Chapter 1 5.
current cost, and
Overview of Accounting
Definition of Accounting
• Accounting is “the process of
identifying, measuring, and
communicating economic information
to permit informed judgment and
decisions by users of information.”
Three important activities
1. Identifying - the process of analyzing
events and transactions to determine
whether or not they will be recognized.
Only accountable events are recognized.
2. Measuring - involves assigning
numbers, normally in monetary terms, to
the economic transactions and events.
3. Communicating - the process of
transforming economic data into useful
accounting information, such as financial
statements and other accounting reports,
for dissemination to users.
Types of Events
1. External events – events that involve
an external party.
a. Exchange (reciprocal transfer)
– reciprocal giving and receiving
b. Non-reciprocal transfer – “one
way” transaction
c. External event other than
transfer – an event that involves
changes in the economic resources or
obligations of an entity caused by an
external party or external source but
does not involve transfers of
resources or obligations.
2. Internal events – events that do not
involve an external party.
a. Production – the process by which
resources are transformed into
finished goods.
b. Casualty – an unanticipated loss
from disasters or other similar
events.
Measurement
• The several measurement bases used in
accounting include, but not limited to,
the following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
6. sometimes inflation-adjusted costs.
• The most commonly used is historical
cost. This is usually combined with the
other measurement bases. Accordingly,
financial statements are said to be
prepared using a mixture of costs and
values.
Valuation by fact or opinion
• When measurement is affected by
estimates, the items measured are said
to be valued by opinion.
• When measurement is unaffected by
estimates, the items measured are said
to be valued by fact.
Basic purpose of accounting
• The basic purpose of accounting is to
provide information about economic
activities intended to be useful in
making economic decisions.
Types of accounting information
classified as to users’ needs
• General purpose accounting
information - designed to meet the
common needs of most statement
users. This information is governed by
the Philippine Financial Reporting
Standards (PFRSs).
• Special purpose accounting
information - designed to meet the
specific needs of particular statement
users. This information is provided by
other types of accounting, e.g.,
managerial accounting, tax basis
accounting, etc.
Basic Accounting Concepts
1. Double-entry system – each
accountable event is recorded in two
parts – debit and credit.
2. Going concern - the entity is assumed
to carry on its operations for an
indefinite period of time.
3. Separate entity – the entity is treated
separately from its owners.
4. Stable monetary unit - amounts in
the financial statements are stated in
terms of a common unit of measure;
changes in purchasing power are
ignored.
5. Time Period – the life of the business is
divided into series of reporting periods.
6. Materiality concept – information is
material if its omission or misstatement
could influence economic decisions.
7. Cost-benefit – the cost of processing
and communicating information should
not exceed the benefits to be derived
from it.
8. Accrual Basis of accounting – effects
of transactions are recognized when they
occur (and not as cash is received or
paid) and they are recognized in the
accounting periods to which they relate.
9. Historical cost concept – the value of
an asset is determined on the basis of
acquisition cost.
10. Concept of Articulation – all of the
components of a complete set of financial
statements are interrelated.
11. Full disclosure principle – financial
statements provide sufficient detail to
disclose matters that make a difference
to users, yet sufficient condensation to
make the information understandable,
keeping in mind the costs of preparing
and using it.
12. Consistency concept – financial
statements are prepared on the basis of
accounting policies which are applied
consistently from one period to the next.
13. Matching – costs are recognized as
expenses when the related revenue is
recognized.
14. Residual equity theory – this theory
is applicable where there are two classes
of shares issued, ordinary and preferred.
The equation is “Assets – Liabilities –
Preferred Shareholders’ Equity =
Ordinary Shareholders’ Equity.”
15. Fund theory – the accounting objective
is the custody and administration of
funds.
16. Realization – the process of converting
non-cash assets into cash or claims for
cash.
17. Prudence (Conservatism) – the
inclusion of a degree of caution in the
exercise of the judgments needed in
making the estimates required under
conditions of uncertainty, such that
assets or income are not overstated and
liabilities or expenses are not
understated.
Common branches of accounting
1. Financial accounting - focuses on
general purpose financial statements.
2. Management accounting – focuses
on special purpose financial reports for
use by an entity’s management.
3. Cost accounting - the systematic
recording and analysis of the costs of
materials, labor, and overhead incident
to production.
4. Auditing - the process of evaluating the
correspondence of certain assertions
with established criteria and expressing
an opinion thereon.
5. Tax accounting - the preparation of tax
returns and rendering of tax advice, such
as the determination of tax consequences
of certain proposed business endeavors.
6. Government accounting - refers to
the accounting for the government and
its instrumentalities, placing emphasis
on the custody of public funds, the
purposes for which those funds are
committed, and the responsibility and
accountability of the individuals
entrusted with those funds.
Four sectors in the practice of
accountancy
1. Practice of Public Accountancy - involves
the rendering of audit or accounting
related services to more than one client
on a fee basis.
2. Practice in Commerce and Industry -
refers to employment in the private
sector in a position which involves
decision making requiring professional
knowledge in the science of accounting
and such position requires that the
holder thereof must be a CPA.
3. Practice in Education/Academe –
employment in an educational
institution which involves teaching of
accounting, auditing, management
advisory services, finance, business law,
taxation, and other technically related
subjects.
4. Practice in the Government –
employment or appointment to a
position in an accounting professional
group in the government or in a
government–owned and/or controlled
corporation where decision making
requires professional knowledge in the
science of accounting, or where civil
service eligibility as a CPA is a
prerequisite.
Accounting standards in the
Philippines
• Philippine Financial Reporting
Standards (PFRSs) are Standards and
Interpretations adopted by the
Financial Reporting Standards Council
(FRSC). They comprise:
1. Philippine Financial Reporting
Standards (PFRSs);
2. Philippine Accounting Standards (PASs);
and
3. Interpretations
The need for reporting standards
• Entities should follow a uniform set of
generally acceptable reporting
standards when preparing and
presenting financial statements;
otherwise, financial statements would
be misleading.
• The term “generally acceptable” means
that either:
a. the standard has been established by
an authoritative accounting rule-
making body; or
b. the principle has gained general
acceptance due to practice over time
and has been proven to be most
useful.
• The process of establishing financial
accounting standards is a democratic
process in that a majority of practicing
accountants must agree with a
standard before it becomes
implemented.
Chapter 2
Conceptual Framework for Financial
Reporting
Purpose of the Conceptual Framework
• The Conceptual Framework prescribes
the concepts for general purpose
financial reporting. Its purpose is to:
a. assist the International Accounting
Standards Board (IASB) in
developing Standards that are
based on consistent concepts;
b. assist preparers in developing
consistent accounting policies
when no Standard applies to a
particular transaction or when a
Standard allows a choice of
accounting policy; and
c. assist all parties in understanding
and interpreting the Standards.
I.
Status of the Conceptual Framework
• The Conceptual Framework is not a
PFRS. When there is a conflict between
the Conceptual Framework and a
PFRS, the PFRS will prevail.
• In the absence of a standard,
management shall consider the
Conceptual Framework in making its
judgment in developing and applying
an accounting policy that results in
useful information.
