PARTNERSHIP FORMATION When measuring the contributions of

partners, the following additional

Art. 1767. By the contract of partnership
guidance from PFRS.
two or more persons bind themselves to
contribute money, property, or industry Cash and Cash Equivalents Face amount
to a common fund, with the intention of Accounts Receivable Fair Value
dividing the profits among themselves. Inventory LCNRV
Equipment Fair Value
Characteristics of a partnership

 Ease of formation   Capital and Drawings Account

 Separate legal personality
 Mutual agency   Owners, Capital
 Co-ownership of property  Initial
 Co-ownership of profits  Permanent Investment
 Limited life   withdrawals  Additional
 Transfer of ownership of capital Investment
 Unlimited liability    Shares in  Shares in
      losses Profit
Accounting for partnership  Debit balance
Conceptual framework for Financial of drawings
Reporting and PFRS are applicable to all account
Owner’s Drawing
reporting entities regardless of type of
 Recurring
organization.
 Temporary reimbursable
FORMATION withdrawals costs paid by
during the the partner.
- a contract of partnership is consensual period
- a contract of partnership is consensual.  Temporary
- must be in a public instrument when: funds held to
a. immovable property or real be remitted to
rights are contributed to the the
partnership. partnership
b. the partnership has a capital of    
3000 or more.
c. requires inventory of any
immovable property - effect if
not, void. Two Individuals forming Partnership

1. Open the book of accounts of

Partnership
Valuation of contribution
One Individual and one Sole Proprietor
1. Prescribed in the contract of
forming Partnership
partnership.
2. Valuation by the expert chosen by 1. Close the nominal accounts of the
the partners sole proprietorship business.
2. Revalue the assets contributed.
3. Adjust the capital account of the
sole proprietorship business.
4. Close the books of the sole
proprietorship business.
5. Open the books of the Partnership.
Two or more sole proprietor forming
Partnership.
1. Close the nominal accounts of all
the sole proprietorship business.
2. Revalue the assets contributed.
3. Adjust the capital account of all
the sole proprietors.
4. Close the books of all the sole
proprietors.
5. Open the books of the Partnership.
PARTNERSHIP OPERATIONS
Division of profit and losses (Art.
1797)
1. In accordance with their
partnership agreement
2. Only share in profits has been
agreed; share in losses shall be the
same:
> As for the losses, industrial
partner shall not be liable.
>As for the profits, industrial
partners shall receive such share
as may be just and equitable.
Note:
The designation of losses and profits
cannot be entrusted to one of the
partners (Art. 1798)
A stipulation which excludes one or more
partners from any share in the profits or
losses is VOID (Art. 1799)
In addition to P/L sharing:
Salaries - addition to the share in profits as
compensation for his services to the
partnership.
Bonuses - bonus for excellent
management performance. This is
applicable only if the partnership earns
profit.
Interest on capital contributions - entitled
to annual interest on their capital
contributions.
Note: The items above are normally
provided first and remaining amount is
shared based on P/L ratio.
PARTNERSHIP DISSOLUTION
Dissolution - change in the relation of the
partners caused by any partner being
disassociated from the business.
Liquidation - termination of business
operations or winding up of business
affairs.
Major considerations in the accounting
for partnership dissolutions.
1. Admission of partner
 > Purchase of interest
-Purchase of part or all of interest
of one.
-Consideration paid is not
recorded in the books.
-Total capital remains the same.
Only transfer within equity to
establish the new partner's
account.
> Investment in the partnership
-Admitted by investing directly to
the business.
-Transaction with the partnership.
-Consideration paid is recorded in
the books.
-Total capital is increased.
-No gain or loss is recognized by
the partnership.
Scenarios that may occur for the
investment in the partnership
> Equal to capital credit; no bonus
> Greater than capital credit; excess
treated as bonus to old partners.
> Less than capital credit; deficiency
treated as bonus to old partners.
2. Withdrawal, retirement or death
of partner
The partner's capital may be:
> Purchased by one or all of the
remaining partners
> Settled by the partnership
Deferred settlement
-Partner's interest is transferred to a
liability account.
-Considered normal claim, subordinate to
the outside creditors.
It may also agree that interest shall accrue
on the unpaid balance of outgoing partner.
It is adjusted for the following:
> Share of any profit or loss.
> Share of any revaluation gains or losses
3. Incorporation of the Partnership
a) Adjust the partner’s capital
balance for their share in
profit or loss and for
revaluation gains or losses as
at the date of the
incorporation.
b) Close the books of the
Partnership.
c) Convert their capital accounts
into their respective number of
shares.
d) Open the new books of the
corporation.
PARTNERSHIP LIQUIDATION
Liquidation- termination of business
operations or the winding up of affairs.
1. Assets are converted into cash
2. Liabilities are settled.
3. Any remaining amount is
distributed to the owners.
