs-16-recognition-and-measurement-
of-l eases/#link-subsequent-measurement-of-the-lease-liability
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Module 2
Reporting Financial Performance and Statement of Cash
Flows Week 4 - 5

Introduction

This module discusses the events that affect the reporting of financial performance
and the presentation of Statement of cash flows. In reporting the financial
performance, the accountant must consider the following events: change in
accounting policies; change in accounting estimates, and prior period error, and
analyse the effects of the aforementioned events on the financial statements. The
presentation of the Statement of Cash flow, on the other hand, includes the
identification and analysis of the operating activities, investing activities and financing
activities.

Learning Objectives

After studying this module, students should be able to:

1. Understand the events that affects the reporting of financial performance and
its required adjustments
2. Apply the concept on presenting the Statement of Cash Flows.

Concept to Review

1. Accounting Policies - The specific principles, bases, conventions, rules,

and practices adopted by an entity in preparing and presenting financial
statements. 2. Change in Accounting Estimate. An adjustment of the carrying
amount of an asset or a liability or the amount of the periodic consumption of
an asset. 3. Material . Omissions or misstatements of items are material if they
could influence the economic decision that users make on the basis of the
financial statements.
4. Prior Period Errors. Are omissions from, and misstatements in, the
entity‟s financial statement for one or more prior periods arising from a failure to
use, or misuse of, reliable information
5. Retrospective Application . Applying a new accounting policy to
transactions, other events and conditions as if that policy had always been
applie d. 6. Retrospective Restatement . Correcting the recognition,
measurement, and disclosure of amounts of elements of financial statements
as if a prior period error had never occurred.
 7. Prospective Application . Application of a change in accounting policy
and recognizing the effect of a change in an accounting estimate. Impracticable .
It is

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impracticable when an entity cannot apply a requirement after making

every reasonable effort to do so.

Accounting policies are determined by applying the relevant IFRS and considering
any relevant implementation Guidance issued by the IASB for that IFRS. When there
is no applicable IFRS or interpretation, management should use its judgment in
developing and applying an accounting policy that results in information that is
relevant and reliable.

An entity must select and apply its accounting policies for a period consistently
for similar transactions, other events and conditions. The same accounting
policies are usually adopted from period to period, to allow users to analyze
trends over time in profit, cash flows, and financial position.

When can changes be applied?

The change is required by an IFRS; the change will result in a more

appropriate presentation of events or transactions in the financial statements of the
entity.

The standard highlights two types of event w/c do not constitute changes: 1. Adopting
an accounting policy for a new type of transaction or event not dealt with
previously by the entity,
2. Adopting a new accounting policy for a transaction or event which has
not occurred in the past or which was not material.

In the case of tangible noncurrent assets, a policy of a revaluation adopted for the
first time is not treated as a change in policy under IAS 8, but as a revaluation under
IAS 16 Property. Plant, and Equipment.

Where a new IFRS is adopted, resulting in a change of accounting policy, IAS 8

requires any transitional provisions in the new IFRS itself to be followed. If none are
given, provisions of IAS 8 shall be followed.
1. Reasons for the change/nature of change
 2. Reasons why new policy provides more relevant/reliable information 3.
Amount of the adjustment for the current period and for each period presented
4. Amount of the adjustment relating to periods prior to those included in
the comparative information
5. The fact that comparative information has been restated or that it is
impracticable to do so.

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6. Estimates arise in relation to business activities because of the

uncertainties inherent within them. Examples are: debt allowance, useful lives
of depreciable assets, and obsolescence of inventory.

The rule here is that the effect of a change in an accounting estimate should be
included in the determination of net proper or loss in one of:
1. The period of the change, if the change affects that period only
2. The period of the change and the future periods, if the
change affects both

Prior Period Errors

Nature of the prior period error:

For each prior period, to the extent practicable, the amount of the correction. The
amount of the correction at the beginning of the earliest prior period presente. If
retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of how and
from when the error has been corrected. Subsequent periods need not repeat these
disclosures.

IFRS 5: Non-current Asset held for Sale

IFRS 5 requires assets "held for sale" to be recognized separately in the statement
of financial position. It sets out the criteria for recognizing a discontinued operation.

Noncurrent Asset is an asset that does not meet the definition of a current asset.
Noncurrent Asset Held for Sale - IFRS 5, paragraph 6, provides that a noncurrent
asset or disposal group is classified as held for sale if the carrying amount will be
recovered principally through a sale transaction rather than through continuing use.

Conditions for classification as held for sale.

1. The asset or disposal group is available for immediate sale in the present
con ditio/n.
2. The sale must be highly probable.

