FINANCIAL ACCOUNTING AND REPORTING

Learning
Log
Destiny Lazarte
Teacher Adeline Palmerston
BSAC - ACA
Inventories
Inventories
Related Standard: PAS 2

DEFINITION OF TERMS

MEASUREMENT

RECOGNITION
DEFINITION OF TERMS

Inventories
assets that are:
Held for sale in the ordinary course of business
(finished goods)
In the process of production for such sale (work in
progress)
In the form of materials or supplies to be consumed
in the production process or in the rendering of
services (raw materials and manufacturing supplies)

Ordinary course of business - refers to the necessary, normal,

or usual business activities of an entity.
IMPORTANT DEFINITIONS UNDER INVENTORY

Goods in Transit
Goods that the seller has already shipped but the buyer has not yet
received. Goods in transit may form part of the buyer’s or the seller’s
inventories depending on the sale term
SALE TERMS SALE TERMS

FOB Shipping Point FOB Destination

FOB - "free on board" FOB - "free on board"

ownership is transferred to the ownership is transferred to the

buyer upon shipment. buyer only when the buyer
receives the goods.
Recording the inventory:
Included in buyer’s books; Recording the inventory:
Excluded in seller’s books Remains in the seller’s books

As a rule:
the entity who owns the goods being shipped should pay for the shipping
costs
FREIGHT TERMS FREIGHT TERMS

Freight Prepaid Freight collect

The seller pays the freight in advance before
shipment. However, this does not mean that
the seller is the one who is supposed to pay
for the freight.
Freight is not yet paid upon shipment. The
carrier collects shipping costs from the
buyer upon delivery. Thus, the buyer pays
for the freight. However, this does not mean
that the buyer is the one who is supposed
to pay for the freight.

As a rule:
the entity who owns the goods being shipped should pay for the shipping
costs
IMPORTANT DEFINITIONS UNDER INVENTORY

Consigned goods
An entity (consignor) delivers goods to another party (consignee) who
undertakes to sell the goods to end customers on behalf of the consignor.

Recording the inventory:

Consignor retains control over the consigned goods until they are sold
to end customers; consigned goods remained in the consignor’s
inventory;
Transfers of consigned goods between the consignor and consignee
are usually recorded only through memo entries
 IMPORTANT DEFINITIONS UNDER INVENTORY

Inventory financing agreements

Inventories may be acquired or sold uner various forms of financing agreement, which includes:

Product Financing Agreement Pledge of inventory

A borrower uses its inventory as collateral security for a loan.
A seller sells inventory to a buyer but assumes an
Example:
obligation to repurchase it at a later date. Warehouse financing – a third party (e.g. a public warehouse) holds the
inventory and acts as the creditor’s agent.
Recording the inventory:
Recording the inventory:
Seller retains ownership over the inventory Borrower retains ownership over the inventory

Loan of inventory
an entity borrows inventory from another entity to be
replaced with the same kind of inventory.

Recording the inventory:

Borrower includes the loaned goods in its inventory
IMPORTANT DEFINITIONS UNDER INVENTORY

Sale with unusual right of return

The buyer normally recognizes the goods purchased under a sale with right of return at
the time of sale, unless the goods purchased does not qualify for recognition as asset.

Circumstances that do not qualify for recognition:

No economic benefits that will be derived from the goods (e.g. defective or
unsalable);
The buyer intends to return the goods to the seller within the time limit allowed
under sale agreement.
IMPORTANT DEFINITIONS UNDER INVENTORY

Sale on trial or on
approval
A seller allows prospective customer to use a good for a given period of time.

Recording the inventory:

Remains in the seller’s inventory during the trial period
Excluded in the buyer’s inventory until final approval and purchase
IMPORTANT DEFINITIONS UNDER INVENTORY

Installment sale
Regular sale - An installment sale where the possession of the goods is transferred
to the buyer, but the seller retains legal title solely to protect the collectability of
the amount due.

Recording the inventory:

Excluded from the seller’s inventory
Included in the buyer’s inventory at the point of sale
IMPORTANT DEFINITIONS UNDER INVENTORY

Bill and hold sale

A contract (of sale) under which a seller bills a customer but retains physical
possession of the goods until it is transferred to the customer at a future date.