Methods of Liquidation
1. Lump-sum Liquidation- all the
non-cash assets of the partnership
are sold simultaneously, or within
a very short period of time, and
the proceeds are used to settle first
all the liabilities and any
remaining amount is paid to the
partners under a lump-sum basis.
 2. Installment Liquidation- partner’s
claim are settled on installment
basis as cash becomes available,
but only after all the partnership
liabilities are fully settled.
Settlement of Claims (Order of Priority)
1. Outside creditors
2. Inside creditors
3. Owner’s capital balances
Lump-sum Procedure
1. All of the non-cash assets are
converted to cash.
2. The total gain or loss on sale of
non-cash assets is allocated to the
partner’s capital balances based in
their P/L ratios.
3. Actual Liquidation Expenses are
allocated to the partner’s capital
balances based on their P/L ratios.
4. The liabilities to outside creditors
are fully settled.
5. The liabilities to inside creditors
are fully settled.
6. Any remaining cash is distributed
to the owners in full settlement of
their interests.
Installment Procedure
1. Some of the non-cash assets are
converted to cash.
2. The carrying amount of any
unsold non-cash assets are
considered as a loss. This is
allocated to partner’s capital
balances based on their P/L ratios.
3. Actual and estimated future
liquidation expenses are is
allocated to partner’s capital
balances based on their P/L ratios.
4. The liabilities to outside creditors
are partially or fully settled.
5. The liabilities to inside creditors
are partially or fully settled but
only after the full settlement of
the liabilities to outside
creditors.
6. If both the liabilities to outside
and inside creditors are fully
settled, any remaining cash less
cash set aside for future
liquidation expenses is
distributed to the owners as partial
settlement of their interest.
Note: Expected future expenses are
recognized immediately as losses to be
allocated to the partner’s capital balances.
Unsold noncash assets are
considered as losses to be allocated also to
the partner’s capital balances.
Doctrine of Marshalling of assets
- Applied when the partnership and
some of the partners are insolvent.
Rules:
1. Any available assets of the
partnership are used to settle the
partnership’s liabilities.
2. In case the assets of the
partnerships are insufficient to pay
all the liabilities, the solvent
general partners are required to
provide additional funds from
their personal assets.
Claims of the personal assets f a partner
(Order of Priority)
i. Those owing to personal creditors
of the partner.
ii. Those owing to partnership
creditors.
iii. Those owing to partners by way of
contribution.
 3. In case some partners are 2. Maximum loss possible is
insolvent (limited partners), their computed by adding carrying
capital deficiency is offset to the amount of unsold non-cash
capital balances of the other assets, estimated future
partners. If after allocating the liquidation cost and cash set
capital deficiency of an insolvent aside for potential unrecorded
(or limited) partner, a solvent liabilities.
partner’s capital balance results to
Cash Priority Program- determines which
a negative amount, the solvent
partner shall be paid first and which
partner is required to provide
partner shall be paid last, after all the
additional contribution.
liabilities are settled.
Non-cash assets used as payment for
Assumptions:
claim
a) Unsold non-cash assets are treated
- Noncash asset is considered sold at the
as loss
amount agreed to be debited to the
b) Expected future liquidation cost
creditor’s or partner’s claim.
and potential unrecorded liabilities
- Different between the carrying amount
are recognized immediately as
of the non-cash asset and the agreed
losses.
settlement amount is treated as gain or
loss that is apportioned to all of the Maximum loss absorption capacity
partner’s capital balances.
Total partner’s interest
Safe Payment Schedule- shoes how much
Partner’s P/L percentage
cash can be safely paid to the partners
during installment liquidation, which
avoids any overpayment.
Procedure:
Assumptions:
1. Maximum loss absorption
a) Unsold non-cash assets are treated capacity of partners is determined.
as loss 2. Maximum loss absorption
b) Expected future liquidation cost capacity is equalized.
and potential unrecorded liabilities 3. Cash priorities are computed by
are recognized immediately as multiplying differences above by
losses. the respective partner’s P/L ratio.
Note: sum of a and b is referred to as
“maximum loss possible”

Procedure:

1. Actual loss on realization is

determined by adding losses on
the sales of non-cash assets and
actual liquidation cost.

CORPORATE LIQUIDATION
AND REORGANIZATION
Insolvency
Under the Insolvency Act of the
Philippines, insolvency may be either:
a. Voluntary
b. Involuntaryp
Corporate Liquidation
Liquidation- termination of business
operation or the winding up of affairs.
- Assets are converted into cash,
liabilities are settled, and any
remaining amount is distributed to
owners.
Measurement Basis
Measurement bases prescribed in the
PFRS do not apply in liquidating entities.
The appropriate measurement are
realizable value (estimated selling price
less disposal costs) for assets and
expected settlement amount for
liabilities.
Statement of Affairs
- Shows the financial position of a
liquidating entity.