PAS 7: Statement of Cash Flows

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Is a component of financial statements summarizing the operating, investing

and financing activities of an entity? The primary purpose of a statement of cash flows
is to provide relevant information about cash receipts and cash payment of an entity
during a period. An entity shall prepare a statement of cash flows and present it as an
integral part of the financial statements for each period for which financial statements
are presented.

Benefits of Cash Flow Information

Users can gain further appreciation of the change in net assets, of the entity‟s
financial position (liquidity and solvency) and the entity‟s ability to adapt to changing
circumstances by affecting the amount and timing of cash flows. Statements of cash
flows enhance comparability as they are not affected by differing accounting policies
used for the same type of transaction.

The statement of cash flows is designed to provide information about the change in
an entity's cash and cash equivalents. Cash compromises cash on hand and demand
deposit

Cash Equivalents are short-term highly liquid investments that are readily convertible
to known amounts of cash and which are subject to an insignificant risk of change in
value. According to IAS 7, paragraph 7: An investment normally qualifies as a cash
equivalent only when it has a short maturity of three months or less from date of
acquisition. In other words, the investment must be acquired three months or less
before the date of maturity.

Examples of Cash Equivalents

1. Three-month BSP treasury bill
2. Three-year BSP treasury bill purchased three months before date of
maturity 3. Three-month money market instrument or commercial paper
4. Three-month time deposit

Indirect Method versus Direct Method

The direct method is encouraged where the necessary information is not too costly
to obtain, but IAS 7 does not require it. In practice the indirect method is more
commonly used, since it is quicker and easier

There are different ways in which the information about gross cash receipts and
payments can be obtained:

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1. Using the Direct Method. This is the most obvious way because it is obtained
by simply extracting information from the accounting records, which may be
a laborious task.
2. Using the Indirect Method. This method is undoubtedly easier from the point
of view of the preparer of the statement of cash flows. The net profit or loss for
the period is adjusted for:

Changes during the period in inventories, operating receivables and payables Non-
cash items, e.g. depreciation, provisions, profits/losses on the sales of assets Other
items, the cash flows from which should be classified under investing or financing
activities

Cash flow from Investing Activities

Cash flow from investing activities is one of the sections on the cash flow statement
that reports how much cash has been generated or spent from various investment
related activities in a specific period. Investing activities include purchases of physical
 assets, investments in securities, or the sale of securities or assets. Negative cash
flow is often indicative of a company's poor performance. However, negative cash
flow from investing activities might be due to significant amounts of cash being
invested in the long term health of the company, such as research and development.
Cash flows from investing activities provide an account of cash used in the purchase
of non current assets or long term assets that will deliver value in the future. Investing
activity is an important aspect of growth and capital.

A change to property, plant, and equipment (PPE), a large line item on the balance
sheet, is considered an investing activity. When investors and analysts want to know
how much a company spends on PPE, they can look for the sources and uses of
funds in the investing section of the cash flow statement. Capital expenditures
(CapEx), also found in this section, is a popular measure of capital investment used in
the valuation of stocks. An increase in capital expenditures means the company is
investing in future operations. However, capital expenditures are a reduction in cash
flow. Typically, companies with a significant amount of capital expenditures are in a
state of growth.

Below are a few examples of cash flows from investing activities along with whether
the items generate negative or positive cash flow.
1. Purchase of fixed assets–cash flow negative
2. Purchase of investments such as stocks or securities–cash flow
negative 3. Lending money–cash flow negative
4. Sale of fixed assets–cash flow positive
5. Sale of investment securities–cash flow positive

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6. Collection of loans and insurance proceeds–cash flow positive

Cash flow from Financing Activities

Financing Activities are the activities that result in change in size and composition of
the equity capital and borrowings of the entity. Include from the transaction involving
non trade liabilities and equity of the entity.

Financing Activities are the cash flow that result from the transactions:
1. Between the entity and the owners equity financing
2. Between the entity and the creditors debt financing
Cash flow from financing activities in IAS 7, paragraph 43, provides that investing
and financing transactions that do not require use of cash or cash equivalents shall
be excluded from the statement of cash flows. Such transactions shall be
disclosed elsewhere in the financial statement either in the notes to the financial
statement or in a separate schedule or in a way that provides information about the
transactions.

The following noncash transactions are disclosed separately:

1. Acquisition of asset by assuming directly related liability
2. Acquisition of asset by issuing share capital
3. Acquisition of asset by issuing bonds payable
4. Conversion of bonds payable into share capital
5. Conversion of preference share into ordinary shares

Interest

In IAS 7, paragraph 33, provides that Interest paid and interest received shall be
classified as operating cash flows because they enter into the determination of net
income or loss. Alternatively, interest paid may be classified as financing cash flow
because it is a cost of obtaining financial resources. Alternatively, interest received
may be classified as investing cash flow because it is return on investment. For a
financial institution, interest paid and interest received are usually classified as
operating cash flows.