Scope of the Conceptual Framework
• The Conceptual Framework is
concerned with general purpose
financial reporting. General purpose
financial reporting involves the
preparation of general purpose
financial statements. The Conceptual
Framework provides the concepts
regarding the following:
1. The objective of financial reporting
2. Qualitative characteristics of useful
financial information
3. Financial statements and the reporting
entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital
Objective of general purpose financial
reporting
• The objective of general purpose
financial reporting is to provide
financial information about the
reporting entity that is useful to
primary users in making decisions
about providing resources to the entity.
• The objective of general purpose
financial reporting forms the
foundation of the
Primary Users
• Primary users – are those who cannot
demand information directly from
reporting entities. The primary users
are:
a. Existing and potential investors
b. Lenders and other creditors.
• Only the common needs of primary
users are met by the financial
statements.
Qualitative Characteristics
Fundamental qualitative characteristics
1) Relevance
a. Predictive value
b. Feedback value
2) Faithful representation
a. Completeness
b. Neutrality
c. Free from error
II. Enhancing qualitative characteristics
1) Comparability
2) Verifiability
3) Timeliness
4) Understandability
Fundamental vs. Enhancing
• The fundamental qualitative
characteristics are the characteristics
that make information useful to users.
• The enhancing qualitative
characteristics are the characteristics
that enhance the usefulness of
information
Relevance
• Information is relevant if it can affect
the decisions of users
• Relevant information has the following:
a. Predictive value – the information
can be used in making predictions
b. Confirmatory value – the
information can be used in
confirming past predictions
Materiality – is an ‘entity-specific’ aspect of
relevance.
Faithful Representation
• Faithful representation means the
information provides a true, correct
and complete depiction of what it
purports to represent
• Faithfully represented information has
the following:
a. Completeness – all information
necessary for users to understand
the phenomenon being depicted is
provided.
b. Neutrality – information is selected
or presented without bias.
c. Free from error – there are no
errors in the description and in the
process by which the information is
selected and applied.
Enhancing Qualitative Characteristics
1. Comparability – the information helps
users in identifying similarities and
differences between different sets of
information.
2. Verifiability – different users could
reach consensus as to what the
information purports to represent.
3. Timeliness – the information is
available to users in time to be able to
influence their decisions.
4. Understandability – users are
expected to have:
a. reasonable knowledge of business
activities; and
b. willingness to analyze the
information diligently.
Financial statements and the
Reporting entity
Objective and scope of financial
statements
• The objective of general purpose
financial statements is to provide
financial information about the
reporting entity’s assets, liabilities,
equity, income and expenses that is
useful in assessing:
a. the entity’s ability to generate future
net cash inflows; and
b. management’s stewardship over
economic resources
Reporting period
• Financial statements are prepared for a
specific period of time (i.e., the
reporting period) and include
comparative information for at least
one preceding reporting period.
Going concern
• Financial statements are normally
prepared on the assumption that the
reporting entity is a going concern,
meaning the entity has neither the
intention nor the need to end its
operations in the foreseeable future.
Reporting entity
• A reporting entity is one that is
required, or chooses, to prepare
financial statements, and is not
necessarily a legal entity. It can be a
single entity or a group or combination
of two or more entities.
Elements of Financial Statements
Asset
• Asset is “a present economic resource
controlled by the entity as a result of
past events. An economic resource is a
right that has the potential to produce
economic benefits.”
 Three aspects in the definition of an
asset
1. Right – asset refers to a right, and not
necessarily to a physical object, e.g., the
right to use, sell, lease or transfer a
building.
2. Potential to produce economic
benefits – the right has a potential to
produce economic benefits for the entity
that are beyond the benefits available to
all others. Such potential need not be
certain or even likely – what is important
is that the right already exists and that,
in at least one circumstance, it would
produce economic benefits for the entity.
3. Control – means the entity has the
exclusive right over the benefits of an
asset and the ability to prevent others
from accessing those benefits
Liability
• Liability is “a present obligation of the
entity to transfer an economic resource
as a result of past events.”
Three aspects in the definition of a
liability
1. Obligation – An obligation is “a duty or
responsibility that an entity has no
practical ability to avoid.” (CF 4.29) An
obligation can be either legal obligation
or constructive obligation.
2. Transfer of an economic resource –
the obligation has the potential to
require the transfer of an economic
resource to another party. Such potential
need not be certain or even likely – what
is important is that the obligation
already exists and that, in at least one
circumstance, it would require the
transfer of an economic resource.
3. Present obligation as a result of
past events – A present obligation
exists as a result of past events if:
a. the entity has already obtained
economic benefits or taken an
action; and
b. as a consequence, the entity will or
may have to transfer an economic
resource that it would not otherwise
have had to transfer.
Executory contracts
• An executory contract “is a contract
that is equally unperformed – neither
party has fulfilled any of its obligations,
or both parties have partially fulfilled
their obligations to an equal extent.”
(CF 4.56)
• An executory contract establishes a
combined right and obligation to
exchange economic resources.
• The contract ceases to be executory
when one party performs its obligation.
➢ If the entity performs first, the
entity’s combined right and
obligation changes to an asset.
➢ If the other party performs first, the
entity’s combined right and
obligation changes to a liability
Equity
• “Equity is the residual interest in the
assets of the entity after deducting all
its liabilities.” (Conceptual Framework
4.63)
• Equity equals Assets minus Liabilities
Income and Expenses
• Income is “increases in assets, or
decreases in liabilities, that result in
increases in equity, other than those
relating to contributions from
holders of equity claims.”
(Conceptual Framework 4.68)
• Expenses are “decreases in assets,
or increases in liabilities, that result
in decreases in equity, other than
those relating to distributions to
holders of equity claims.”
(Conceptual Framework 4.69)
Recognition & Derecognition
The recognition process
• Recognition is the process of including
in the statement of financial position or
the statement(s) of financial
performance an item that meets the
definition of one of the financial
statement elements (i.e., asset, liability,
equity, income or expense). This
involves recording the item in words
and in monetary amount and including
that amount in the totals of either of
those statements.
Recognition criteria
• An item is recognized if: a. it meets the
definition of an asset, liability, equity,
income or expense; and b. recognizing
it would provide useful information,
i.e., relevant and faithfully represented
information.
Relevance
• The recognition of an item may not
provide relevant information if, for
example: a. it is uncertain whether an
asset or liability exists; or b. an asset or
liability exists, but the probability of an
inflow or outflow of economic benefits
is low. (Conceptual Framework 5.12)
However, the presence of one or both
of the foregoing does not automatically
lead to the non-recognition of an item.
Other factors should also be
considered.
Faithful representation
• The level of measurement uncertainty
and other factors can affect an item’s
faithful representation, but not
necessarily its relevance.
Measurement uncertainty
• Measurement uncertainty exists if the
asset or liability needs to be estimated.
A high level of measurement
uncertainty does not necessarily lead to
the non-recognition of an asset or
liability if the estimate provides
relevant information and is clearly and
accurately described and explained.
• However, measurement uncertainty
can lead to the non-recognition of an
asset or a liability if making an estimate
is exceptionally difficult or
exceptionally subjective.
Derecognition
• Derecognition is the removal of a
previously recognized asset or liability
from the entity’s statement of financial
position.
• Derecognition occurs when the item
ceases to meet the definition of an asset
or liability.