Assets
1. Assets pledged to fully secured
creditors- these are assets with
realizable values equal to or
greater than the expected net
settlement amounts of the related
liabilities for which the assets
have been pledged as security.
2. Assets pledged to partially
secured creditors- these are assets
with realizable values less than the
expected settlement amounts of
the related liabilities for which the
assets have been pledged as
security.
3. Free Assets- these are assets that
have not been pledged as security
for liabilities. These also include
excess of assets pledged to fully
secured creditors over the related
liabilities.
Liabilities
1. Unsecured liabilities with
priority- these are all liabilities
that although not secured by any
asset, are mandated by law to be
paid first before other unsecured
liabilities.
2. Fully secured creditors- these are
all liabilities secured by the assets
with sufficient realizable values.
3. Partially secured creditors- these
are all liabilities secured by assets
with insufficient realizable values
4. Unsecured liabilities without
priority- all other liabilities not
classifiable under 1,2, 3 above.
Procedure
1. Restate the assets and liabilities.
2. Identify the classification of the
assets and liabilities.
3. Compute for the Estimated
recovery percentage
Estimated Recovery Percentage
Net free Asstes
Total unsecured liabilities without priority
*Net Free Assets
Total Free Assets
Less: Total Unsecured liabilities
without priority
Net Free Assets
4. The statement of affairs
prepared.
Statement of realization and liquidation
- Periodic financial reports that show
information on the progress of the
liquidation process, most especially
when the winding up of affairs is
entrusted to a receiver.
XX  Liabilities to be liquidated- total
liabilities to be settled as at the
XX
beginning of the period (measured
at book value).
 Liabilities to be assumed-
XX
previously unrecorded liabilities
is that were recognized during the
period (Additional liabilities/ New
liabilities).
 Liabilities liquidated- actual net
settlement amounts of liabilities
paid during the period.
 Liabilities not liquidated- unpaid
liabilities as at the end of the
period (measured at book value).

Debits Credits Debits Credits

 Assets to be realized  Assets realized  Liabilities to be
 Assets acquired  Assets not realized  Liabilities liquidated liquidated
 Liabilities liquidated  Liabilities to be  Liabilities assumed
 Liabilities not liquidated  Liabilities not
liquidated  Liabilities assumed liquidated
 Supplementary  Supplementary
expenses  Supplementary expenses/income-
income
Assets income and expenses realized/incurred
during the period.
 Assets to be realized- total non-cash
assets available for disposal as at the Note: The assets and liabilities are
beginning of the period. measured at book value in order to
highlight the actual gains or losses from
 Assets Acquired- previously
sale of assets and liabilities.
unrecorded assets that were
recognized during the period Reorganization- means the
(Additional assets/ new assets). implementation of business plan to
 Assets realized- represents the actual restructure or rehabilitate a corporation
net proceeds from the conversion of with the hopes of increasing company
non-cash assets into cash during the value. It also involves changing the
period. entity’s capital structure.
 Assets not realized- the unsold non-
Types of corporate organization
cash assets as at the end of the period
(measured at book value). 1. Group reorganization- ownership
Debits Credits within a group of companies
 Assets to be realized changes due to new acquisitions,
(excluding cash) formation of new holding
 Assets acquired  Assets realized company, buyouts, takeovers,
 Assets not realized reverse acquisitions, disposal of
Liabilities
 subsidiaries, demergers, and other
forms of changes in ownership.
2. Recapitalization- change in the
capital structure through
replacement of old shares with
new shares.
a. Change form par to no par or
vice versa
b. Increase or decrease in par or
stated value
c. Share split
3. Quasi-reorganization- accounting
procedure whereby a financially
troubled corporation revalues its
assets and liabilities and realigns
its equity.
4. Corporate rehabilitation- process
whereby a financially troubled
corporation is administered by
another party in order to bring
back the corporation to its former
financial condition.
5. Troubled debt restructuring-
involves the settlement of
obligation at other than the
original agreed method of
settlement.
JOINT ARRANGEMENTS
Joint arrangement is an arrangement of
which two or more parties have joint
control (PFRS11.4)
Essential elements in the definition of
control  vehicle
 Contractual arrangements
o A contractual agreement for the
sharing of joint control over an
investee distinguishes an interest in
a joint arrangement from other
types of investments, such as
investment in equity securities
measured at fair value (PFRS 9),
investment in associate (PAS 28)
and investment in subsidiary (PFRS
3 and 10).
o The contractual arrangement
establishes joint control over the
joint arrangement. Such a
requirement ensures that no single
party is in a position to control the
activity unilaterally.
 Joint control 
o Joint control is the contractually
agreed sharing of control of an
arrangement which exists only when
decisions about the relevant
activities require the unanimous
consent of the parties sharing
control.
Note: An arrangement is considered a
joint arrangement even if not all of the
parties to the arrangement have joint
control. It is sufficient that at least two of
those parties share joint control.