Dividends

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IAS 7, paragraph 33, provides that dividends received shall be classified as

operating cash flow because it enters into the determination of net income.
Alternatively, dividend received may be classified as investing cash flow because it is
a return on investment. IAS 7, paragraph 34 , provides that dividends paid shall be
classified as financing cash flow because it is the cost of obtaining financial
resources. Alternatively, dividend paid may be classified as operating cash flow in
order to assist users to determine the ability of the entity to pay dividends out of
operating cash flows

Income Taxes

IAS 7, paragraph 35, provides that cash flow arising from income taxes shall be
separately disclosed as a cash flows from operating activities unless they can be
specifically identified with investing and financing activities.

Example of Cash Flows from Financing Activities

Inflow:
1. Cash receipt from issuance of ordinary and preference shares
2. Cash receipt from issuing debentures, loans notes, bonds, mortgages, and
other short or long-term borrowings
Outflow:
1. Cash payments for amounts borrowed
2. Cash payment by a lease for the reduction of the outstanding principal
lease liability.
3. Cash payment for dividends to shareholders
4. Cash payments to acquire treasury shares

Assessments

Exercises:
1. Explain change in accounting policies, change in accounting estimates and
prior periods. Cite examples for each.
2. Discuss the required adjustments and disclosures for change in
accounting policies, change in accounting estimates and prior period error,
respectively. 3. Expound on how to account for a non-current asset held for
sale. 4. Explain the presentation of the statement of cash flows.
5. Expound the difference between cash and cash equivalents.
6. Give examples of the operating activities, investing activities and
financing activities presented in the statement of cash flows.
7. Differentiate between indirect and direct of presentation the net cash flows
from operating activities.

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8. Discuss the presentation of interest, dividends and income taxes on
the statement of cash flows.

References

Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017),
Financial Accounting Volume Two. Manila, Philippines. GIC Enterprises
& Co.,Inc.

Asuncion, Darrell Joe O. CPA,MBA, Escala, Raymund Francis A. CPA, MBA,

Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora
Hill, Baguio City. Real Excellence Publishing and Nation‟s Foremost CPA Review
Inc.

Silvia.M.,2019.https://www.ifrsbox.com/ifrs-conceptual-framework
2018/#:~:text=The%20Conceptual%20Framework%20for%20the,was%20issued%20
ba ck%20in%201989.
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Module 3
Revenues from Contracts with Customers and Government
Grants Week 6

Introduction

This module discusses the accounting for Revenues from Contract with Customers
and for Government Grants. It sets out rules for the recognition of revenue based on
the transfer of control to the customers from the entity. This also tackles the step by
step process on accounting for revenues from contracts with customers and the
identification of the point of time in which revenues must be recognized. Additionally,
this discusses the recognition of government grants and disclosure for government
assistance.

Learning Objectives

After studying this module, students should be able to:

1. Understand the recognition of revenues based on the transfer of control to
the customer from the entity.
2. Demonstrate the process on how to account for the revenues from contracts
with customers.
3. Identify the different points of time in the recognition of revenues. 4. Explain the
recognition of government grants and disclosure for government assistance.

Revenues from Contracts with Customers

Core Principle
1. Entity should recognize revenue in a manner that depicts the pattern of transfer
of goods or services to a customer.
2. Amount recognized as revenue should reflect the consideration to which the
entity expects to be entitled in exchange for good or service.

Things to remember:
1. Income - increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that result in
an increase in equity, other than those relating to contributions from
equity instruments.
 2. Revenue - income arising from course of entity's ordinary activities 3. Contract -
agreement between two or more parties that creates enforceable rights and
obligations

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3. Contract Asset - entity's right to payment for goods and services that entity
has transferred to a customer if that right is conditioned on something other than
the passage of time.
4. Receivable - entity's right to consideration that is unconditional
5. Contract Liability - entity's obligation t o transfer goods and services to a
customer for which the entity has received consideration
6. Customer - party that has contracted with an entity to obtain goods or services
that are an output of the entity's ordinary activities in exchange for consideration 7.
Performance obligation promise in a contract with a customer to deliver either: a.
good or service that is distinct; or
b. series of distinct goods or services that are substantially the same and
that have the same pattern of transfer to the customer
8. Stand alone Selling Price price at which an entity would sell a promised good
or service separately to a customer
9. Transaction Price amount of consideration to which entity expects to be entitled
in exchange for transferring promised goods or services to a customer

Five-Step Model

Step 1. Identify the contract with the customer.