Unit of account
• Unit of account is “the right or the
group of rights, the obligation or the
group of obligations, or the group of
rights and obligations, to which
recognition criteria and measurement
concepts are applied.”
Measurement bases
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost
Historical cost
• The historical cost of:
a. an asset is the consideration paid to
acquire the asset plus transaction
costs.
b. a liability is the consideration
received to incur the liability minus
transaction costs.
• Historical cost is updated over time to
depict the following:
➢ Depreciation, amortization, or
impairment of assets
➢ Collections or payments that
extinguish part or all of the asset or
liability
➢ Unwinding of discount or premium
when the asset or liability is
measured at amortized cost
Fair value
• 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.”
Value in use and fulfilment value
• Value in use is “the present value of the
cash flows, or other economic benefits,
that an entity expects to derive from
the use of an asset and from its
ultimate disposal.” (Conceptual
Framework 6.17)
• Fulfilment value is “the present value of
the cash, or other economic resources,
that an entity expects to be obliged to
transfer as it fulfils a liability.”
(Conceptual Framework 6.17)
Current cost
• The current cost of:
a. an asset is “the cost of an
equivalent asset at the
measurement date, comprising the
consideration that would be paid
at the measurement date plus the
transaction costs that would be
incurred at that date.”
b. a liability is “the consideration
that would be received for an
equivalent liability at the
measurement date minus the
transaction costs that would be
incurred at that date.” (Conceptual
Framework 6.21)
Entry values vs. Exit values
• Current cost and historical cost are
entry values (i.e., they reflect prices in
acquiring an asset or incurring a
liability), whereas fair value, value in
use and fulfilment value are exit values
(i.e., they reflect prices in selling or
using an asset or transferring or
fulfilling a liability).
Considerations when selecting a
measurement basis
• When selecting a measurement basis, it
is important to consider the following:
a. The nature of information
provided by a particular
measurement basis (e.g.,
measuring an asset at historical
cost may lead to the subsequent
recognition of depreciation or
impairment, while measuring
that asset at fair value would lead
to the subsequent recognition of
gain or loss from changes in fair
value).
b. The qualitative characteristics,
the cost-constraint, and other
factors (e.g., a particular
measurement basis may be more
verifiable or more costly to apply
than the other measurement
bases).
Measurement of Equity
• Total equity is not measured directly. It
is simply equal to difference between
the total assets and total liabilities.
• Because different measurement bases
are used for different assets and
liabilities, total equity cannot be
expected to be equal to the entity’s
market value nor the amount that can
be raised from either selling or
liquidating the entity.
• Equity is generally positive, although
some of its components can be
negative. In some cases, even total
equity can be negative such as when
total liabilities exceed total assets.
Presentation and Disclosure
• Information is communicated through
presentation and disclosure in the
financial statements.
• Effective communication makes
information more useful. Effective
communication requires:
a. focusing on presentation and
disclosure objectives and principles
rather than on rules.
b. classifying information by grouping
similar items and separating
dissimilar items.
c. aggregating information in a
manner that it is not obscured
either by excessive detail or by
excessive summarization.
Presentation and disclosure objectives
and principles
• The objectives are specified in the
Standards.
• The principles include:
a. the use of entity-specific
information is more useful that
standardized descriptions, and
b. duplication of information is usually
unnecessary.
Classification
• Classifying means combining similar
items and separating dissimilar items.
• Offsetting of assets and liabilities is
generally not appropriate.
Classification of income and expenses
• Income and expenses are classified as
recognized either in:
a. profit or loss; or
b. other comprehensive income.
Aggregation
• Aggregation is “the adding together of
assets, liabilities, equity, income or
expenses that have shared
characteristics and are included in the
same classification.”
Concepts of Capital and Capital
Maintenance
• Financial concept of capital –
capital is regarded as the invested
money or invested purchasing power.
Capital is synonymous with equity, net
assets, and net worth.
• Physical concept of capital –
capital is regarded as the entity’s
productive capacity, e.g., units of
output per day.
 PAS 1
Presentation of Financial Statements
Objective of PAS 1
• PAS 1 prescribes the basis for
presentation of general purpose
financial statements to improve
comparability both with the entity's
financial statements of previous
periods (intra-comparability) and with
the financial statements of other
entities (inter-comparability).
General purpose financial statements
• General purpose financial
statements are those intended to
serve users who do not have the
authority to demand financial reports
tailored for their own needs. General
purpose financial statements cater to
most of the common needs of a wide
range of external users. General
purpose financial statements are the
subject matter of the Conceptual
Framework and the PFRSs.
Complete set of financial statements
1. Statement of financial position
2. Statement of profit or loss and other
comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
a) comparative information in
respect of the preceding period;
and
6. Additional statement of financial
position (required only when certain
instances occur)
General features
1. Fair Presentation and Compliance
with PFRSs - The application of PFRSs,
with additional disclosure when
necessary, is presumed to result in
financial statements that achieve a fair
presentation.
2. Going concern - An entity is not a
going concern if, as of the financial
reporting date or prior to the date of
authorization of the financial statements
for issue, management either:
a) Intends to liquidate the entity or to
cease trading, or
b) Has no realistic alternative but to do
so.
• The assessment of going concern is at
least 12 months.
3. Accrual Basis of Accounting - An
entity shall prepare its financial
statements, except for cash flow
information, using the accrual basis of
accounting.
4. Materiality & Aggregation - Each
material class of similar items must be
presented separately in the financial
statements.
5.Offsetting - Assets and liabilities, and
income and expenses, shall not be offset
unless required or permitted by a PFRS.
• Measuring assets net of valuation
allowances, for example, obsolescence
allowances on inventories, allowances
for doubtful accounts on receivables,
and accumulated depreciation on
property, plant, and equipment are not
offsetting.
6. Frequency of reporting – An entity
shall present a complete set of financial
statements (including comparative
information) at least annually.
• When an entity changes the end of its
reporting period and presents financial
statements for a period longer or
shorter than one year, an entity shall
disclose the following:
1. The period covered by the financial
statements,
2. The reason for using a longer or
shorter period, and
3. The fact that amounts presented in
the financial statements are not
entirely comparable.
7. Comparative Information
An entity shall present comparative
information in respect of the preceding
period for all amounts reported in the
current period’s financial statements, unless
other standards permit or require otherwise.
8. Consistency of presentation - An
entity shall retain the presentation and
classification of items in the financial
statements from one period to the next
unless:
a. it is apparent that another
presentation or classification would
be more appropriate following a
significant change in the nature of
the entity’s operations or a review of
its financial statements; or
b. a PFRS requires a change in
presentation.
Additional Statement of financial
position
• An additional statement of financial
position is presented as at the
beginning of the preceding period when
an entity:
1. Applies an accounting policy
retrospectively, or
2. Makes a retrospective restatement of
items in its financial statements, or
3. reclassifies items in its financial
statements.
…..and the effect of the event to the
statement of financial position as at the
beginning of the preceding period is
material.
Statement of financial position
• A statement of financial position may
be presented as either
1. Classified – showing distinctions
between current and noncurrent assets
and liabilities, or
2. Unclassified (based on liquidity)
– showing no distinction between
current and noncurrent items.