PFRS 11 distinguishes between:
 parties that have joint control of a
joint arrangement (referred to as joint
operators or joint venturers), and 
 parties that participate in but do not
have joint control of, a joint
arrangement.
Types of joint arrangement
 Joint operation
o contractually agreed
o have rights to the assets and
obligations for the liabilities
o held in or not structured separate
 
o parties are called joint operators.
 Joint venture 
o contractually agreed
o equity method 
o have rights to the net assets
o held in a separate vehicle 
o joint venturers 
Note: Party to a joint arrangement is “an
entity that participates in a joint
arrangement, regardless of whether that
entity has joint control of the arrangement.
Summary of Investments
Regular Investor (less than 20%)
- FVPL or FVOCI asset
- PFRS 9 (Fair Value Method)
Significant Influence (20%-50%)
- Investment in Associate
- PAS 28 (Equity Method)
Control (51%-100%)
- PFRS 3 and 10 (Consolidation
Method)
Joint Control
a. Joint Operation (PFRS 11 and
other relevant PFRS)
- Recognize own asset, liabilities,
revenues and expenses plus share
in the assets, liabilities, revenues
and expenses of the joint
operation.
b. Joint Venture (PFRS 11 and PAS
28)
- Equity Method
Note: In the separate financial
statements, investment ins associates,
subsidiaries and joint ventures are
accounted for as either at cost, at fair
value in accordance with PFRS 9 or
using the equity method.
Separate vehicle
- A separately identifiable financial
structure, including separate legal
entities or entities recognized by
statue, regardless of whether those
entities have a legal personality.
Accounting for join operation
transactions
a. No separate records are
maintained
- Joint operations transactions
involving income and expenses
are recorded in each of the joint
operator’s individual books using
the “Joint Operation” account.
Joint Operation
Debits Credits
 Merchandise  Merchandise
contributions withdrawals
 Purchases and  Purchase returns and
freight-in discounts
 Sales return and  Sales and other
discounts income
 Expenses  Unsold merchandise,
if any
Note:
- Personal accounts are used. ei.
receivable from or payable to, a
joint operator.
- Management fees are treated as
expense by the joint operation and
as income by the manager.
- The Joint Operation, personal
accounts and other JO accounts
are maintained alongside a joint
operator’s regular accounts, but
these are closed when the joint
operator prepares its general-
purpose financial statements.
b. Separate records are maintained
- Joint operations transactions are
recorded in those separate books
in the separate books in the
regular manner.
- Joint operators record only their
own transactions in their
respective books.
Note: An entity that acquires an interest in
joint operation whose activity constitutes a
business shall account for its share as a
business combination.
Joint Venture
- Entity recognizes its interest as an
investment and account for it
using the equity method.
- Under the equity method, the
investment is initially recognized
at cost and subsequently adjusted
 for the investor’s share in the
investee’s changes in the equity.
Investment in Joint Venture
Debits Credits
 Initial Investment  Dividends
 Share in Profit
 Share in OCI
Presentation
Presented as non-current assets, except
when they are classified as held for sale
under PFRS 5 Non-Current Assets Held
for Sale and Discontinued Operations.
CONSTRUCTION CONTRACTS
An entity applies PFRS 15 revenue from
contracts with customers to account for
revenue from contracts with customers.
PFRS 15 supersedes PAS 11 Construction
Contracts.
Core principle under PFRS 15
An entity recognizes revenue to
depict the transfer of promised goods or
services to customers in an amount that
reflects the consideration to which the
entity expects to be entitled in exchange
for those goods or services.
Construction contract  a) The entity has no remaining
 is a contract specifically
negotiated for the construction of
an asset or a combination of assets
that are closely interrelated or
interdependent in terms of design,
technology and function or their
ultimate purpose or use.
 Construction contracts are
generally long term.
 The primary issue in the
accounting for construction
contracts is the timing of
recognition of contract revenue
and contract cost.
Revenue recognition principles under
PFRS 15
Step 1: Identify the contract with the
customer
 The contract is with a customer
and (among others) to
collectability of consideration is
probable.
 Accounted when all of the
following criteria are met:
a. The contracting parties have
approved the contract and are
committed to perform the
respective obligations.
b. The entity can identify each
party’s rights regarding the goods
or services to be transferred 
c. The entity can identify the
payment terms for the goods or
services to be transferred
d. The contract has commercial
substance
e. The consideration in the contract
is probable of collection.
No revenue is recognized on a contract
that does not meet the criteria above. Any
consideration received from such contract
is recognized as a liability and recognized
as revenue only when either of the
following has occurred.
obligation to transfer goods or
services to the customer and all or
substantially all of the
consideration has been received
and is non-refundable.
b) The contract has been terminated
and the consideration received is
non-refundable.
Note: Each contract is accounted for
separately.
