Point-in-Time/ cost recovery (zero profit)

- recognizes revenue only to the extent of costs incurred that are expected to be recoverable.

- only after all costs are incurred when gross profit will be recognized

- revenue should recognize at a point in time (the company recognizes revenues and gross profit when
the contract is completed)

Construction Contract

- requires the treatment of a contract to last for a period of more than one year.

- the contract activity starts in one financial period and ends in another

- thus creating a problem to which of the two or more periods contract income and costs should be
allocated

- 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 their design, technology, and function or their
ultimate purpose or use

- may involve the building of one asset or a series of interrelated assets

- they also include rendering of services

Fixed price contract

- a contract in which the contractor agrees to a fixed price, or a fixed costs per unit of output, which in
some cases is subject to cost escalation clauses

Cost-plus contract

- a contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a
percentage of these costs or a fixed fee

Construction revenue

- total amount of consideration receivable under the contract

- an estimate of what the final amount will be

- initial amount of revenue agreed of the contract

- variations in contract work and claims

- agreed variation (increase/decrease)

- cost escalation clauses in a fixed price contact (incr.)

- penalties (decr.)

-
Variation

- instruction by the customer for a change in the scope of the work to be performed under the contract

Claim

- amount that the contractor seeks to collect from the customer or another party as reimbursement for
costs no included in the contract price

Over-time / Percentage -of-completion

- application of the accrual assumption.

-used when the outcome of the construction contract can be estimated reliably

- avoids the mismatch between costs being recognized as they are incurred, and revenue only being
recognized when the contract is completed

Cost-to-cost method (proportion of contract costs incurred)

- most popular of the input measures

- degree of completion is determined by comparing costs already incurred with the most recent
estimates of total expected costs to complete the project
Voluntary insolvency

- when the insolvent entity itself petitions the Regional Trial Court that it be declared as insolvent

- In the case of involuntary insolvency, the petition is made by three of more creditors

- both the petitions for suspension of payments and for voluntary insolvency shall include as schedule
and inventory of all debtor’s assets and liabilities

- the debtor has insufficient assets to pay its debts

Involuntary insolvency

- the debtor committed an act of insolvency

- the debtor has left or with the intent to defraud creditors, has concealed or is removing assets to avoid
attachment

 When a debtor is declared insolvent, its assets and liabilities are placed within the jurisdiction
and control of the court in insolvency without affecting the liens of mortgagees and pledges
 Liquidation under insolvency does not involve termination of the business or dissolution of the
corporation
 Acts of the court: to dismiss the debtor’s or creditor’s bankruptcy petition or to grant for relief
under insolvency law
 The court appoints an interim trustee after the order of relief, to serve permanently or until
trustee is elected by the creditors
 Outsider creditors appoint a trustee to manage the debtor’s estate

Trustee

- elected by the creditors or appointed by the court assumes custody of the debtor’s nonexempt
property

- to continue operating the debtor’s business if directed by the court

- realize the free assets of the debtor’s estate

Pay cash to unsecured creditors

- responsible for keeping accounting records to enable the filing of a final report with the court

Statement of affairs

- a financial condition prepared for a corporation entering into the stage of liquidation or bankruptcy

- it is a report designed to show the estimated amount that would be received by each class of claim in
the event of liquidation

- provides information concerning how much money each class of creditors can expect to receive on
liquidation of the company
  Assets are classified as to whether they are pledged with creditors or not pledged with creditos
 Liabilities are classified by category of creditor: creditor’s with priority, secured creditors, and
unsecured creditors, general creditors
 Estimated recovery percentage/ dividend to general unsecured creditors = net free assets / total
unsecured creditors without priority

Statement of reliazition and liquidation

- an activity progress toward the liquidation of a debtor’s estate

- it shows the actual transaction that transpired during the period covered

- reports the actual liquidation results

- provides the ongoing reporting of the trustee’s activities and is updated throughout the liquidation
process
  PFRS 11: Joint arrangement adopts the definition of control as included in PFRS 10 as a basis for
determining whether their joint control

Joint control

- requires an entity or a party to a joint arrangement to determine the type of joint arrangement in
which it is involved by assessing its right and obligations