Current Assets
• An entity shall classify an asset as
current when:
1. it expects to realize the asset or intends
to sell or consume it, in its normal
operating cycle;
2. it holds the asset primarily for the
purpose of trading;
3. it expects to realize the asset within
twelve months after the reporting
period; or
4. the asset is cash or a cash equivalent
unless the asset is restricted from being
exchanged or used to settle a liability
for at least twelve months after the
reporting period.
Current Liabilities
• An entity shall classify a liability as
current when:
1. it expects to settle the liability in its
normal operating cycle;
2. it holds the liability primarily for the
purpose of trading;
3. the liability is due to be settled
within twelve months after the
reporting period; or
4. the entity does not have the right at
the end of the reporting period to
defer settlement of the liability for
at least twelve months after the
reporting period.
Currently maturing long-term
liabilities
• General rule: Currently maturing
long term liabilities are presented as
current liabilities.
• Exception: The entity has the right, at
the end of the reporting period, to roll
over the obligation for at least twelve
months after the reporting period
under an existing loan facility – non-
current liability
Breach of loan agreement
• General rule: A liability that is
payable on demand is a current
liability.
• Exception: It is presented as non-
current liability if the lender provides
the entity, on or before the balance
sheet date, a grace period ending at
least 12 months after the balance sheet
date to rectify a breach of loan
covenant.
Presentation of Deferred taxes
• Deferred tax liabilities (assets) are
presented as noncurrent items in a
classified statement of financial
position, irrespective of their expected
dates of reversal.
Minimum line items in the statement
of financial position
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts
shown under (e), (h) and (i));
e. Investments accounted for using the
equity method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
j. Assets (or disposal groups) classified as
held for sale in accordance with PFRS 5;
k. Trade and other payables;
l. Provisions;
m. Financial liabilities (excluding amounts
shown under (k) and (l));
n. Liabilities and assets for current tax, as
defined in PAS 12 Income Taxes;
o. Deferred tax liabilities and deferred tax
assets, as defined in PAS 12;
p. Liabilities included in disposal groups
classified as held for sale in accordance
with PFRS 5;
q. Non-controlling interests, presented
within equity; and
r. Issued capital and reserves attributable
to owners of the parent
Order/ Format of Presentation
• PAS 1 does not prescribe the order or
format in which an entity presents
items.
Statement of profit or loss and other
comprehensive income
• An entity shall present all items of
income and expense recognized in a
period:
1. in a single statement of profit or loss
and other comprehensive income;
or
2. in two statements: (1) a statement
displaying the profit or loss section
only (separate ‘statement of profit
or loss’ or ‘income statement’) and
(2) a second statement beginning
with profit or loss and displaying
components of other comprehensive
income.
Extraordinary items
• PAS 1 prohibits the presentation of any
items of income or expense as
extraordinary items in the statement(s)
presenting profit or loss and other
comprehensive income or in the notes.
Other comprehensive income for the
period
a. Changes in revaluation surplus
b. Unrealized gains and losses on
investments in FVOCI securities
c. Remeasurements of the net defined
benefit liability (asset)
d. Gains and losses arising from translating
the financial statements of a foreign
operation
e. Effective portion of gains and losses on
hedging instruments in a cash flow hedge
• OCI may be presented either (a) net
of tax or (b) gross of tax.
Reclassification adjustments
• Reclassification adjustments are
amounts reclassified to profit or loss in
the current period that were recognized
in other comprehensive income in the
current or previous periods.
Total comprehensive income
• Total comprehensive income comprises
all components of
1. Profit or loss; and
2. Other comprehensive income.
Presentation of Expenses
1. Nature of expense method
2. Function of expense method
• If an entity classifies expenses by
function, it shall disclose
additional information on the
nature of expenses
Disclosure of dividends
• Dividends declared by an entity are
disclosed either in the (a) notes or (b)
statement of changes in equity.
Order of presentation of disclosures in
the Notes
1. Statement of compliance with PFRSs;
2. Summary of significant accounting
policies applied;
3. Supporting information for items
presented in the other financial
statements; and
4. Other disclosures.
PAS 2
Inventories
Inventories
Inventories are assets:
a. Held for sale in the ordinary course of
business (Finished Goods);
b. In the process of production for such
sale (Work In Process); or
c. 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).
Financial statement presentation
• All items that meet the definition of
inventory are presented on the
statement of financial position as one
line item under the caption
“Inventories.” The breakdown of this
 line item (as finished goods, WIP and
Raw materials) is disclosed in the
notes.
• Inventories are normally presented in a
classified statement of financial
position as current assets.
Measurement
• Inventories are measured at the lower
of cost and net realizable value
(NRV).
• The cost of inventories comprise all
costs of purchase, costs of
conversion and other costs
incurred in bringing the inventories to
their present location and condition.
• Net realizable value (NRV) is the
estimated selling price in the ordinary
course of business less the estimated
costs of completion and the estimated
costs necessary to make the sale.
Costs that are EXPENSED when
incurred
1. Abnormal amounts of wasted
materials, labor or other production
costs.
2. Selling costs, for example, advertising
and promotion costs and delivery
expense or freight out.
3. Administrative overheads that do
not contribute to bringing inventories to
their present location and condition.
4. Storage costs, unless those costs are
necessary in the production process
before a further production stage, (e.g.,
the storage costs of partly finished goods
may be capitalized as cost of inventory,
but the storage costs of completed
finished goods are expensed).
Cost Formulas
1. Specific identification - shall be
used for inventories that are not
ordinarily interchangeable (i.e., used
for inventories that are unique). Cost of
sales is the cost of the specific
inventory that was sold.
2. FIFO – cost of sales is based on the
cost of inventories that were purchased
first. Consequently, ending inventory
represents the cost of the latest
purchases.
3. Weighted Average Cost – cost of
sales is based on the average cost of all
inventories purchased during the
period.
Wtd. Ave. Cost = (TGAS in pesos ÷
TGAS in units)
Write down of inventories
• Inventories are usually written down to
net realizable value on an item by
item basis.
• If the cost of an inventory exceeds its
NRV, the inventory is written down to
NRV, the lower amount. The excess of
cost over NRV represents the amount
of write-down.
Reversal of write-downs
• The amount of reversal to be recognized
should not exceed the amount of the
original write-down previously
recognized.
Recognition as an expense
• The carrying amount of an inventory that
is sold is charged as expense (i.e., cost of
sales) in the period in which the related
revenue is recognized. Likewise, the
write-down of inventories to NRV and all
losses of inventories are recognized as
expense in the period the write-down or
loss occurs.
PAS 7
Statements of Cash Flow
Statement of Cash Flows
• The statement of cash flows provides
information about the sources and
utilization (i.e., historical changes) of
cash and cash equivalents during the
period. The statement of cash flows
presents cash flows according to the
following classifications:
1. Operating activities
2. Investing activities
3. Financing activities
Activities
1. Operating activities include
transactions that enter into the
determination of profit or loss. These
transactions normally affect income
statement accounts.
Examples of cash flows from
Operating Activities
a. cash receipts from the sale of goods,
rendering of services, or other forms
of income
b. cash payments for purchases of goods
and services
 c. cash payments for operating
expenses, such as employee benefits,
insurance, and the like, and payments
or refunds of income taxes
d. cash receipts and payments from
contracts held for dealing or trading
purposes
2. Investing activities include
transactions that affect long-term assets
and other non-operating assets.