However, two or more contracts entered
into at near the same time with the same
customer are combined and accounted for
as single contract if:
 a. The contracts are negotiated as a
package with a single commercial
objective.
b. The amount of consideration to be
paid in one contract depends in the
price or performance of the other
contract.
c. Some or all of the goods or
services promised in the contracts
are a single performance
obligation.
Step 2: Identify the performance
obligations in the contract
Each promise to transfer the following is a
performance obligation that is accounted
for separately:
a. Distinct good or service
b. A series of distinct goods or
services that are substantially the
same and have the same pattern of
transfer to the customer.
A promise good or service is distinct if:
a. The customer can benefit from the
good or service  If the entity cannot demonstrate that a
b. The promise to transfer the good
or service is separately
identifiable.
Note: Separately identifiable if the good
or service:
I. Is not an input to a combined
output
II.  does not significantly modify
another good or service promise in
the contract
III.  is not highly interrelated with
other goods or services promise in
the contract.
Note: Series of distinct goods or services
that are substantially the same and have
the same pattern of transfer to the
customer are accounted for a single
performance obligation if each good or
service in the series represents a
performance obligation that would be
satisfied over time.
Satisfaction of performance obligations
1. Over time
a. The customer simultaneously
receives and consumes the
benefits provided by the
entity’s performance as the
entity performs.
b. The entity’s performance
creates or enhances an asset
that the customer controls as
the asset is created or
enhanced.
c. The entity’s performance
does not create an asset with
an alternative use to the
entity has an enforceable
right to payment for
performance completed to
date.
2. At a point in time
performance obligation is satisfied over
time, it is presumed that the performance
obligation is satisfied at a point in time.
Step 3: Determine the transaction price 
 Transaction price is the amount
that the entity expects to be
entitled to in exchange for
satisfying a performance
obligation.
 In a construction contract the
transaction price normally consist
of the following:
o  the contract prices
o  any subsequent variations in
the contract price to the extent
that it is probable that they
will result in revenue and they
are capable of being measured
reliably. 
o A construction contract may
be either:
 a. Fixed price contracts - in which
the contractor agrees to a fixed
contract price are fixed rate per
unit of output.
b. Cost plus contract- a Methods of measuring progress
construction contract in which
the contractor is reimbursed for
allowable or defined costs plus a
fee.
i. Cost-plus variable fee
contract-the contractor
is reimbursed for the
costs plus a percentage
of those costs.
ii. Cost-plus fixed fee
contract-the contractor
is reimbursed for the
costs plus a fixed
amount.
Step 4: Allocate the transaction price to
the performance of obligations.
 The transaction price is allocated
to the performance obligations
based on the relative stand-alone
prices of the distinct goods or
services.
 The stand-alone selling price us
the price at which a promised
good or service can be sold
separately to a customer.
Step 5: Recognize revenue when or as a
performance obligation is satisfied  Percentage of completion- is determined
 For a performance obligation
satisfied over time, revenue is
recognized as the entity
progresses towards the complete
satisfaction of the performance
obligation.
 For a performance obligation is
satisfied at a point in time
revenue is recognized when the
entity completely satisfies the
performance obligation.
 Revenue is measured at the
amount of transaction price
allocated to the performance
obligation satisfied.
1. Input Methods- recognize
revenue on the basis of efforts or
inputs expended relative to the
total expected inputs needed to
fully satisfy a performance
obligation.
2. Output Methods- recognize
revenue on the basis of direct
measurements of the value to the
customers of the goods or services
transferred to date relative to the
remaining goods or services
promised under the contract.
Accounting for Construction Contracts
Can reasonably
Percentage of
Completion
be estimated
Method
Outcome of
the contract Cannot
Zero Profit
reasonably be
estimated
Method
Cost to cost method- refers to the
estimation of stage of completion by
reference to the proportion that contract
costs incurred or work performed to date
bear to the estimated total contract cost.
as the ratio of total cost incurred to date
over the estimated total contract costs.
> Total cost incurred to date represents the
cumulative costs incurred from contract
inception up to the current reporting date.
> Estimated total contract costs pertain to
the forecasted total cost of completing the
contract. This can also be determined as
the sum of total cost incurred to date and
estimated cost to complete.
> Estimated cost to complete pertain to the Record cash collection
anticipated additional cost required to fully Cash XX
complete the contract. Contract retention (if any) XX
Formula #1 A/R XX
POC= Total costs incurred to date
Estimated total contract costs Efforts-expended method
Formula #2 The percentage of completion is based on
POC= Total costs incurred to date efforts-expended in completing the
Total costs incurred to date + Estimated contract - normally in direct labor hours,
total contract costs rather than on cost.
Contact costs
Formula #1
1. Incremental Costs of obtaining a
POC= Total labors to date
contract
Estimated total contract labor hours
2. Cost to fulfill a contract
Formula #2
POC= Total labors hours to date Incremental costs of obtaining a contract
Total labor hours to date + Estimated - Costs incurred in obtaining a
total labor hours contract with a customer that the
General Formula entity would not have incurred had
Contract Price XX the contract not been obtained.