Recording the inventory:

Excluded from the seller’s inventory
Included in the buyer’s inventory upon billing, provided:
The reason for the bill-and-hold arrangement is substantive.
The goods are identified separately as belonging to the customer.
The goods are available for immediate transfer to the customer; and
The seller cannot use the goods or sell them to another customer.
IMPORTANT DEFINITIONS UNDER INVENTORY

Lay away sale

A type of sale in which the goods are delivered only when the buyer makes the final
payment in a series of installments.

Recording the inventory:

Included in the seller’s inventory until the goods are delivered to the buyer when
final installment payment has been made
ACCOUNTING FOR INVENTORIES
 MEASUREMENT

Lower of cost and Net

Initial: Cost Subsequent: Realizable value (LCNRV)*

*in line with the basic accounting concept that: “an asset shall not be carried at an
amount that exceeds its recoverable amount (prudence/conservatism)”

RECOGNITION

Recognized when they meet the definition of inventory and qualify for
recognition as assets, such as when an entity obtains control over them. Control
is determined under circumstances such as:
Goods in Transit
Consigned goods
Inventory Financing Arrangements
Sale with unusual right of return
Sale on trial or sale on approval
Installment Sale
Bill and hold sale
Lay away sale
 Personal Professional
Realizations Realizations
Likewise, in business context, of course proper
I realized that proper accounting for inventories is
accounting procedures and determination of
essential even in daily life, for example: owning a
inventories helps an entity especially those that
small sari-sari store. Through identifying and
are focused on selling products for them to easily
recording inventories in goods that are to be sold
identify goods that needs to be sold first from
to customers, helps one know and track which
goods that are recently purchased. With these,
goods are need to be sold immediately, which
the entity may be able to track their inventories
goods are not counted for one to also track the
well along with their sales and cost of goods that
progress of sales.
were sold and available for sale.
Inventory
Estimation
DEFINITION OF TERMS

PRO-FORMA
DEFINITION OF TERMS

Inventory Estimation
Happens when:
It is not practicable to take a physical count to know the
value of inventories.
Records of inventories are incomplete, and they must
be approximated.

Estimates are allowed under PAS 2 only if the approximate

the cost
The cost of inventories may be estimated using either:
Gross Profit Method
Retail Method
GROSS PROFIT METHOD

Under this method, gross profit is assumed to be relatively constant from period
to period. Thus, the gross profit rate (GPR) is used to determine the cost ratio.
Cost ratio:
Based on sales: 100% Net sales - GPR based on sales
Based on cost: 100% Cost of goods sold ÷ Net Sales (100% + GPR based on
cost)
Cost ratio - used to estimate the inventory and cost of goods sold

RETAIL METHOD

Is often used in the retail industry (e.g. supermarkets and department stores) for
measuring large quantities of inventories with rapidly changing items and with
similar margins and for which it is impracticable to use other costing methods. In
fact, the gross profit method is a variation of this method.

Cost ratio:
Computed directly without regard to the gross profit rate
Net mark-ups and Net mark-downs are considered.
Net mark-ups (markups less markup cancellations) - are net increases
above the original retail price.
Net mark-downs (markdowns less markdown cancellations) - are net
decreases below the original retail price.
APPLICATION OF RETAIL METHOD (AVERAGE COST METHOD)

Average cost method

Storyboard Creation
Under this method, the Total goods Available for sale at cost (Beginning Inventory + Cost of goods
purchased) is determined and divided by the Total goods available for sale at sales price to come up with
Create a short script on whatever topic you have in mind. Make sure to include an audience
the cost ratio.
analysis explaining who your project’s intended audience is and why.
Total goods available for sale at cost
Cost ratio =
Total goods available for sale at sales price or at retail

The cost ratio is then multiplied with net sales to compute for the cost of goods sold (much like under the
gross profit method) or multiplied with the ending inventory at sales price or at retail to compute for the
ending inventory at cost.

Cost of goods sold = Net sales × cost ratio

Ending inventory at cost = Ending inventory at retail × cost ratio

When determining Total goods available for sale at sales price, net mark-ups are added while net
markdowns are deducted.
APPLICATION OF RETAIL METHOD (FIFO COST METHOD)

FIFO cost method

Storyboard Creation
The application for this method is very similar to the application of the Average cost method. The only
Create a short script on whatever topic you have in mind. Make sure to include an audience
difference lies on the computation of the cost ratio. Under this method, the beginning inventories at cost
analysis explaining who your project’s intended audience is and why.
and at retail are simple excluded from total goods available for sale when computing for the cost ratio.

