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    intermediate accounting 3

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    12 views20 pages

    2414

    Uploaded by

    miya girl
    intermediate accounting 3

    Copyright:

    © All Rights Reserved
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    of 20
    PFRS for SMEs e ‘There are thirty five (35) sections comprising the IFRS for SMEs relating to topics basically on financial accounting and advanced accounting. Only the sections relating to financial accounting ate discussed in this Intermediate Accounting textbook. Section 1 Small and medium-sized entities Section 2 Concepts and pervasive principles Section 3 Financial statement presentation Section 4 Statement of financial position Section 5 Statement of comprehensive income ction 6 Statement of changes in equity and statement of income and retained earnings ection 7 Statement of cash flows Section 8 Notes to financial statements Section 10 Accounting policies, estimates and errors Section 11 Basic financial instruments Section 12 Other financial instrument issues Section 13 Inventories Section 14 Investments in associates Section 16 Investment property Section 17 Property, plant and equipment- Section 18 Intangible assets other than goodwill Section 20 Leases Section 21 Provisions and contingencies Section 22 Liabilities and equity , Section 23 Revenue Section 13 Government grants Section 25 Borrowing costs Section 26 Share-based payment Section 27 Impairment of assets Section 28 Employee benefits tion 29 Income tax Section 31 Hyperinflation Section 32 Events after the end of reporting period a ‘ion 83 Related party disclosures 7 section 34 Specialized activities ettion 35 Transition to PFRS for SMEs 723 Introduction The Financial Reporting Standards Council or FRS¢ approved on October 13, 2009 the adoption of IFRS for SMizg issued by the International Accounting Standards Board op IASB as Philippine Financial Reporting Standards for Smal, and Medium-sized Entities or PFRS for SMEs. The Philippine Securities and Exchange Commission En Banc in its meeting on December 3, 2009 also resolved to adopt the PFRS for SMEs as part of its rules and regulations. DEFINITION OF SMEs The International Accounting Standards Board defines small and medium-sized entities or SMEs as entities that: a. Do not have public accountability, and b, Publish general purpose financial statements for external users. Public accountability An entity has public accountability if: a. The debt or equity instruments of the entity are traded in a public market. b. The entity is in the process of issuing debt or equit instruments for trading in public market, for example, domestic or foreign stock exchange, over-the-countel | market, local and regional market. ¢. Theentity holds assets in fiduciary capacity for a broad group of outsiders as one of its primary businesses. it uni i ‘i ities Banks, credit unions, insurance companies, securitt 4 dealers or brokers, pension funds, mutual funds 4 “investment banks would meet this second criterion. 724 Securities traded in a public market The IASB concluded that, regardless of size, entities whose securities are traded in a public market should follow full IFRS and not IFRS for SMEs. An entity's decision to enter a public capital market makes it publicly accountable. : The entity must provide the outside debt and equity investors with a “broader range" of financial information than may be _needed by users that obtain capital only from private sources. This public accountability of listed entities is recognized by the government by establishing laws and regulations that deal with market regulation and disclosures to investors. ‘inancial institutions primary busjness for financial institutions is to hold and manage financial resources entrusted to them by a broad group of clients and customers who are not involved in the management of the entities. As such, financial institutions are "publicly accountable” because the entities act in a fiduciary capacity. Accordingly, financial institutions must follow full IFRS and not IFRS for SMEs. SME under Philippine jurisdiction The IASB's definition of SMEs does not include size criteria for determining what is a small and medium-sized entity because it is not feasible to develop size test that would be applicable and long-lasting in numerous countries. Under Philippine jurisdiction, the definition of small and medjum-sized entity (SME) includes size criteria in terms of total assets and total liabilities. The definition of SME is set forth in Philippine.Securitiés gad Exchange Commission En Banc Resolution dated August 725 : Definition of SME by SEC The Philippine Securities and Exchange Commission define, SME as an entity: a, With total assets between P3,000,000 and P350,000,000, OR with total liabilities between P3,000,000 and P250,000,000. b. That is not required to file financial statements under SRC Rule 68.1. This SRC Rule 68.1 pertains to listed entities or entities whose securities are traded in an exchange market, and entities with assets of at least P50,000,000 and have 200 or more holders each holding at least 100 shares of a class of equity securities. ¢. That is not in the process of filing financial statements for the purpose of issuing any class of instruments in a public market. d, That is not a holder of secondary license issued by a regulatory agency such as a bank (all types of banks), an investment house, a finance company, an insurance company, securities broker or dealer, a mutual fund and pte-need company. “'e, That is not a public utility. Micro-business entities Micro-business entities are entities whose total assets or total Habilities are below the P3,000,000 floor threshold. : : A : . \ Micro-business entities have the option to use any of the following bases of