Less: Estimated Total Construction Cost -asset if recoverable.
XX - expense if costs would have been
*Prior period cost incurred incurred regardless of whether the
*Current period cost incurred contract was obtained.
*Estimated cots to complete
Costs to fulfill a contract
Estimated Gross Profit
Multiply by Percent of Completion XX - Costs incurred in fulfilling a
% contract that are within the scope
Realized gross profit (RGP) to date of other standards.
Less: RGP in prior period XX - If costs are outside the scope of
RGP(L) for the current period those standards, it will be
classified as asset if costs are:
Pro Forma Entries a. Directly related to a contract
Incurrence/Payment of construction or specifically identifiable
cost anticipated contract.
b. Generate or enhance resources
CIP XX
that will be used in satisfying
Cash XX
performance obligations in the
Construction revenue recognition
future.
Construction cost XX
c. Expected to be recovered
CIP (If RGP) XX
Amortization and impairment
Construction XX
revenue - Contract costs recognized as asset
CIP (If RGL XX are amortized on a systematic
Record progress billing basis that is consistent with the
A/R XX transfer of the related goods or
PB XX services to the customer.
 - Impairment loss is recognized to
the extent that the carrying amount
of the asset exceeds:
a. The remaining amount of
consideration that the entity
expects to receive in exchange
for the goods or services to
which the asset relates; less
b. The costs that relate directly
to providing those goods or
services and that have not
been recognized as expenses.
When using the cost-to-cost method, an
entity excludes the following when
measuring its progress on a contract:
a. Costs that do not contribute to the
entity’s progress in satisfying the
performance obligation.
b. Costs incurred that are not
proportionate to the entity’s
progress in satisfying the
performance obligation.
Note: The entity may adjust the input
method to recognize revenue only to the
extent of that costs incurred if the entity
expects at contract inception.
Presentation
A contract where either party has
performed is presented in the statement of
financial position as a contract liability,
contract asset or receivable.
•Contract liability- is an entity's
obligation to transfer goods or services to
a customer for which the entity has
received consideration (or the amount is
due) from the customer.
• Contract asset- is an entity's
right to consideration in exchange for
goods or services that the entity has
transferred to a customer when that right is
conditioned on something other than the
passage of time.
• Receivable- is an entity's right to
consideration that is unconditional.
*Construction in progress XX
Less: Progress billings (XX)
Contract asset (liability) XX(XX)
*Cost incurred XX
Add: RGP XX
Less: RGL XX
CIP XX
 CIP>PB (Contact Asset or Due
from customer)
 CIP<PB (Contract Liability or Due
to customer)
Changes in measure of progress
• The measure of progress shall be
updated as circumstances change over
time to reflect any changes in the outcome
of the performance obligation. Such
changes are accounted for prospectively as
a change in accounting estimate in
accordance with PAS 8 Accounting
Policies. Changes in Accounting Estimates
and Errors.
Cost recovery approach
• If the outcome of a performance
obligation that is satisfied over time
cannot be measured reasonably, revenue
shall be recognized only to the extent of
costs incurred that are expected to be
recovered (ie. zero profit" method).
Onerous contract
•A construction contract becomes
onerous if the expected costs in fulfilling
the performance obligation exceed the
transaction price.
•The entity recognizes and
measures the present obligation under an
onerous contract as a provision in
accordance with PAS 37 Provisions,
Contingent Liabilities and Contingent
Assets.
Variable consideration
• If the consideration includes a
variable amount. the entity shall estimate
the amount to which it will be entitled in
exchange for transferring the promised
goods or services to the customer.
• "Constraining estimates of
variable consideration" principle— The
estimated amount of variable
consideration will be included in the
transaction price only to the extent that it
is highly probable that a significant
reversal in the amount of cumulative
revenue recognize° will not occur when
the uncertainty associated with the
variable consideration is subsequently
resolved.
Examples of contract stipulations that
could make the consideration in a
construction contract to be variable:
1. Penalties
2.Incentive payments
3.Cost escalations
Contract modification
•A contract modification is a
change in the scope and/or price of a
contract that is approved by the
contracting parties, in writing, orally or
implied by customary business practices.
Similar terms are "change order,"
"variation" and "amendment."
Contract modification: it is accounted
for:
• As a separate contract- if the
modification results to additional goods or
services that are distinct and the modified
contract price reflects the stand-alone
selling prices of those additional goods or
services.
Account for the existing contract
as is and the accounts
for the modification as a new and separate
contract.
• As if the modification is a
termination of an existing contract and the
creation of a new contract — if the
additional goods or service are distinct but
the modified contract price does not reflect
the stand-alone selling prices of those
additional goods or services.
The balance of the transaction
price from the original contract +
consideration from the modification =
allocated to the remaining performance
obligations
•As if the modification is part of
the existing contract — if the additional
goods or services are not distinct
The effect of the modification is
accounted for as a prospective catch-up
adjustment to revenue.