Total goods available for sale at cost less beginning inventory at cost
Cost ratio =
Total goods available for sale at sales price or at retail less beginning inventory at retail

The cost ratio is then multiplied with net sales to compute for the cost of goods sold (much like under the
gross profit method) or multiplied with the ending inventory at sales price or at retail to compute for the
ending inventory at cost.

Cost of goods sold = Net sales × cost ratio

Ending inventory at cost = Ending inventory at retail × cost ratio
PRO - FORMA FORMULA STATEMENT FOR COST OF GOODS SOLD

Accounts of a manufacturing entity

Raw materials, beg. ₱ xx
Net purchases xx
Freight-In xx
Total raw materials available for use xx
Raw materials, end. (xx)
Raw materials issued to production xx
Work in process, beg. xx
Direct labor xx
Production overhead xx
Total goods put into process xx
Work in process, end. (xx)
Cost of goods manufactured xx
Finished goods, beg. xx
Total goods available for sale xx
Finished goods, end. xx
Cost of goods sold ₱ xx

Personal
Realizations
Same goes with inventory estimation, I realized
that proper accounting for inventories is essential
especially when it needs an in-depth analysis on
products especially when uncertainties happen.
Professional
Realizations
In addition to prior knowledge or background on
inventory, it is also essential to have inventory
estimation because there are external factors
(e.g., flood, calamities, etc.) that may arise which
can cause inventories to be lost, or out of track.
Thus, when an entity assess that physical count is
not enough, they will go through the process of
approximation of inventories.
Agriculture
Agriculture
Related Standard: PAS 40

DEFINITION OF TERMS

MEASUREMENT

RECOGNITION
DEFINITION OF TERMS

Agriculture
farming or the process of producing crops and raising livestock.
Agricultural activity
is "the management by an entity of the biological transformation
and harvest of biological assets for sale or for conversion into
agricultural produce or into additional biological assets.” (PAS
41.5)
Biological assets
is “the harvested produce of the entity’s biological assets.” (PAS
41.5). It refers to those that are in their natural state and are not
yet processed.
DEFINITION OF TERMS

Biological assets
“a living animal or plant.” (PAS 41.5)
Consumable biological assets - "those that are to be
harvested as agricultural produce or sold as biological assets.”
(PAS 41.44)
Bearer Biological Assets – those that are held to bear produce.
Bearer Plants – “a living plant that:
a. Is used in the production or supply of agricultural
produce;
b. Is expected to bear produce for more than one period;
c. Has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales.” (PAS 41.5)
DEFINITION OF TERMS

Harvest
Is “the detachment of produce from biological asset or the
cessation of a biological asset’s life processes.” (PAS 41.5)
Mature Biological Assets
are “those that have attained harvestable specifications (for
consumable biological assets) or are able to sustain regular
harvests (for bearer biological assets). (PAS 41.45)
IMPORTANT DEFINITIONS UNDER AGRICULTURE

Agricultural Activity
These include: raising livestock, forestry, annual or perennial cropping, cultivating orchards and
plantations, floriculture, and aquaculture (including fish farming). (PAS 41.5)

Common features:
a. Capability to change - biological transformation.
b. Management of change - enhance, stabilize conditions for process to take place.
c. Measurement of change - change in quality/quantity brought about by biological
transformation or harvest.

Biological transformation comprises the following:

Asset changes through:
a. Growth - increase in quantity or improvements in quality of an animal or plant.
b. Procreation – creation of addition living animal or plant.
c. Degeneration – decrease in the quantity or deterioration in quality of an animal or
plant
Production of agricultural produce.
IMPORTANT DEFINITIONS UNDER AGRICULTURE