Examples of cash flows from Investing
Activities
a. cash receipts and cash payments in
the acquisition and disposal of
property, plant and equipment,
investment property, intangible
assets and other noncurrent assets
b. cash receipts and cash payments in
the acquisition and sale of equity or
debt instruments of other entities
(other than those that are classified
as cash equivalents or held for
trading)
c. cash receipts and cash payments on
derivative assets and liabilities (other
than those that are held for trading
or classified as financing activities)
d. loans to other parties and collections
thereof (other than loans made by a
financial institution)
3. Financing activities include
transactions that affect equity and non-
operating liabilities.
Examples of cash flows from
Financing Activities
a. cash receipts from issuing shares or
other equity instruments and cash
payments to redeem them
b. cash receipts from issuing notes,
loans, bonds and mortgage payable
and other short-term or long-term
borrowings, and their repayments
c. cash payments by a lessee for the
reduction of the outstanding liability
relating to a lease.
Core principle
Interests and Dividends
Reporting cash flows from operating
activities
1. Direct method - shows each major
class of gross cash receipts and gross
cash payments.
2. Indirect method - adjusts accrual
basis profit or loss for the effects of
changes in operating assets and liabilities
and effects of non-cash items.
PAS 8
Accounting Policies, Changes in
Accounting Estimates and Errors
Objective and Scope
• PAS 8 prescribes the criteria for
selecting, applying, and changing
accounting policies and the accounting
and disclosure of changes in accounting
policies, changes in accounting
estimates and correction of prior period
errors.
Accounting policies
• Accounting policies are “the specific
principles, bases, conventions, rules and
practices applied by an entity in
preparing and presenting financial
statements.” (PAS 8.5)
• Accounting policies are the relevant
PFRSs adopted by an entity in preparing
and presenting its financial statements
PFRSs
• Philippine Financial Reporting
Standards (PFRSs) are Standards and
Interpretations adopted by the Financial
Reporting Standards Council (FRSC).
They comprise the following:
1. Philippine Financial Reporting
Standards (PFRSs);
2. Philippine Accounting Standards (PASs);
and
3. Interpretations
Hierarchy of reporting standards
1. PFRSs
2. Judgement
When making the judgement
➢ Management shall consider the
following:
a. Requirements in other PFRSs
dealing with similar transactions
b. Conceptual Framework
Management may consider the
following:
a. Pronouncement issued by other
standard-setting bodies
b. Other accounting literature and
industry practices
• When it is difficult to distinguish a
change in accounting policy from a
change in accounting estimate, the
change is treated as a change in an
accounting estimate.
• An entity shall change an accounting
policy only if the change:
1. is required by a PFRS; or
2. results to a more relevant and
reliable information about an
entity’s financial position,
performance, and cash flows.
Examples of changes in accounting
policy
1. Change from FIFO cost formula for
inventories to the Average cost
formula.
2. Change in the method of recognizing
revenue from long-term construction
contracts.
3. Change to a new policy resulting
from the requirement of a new PFRS.
4. Change in financial reporting
framework, such as from PFRS for
SMEs to full PFRSs.
5. Initial adoption of the revaluation
model for property, plant, and
equipment and intangible assets.
6. Change from the cost model to the
fair value model of measuring
investment property.
7. Change in business model for
classifying financial assets resulting
to reclassification between financial
asset categories.
Examples of changes in accounting
estimate
1. Change in depreciation or
amortization methods
2. Change in estimated useful lives of
depreciable assets
3. Change in estimated residual values
of depreciable assets
4. Change in required allowances for
impairment losses and uncollectible
accounts
5. Changes in fair values less cost to sell
of non-current assets held for sale
and biological assets
Errors
➢ Errors include the effects of:
1. Mathematical mistakes
2. Mistakes in applying accounting
policies
3. Oversights or misinterpretations of
facts; and
4. Fraud
PAS 10
Events after the Reporting Period
Events after the Reporting Period
• Events after the reporting period are
“those events, favorable or unfavorable,
that occur between the end of the
reporting period and the date that the
financial statements are authorized for
issue.” (PAS 10)
Two types of events after the reporting
period
1. Adjusting events after the
reporting period – are those that
provide evidence of conditions that
existed at the end of the reporting
period.
2. Non-adjusting events after the
reporting period – those that are
indicative of conditions that arose after
the reporting period
Date of authorization of the financial
statements
• This date is the date when
management authorizes the financial
statements for issue regardless of
whether such authorization for issue is
for further approval or for final
issuance to users.
Examples of adjusting events:
1. The settlement after the reporting period
of a court case that confirms that the
entity has a present obligation at the end
of reporting period.
2. The receipt of information after the
reporting period indicating that an asset
was impaired at the end of reporting
period. For example:
i. The bankruptcy of a customer
that occurs after the reporting
period may indicate that the
carrying amount of a trade
receivable at the end of reporting
period is impaired.
ii. The sale of inventories after the
reporting period may give
evidence to their net
realizable value at the end of
reporting period
3. The determination after the reporting
period of the cost of asset purchased, or
the proceeds from asset sold, before the
end of reporting period.
4. The discovery of fraud or errors that
indicate that the financial statements are
incorrect.
Examples of non-adjusting events
normally requiring disclosures:
1. Changes in fair values, foreign exchange
rates, interest rates or market prices
after the reporting period.
2. Casualty losses (e.g., fire, storm, or
earthquake) occurring after the reporting
period but before the financial
statements were authorized for issue.
3. Litigation arising solely from events
occurring after the reporting period.
4. Major ordinary share transactions and
potential ordinary share transactions
after the reporting period.
5. Major business combination after the
reporting period.
6. Announcing a plan to discontinue an
operation after the reporting period.
7. Declaration of dividends after the
reporting period
Disclosures
• Date of authorization for issue
• Adjusting events
• Material Non-adjusting events
PAS 12
Incoming Taxes
Accounting profit vs. Taxable profit
• The varying treatments of economic
activities between the PFRSs and tax
laws result to permanent and temporary
differences.
Permanent differences
• Permanent differences are those that do
not have future tax consequences.
Examples:
a. Interest income on government
bonds and treasury bills
b. Interest income on bank deposits
c. Dividend income
d. Fines, surcharges, and penalties
arising from violation of law
e. Life insurance premium on
employees where the entity is the
irrevocable beneficiary
Temporary differences
• Temporary differences are those that
have future tax consequences.
Temporary differences are either:
a. Taxable temporary differences –
arise, for example, when financial
income is greater than taxable
income or the carrying amount of an
asset is greater than its tax base.
b. Deductible temporary differences
arise in case of the opposites of the
foregoing.
• Taxable temporary differences result to
deferred tax liabilities while
deductible temporary differences result
to deferred tax assets.
Deferred taxes
• If the increase in deferred tax
liability exceeds the increase in
deferred tax asset, the difference is
deferred tax expense. If it is the
 opposite, the difference is deferred tax
income or benefit.
• A deferred tax asset is recognized only to
the extent that it is realizable.
• Deferred taxes are measured using
enacted or substantially enacted tax rates
that are applicable to the periods of their
expected reversals.
• Deferred tax assets and liabilities are not
discounted.