Claims for reimbursements on tie
contract
•A claim is an amount that the
contractor seeks to collect from the
customer or another party as
reimbursement for costs not included in
the contract price.
• If the entity has an enforceable
right on the claim, the entity shall account
for the claim as a contract modification
using the principles in PFRS 15.
Significant financing composition in a
contract
• Promised consideration is
discounted if the timing of the agreed
payments provides the customer or the
entity with a significant benefit of
financing the transfer of goods and
services. The difference between the
promised consideration and the present
value is recognized separately as interest
revenue or interest expense.
Uncertainty in the collectability of
contract revenue
• If the uncertainty in the
collectability of contract revenue arises at
contact inception, the entity does not
recognize any revenue from the contract.
Any consideration received is recognized
as a liability.
• If the uncertainty in the
collectability of contract revenue arises
subsequent to contract inception, the
collectability is accounted for as
impairment of trade receivable and/or
contract asset.
Non-cash considerations
• The contributed goods and
services are treated as non-cash
consideration and included in the
transaction price if the entity obtains
control over them. Non-cash consideration
is measured:
At fair value or Selling Price of the good
or serviced promised in exchange for the
consideration.
ACCOUNTING FOR FRANCHISE
OPERATIONS - FRANCHISOR
An entity applies PFRS 15 revenue from
contracts with customers to account for
revenue from contracts with customers.
PFRS 15 supersedes PAS 18 Revenue.
Core principle under PFRS 15
An entity recognizes revenue to depict the
transfer of promised goods or services to
customers in an amount that reflects the
consideration to which the entity expects
to be entitled in exchange for those goods
or services.
Revenue recognition principles under
PFRS 15
Step 1: Identify the contract with the
customer.
Step 2: Identify the performance
obligations in the contract.
Step 3: Determine the transaction price  obligation.
Step 4: Allocate the transaction price to
the performance of obligations.
Step 5: Recognize revenue when or as a
performance obligation is satisfied  the
Licensing
PFRS15 defines a license as one
that “establishes a customer’s right to the
intellectual property of an entity”.
Example of licenses of intellectual
property include:
 software and technology
 motion pictures, music and other
forms of media and entertainment
 franchises
 patents, trademarks and copyrights
Franchise
A franchise is a contractual
agreement under which the franchisor
grants the franchisee the right to sell
certain products or services, to use certain
trademarks or trade names or to perform
certain functions usually within a
designated geographical area
Franchises are two types
1. Contractual arrangement between
two private entities or individuals
- The franchisor having developed
a unique concept of product
protects the concept or product
through a patent copyright or
trademark or trade name
2. Contractual arrangement between
a private entity or an individual
and the government - a
governmental body allows a
private entity to use public
property in performing its services
Promise to grant license is:
Not distinct Distinct
The promises are The promise to grant
accounted for the license is treated
together as a single as a separate
performance performance
obligation
Use general Use specific
principles to principles:
determine whether Right to access - the
performance entity's intellectual
obligation is property as it exists
satisfied over time throughout the
or at a period in license period, the
time. performance of
obligation is
satisfied over time.
Right to use - the
 entities intellectual Continuing franchise fees- these are the
property as it exists periodic payments made by the franchisee
at the point in time to the franchisor for the ongoing
at which the license franchisee support. Continuing franchise
is granted, the
fees are also referred to as a royalty fees
performance of
obligation is and are usually based on a certain
satisfied at a point percentage of the franchisee’s sales, but
in time. can also be set up as fixed amount or on a
sliding scale and are payable periodically.
The customer The customer can Sale of equipment and other tangible
cannot detect the detect the use of and assets- in most franchise agreements the
use of and obtain all obtain all the
franchisor provides equipment and other
the remaining remaining benefits
tangible assets to the franchisee for a
benefits from the from the license at
license at the time it the time it was
separate fee.
was granted. granted. Option to Purchase
Intellectual property Intellectual property When the franchise agreement includes the
changes throughout does not change provision that the franchisor has an option
the license period. throughout the to purchase the franchise business, the
a. The entity license period. initial franchise fee must be deferred and
continues to be when the option is exercise, the deferred
involved with the
revenue from initial franchise fee is treated
intellectual property.
as reduction from the investment.
b. The entity
undertakes activity
that significantly
affect the
intellectual property.
May be evidenced
by a sales-based
royalty agreement
between the entity
and the customer.
Franchise fees
Franchise fees refer to the fees that the
franchisee agrees to pay to the franchisor CONSIGNMENT SALES
in a franchise agreement.  An entity (called the consignor)
delivers goods to another party
(called the consignee).
Franchise fees come into the form of:  The consignor recognizes revenue
Initial franchise fee- this is the one of only when the consignee sells the
payment made by the franchisee to the consigned goods to end
franchisor to obtain the franchise right. customers.