Government Grants
Under PAS 41, if the government grant is:
a. Unconditional – the grant is recognized in profit or loss when it becomes receivable.
b. Conditional – the grant is recognized in profit or loss when the attached conditions
are met.
c. Conditional but the terms of the grant allow part of it to be retained according to
the time that has elapsed – a portion of the grant is recognized in profit or loss as time
passes.
Encouraged Disclosures
Disclosure of the following information is encouraged but not required:
a. Consumable and bearer biological assets
b. Mature and immature biological assets
c. Breakdown of total gain (loss) from changes in FVLCS during the period attributable to
price change and physical change
MEASUREMENT (BIOLOGICAL ASSETS)

Fair value less costs to sell

Initial and Subsequent: (FVLCS)

If fair value cannot be reliably determined on initial recognition:

Cost less accumulated depreciation and
Initial: Cost Subsequent: accumulated impairment losses

MEASUREMENT (AGRICULTURAL PRODUCE AT THE POINT OF HARVEST)

In all cases,
Fair value less
Initial: costs to sell
Subsequent: LCNRV under PAS 2

Gain or loss arising from initial measurement and subsequent changes in FVLCS is
recognized in profit or loss.

RECOGNITION

A biological asset or agricultural produce is recognized when it meets the asset

recognition criteria, including the reliable measurement of its fair value or cost.

Personal
Realizations
I was really shocked and amazed that there are
accounting procedures in agricultural activity and
that there are several things that needs to be
taken into consideration such as: classifying
whether an asset is a biological asset where PAS
41 applies. These information provided a more
deeper understanding on certain accounting
principles and standards.
Professional
Realizations
This chapter is a significant concept especially those
entities focusing on agricultural industry, raising
livestock and producing products from fruits and
plants as its source. They must take into
consideration the correct classification of those
assets which PAS 41 applies and if not, what other
standards that may apply. Since I learned that once
an asset is wrongly classified, then the subsequent
measurement will be completely wrong all
throughout.
Property, Plant
Property, Plant
and Equipment
and Equipment
PART 1
Related Standard: PAS 16

DEFINITION OF TERMS

INITIAL MEASUREMENT

RECOGNITION
DEFINITION OF TERMS

Property, Plant and Equipment

these are:
a. Tangible Assets (have physical substance);
b. Used In business (used in the production or supply of goods or
services, for rental, or for administrative purposes); and
c. Long-term in nature (expected to be used for more than one
period).
Cost
is “the amount of cash or cash equivalents paid of the fair value of the
other consideration given to acquire an asset at the time of its acquisition
or construction or, where applicable, the amount attributed to that asset
when initially recognized in accordance with the specific requirements of
other PFRSs.” (PAS 16.6)
CLASSES OF PPE
a. Land (Property) – it is used in the entity’s operations as “owner occupied” property such as land
on which the entity’s office building was constructed, land used as plant site, and land held for future
plant site.
b. Land improvements – are enhancements to the land which have a definite useful life, such as
private driveways, walks, fences, parking lots, drainages and water systems, and cost of trees, shrubs,
plants, and other landscaping.
c. Building (Plant) – is classified as PPE if it is used in the entity’s operations as “owner occupied”
property such as office building and those that are constructed or developed for future use.
d. Building Improvements – are subsequent expenditures that either increase the useful life or
improve the current state of a building. Ex. Elevator & escalator not included in the purchased
building; ventilation, plumbing and lighting systems installed after occupancy; and immovable
fixtures.
e. Equipment – this refers to delivery and transportation equipment, office equipment, machinery,
furniture and fixtures, furnishings, factory equipment, and similar fixed assets.
f. Bearer Plants – is a living plant that:
(1) is used in the production or supply of agricultural produce;
(2) is expected to bear produce for more than one period; and
(3) has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales. (PAS 16.6)
SELF-CONSTRUCTED ASSETS
The entity measures the cost of a self-constructed asset using the same principles used for a
purchased asset.
OTHER MODES OF ACQUISITION OF PPE

Acquisition through exchange

PPE may be acquired in exchange for:
(a) a non-monetary asset or
(b) a combination of monetary and non-monetary assets.

Measurement of PPE depends on whether exchange transaction has commercial

substance or not.