• Deferred tax asset and liabilities are
presented as non-current.
PAS 16
Property, Plant and Equipment
Characteristics of PPE
a. Tangible assets – items of PPE have
physical substance
b. Used in normal operations – items
of PPE are used in the production or
supply of goods or services, for rental,
or for administrative purposes
c. Long-term in nature – items of PPE
are expected to be used from more than
a year
Examples of items of PPE
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of
goods
e. Equipment held for environmental
and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived
stand-by equipment
h. Furniture and fixture
i. Bearer plants
Recognition
The cost of an item of property, plant and
equipment shall be recognized as an asset
only if:
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.
Initial measurement
• An item of PPE is initially measured
at its cost.
Elements of Cost
1. Purchase price, including non-
refundable purchase taxes, after
deducting trade discounts and
rebates.
2. Costs directly attributable to bringing
the asset to the location and condition
necessary for it to be capable of
operating in the manner intended by
the management.
3. Present value of decommissioning
and restoration costs to the extent
that they are recognized as obligation
Examples of directly attributable costs
• Costs of employee benefits arising
directly from the construction or
acquisition of PPE;
• Costs of site preparation;
• Initial delivery and handling costs (e.g.,
freight costs);
• Installation and assembly costs;
• Testing costs, GROSS* of disposal
proceeds of samples generated during
testing; and
• Professional fees.
* (the proceeds, and the cost of the samples
are recognized in profit or loss)
Cessation of capitalizing costs to PPE
• Recognition of costs in the carrying
amount of an item of PPE ceases when
the item is in the location and condition
necessary for it to be capable of
operating in the manner intended by
management.
Measurement of Cost
• The cost of an item of PPE is the cash
price equivalent at the recognition
date. If payment is deferred beyond
normal credit terms, the difference
between the cash price equivalent and
the total payment is recognized as
interest over the period of credit unless
such interest is capitalized in accordance
with PAS 23 Borrowing Costs.
Acquisition through exchange
• If the exchange has commercial
substance, the asset received from the
exchange is measured using the
following order of priority:
a. Fair value of asset Given up
b. Fair value of asset Received
c. Carrying amount of asset Given up
• If the exchange lacks commercial
substance, the asset received from the
exchange is measured at (c) above.
Subsequent measurement
• Subsequent to initial recognition, an
entity shall choose either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that
policy to an entire class of PPE.
Cost Model
• After recognition, an item of PPE is
measured at its cost less any
accumulated depreciation and any
accumulated impairment losses.
Depreciation
• Depreciation is the systematic
allocation of the depreciable amount of
an asset over its estimated useful life.
• When computing for depreciation, each
part of an item of PPE with a cost that is
significant in relation to the total cost
of the item shall be depreciated
separately.
• Depreciation begins when the asset is
available for use, i.e., when it is in the
location and condition necessary for it to
be capable of operating in the manner
intended by management.
• Depreciation ceases when the asset is
derecognized or when it is classified as
“held for sale” under PFRS 5, whichever
comes earlier.
Selection of depreciation method
• There are various methods of
depreciation. The entity shall select
the method that most closely
reflects the expected pattern of
consumption of the future
economic benefits embodied in
the asset.
• However, a depreciation method that
is based on revenue that is
generated by an activity that includes
the use of an asset is not
appropriate.
The Straight-line method of
Depreciation
Straight line method – depreciation is
recognized evenly over the life of the asset
by dividing the depreciable amount by the
estimated useful life.
Depreciation = (Historical cost –
Residual value) ÷ Estimated useful life
Changes in depreciation method,
useful life, and residual value
• A change in depreciation method,
useful life, or residual value is a
change in accounting estimate
accounted for prospectively.
• Prospective accounting means the
change affects only the current
period and/or future periods. The
change does not affect past periods.
Revaluation Model
• After recognition as an asset, an item of
PPE whose fair value can be measured
reliably shall be carried at a revalued
amount, being its fair value at the
date of the revaluation less any
subsequent accumulated depreciation
and subsequent accumulated
impairment losses.
Revaluation Surplus
*The fair value is determined using an
appropriate valuation technique, taking into
account the principles set forth under PFRS
13.
Frequency of revaluation
• For items with significant and volatile
changes in fair value, annual
revaluation is necessary. For items
with insignificant changes in fair value,
revaluation may be made every 3 or 5
years.
Revaluation applied to all assets in a
class
• If an item of PPE is revalued, the
entire class of PPE to which that
asset belongs shall be revalued.
• The items within a class of PPE are
revalued simultaneously to avoid
selective revaluation of assets and the
reporting of amounts in the financial
statements that are a mixture of costs
and values as at different dates.
Subsequent accounting for revaluation
surplus
• Revaluation is initially recognized in
other comprehensive income
unless the revaluation represents
impairment loss or reversal of
 impairment loss, in which case it is
recognized in profit or loss.
• Subsequently, the revaluation
surplus is accounted for as follows:
1. If the revalued asset is non-
depreciable, the revaluation
surplus accumulated in equity is
transferred directly to
retained earnings when the asset
is derecognized.
2. If the revalued asset is
depreciable, a portion of the
revaluation surplus may be
transferred periodically to retained
earnings as the asset is being used.
Derecognition
• The carrying amount of an item or PPE
shall be derecognized:
a. on disposal; or
b. when no future economic
benefits are expected from
its use or disposal
PAS 19
Employee Benefits
Employee Benefits
• Employee benefits are “all forms of
consideration given by an entity in
exchange for service rendered by
employees.” (PAS 19.8)
Four Categories of Employee Benefits
Under PAS 19
1. Short-term employee benefits
2. Post-employment benefits
3. Other long-term employee benefits
4. Termination benefits
Short-term Employee Benefits
• Short-term employee benefits are
employee benefits (other than
termination benefits) that are due to be
settled within 12 months after the end
of the period in which the employees
render the related service.
Example:
1. Salaries, wages, and SSS, PhilHealth
and Pag-IBIG contributions
2. Paid vacation leaves and sick leaves
3. Profit-sharing and bonuses
4. Non-monetary benefits (e.g., free
goods and services)
Recognition and Measurement
When an employee has rendered service to
an entity during an accounting period, the
entity shall recognize the undiscounted
amount of short-term employee benefits
expected to be paid in exchange for that
service:
1. As a liability (accrued expense),
after deducting any amount already
paid
2. As an asset (prepaid expense) if the
amount paid is in excess of the
undiscounted amount of the benefits
incurred: provided, the prepayment
will lead to a reduction in future
payments or a cash refund; and
3. As an expense, unless the employee
benefits forms part of the cost of an
asset, e.g., as part of the cost of
inventories or property, plant and
equipment.
Short-term Compensated Absences
• Accumulating compensated absences
are those that are carried forward and
can be used in future periods if the
current period’s entitlement is not used
in full. Accumulating compensated
absences may either be:
a. Vesting – wherein employees are
entitled to a cash payment for
unused entitlement on leaving the
entity; or
b. Non-vesting – wherein employees
are not entitled to a cash payment
for unused entitlement on leaving
the entity
• Non-accumulating compensated
absences are those that are not caried
forward. No liability or expense is
recognized until the absences occur,
because employee benefits does not
increase the amount of the benefit.