Contract Criteria:
1. Approval of contract in writing, orally or in accordance with customary
business practice
2. Identification of rights and obligations of the parties and payment terms. 3.
Contract has commercial substance and the collection of consideration is probable
Contract Criteria (Exception to Separate Contracts):
1. If the contracts are treated as a single package.
2. Consideration in one contract depends upon the good or service of
another contract.
3. Goods or services in the contract relate to a single performance obligation.

Step 2. Identify the performance obligation in the contract.

Distinct Good or Service Criteria:
1. The customer can benefit from the good or service.
 2. The entity 's promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract.
Distinct Good or Service:
1. Sale of finished goods produced by a manufacturer
2. Sale of merchandise inventory by a retailer

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3. Constructing, manufacturing or developing assets on behalf of customers, as

in long term construction contracts.
4. Granting license or franchise.
5. Performing a contractually agreed upon task for a customer, as in
bookkeeping service or payroll processing service.

Step 3. Determine the transaction price

Factors that Affect Transaction Price:
1. Variable consideration
2. Time value of money
3. Non-cash Consideration
4. Consideration payable to a customer

Step 4. Allocate the transaction price to the performance obligations in

the contract.
If not directly observable, it must be estimated using these Methods:
1. Adjusted Market Assessment Approach
2. Expected Cost Plus Margin Approach
3. Residual Approach

Step 5. Recognize revenue when or as the entity satisfies a performance obligation.

1. Revenue shall be recognized when an entity transfers control of the good
or service to a customer.
2. Control of an Asset is the ability to direct the use of the asset and
obtain substantially all of the benefits from the asset.
3. Revenue can be recognized either at point in time or over time.

Revenue Recognition at point of time

1. The entity has the right to receive payment for the asset and for which the
customer is obliged to pay.
2. The customer has legal title to the asset.
3. The entity ha s transferred physical possession of the asset to
customers. 4. The customer has significant risks and rewards of
ownership of the asset. 5. The customer has accepted the asset.

Revenue Recognition over time

1. Customer simultaneously receives and consumes the benefits provided by
the entity's performance as the entity performs.

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2. Entity's performance creates or enhances an asset that customer controls as

the asset is created or enhanced.
3. Entity's performance does not create an asset with alternative use to the entity
and the entity has the enforceable right to receive the payment for
performance completed to date.

Performance Obligation Satisfied Over Time

This meets the criteria in Step 5 and, if it entered into more than one accounting
period, would previously have been described as a long term contract; depending
when a performance obligation is fulfilled in a contract. Revenue is recognized "over
time" when an any of the following is satisfied:

1. The customer "simultaneously" receives and consumes the benefits provided

by the entity‟s performance as the entity performs.

This criteria, according to the Financial Accounting Standards Board (FASB),

is mainly for services that are consumed by customers continuously over a
period of time. However, many service providers may have difficulty in
determining whether or not their customers consume benefits as they perform
each obligation; this is due to the subjectivity in determining what the “benefits”
are. To address this issue, the new standard requires the service provider to
assess, in a hypothetical situation, if another provider would need to
substantially re perform the work completed to date. If another provider does
not need to substantially re perform the work done, then the original service
provider should establish that control is transferred over time; consequently,
 the customer is assumed to receive and consume the benefit as the service
provider performs an obligation.

2. The entity‟s performance "creates or enhances an asset" (for example, work

in process) that the customer controls as the asset is created or enhanced. 3. The
entity‟s performance does not create an asset with an alternative use to the entity,
and the "entity has an enforceable right to payment for performance completed to
date."

Alternative Use. To assess if an asset has an alternative use, the entity should
consider practical limitations as well as contractual restrictions. This assessment
should be made at the inception of the contract; nevertheless, should a modification
in the contract arise at a future date and that modification substantially changes the
performance obligation in the contract, then the entity should make a subsequent
assessment.

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Practical Limitations . In considering practical limitations of directing an as set to

another use, the entity should consider whether the asset is designed and produced
to fit unique specifications of the customer. This could be determined by evaluating
whether or not (a) the entity would incur a significant cost to rework the asset for a
different purpose or (b) the entity would only be able to sell the asset at a significant
loss. Moreover, an entity should complete this evaluation based on the asset‟s
expected final form, not the asset‟s form while in production.

Contractual Restrictions . Practical limitations may not always be a viable method

to prove that an asset has no alternative use; hence, contractual restrictions may be
more relevant than practical limitations (e.g. some real estate contracts). Criterion 3
requires the contractual restrictions be substantive. It means that an asset must not
be fundamentally interchangeable with other assets that the vendor owns;
additionally, the vendor should not be able to transfer that asset to another customer
without incurring significant loss or breaching the contract with the customer.

Right to Payment. ASC 606 10 25 29 states that the seller should assess whether it
is entitled to payment from the customer for its performance to date if the contract
is terminated. Since the seller is creating an asset that has no alternative use to the
seller, the seller is creating the asset on behalf of the customer. Therefore, the seller‟s
right to
payment indicates that the customer is receiving benefit
 from the seller‟s performance, hence control is transferred to
the customer.