1. With Commercial Substance – an exchange that results to an expected change in

the entity’s subsequent cash flows.
Fair value of the asset given up (plus cash paid or minus cash received)
Fair value of the asset received
Carrying Amount of the asset given up (plus cash paid or minus cash received)
2. Without Commercial Substance – PPE received is measured at the carrying
amount of the asset given up (plus cash paid or minus cash received)
OTHER MODES OF ACQUISITION OF PPE

Acquisition through Trade-in

In a trade-in transaction, a buyer uses a used asset as part payment for the purchase of a new asset.
PPE will be measured through this order of priority:
a. Fair value of the asset given up (plus cash paid or minus cash received)
b. Fair value of the asset received
c. Carrying Amount of the asset given up (plus cash paid or minus cash received)
Acquisition through issuance of own equity instruments
Under PFRS 2 Share-based Payments, the asset received is measured using the following order of
priority:
a. Fair value of the asset received
b. Fair value of the equity instrument issued
Acquisition through issuance of debt instruments
A PPE in this transaction is initially measured using the following order of priority:
a. Fair value of the asset received
b. Fair value of the debt instrument issued
OTHER MODES OF ACQUISITION OF PPE

Acquisition through Donation

A PPE received from donation is measured at fair value and accounted for as:

a. Donated capital – if the donor is an owner (shareholder). Any cost incurred

attributable to the receipt of donation and transfer of ownership is offset to the
donated capital account.

b. Income – if the donor is an unrelated party. Any cost incurred attributable to the
receipt of donation and transfer of ownership is offset to the income recognized.

c. Government grant in accordance with PAS 20 – if the donor is the government.

INITIAL MEASUREMENT

Cost
Is measured at the cash price equivalent at the acquisition date. If payment is
deferred, the difference between cash price equivalent and the total payment is
recognized as interest expense.

Cost comprises of the following:

a. Purchase Price, including import duties, nonrefundable purchase taxes, less
trade discounts and rebates.
b. Direct costs of bringing the asset to the location and condition necessary for
it to be used in the manner intended by management.
c. Initial estimate of dismantlement, removal and site restoration costs for
which the entity incurs an obligation by acquiring or using the asset other than
to produce inventories.

RECOGNITION

a. It is probable that future economic benefits associated with the item will flow
to the entity; and
b. The cost of the item can be measured reliably. (PAS 16.17)
 Personal
Realizations
It really is tricky to understand this chapter
because it involves construction of building,
acquisition of land, and other non-current asset. I
learned that even construction activities involve
proper accounting procedures where it is
necessary to identify them before the
construction activity will take place, while it is
ongoing and after the whole construction activity.
Professional
Realizations
This chapter provides an overview on how to
account for property, plant and equipment where an
entity identify and considers costs that are directly
attributable to the acquisition of the PPE, and costs
that are expensed outright. These concepts is helpful
especially to those entities who venture on using
assets that are necessary in their production or
supplying activities wherein these assets are also
long-term in nature.
Property, Plant
Property, Plant
and Equipment
and Equipment
PART 2
Related Standard: PAS 16

DEFINITION OF TERMS

SUBSEQUENT MEASUREMENT

RECOGNITION
DEFINITION OF TERMS

Depreciation
Is “the systematic allocation of the depreciable amount of an asset over its
useful life” (PAS 16.6)

Kinds of depreciation:
1. Physical depreciation – This relates to an asset’s deterioration and wear-
down over a period of time.
2. Functional or economic depreciation – This arises from an asset’s
obsolescence of inadequacy to perform efficiently.
Obsolescence – the process of becoming no longer useful or outdated.
Types of obsolescence:
Functional obsolescence – (asset loses value due to outdated design)
Locational or Economical obsolescence – (property loses value
because of negative influences from external factors, e.g., flood,
landslide, etc.)
Technical obsolescence – (a new product or technology
replaces an old one)
Physical obsolescence – (asset loses value due to
misuse or poor maintenance)
Inadequacy – results when an asset is no longer appropriate
because of an increased volume of operations.
DEFINITION OF TERMS

Recognition of depreciation:
Each significant part of an item in PPE is depreciated separately. (PAS
16.44)
Recognized in profit or loss (as expense) unless it is included in the cost of
producing another asset.
Starts when the asset is available for use in the manner intended by the
management; and stops when the asset is:
Derecognized (i.e., sold or disposed of);
Classified as held for sale under PFRS 5; or
Fully depreciated
Depreciable amount
Is “the cost of an asset, or other amount substituted for cost, less its residual
value.” (PAS 16.6)
Residual value
Is “the estimated amount that an entity would currently obtain
from disposal of the asset, after deducting the estimated
costs of disposal, if the asset were already of the age and
in the condition expected at the end of its useful life.” (PAS 16.6)
DEFINITION OF TERMS