Post-employment Benefits
• Post-employment benefits are
employee benefits (other than
termination benefits) that are payable
after the completion of employment.
Post-employment benefit plans are
classified as either:
1. Defined contribution plans
2. Defined benefit plans
 Defined Contribution vs. Defined because the reporting entity’s
Benefit obligation for each period is
Defined Defined Benefit determined by the amounts to be
Contribution Plan Plan contributed for that period.
• The employer • The Consequently, no actuarial
commits to employer assumption are required to
contribute to a commits to measure the obligation or the
fund which pay retiring expense and there is no possibility of
will be used to employee a any actuarial gain or loss.
pay for the definite • The accounting for defined benefit
retirement amount. plans is complex because actuarial
benefits of the assumptions are required to
employees measure the obligation and the
• Risk that • Risk that expenses and there is possibility of
retirement retirement actuarial gain and loss.
benefit may be benefit • Obligations are measured on a
insufficient maybe discounted basis
rests with the insufficient
employee. rests with the Accounting Procedures for Defined
employer. Benefit Plans

Other relevant terms Step 1: Determine the deficit or

Contributory Non- surplus
contributory
• Both the • Only the (Deficit) Surplus = FVPA – PV of DBO
employee employer
and contributes Step 2: Determine the Net defined
employer for the benefit liability (assets)
contributes retirement • If there is a deficit, the deficit is the
for the benefits of net defined liability.
retirement the • If there is a surplus, the net defined
benefits of employee benefit asset is the lower of the
the surplus and the asset ceiling.
employee
The asset ceiling is the present value of any
Funded Unfunded economic benefits available in the form of
• A fund is • No fund is refunds from the plan or reductions in future
transferred transferred contribution to the plan.
to a trustee to a trustee
who will Step 3: Determine the defined benefit
manage the cost
fund.
• The trustee • The
assumes employer
obligations retains the
of paying obligation
retirement of paying
benefits out retirement
from the benefits of
fund and the
directly to employees.
retiring
employees. Current service cost – is the increase in
the present value of a defined benefit
Accounting for defined contribution obligation resulting from employee service in
plan the current period.
• The accounting for defined
contribution plans is straightforward
Past service cost – is the change in the
present value of the defined benefit
obligation resulting from a plan amendment
or curtailment.
Gain or loss on settlement – the
difference between the present value of the
defined benefit obligation and the settlement
price.
Interest cost on the defined benefit
obligation – is the increase during a period
in the present value of a defined benefit
obligation which arises because the benefits
are one period closer to settlement.
Actuarial gain and losses – are changes
in the present value of the defined benefit
obligation resulting from experience
adjustments and the effects of changes in
actuarial assumptions.
Actuarial Assumptions
• Actuarial assumptions are an entity’s
best estimates of the variables that
will determine the ultimate cost of
providing post-employment benefits.
I. Demographic assumptions
about the future characteristics of
employees who are eligible for
benefits. Demographic assumptions
dead with matters such as:
a. Mortality, both during and after
employment
b. Rates of employee turnover,
disability and early retirement
c. The proportion of plans with
dependents who will be eligible
for benefits
d. Claim rates under medical plans
II. Financial assumptions, dealing
with items such;
a. The discount rate
b. Future salary and benefits levels
c. Future medical cost, if any,
including cost of administering
claims and payments
d. The expected rate of return on
plan assets.
• The rate used to discount post-
employment benefit obligations shall
be determined by reference to
market yields at the end of the
reporting period on high quality
corporate bonds.
• In countries where there is no deep
market such bonds, the market
yields at the end of the reporting
period on government bonds shall be
used.
Other Long-term Employee Benefits
• Other long-term employee benefits
are employee benefits (other than
post-employment benefits and
termination benefits) that are due to
be settled beyond 12 months after
the end of the period in which the
employees render the related service.
• Other long-term employee benefits
are accounted for using the
procedures applicable for a defined
benefit plan. However, all of the
components of the net benefit cost
are recognized in profit or loss.
1. Long term compensated absences,
e.g., sabbatical leave
2. Jubilee or other long-service benefits
3. Long term-disability benefits
4. Profit-sharing and bonuses payable
beyond 12 months after the end of
the period in which the employees
have rendered the related service.
5. Deferred compensation payable
beyond 12 months after the end of
the period in which it is earned.
Termination Benefits
Termination Benefits are employee benefits
provided in exchange for the termination of
an employee’s employment as a result of
either;
1. An entity’s decision to terminate an
employee’s employment before the
normal retirement date; or
2. An employee’s decision to accept an
entity’s offer of benefits in exchange
for the termination of employment.
Measurement
Termination benefits are initially and
subsequently recognized in accordance with
the nature of the employee benefit.
a. If the termination benefit are
payable within 12 months, the entity
shall account for the termination
benefits similarly with short term
employee benefits.
b. If the termination benefits ae
payable beyond 12 months, the entity
shall account for the termination
benefits similarly with other long-
term benefits.
 c. If the termination benefits are, in
substance, enhancement to post-
employment benefits, the entity shall
account for the benefits as post-
employment benefits.
PAS 20
Accounting or Government Grants and
Disclosure Government Assistance
Government grants are assistance
received from the government in the form of
transfers of resources in exchange for
compliance with certain conditions.
Government grants exclude government
assistance whose value cannot be reasonably
measured or cannot be distinguished from
the entity’s normal trading transactions.
Examples of Government Grants
a. Receipt of cash, land, or other non-
cash assets from the government
subject to compliance with certain
conditions.
b. Receipt of financial aid in case of loss
from a calamity.
c. Forgiveness of an existing loan from
the government.
d. Benefit of a government loan with
below-market rate of interest.
The following are not government
grants:
a. Tax benefits
b. Free technical or marketing advice
c. Provision of guarantees
d. Government procurement policy that
is responsible for a portion of the
entity’s sales, and
e. Public improvements that benefit the
entire community.
Recognition
• Government grants are recognized if
there is reasonable assurance that:
a. The attached conditions will be
complied with; and
b. The grants will be received.
Classification of government grants
according to attached condition
a. Grants related to assets – grants
whose primary condition is that an
entity qualifying for them should
purchase, construct or otherwise
acquire long-term assets.
b. Grants related to income –
grants other than those related to
assets.
Initial Measurement
Monetary grants are measured at the
a. Amount of cash received; or
b. The fair value of amount receivable
c. Carrying amount of loan payable to
government for which repayment is
forgiven; or
d. Discount on loan payable to
government at a below-market rate
of interest.
Non-monetary grants (e.g., land and
other resources) are measured at the
a. Fair value of non-monetary asset
received.
b. Alternatively, at nominal amount or
zero, plus direct costs incurred in
preparing the asset for its intended
use.
Accounting for Government Grants
• The main concept in accounting for
government grants is the matching
concept.
• This means that the government
grant is recognized as income as the
entity recognize as expense the
related cost for which the grant is
intended to compensate.
Presentation of Government Grants
Related to Income
• Grants related to income are
sometimes presented in the income
statement either by;
a. Gross presentation – the grant is
presented separately or under a
general heading such as “Other
income”, or
b. Net presentation – the grant is
deducted in reporting the related
expense.
Repayment of government grants
• A government grant that becomes
repayable is accounted for as a
changes in accounting estimate that
is treated prospectively under PAS
8.