Performance Obligations Satisfied at a Point in Time. This will be the point in time
at which the customer obtains control of the promised asset and the entity satisfies
a performance obligation.
The following factors would indicate revenue recognition of a point in time: 1. The entity
has the "right to receive payment" for the asset and for which the customer is obliged
to pay. This exist only if goods or services have been delivered to the point that the
entity has the right to ask for the payment.
2. The customer has a "legal title" to the asset. If the asset is already under the
name of the customer, if not, for example is the long term rent called, lease. 3.
The entity has "transferred physical possession" of the asset to the customer.
It inferred to other arrangements or contractual stipulations (e.g., consignment 4.
The customer has the "significant risks and rewards" of ownership of the
asset. This requires judgment, for example, an entity sold goods to a customer
and it (entity) has the responsibility to deliver it, thus, it still has control of the
goods. However, the entity still need to determine the risks to the ownership of the
asset

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that can separate performance obligation (e.g., maintenance services

for products), and the risks should not have an impact on the transfer of control. 5.
The customer "has accepted the asset”

Common Types of Transaction

1. Warranties. If a customer has the option to purchase a warranty separately
from the product to which it relates, it constitutes a distinct service and is
accounted for as a separate performance obligation. This would apply to a
warranty which provides the customer with a service in addition to the assurance
that the product complies within agreed upon specifications. If the customer does
not have the option to purchase the warranty separately, for instance if the
warranty is required by law, that does not give rise to a performance obligation
and the warranty is accounted for in accordance with IAS 3 7.
2. Principal Versus Agent. An entity must establish in any transaction whether it
is acting as a principal or agent.
a. Principal. It is a principal if it controls the promised good or service before
it is transferred to the customer.
 b. Agent. It is acting as agent if its performance obligation is to arrange for
the provision of goods and services by another party.
3. Repurchase Agreements. An entity sells an asset and promises, or has
the option to repurchase it. Repurchase agreements generally come in three
forms: a. An entity has an obligation to repurchase the asset (a forward contract).
b. An entity has the right to repurchase the asset (a call option)
c. An entity must repurchase the asset if requested to do so by the customer (a
put option).
4. Consignment Arrangement: Consignment . It is a method of marketing goods in
which the entity called "consignor" transfers physical possession of certain goods
to a dealer or distributor called the "consignee" that sells the goods on behalf of
the consignor. The consignor shall not recognize revenue upon delivery of
the goods to the consignee until the goods are sold by the consignee

REASON: The product is controlled by the consignor and the consignee does not
have an unconditional obligation to pay for the product. When consigned goods are
sold by the consignee, a report called "account sales" is given to the consignor
together with a cash remittance for the amount of sales minus commission and other
expenses chargeable against the consignor.

5. Bill and Hold Arrangement. A contract under which an entity bills a customer
for a product but the entity retains the possession of the product. For example,
a customer may request an entity to enter such a contract because of space for
the

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product or because of delays in the customer's production schedule.

Depending on the terms of the contract, revenue shall be recognized "when
the customer obtains control or takes title of the product" even though the
product remains in an entity's physical possession.

All of the following criteria must be met for the recognition of revenue in a bill
and hold arrangement:
a. The customer requested for the arrangement.
b. The product must be "identified separately as belonging to the customer."
c. The product "must be ready for physical transfer to the customer
anytime." d. The entity cannot have the ability to use the product or to direct
it to another customer.
IAS 20 - GOVERNMENT GRANTS AND DISCLOSURE OF
GOVERNMENT ASSISTANCE

The treatment of government grants is covered by IAS 20 Accounting for

Government Grants and Disclosure of Government Assistance. IAS 20 does not
cover: 1. Accounting on government grants in financial statements reflecting the
effects of changing prices
2. Government assistance given in the form of „tax breaks‟
3. Government acting as part-owner of the entity
4. Grants covered by IAS 41 Agriculture
Terms to Remember:

Government. Government, government agencies

and similar bodies whether local, national or
international.

Government Assistance. Action by government designed to provide economic

benefit specific to an entity or range of entities qualifying under certain criteria.

Government Grants. Assistance in government in form of transfers of resources to

an entity in return for past or future compliance with certain conditions relating to
the operating activities of the entity. An entity should not recognize government
grants until it has reasonable assurance that:
1. The entity will comply with any conditions attached to the grant.
2. The entity will actually receive the grant.

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Non monetary Government Grants. A non monetary asset may be transferred

by government to an entity as grant, for example, piece of land, or other resources.