Useful life
(a) “The period over which an asset is expected to be available for use by
an entity; or
(b) The number of production or similar units expected to be obtained
from the asset by an entity.” (PAS 16.6)

Factors to consider in determining the useful life of an asset:

a. Expected usage of the asset
b. Expected physical wear and tear
c. Obsolescence
d. Legal and similar limitation on the use of the asset (e.g., the government
places an age limit for public utility buses)

DEPRECIATION METHODS
Straight-line method (Based on
time)
Under this method, depreciation is recognized evenly
over useful life of the asset. The formula is as follows:
Annual depreciation = Depreciable amount ÷ Useful
life
DEPRECIATION METHODS (PARTIAL YEAR)
When an asset is acquired or disposed of during the
year, the full-year depreciation is prorated in order to
achieve proper matching. In practice, the proration is
normally done on the basis of the nearest full month.
a. When an asset is acquired or disposed of during
the first half of a month, the asset is treated as if it
has been acquired or disposed of at the beginning
of that month.
b. When an asset is acquired or disposed of during
the last half of a month, the asset is treated as if it
has been acquired or disposed of at the end of that
month (or at the beginning of the following month).
DEPRECIATION METHODS
Sum of the years digits’ (SYD)
Method (Accelerated)
This method is under accelerated depreciation method
where depletion charges decrease over the useful life of
the asset. Under this method, depreciation is computed
by applying a series of fractions to the depreciable
amount of the asset. The formula is as follows:
SYD Denominator = Life x [(Life+1) ÷ 2]
DEPRECIATION METHODS
Double Declining Balance Method
(Accelerated)
This method is also under accelerated depreciation
method, where depreciation is computed by applying a
fixed rate on the asset’s carrying amount, rather than the
depreciable amount. Unlike other depreciation methods,
the double declining method initially ignores the residual
value. The residual value is considered only at the latter
part of the asset’s useful life by adjusting depreciation
charge(s) so that the carrying amount does not fall below
the residual value. The formula for the rate is as follows:
Double declining rate = [2 ÷ Life]
150% declining rate (variation) = [1.5 ÷ Life]
DEPRECIATION METHODS

Units of production Method (Based on actual physical use)

This relates depreciation to the estimated production capability of an asset and is expressed in a
rate per hour of input or per hour of output. The formulas are as follows:

Input Method (based on hours): Depreciation rate = Depreciable amount ÷ Estimated total hours

Output Method (based on units produced): Depreciation rate = Depreciable amount ÷ Estimated total
units

Note: No depreciation is recognized when the asset is not used during the period.

Other depreciation methods (Group methods)

When component depreciation (i.e., item-by-item basis) is too costly to implement, the following
simplified depreciation methods may be used:

1. Composite Method and Group Method

2. Retirement Method
3. Replacement Method
4. Inventory Method
SUBSEQUENT MEASUREMENT

Subsequent to initial recognition, an entity chooses either:

Cost Model – a PPE is carried at its cost less any accumulated depreciation and any accumulated
impairment losses.
Revaluation Model – a PPE is subsequently measured at a revalued amount, being its fair value at
the date of the revaluation less any subsequent accumulated depreciation and accumulated
impairment losses.
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.” (PFRS 13. Appendix A)
Basis for revaluation:
PFRS 13 requires an entity to:
a. Consider the non-financial asset’s highest and best use, determined from the perspective of
market participants;
Highest and best use takes into account the ff:
Physical characteristics of the non-financial asset;
Legal restrictions on the use of the non-financial asset; and
Financial feasibility – whether the use of the asset generates adequate income or cash flows.
b. Observe the fair value hierarchy; and
c. Use an appropriate valuation technique.
SUBSEQUENT MEASUREMENT
Three most widely used valuation techniques
1. Market approach – fair value measurement is based on the sale prices of similar properties that were
recently sold, adjusted for the differences in the properties.
Factors to consider:
a. Location
b. Features of the location
c. Size of the property
d. Physical features; and
e. Legal restrictions on the property
2. Cost approach - fair value measurement is based on the amount currently needed to replace the asset
(current replacement cost). Involves the following steps:
(1) Estimate the asset's replacement cost.
(2) Estimate the depreciation taking into account the asset physical deterioration, functional obsolescence
and locational obsolescence.
(3) The difference between (1) and (2) is the fair value.
(4) Fair value less carrying amount is the revaluation surplus.
3. Income approach – the valuation is based on the amount of income that the property can potentially
generate, This involves estimating the following:
a. The annual income, net of operating expenses, expected from the property; and
b. The appropriate discount rate or capitalization rate when which will be applied to the amount determined
in (a) above.
 Personal
Realizations
Alongside with PPE Part 1, this chapter is really is
tricky to understand too because it involves the
subsequent measurement of PPE. This chapter
also tickled my curiosity on building projects by
big-time businesses in terms of the subsequent
measurement of PPE they use. Since the entity
chooses either the cost model or revaluation
model.
Professional
Realizations
This chapter is also essential for PPE items because
these assets are subjected to depreciation and are
identified which subsequent measurement is
applied, either cost model or revaluation model. In
this case, it depends on the entity which subsequent
measurement they will apply as long as it will provide
them relevant and reliable financial information
derived from the assets (PPE).
 Depletion of
Depletion of
Mineral Resources
Mineral Resources
Related Standard: PFRS 6

DEFINITION OF TERMS

MEASUREMENT

CLASSIFICATION
DEFINITION OF TERMS

Exploration for and Evaluation of Mineral

Resources
“the search for mineral resources, including minerals, oil, natural gas and similar
non-regenerative resources after the entity has obtained legal rights to explore
in a specific area, as well as the determination of the technical feasibility and
commercial viability of extracting the mineral resource.” (PFRS 6. Appendix A)
Exploration and evaluation expenditures
“expenditures incurred by an entity in connection with the exploration for and
evaluation of mineral resources before the technical feasibility and commercial
viability of extracting a mineral resource are demonstrable.” (PFRS 6. Appendix A)

Application: PFRS 6 is applicable after legal rights are

obtained but before technical feasibility and commercial
viability are demonstrable.

Accounting Policy: PFRS 6 permits entities to develop their

own accounting policy based entirely on management’s
judgment and without the need to consider the hierarchy of
standards in PAS 8.

Note: Expenditures may be recognized as expenses or assets

depending on the chosen accounting policy.
DEFINITION OF TERMS

Exploration and evaluation assets

“exploration and evaluation expenditures recognized as assets in
accordance with the entity’s accounting policy.” (PFRS 6. Appendix A)
Depletion
Is the systematic allocation of the depletion base of a natural resource
over the period the natural resource is extracted.
Depletion base
Is the capitalized cost of the natural resource less its residual value.
Useful life of a natural resource
Is expressed as the quantity of natural resource or number of production
or similar units expected to be obtained from the natural resource by an
entity.
DEFINITION OF TERMS

Trust fund doctrine

A corporation’s legal capital is considered a trust fund for the protection
of its creditors, thus, no part of it can be distributed unless the
corporation is dissolved or liquidated.
Wasting asset doctrine
A doctrine that applies to wasting assets corporation wherein dividends
can be declared not only from unrestricted retained earnings but also from
the balance of accumulated depletion to the extent that it is already
realized but not yet liquidated.
IMPORTANT DEFINITIONS UNDER DEPLETION OF MINERAL RESOURCES

Natural resources (mineral resources)

often called wasting assets, include petroleum, minerals and timber. They have two main
features:
1. The complete removal (physical consumption) of the asset, and
2. the replacement of the asset only by an act of nature.
IMPORTANT DEFINITIONS UNDER DEPLETION OF MINERAL RESOURCES

Impairment Loss
Exploration and evaluation assets are assessed for impairment when
indication exists that their carrying amount exceeds their recoverable
amount. Indications include:

a. The right to explore has expire or will expired in the near future and is
not expected to be renewed;
b. Expenditures for further exploration and evaluation activities are
significantly higher than expected;
c. The exploration and evaluation activities in a specific area have to be
discontinued because no mineral resources have been discovered; and
d. Indication exists that, although a specific area will be developed, the
carrying amount of the exploration and evaluation asset is unlikely to
be fully recovered.
IMPORTANT DEFINITIONS UNDER DEPLETION OF MINERAL RESOURCES

Depletion
Depletion begins when natural resource starts to be extracted and ceases when the
natural resource is physically consumed or when the natural resource is
derecognized – disposed before it is consumed. No depletion is recognized in
periods where no natural resource is extracted.