 PAS 21
The Effects of changes in Foreign
Exchange Rates.
Two ways of conducting foreign
activities
1. Foreign currency – individual
entities often enter into transactions
in a foreign currency.
1. Foreign operations – groups
often include overseas entities.
Two main accounting issues
Exchange rates are constantly changing.
Therefore, the principal issues in accounting
for foreign activities are determining;
1. Which exchange rate(s) to use; and
2. How to report the effects of changes
in exchange rates in the financial
statements.
Functional currency
• When preparing financial
statements, a reporting entity must
identify its functional currency
• Functional currency is the currency
of the primary economic
environment in which the entity
operates.
• The primary economic environment
in which an entity operates is
normally the one which it primarily
generates and expends cash.
Factor in Determining Functional
Currency
Primary Factors
An entity’s functional currency is:
1. The currency that mainly influences:
• Sales prices
• Cost of goods sold/Cost of
services provided
Secondary Factors
2. The currency in which funds from
financing activities are generated
3. The currency in which receipts from
operating activities are usually
retained.
Foreign Currency Transactions
• Initial Recognition
The foreign currency amount is
translated at the spot exchange rate at the
date of transactions.
• Subsequent Recognition: at the
end of each reporting period:
1. Foreign currency monetary items
are re-translated using the closing
rate;
2. Non-monetary items that are
measured at historical cost in a
foreign currency shall be translated
using the exchange rate at the
date of the transaction: and
3. Non-monetary items that are
measured at fair value in a foreign
currency shall be translated using
the exchange rates at the date
when the fair value was
determined.
Monetary Items
• Monetary items – are units of
currency held and assets and
liabilities to be received or paid in a
fixed or determinable number of
units of currency.
Recognition of Exchange Differences
• When a foreign currency
transactions occurred in one period
and settled in another period.
a. The exchange difference between
the transaction date and the end of
reporting period is recognized in
the period of transaction, while
b. The exchange difference
between the end of the
previous reporting period
and the date of settlement is
recognized in the period of
settlement.
• When a foreign currency transaction
occurred and settled in the same
period, all the exchange difference is
recognized in that period.
Foreign Operations
• A foreign operation is an entity that
is a subsidiary, associate, joint
venture or branch of a reporting
entity, the activities of which are
based or conducted in a country or
currency other than those of the
reporting entity.
Translation to the Presentation
Currency
1. Assets and liabilities are translated
at the closing rate at the date of the
statement of financial position.
2. Income and expenses, including
other comprehensive income, are
translated at spot exchange rates
 at the dates of the transactions. For
practical reasons, average rates for
a period may be used, if they provide
a reasonable approximation of the
spot rates when the transactions
took place. However, if exchange
rates fluctuate significantly, the use
of the average rates is inappropriate.
3. The resulting exchange difference is
recognize in other
comprehensive income.
PAS 23
Borrowing Costs
Core Principle
• Borrowing cost that are directly
attributable to the acquisition,
construction or production of a
qualifying asset form part of the
cost of that asset. Other borrowing
costs are recognized as an expense.
Borrowing cost
Borrowing costs are interest and other
costs incurred by an entity in connection
with the borrowing of funds. Borrowing costs
may include:
1. Interest expense on financial
liabilities or lease liabilities
computed using the effective interest
method.
2. Exchange differences arising from
foreign currency borrowings to the
extent that they are regarded as an
adjustment to interest costs.
Qualifying asset
Qualifying asset is an asset that
necessarily takes a substantial period of time
to get ready for its intended use or sale.
Depending on the circumstances, any of the
following may be qualifying assets:
a. Inventories
b. Manufacturing plants
c. Power generation facilities
d. Intangible assets
e. Investment properties measured
under cost model
The following are not qualifying assets
a. Financial assets, and inventories that
are manufactured, or otherwise
produces, over a short period of
time.
b. Assets that are ready for their
intended use or sale when acquired
are not qualifying assets.
c. Assets that are routinely
manufactured or otherwise
produced in large quantities on a
repetitive basis.
d. Assets measured at fair value.
Commencement of Capitalization
The capitalization of borrowing costs
as part of the cost of a qualifying asset
commences on the date when all of the
following conditions are met:
a. The entity incurs expenditures for
the asset;
b. The entity incurs borrowing costs;
and
c. It undertakes activities that are
necessary to prepare the asset for its
intended use or sale.
Suspension of Capitalization
• Capitalization of borrowing costs
shall be suspended during extended
periods of suspension of active
development of a qualifying asset.
Cessation of Capitalization
• An entity shall cease capitalizing
borrowing costs when
substantially all the activities
necessary to prepare the qualifying
asset for its intended use or sale are
complete.
Determining borrowing costs eligible
for capitalization
1. Qualifying assets financed through
specific borrowing
2. Qualifying assets financed through
general borrowing
The amount computed in the formula
above shall be compared with the actual
borrowing costs incurred during the period.
The amount to be capitalized is the lower
amount.
 PAS 24
Related Party Disclosures
• The financial position and profit or
loss of an entity may be affected by a
related party relationship even if
related party transaction do not
occur. The mere existence of the
relationship may be sufficient to
affect the transactions of the entity
with other parties.
• Necessary disclosures, therefore,
should be provided to draw user’s
attention to the possible effects of
such relationships and transaction
on the financial statements
presented.
Related Parties
• A related party is “a person or
entity that is related to the reporting
entity that is preparing its financial
statements.”
Examples of related parties:
1. Investor and investee relationship
where control, joint control or
significant influence exists.
2. Key management personnel
3. Close family member
4. Pots – employment benefit plan
Control – an investor controls an investee
when the investor is exposed, or has rights,
to variable returns from its involvement with
the investee and has the ability to affect those
returns through its power over the investee.
Significant Influence – is the power to
participate in the financial and operating
policy decisions of an entity, but is not
control over those policies. Significant
influence may be gained by share ownership,
statue or agreement.
Joint control – is the contractually agreed
haring of control over an economic activity.
Key management personnel are those
person having authority and responsibility
for planning, directing and controlling the
activities of the entity, directly or indirectly,
including any director (whether executive or
otherwise) of that entity.
Close members of the family of an
individual
a. The individual’s domestic partner
and children;
b. Children of the individual’s domestic
partner; and
c. Dependents of the individual or
individual’s domestic partner.
A related party transactions is a transfer
resources, services or obligations between a
reporting entity and a related party,
regardless of whether a price is charges.
Unrelated parties
The following is not related parties
1. Two entities simply because they have a
director in common.
2. Two ventures simply because they
share joint control over a joint venture
3. Providers of finance, trade unions,
public utilities, and departments and
agencies of a government that does not
control, jointly control, or significantly
influence the reporting entity, simply
virtue of their normal dealings with an
entity.
4. A customer, supplier, franchisor,
distributor or general agent with whom
an entity transacts a significant volume
of business, simply by virtue of the
resulting economic dependence.
Disclosure
1. Parent-subsidiary relationship
regardless of whether there have
been transactions between them
2. Key management personnel
compensation broken down into the
following categories spots and loans
to key management personnel.
3. Related party transactions – nature
of transaction and outstanding
balances.
• Disclosures that related party
transactions are made only if such
terms can be substantiated.