Grants Related to Assets . Government grants whose primary condition is that an

entity qualifying for them should purchase, construct or otherwise acquire non-current
assets.

Presentation of Grants Related to Assets

There are two choices for how government grants related to assets should be shown
in the statement of financial position:
1. Set up grants as deferred income.
2. Deduct the grant in arriving at the carrying amount of an asset.

Presentation of Grants Related to Income

Choice in method of disclosure:

1. Present as a separate credit or under a general heading.
2. Deduct from the related expense.

Repayment of Government Grants

1. Repayment of Grant related to income: Apply first against any
unamortized deferred income set up in respect of the grant. Repayment of Grant
related to asset: Increase the carrying amount of the asset or reduce the deferred
income balance by the amount repayable.

Government Assistance
1. Some forms of government assistance cannot reasonably have a value placed
on them.
2. There are transactions with the government which cannot be distinguished
from the entity‟s normal trading transactions.

Disclosure required of the following:

1. Accounting policy adopted, including method of presentation.
2. Nature and extent of government grants recognized and other forms of
assistance received.
3. Unfulfilled conditions and other contingencies attached to recognize
government assistance.

SIC 10 - GOVERNMENT ASSISTANCE

No Specific Relation to Operating Activities.

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- Examples of such assistance are transfers of resources by governments to

entities which:
1. Operate in a particular industry
2. Continue operating in recently privatized Industries
 3. Start or continue to run their business in underdeveloped areas.

Government assistance to entities meets the definition of government grants in IAS

20, even if there are no conditions specifically relating to the operating activities of the
entity other than the requirement to operate.

Assessments
Tasks:
1. Differentiate between Income and Revenue.
2. Discuss on how to identify contracts with customers and the
performance obligation in a contract.
3. Illustrate the transaction price in the contract with customers
4. Explain the recognition of revenue from contracts with customers. 5. Expound
the difference between the revenue recognition at point of time and revenue
recognition over time.
6. Identify the examples of common transactions with contracts with customers. 7.
Discuss the accounting for government grants and disclosures for
government assistance.

References

Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017),
Financial Accounting Volume Two. Manila, Philippines. GIC Enterprises
& Co.,Inc.

Asuncion, Darrell Joe O. CPA,MBA, Escala, Raymund Francis A. CPA, MBA,

Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora
Hill, Baguio City. Real Excellence Publishing and Nation‟s Foremost CPA Review
Inc.

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Module 4
Inventories and Agriculture
Week 7

Introduction

This module discusses the concept of recognition and measurement of inventories

and those items related to agriculture, e.g. biological assets and agricultural produce.
This tackles the different costs associated with inventories, the techniques in
measuring the cost of inventories, the accounting for inventory write down, and
recognition and measurement of biological assets and agricultural produce.

Learning Objectives

After studying this module, students should be able to:

1. Understand the concept of recognition and measurement of inventories
and accounting for the cost of inventories.
2. Explain the standards that govern with the accounting for biological assets
and agricultural produce.

Inventories

Inventories (PAS 2) are assets:

1. held for sale in the ordinary course of business'
2. in the process of production for such sale
3. in the form of materials or supplies to be consumed in the production process or
in the rendering of services

Net Realizable Value

is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.

Fair Value
is the price that would be received to sell an asset or pa id to transfer a liability
in an orderly transaction between market participants at the measurement date.
 Inventories can include any of the following:

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1. Goods purchased and held for resale, (e.g. goods held for sale by a retailer,
or land) and buildings held for resale
2. Finished goods produced
3. Work in progress being produced
4. Materials and supplies awaiting use in the production process (raw

materials) Measurement of Inventories

The standard states that “Inventories should be measured at the lower of cost and
net realizable value”.

Cost of Inventories:
1. Cost of Purchase
2. Costs of conversion
3. Other costs incurred in bringing the inventories to their present location
and condition

Cost of Purchase

The standard lists the following as comprising the costs of purchase of inventories:
1. Purchase price plus
2. Import duties and other taxes plus transport, handling and any other cost
directly attributable to the acquisition of finished goods, services and materials
less trade discounts, rebates, and other similar amounts

Costs of Conversion

Costs of conversion of inventories consist of two main parts:

1. Costs directly related to the units of production
2. Fixed and variable production overheads that are incurred in converting
materials into finished goods, allocated on a systematic basis.
Fixed production overheads are those indirect costs of production that remain
relatively constant regardless of the volume of production, (e.g. the cost of factory
management and administration)

Variable production overheads are those indirect costs of production that vary directly,
or nearly directly, with the volume of production. (e.g. indirect materials and labor)

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The standard emphasizes that fixed production overheads must be allocated to items
of inventory on the basis of the normal capacity of the production facilities.