accounting in the preparation of financial \ statements: a. Pull PERS b. PFRS for SMEs c. Another acceptable basis of accounting o 726 Exemptions from PFRS for SMEs ‘The Philippine SEC in its meeting on October 7, 2010 resolved toexempt from the mandatory adoption of the PFRS for SMEs small and medium-sized entity that meets any of the following criteria: 1. Itis a subsidiary of a parent reporting under full PFRS. 2. Itisa subsidiary of a foreign parent that will be moving’ toward full IFRS pursuant to the foreign country's published convergence plan. 3. It is a subsidiary of a foreign parent that has been applying the standards for a nonpublicly accountable entity for local reporting purposes, and is considering moving to full PFRS in order to align its policies with the expected move to full IFRS by its foreign parent pursuant to the foreign country's published convergence plan. 4, Ithasshort-term projections that show that it will breac the quantitative thresholds set in the criteria for an SME, and the breach: is expected to be significant and continuing due to its long-term effect on the entity's asset or liability size. : It is part of a group, either as a significant joint venture or an associate, that is reporting under full PERS. a 6. Itis a branch office of a foreign entity reporting under full IFRS. 7. It has concrete plans to conduct an initial public offering within the next two years. 8. It has a subsidiary that is mandated to report under full PFRS. 9. Ithas been preparing financial statements using full PFRS and has decided to liquidate its assets. 737 First-time adopter A first-time adopter of IFRS for SMEs is an entity thay presents the first annual financial statements that conform with IFRS for SMEs regardless of whether the previous accounting framework was full IFRS or another set of generally accepted accounting principles, Date of transition ‘The date of transition to IFRS for SMEs is the beginning of the earliest period for which full comparative information is presented in accordance with IFRS for SMEs in the first annual financial statements that conform with IFRS for SMEs. Thus, if the first-time adopter presents the first annual financial statements in conformity with IFRS for SMEs on December 31, 2021 on a comparative basis, the date of transition to IFRS for SMEs is January 1, 2020. The IASB has not set an effective date for IFRS for SMEs because the decision whether to adopt the Standard is a matter for each jurisdiction. Under Philippine jurisdiction, the PFRS for SMEs is effective for annual periods beginning on or after January 1, 2010. Transition from PFRS for SMEs to full PFRS If an SME that uses the PFRS for SMEs ii ’s in a current year breaches the floor and ceiling size criteria ai the end of the a i year, the entity shall be required to transition to full in the next year if the ceiling threshold is breached 0 Brother acceptable accounting basis if the floor threshold i* This transition must be mad is , : i s le provided the event that cause' the change is considered significant.and continuing. As a general rule, 20% or total | liabilities would be considered signste te assets of 728 ~wP Opening statement of financial position ‘The opening statement of financial position is the statement of financial position on the date of transition to PFRS for SMEs. In the opening statement of financial position, a first-time adopter shall: a. Recognize all assets and liabilities whose recognition is required by PFRS for SMEs. b. Not recognize as assets or liabilities if the PFRS for SMEs does not permit such recognition. c. Reclassify items that it recognized under the previous accounting framework as one type of asset, liability or component of equity, but a different type of asset, iiability or equity under PFRS for SMEs. d. Apply PFRS for SMEs in measuring all recognized assets and liabilities. The accounting policies that the first-time adopter use in the opening statement of financial position may differ from the previous accounting policies. The resulting adjustments arise from transactions, other events and conditions before the date of transition to PFRS for SMEs, First-time adoption requires full retrospective application of PFRS for SMEs effective at the reporting date for an tntity's first annual financial statements that conform with PERS for SMEs. Therefore, the first-time adopter shall recognize those adjustments directly in retained earnings or another category Of equity, if appropriate. 729 Mandatory exceptions to retrospective application A first-time adopter does not change the accounting that it followed previously for any of the following transactions, Derecognition of financial assets and financial liabilities Hedge accounting Accounting estimates Discontinued operations . Measuring noncontrolling interest ope rp In general, no restatement of the opening statement of financial position is required if it is impracticable to do so. Impracticability means the entity cannot apply restatement after making every reasonable effort to do so. Reconciliation A first time adopter shall make the following reconciliations in the financial statements: 1 Reconciliation of equity reported under the previous reporting framework to equity under PFRS for SMEs for both: a. The transition date. b. The end of the latest period presented in the entity's most recent annual financial statements. 