This is normally paid at the signing of the  Consigned goods – inventory of
agreement and are normally non- consignor; consignee records
refundable. memo entries.
  Freight and other incidental costs Principal vs agent
– capitalized as cost of the
consigned goods
 Typical consignment, the
consignee is entitled to a
commission.
 Commission – recognized as
expense by the consignor but
income of the consignee.
 When the consigned goods are
sold to end customers.
- The consignor recognized
revenue at gross amounts of
consideration INSTALLMENT SALES METHOD
- The consignee recognized
revenue at the commission or Installment sales method is a special case
fee to which it is entitled. of revenue recognition that deviates from
- Pro forma entries revenue recognition principles of PFRS15.
Consignor Books Consignee Books This method may be used for taxation
Consignment of Goods purposes or when the entity is a micro
Memo Entry Memo Entry entity and has opted to use the income tax
Sale of Goods basis of accounting. 
No Entry Cash XX Under the installment sales method the
Principal AgentCI XX
gross profit from an installment sale is
Payable to XX
initially deferred and subsequently
It controls the Remittance of Sale
good Its performance
realize on a piecemeal basis as the
or service
Cash before the XX obligation
Payableisto to
XX
installment payments are received using
good CEor service isXX arrange Cash theXX
Revenue XX the formula below:
transferred to the provision of
Collection on a sale
customer.
COGS XX goods or services
x Gross profit rate
Inventory XXby another party
Realize gross profit
May personally Recognized as
satisfy a performance revenue at the Deferred gross profit
Installment account receivable
obligation. commission or
fee to which it is
Realized Gross Profit
entitled
Amount Collected
It may engage
another party to DGP beg. – DGP, end.
satisfy some or all of
the performance Gross profit
obligation on its Sales
behalf. Sales 100
Cost of sales 60
Recognized as
Gross profit 40
revenue at the gross
amount
consideration.
 GPR 40%
Formula for determination of Collections
Installment AR beg.
Less: Installment AR end
Amount of collections
Realized Gross Profit
Gross Profit Rate
DGP, beg. /GPR
Less: DGP, end/ GPR
Amount of collections
Note: The amount of collection must be
multiplied by GPR must be the principal
amount and do not include the interest
collections. In case there is collection from
customer who issued a non-interest-
bearing note, the amount to be multiplied
must be present value of the amount
collected. Hence, exclude the interest
compound.
Repossession
The seller may repossess the good sold in
case of default by the buyer. On
repossession date:
a. The repossessed good is debited to
an inventory account at “fair
value”. For purposes of applying
the installment sales method, “fair
value” is either:
i. The appraised value, or
ii. The estimated resale price of
the repossessed good less
reconditioning costs and
normal profit margin
b. The carrying amounts of the
related installment receivable and
deferred gross profit are
derecognized
c. The difference between (a) and (b)
is recognized as gain or loss on
repossession
Pro-forma Entry:
Inventory @ FV XX
Deferred gross profit @ CA XX
Loss on repossession XX
Installment receivable @ CA XX
Gain on repossession XX
Accounting Procedures to record
repossession
1. Record the repossessed
merchandise in an appropriate
inventory account at its fair value
(Estimated Selling Price less
Reconditioning Cost and normal
profit margin) at the date of
repossession.
2. Cancel the uncollected installment
account receivable balance related
the account defaulted only.
3. Write-off the balance of the
deferred gross relating to the
above receivable.
4. Recognize the resulting gain or
loss on repossession.
Note: If the given is the FV and silent if it
is after or before reconditioning cost, then
it is construed as before reconditioning
cost and no need to deduct the
reconditioning cost from its FV. But if the
given is the selling price, then you have to
deduct the reconditioning cost and normal
profit margin even if it is not stated the
selling price is after or before
reconditioning costs. Another tip is if the
given is selling price then deduct the
normal profit margin while if the given is
FV whether after or before reconditioning
cost then ignore the normal profit margin.
Trade-ins
A seller may accept from a buyer a trade-
in of old merchandise. Trade-ins under the
“installment sales method” are accounted
for as follows:
a. The trade-in merchandise is
debited to inventory at fair value.
For purposes of applying the
 installment sales method, “fair
value is either:
i. The appraised value of the
traded-in merchandize
ii. The estimated resale price
of the traded-in
merchandise less
reconditioning costs and
normal profit margin.
b. The seller gives the buyer a trade-
in value for the old merchandise.
The trade-in value is the amount
that is treated as part payment of
the new merchandize being sold.
Note:
 Trade-in value > FV (debited to
over allowance and deducted from
the sale price when computing for
the GPR.
 Trade-in value < FV (credited to
under allowance and added to the
sale price when computing for the
GPR.
 When there is under or over
allowance arising from trade in,
GPR may be changed.

Pro-forma Entry:
Inventory @ FV XX
Over Allowance XX
Installment receivable XX
Installment sale XX
Under allowance XX