Important Points:

1. Normal capacity is the expected achievable production based on the average

over several periods/seasons, under normal circumstances.
2. The above figure should take account of the capacity lost through
planned maintenance.
3. If it approximates to the normal level of activity, then the actual level of
production can be used.
4. Low production or idle plants will not result in a higher fixed overhead allocation
to each unit.
5. Unallocated overheads must be recognized as an expense in the period in
which they were incurred.
6. When production is abnormally high, the fixed production overhead allocated
to each unit will be reduced, so avoiding inventories being stated at more than
cost. 7. The allocation of variable production overheads to each unit is based on
the actual use of production facilities.

Other Costs

The standard lists types of cost which would not be included in cost of
inventories. Instead, they should be recognized as an expense in the period they are
incurred. 1. Abnormal amounts of wasted materials, labor or other production costs. 2.
Storage costs (except costs which are necessary in the production process before a
further production stage.)
3. Administrative overheads not incurred to bring inventories to their location
and condition
 4. Selling Costs

Techniques for the Measurement of Costs

Standard costs - are set up to take account of normal production values: Amount of
raw materials used, labor time etc. They are reviewed and revised on a regular basis.
Retail method: this is often used in the retail industry where there is a large turnover
of inventory items, which nevertheless have similar profit margins. The only practical
method of inventory valuation may be to take the total selling price of inventories and
deduct an overall average profit margin, thus reducing the value to an approximation
of cost. The

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percentage will take account of reduced price lines. Sometimes different percentages
are applied on a department basis.

Cost Formula

There are different methods in determining the cost of inventories, these are the
following: 1. First-In – First-Out Method
2. Last-In – First-Out Method
3. Weighted Average Method
4. Specific Identification

First-In-First-Out Method

Assumes that “the goods first purchased are first sold”. The inventory is thus
expressed in terms of recent or new prices while the cost of goods sold is
representative of earlier or old prices.

Last-In – First-Out Method

The standard does not permit anymore the use of LIFO method. Assumes that “the
goods last purchased are first sold.” The inventory is thus expressed in terms of
earlier or old prices and the cost of goods sold is representative of earlier or old
prices.
 Weighted Average Method

Cost of the beginning inventory plus the total cost of purchases during the period
is divided by the total units produced plus those in the beginning inventory to get
the weighted average unit cost.

Specific Identification

Cost of inventories should be assigned by specific identification of their individual cost

for items that are not ordinarily interchangeable and goods or services produced
and segregated for a specific project

Net Realizable Value (NRV)

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The estimated selling price in the ordinary course of business less the estimated cost
of completion and the estimated cost of disposal - as a general rule, assets should
not be carried at amounts greater than those expected to be realized from their sale
or use.

Situations in which NRV is likely to be less than cost, i.e. when there has been:
1. an increase in cost or fall in selling price
2. physical deterioration in the condition of inventory
3. obsolescence of products
4. a decision as part of the company‟s marketing strategy to manufacture and
sell products at a loss
5. errors in production or purchasing

Inventories are usually written down to net realizable value on an item by item or
individual basis.

ACCOUNTING FOR INVENTORY WRITE-DOWN

 1. The cost is lower than net realizable value
2. The net realizable value is lower than cost.

The following treatment is required when inventories are sold:

1. The carrying amount is recognized as an expense in the period in which the
related revenue is recognized.
2. The amount of any write-down of inventories to NRV and all losses of
inventories are recognized as an expense in the period the write-down or loss
occurs. 3. The amount of any reversal of any write-down of inventories arising from
an increase in NRV, is recognized as a reduction in the number of
inventories recognized as an expense in the period in which the reversal occurs.

Different Cost Formulas for Inventories

Two cost formulas allowed by IAS 2

1. First In- First Out (FIFO)
2. Weighted Average

IAS 2 provides that an entity should use the same cost formula for all inventories
having similar nature and use to the entity.

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IAS 41: AGRICULTURE

IAS 41 applies the requirements of IFRS to the treatment of Biological Assets. It

was issued in February 2001, it seeks to harmonize practice in accounting for
agriculture, which demonstrates fundamental differences in its nature and
characteristics to other business activities.

Terms to remember:
1. Agricultural activity is the management by an entity of the biological
transformation of biological assets for sale, into agricultural products or into
additional biological assets.
2. Agricultural produce is the harvested product of an entity‟s biological
assets 3. Biological assets are living animals or plants.
 4. Biological transformation compromises the processes of growth,
degeneration, production and procreation that cause qualitative changes in a
biological asset. 5. A group of biological assets is an aggregation of similar living
animals or plants. 6. Harvest is the detachment produced from a biological asset or
the cessation of a biological asset‟s life processes.
7. Fair value is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date (IFRS
8. Carrying Amount is the amount at which an asset is recognized in the statement of
financial position.