Arrangement

- an activity or an operation or a specific grouping of assets and liabilities, which may or may not form a
legal entity such as a company

Joint arrangements

- arrangements where two or more parties have joint control

- this will only apply if the relative activities require unanimous consent of those who collectively control
the arrangement

Joint operation

- is a joint arrangement whereby the parties that have joint control of the arrangement have rights to
the assets and obligation for the liabilities relating to the arrangement

- the entity only has sharein the individual assets or liabilities of the joint arrangement

Joint venture

- the parties have joint control of the arrangement have rights to the NET ASSETS of the arrangement

- usually involves the establishment of a corporation, partnership, or other economic entity in which
each joint venturer has ownership interest

- when a party has an interest in the net assets and any losses exceed the investment, the losses are not
recognized

 If a joint operator sells goods to the joint operation at a profit or loss, then the joint operator
will only recognize the profit or loss to the extent of the other parties’ interests in the joint
operation
 If a joint operator purchases goods from a joint operation to which it is party, it must not
recognize its share of any gains or losses until it resells the assets to an external party
 A joint operator contributing assets other than cash cannot transfer the asset at fair value to
the joint operation and recognize a full profit on the transaction
 The joint operators can only recognize gains and losses on such transactions to the extent of
the other parties’ interests in the joint operation
Assume:

1. Joint operator XX carries a non-current asset at fair value in its accounts; for example, an item of plant
for P990,000 and its asset is contributed to a joint operation

2. Joint operator YY, contributes cash of P900,000

Books of joint operators

XX

450,00
Cash in JO (50% x 900,000 ) 0
450,00
Non-current assets in JO 0
(50% x 900,000)
900,00
Non-current assets 0

YY

450,00
Cash in JO (50% x 900,000 ) 0
450,00
Non-current assets in JO 0
(50% x 900,000)
900,00
Non-current assets 0

 Where the carrying amount of the asset is lower than the fair value, the operator makes a profit
on selling the proportion of the asset to other operators

Assume:

1. Joint operator Xx contributed a non-current asset with a fir value of P900,000, a carrying amount of
P720,000. Joint operator XX can then recognizes a profit on sale of half the noncurrent asset, namely
P90,000 (being ½ (900,000 – 720,000)

2. Joint operator YY contributed cash of P900,000

Books of joint operators

Cash in JO (50% x 900,000) 450,000 Cash in JO (50% x 900,000 450,000
Noncurrent assets in JO 360,000 Noncurrent assets in JO 450,000
( 50% x 720,000) (50% x 900,000)
Noncurrent assets 720,000 Cash 900,000
Gain on sale of NCA 90,000
(180,000 x 50 %)
  D had manufactured the pipes at a cost of P11,000,000. All properties to the contact agreed that
the fair value of these gas pipes was P15,000,000 and the fair value of the pipeline once it was
completed was P50,000,000
 The operators have a 70% interest in the joint operation
Gas pipeline 15,000,000
steel pipelines 11,000,000
Gain on steel pipes (70% of gain) 2,800,000
Unrealized gain - contra account (30% of gain, P4,000,000) 1,200,000

Amortization expense - gas pipeline (15,000,000/20yrs 750,000

Accumulated depreciation - gas pipeline 750,000

Unrealized gain- contra account (1,200,000/20yrs 60,000

Amortization expense 60,000

 The unrealized gain is a contra account to the pipeline account, it should not be reported as
deferred gain on the liability
 Balance sheet: the unrealized gain will be offset against the pipeline such that the pipeline’s net
cost is P13,860,000 (15,000,000-1,140,000) (1200,000-60,000)
 As the net cost of the pipeline is being amortized, the unrealized gain account is also being
amortized, The unrealized gain is being brought into income over the life of the pipeline

Cash settlement
interest in JO
Add: share in JO gain or profit
Total
Less: Withdrawals
Cash settlement

Downstream transactions

- joint venturer purchases assets from a joint venture

- the joint venturer should not recognize its share of the profit made by the joint venture on the
transaction

Upstream transactions

- joint venturer may sell or contribute assets to a joint venture so making a profit or loss

- any gain or loss should only be recognized to the extent that it reflects the substance f the transaction
- only the gain attributable to the interest of the other joint ventures should be recognized in the FS