2. Reconciliation of the profit or loss determined i® accordance with the previous reporting framework for | . the latest period in the entity's most recent. annus | financial statements to the profit or loss determined | accordance with PFRS for SMEs for the same period- j Quilt re pevrso} Aarnal—+ Coen CASH BASIS Income is recognized when received regardless of when earned, and expense is recognized when paid regardless of when incurred. In other words, the cash basis of accounting does not recognize accounts receivable, accounts payable, accrued income, deferred income, accrued expense and prepaid expense. ACCRUAL BASIS Income is recognized when earned regardless of when received, and expense is recognized when incurred regardless of when paid. The essence of the accrual basis of accounting is the recognition of accounts receivable, accounts payable, accrued income, deferred income, accrued expense and prepaid expense. Cash basis versus accrual basis ey | Cash basis Accrual basis Cash ales pls callction rom Cash sales plus ates on customers, 7» account = 0" me) Purchases Cash purchases plus paymeita ” Cash purchases plus to trade creditors purchases on account. Income other than gales Items received are considered Items earned are considered as income regardless of when as income regardless of when, earned, °° received. Py ou Wee Expenses, in general Items paid are treated as _Ttems incurred are treated as ‘expenses regardless of when expenses regardless of when incurred. paid. © goer YES : " rroniy Depreciation Depreciation in provided Depreciation in provided normally normally. Bad debts [No bad debts are recorded Doubtful accounts are treated hecausettade receivables are an bad debts. aot recognized Cry 078 /#) Orv Q hiv a O perveol bra - sep inwsed @ ime ine @® Pape tre = nal yer invent 879 © peo ne - Comparative income statement ABC Company Income Statement Year ended December 31, 2021 Cash basis Accrual basis Sales 3,300,000 3,500,000 Cost of goods sold: Purchases Inventory — December 31 1,900,000 2,300,000 ( 400,000). ( 400,000) 1,500,000 1,900,000 1,800,000 1,600,000 40,000 50,000 1,840,000 1,650,000 Cost of goods sold Gross income Interest income Total income Expenses: Salaries expense 650,000 720,000 . Office supplies expense 200,000 150,000 Other expenses 50,000 - 50,000 Doubtful accounts - 90,000 Depreciation 40,000 40,000 Total expenses 940,000 1,050,000 Net.income 900,000 600,000 Ww Computation - Cash'basis Accrual basis 1. Cash sales 500,000 500,000 Sales on account - 3,000,000 Collections from customers 2,800,000 Total sales 3,300,000 2. Cash purchases 300,000 300,000 ~ Purchases on account - 2,000,000 Payments to trade creditors 1,600,000 - Total purchases 1,900,000 2,300,000 3. Interest received 40,000 ‘Accrued interest receivable 10,000 Interest income 0 4. Salaries paid 650,000 650,000 Accrued salaries payable = 70,000 Salaries expense 650,000 720,000 5. Office supplies paid 200,000 -—-200,000 Office supplies unused = (80,000) Office supplies expense 200,000 150,000 6. Depreciation (400,000/10) 40,000 40,000 Accounting problem. More often than not, accounting records are maintained on & cash basis. At the end of the accounting period, adjustments are made for accruals and prepayments in order to convert the cash basis records to accrual records. To achieve the conversion from cash basis to accrual basis of accounting, the following formulas may be of help. 382 Computation of sales Cash sales ; oe Sales on account: ‘Trade accounts and notes receivable, end xx Collection of trade accounts and notes receivable xx Sales returns, discounts, and allowances xXx ‘Accounts and notes receivable written off xXx ‘Trade notes receivable discounted (NR directly credited) XX Total xXx “Less: Trade accounts and notes receivable, beginning xx XX ‘Total sales— accrual basis Normally, the data concerning the cash sales and the collections from customers are available from the records. So the main problem in the formula is the computation of sales on account. ‘The substance of the formula is the reconstruction of the accounts and notes receivable because the total accounts and notes receivable would represent the total sales on account. Thus, the approach is to add back all items that decreased trade receivables to the ending balance of accounts receivable and notes > receivable. The items that decreased. receivables normally include: Collections from customers : Sales. returns, allowances. and discounts Accounts and notes receivable written off Notes receivable discounted — when the notes receivable “ account is credited upon discounting. The beginning balances of accounts receivable and notes receivable are deducted: because these items pertain to the preceding year and constitute sales-of the prior year and that they might have been collected during the current year or some may be the subject of returns, allowances and discounts. 383 Computation of purchases Cash purchases xx Purchases on account: "Trade accounts and notes payable, end xx Paymentof trade accounts and notes payable xx Purchases returns, discounts, and allowances xx Total. ue e & Less: Trade accounts and notes payable, beginning xx xx xx ‘Total purchases — accrual basis Normally, the data pertaining to cash purchases and payments of trade payables are available from the records. So the main problem is the computation of purchases on account. £ * The substance of the formula is the reconstruction of the accounts and notes payable because the total accounts and notes payable would represent the total purchases on account. Thus, the approach is to add back all items that decreased trade payables to the ending balance of accounts payable and notes payable. The items that decreased trade payables normally include: . Payment of accounts payable . .Payment of trade notes payable Purchase returns Purchase allowances . Purchase discounts Saeee The beginning balances of accounts and notes payable are deducted because these items pertain to the ‘preceding year and constitute purchases of the preceding year. ‘The beginning balances of accounts and notes payable might have been paid during the current year or some may be the subject of discounts, returns and allowances. 384 Income other than sales Income received-cash basis

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