It is normally computed using the units-of-production method.

Formula:
Depletion rate per unit = Depletion Base / Total estimated units to be
extracted
Depletion charge = Depletion rate per unit × actual units extracted

Depletion charge for each period forms part of the cost of inventory – which
will be expensed when inventory is sold.
IMPORTANT DEFINITIONS UNDER DEPLETION OF MINERAL RESOURCES

Liquidating Dividends
These are dividends declared in excess of retained earnings.

Wherein:
Depletion is realized when the inventory to which it was charged is sold to
unrelated parties.
Depletion is not yet liquidated if it has not yet been declared as dividends in prior
periods.
Formula:
ACCOUNTING FOR DECOMMISSIONING AND RESTORATION COSTS

Decommissioning and restoration costs are capitalized only if the entity has
incurred a present obligation for such costs.
Present obligation arises from either:
legal obligation (law or contract) or;
constructive obligation (due to past practices)
 MEASUREMENT (EXPLORATION AND EVALUATION ASSETS)

Cost model or revaluation

Initial: Cost Subsequent: model

The initial measurement at cost includes the present value of any decommissioning
and restoration costs. Whereas expenditures related to development of mineral
resources are not recognized as exploration and evaluation assets.

CLASSIFICATION (EXPLORATION AND EVALUATION ASSETS)

Exploration and evaluation assets are initially classified as a separate class of

assets and considered as tangible or intangible depending on the nature of
assets. Then, they are assessed first for impairment and reclassified when the
technical feasibility and commercial viability of extracting the mineral resource
become demonstrable.

Personal
Realizations
There are also set of accounting procedures that
need to be followed especially to those entities
which venture on activities related to mineral
resources. Before, I assumed that only the
government are doing such activities but to my
surprise, there are also other business entities
allowed by the government to explore forests and
places which have natural or mineral resources
from them.
Professional
Realizations
This chapter is full of enlightenment because it tackles
about exploration and evaluation of mineral resources,
depletion charges, and significant classifications
relating to these assets. In which it also involves how to
account for costs incurred if an entity has a present
obligation in restoring the site when the entity is already
done extracting the natural resources from the site.
Since, it also talks about many concepts, which is why
utmost patience and sound decision-making skills are
encouraged so that the entity may be able to provide
more relevant and no less reliable, or more reliable and
no less relevant information.
 What is/are your most and/or least favored topic/sub-topics
Storyboard Creation
and/or activities? Why?
Actually, if summer classes were given ample time for us, I think all the topics are quite bearable for me compared to my
Create a short script on whatever topic you have in mind. Make sure to include an audience
experiences last semester. But, so far, my most favored topic is all about Agriculture. It really amazed me because I did
analysis explaining who your project’s intended audience is and why.
not expect that there are accounting concepts relating to fruit-bearing trees, plants, and animals. Also, the reactions
and the Slido channel on MS Teams makes every synchronous sessions' discussions interactive. I will definitely be
missing all these stuffs.

What are the challenges you encountered and how did you
overcome them?
Storyboard Creation
I guess being unmotivated and too affected in problems concerning my family and my surroundings were quite challenging
for me because honestly, it affected my performance, but gladly, I have friends where I can vent out all my feelings, pain,
Create a short script on whatever topic you have in mind. Make sure to include an audience
stress and everything. They helped meexplaining
analysis survived who
this your
termproject’s
and I'mintended
glad to have them.
audience Of course,
is and why. all will not be possible
without God. Through Him and all His wonders, I was able to overcome the challenges and hurdles I encountered especially
during these times. Also, thanks to you Ma'am Z for sharing your knowledge to me and also to my classmates. If things get
back to normal, I would like to personally thank you for giving me an opportunity to have you as one of my instructors, you
equipped me with your knowledge, wisdom and skills which I can use once I become a professional business individual.
Thank you ma'am! Stay safe and may God Bless you always!