Important points:
1. Biological: relates to life phenomena‟, living animals and plants with an
innate capacity of biological transformation which are dependent upon a
combination of natural resources.
2. Transformation: involves physical transformation, whereby animals and
plants undergo a change in biological quantity overtime
3. Management: biological transformation is managed.
4. Conditions are stabilized or enhanced. The transparency of the
relationship between input and outputs is determined by the degree of control
(intensive vs. extensive).
a. It is different from exploitation through extraction, where no attempt is
made to facilitate the transformation.
b. Biological assets are managed in groups of plant or animal classes,
using individual assets to ensure the sustainability of the group. D.
Produce: diverse and may require further processing before ultimate
consumption

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Biological Assets

- Agricultural produce at the point of harvest

- Government grants

The standard does not apply to agricultural land or intangible assets related to
agricul tural activity.
After harvest, IAS 2 is applied. The core income-producing assets of agricultural
activities, held for their transformative capabilities that leads to various outcomes:

Asset changes:
- Growth: Increase in quantity and or quality
- Degeneration: Decrease in quantity and or quality Creation of new assets: -
Production: producing separable non-living product -Procreation:
producing separable living animals.

Two broad categories of agricultural production system:

1. Consumable: animals/plants themselves are harvested

2. Bearer: animals/plants bear produce for harvest

Biological assets are usually managed in groups of animals or plant classes,

with characteristics which allow sustainability in perpetuity.

Land often forms an integral part of the activity itself in pastoral and other land-
based agricultural activities.

Bearer Biological Assets

Amendment to IAS 41 regarding plant-based bearer biological assets

including trees grown in plantations, such as grape vines, rubber trees, and oil palms
are used solely to produce crops over several periods and are not in themselves
consumed. The fair value was not an appropriate measurement for these assets as,
once they reach maturity, the only economic benefit they produce comes from the
agricultural produce they create.

Biological Assets. These assets have been removed from the scope of IAS
41 and should be accounted for under IAS 16 Property, Plant and Equipment. They
are measured at accumulated costs until maturity and are then subject to
depreciation and

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impairment charges. Agricultural produce from these plants continues to be

recognized under IAS 41/IAS 2.
1. The entity controls the assets as a result of IAS events.The entity controls
the assets as a result of IAS events.
2. It is probable that the future economic benefits associated It is probable that
the future economic benefits associated with the asset will flow to with the asset
will flow to the entity.the entity.
3. The fair value or cost of the asset to the entity can be The fair value or cost of
the asset to the entity can be measured reliably.measured reliably.

Presentation and disclosure

In the statement of financial position, biological assets should be classified as a

separate class of assets falling under neither current nor noncurrent classifications.
This reflects the view of such assets as having an unlimited life on a collective basis;
it is the total exposure of the entity to this type of asset that is important.

Biological asset should also be sub-classified either in statement of financial position

or as a note to the accounts:
1. Class of animal or plant
2. Nature of activities (consumable or bearer)
3. Maturity or immaturity for intended use

Agricultural Produce

It is recognized at the point of harvest. Agricultural produce is either incapable of

biological process or such processes remain dormant. Recognition ends once the
produce enters trading activities or production processes within integrated
agribusinesses, although processing activities that are incidental to agricultural
activities and that do not materially alter the form produce are not counted as
processing.

Measurement and Presentation

The IAS states that agricultural produce should be measured at each year end at
fair value less estimated point of sale cost, the extent that is sourced from an entity‟s
urced from an entity‟s biological assets. This is logical that when you consider that,
until harvest, the agricultural produce was valued at fair value, anyway as part of the
biological asset. The change in carrying amount of the agricultural produce held at
year end should be recognized as income or expense in profit or loss. This will be
rare as such produce is usually sold or processed within a short time. within a short
time

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Presentation in the Statement of Financial Position

Agricultural produce should be classified as inventory in the statement of financial

position and disclosed separately either in the statement of financial position or in the
notes.

Assessments

Answer the following requirements:

1. Define inventories.
2. Give examples of inventories.
3. Explain the measurement for inventories.
4. Illustrate the costs attributable to inventories.
5. Discuss the different costing methods for inventories.
6. Expound the proper valuation of inventories.
7. Discuss the accounting treatment for agriculture
8. Differentiate the two categories of biological assets.
9. Explain the recognition principle for biological assets.
10.Define the proper valuation for biological assets and agricultural produce

References
Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017),
Financial Accounting Volume Two. Manila, Philippines. GIC Enterprises
& Co.,Inc.

Asuncion, Darrell Joe O. CPA,MBA, Escala, Raymund Francis A. CPA, MBA,

Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora
Hill, Baguio City. Real Excellence Publishing and Nation‟s Foremost CPA Review
Inc.