Advanced Financial Accounting and Reporting (AFAR)

PARTNERSHIP
I. Introduction
A partnership is defined as an association of two or more persons who contribute money, property, or
industry to a common fund with the intention of dividing the profits among themselves. Accounting for
partnerships should comply with the legal requirements as set forth by the Partnership Law as well as
comply with the partnership agreement itself.
II. Partnership Formation and Capital Accounts
All assets contributed to the partnership are recorded by the partnership of the agreed values for fair
market values, in the absence of agreed values). All liabilities that the partnership assumes are recorded at
their net present values. Thus, if a partner contributes a noncash asset to the partnership (e.g., land or
equipment) subject to a mortgage, the contributing partner's capital account is credited for the agreed
value (or fair values of the noncash asset less the mortgage assumed by the partnership.
The capital account is an equity account similar to the shareholders' equity accounts in a corporation. It is
used to account for permanent withdrawals and additional contributions. Other important accounts
include a drawing account and loans to or from partners. The drawing account is used to account for net
income or loss and personal or normal withdrawals, ie, shares against net income. It is closed at the end of
the period into the capital account. Loan accounts are set up for amounts intended as loans, rather than as
additional capital investments. In liquidation proceedings, a loan to or from a partner is in essence treated
as an increase or decrease in a partner's capital account.
III. Division of Profits and Losses
As a rule profits and losses are allocated based on agreement.
1. Equally
2. Arbitrary Ratio
3. Capital contribution ratio

a. Original Capital or initial investment

b. Beginning Capital of each year
c. Average Capital
d. Ending Capital of each year

4. Interest on capital balance and/or loan balances and the balance on the agreed ratio,
5. Salaries to partners and the balance on the agreed ratio
6. Bonus to partners and the balance on the agreed ratio.

a. Bonus as an “expense” in computing the bonus amount. Here, the bonus is computed based
on net income after the bonus
b. Bonus as a distribution of profit. Here, the bonus is computed based on net income before
deducting the bonus
7. Interest on capital and/or loan balances, salaries to partners and bonuses to partners, and the
balance on the agreed ratio.
 The method of division to be used in any given situation is generally the method specified in the
partnership agreement. This agreement must always be consulted first since it is legally binding on
the partners. If no profit and loss sharing arrangement is specified in the partnership agreement, the
partnership requires that profit and losses be shared according to capital contribution. The capital
contribution should be interpreted to be the original capital/beginning capital of each year in the
absence of original capital; similarly, if the agreement specifies how profits are to be shared but is
silent as to losses, losses are to be shared in the same manner on profits. Notice that the profit and loss
sharing ratio is totally independent of the partner ownership Interests. Thus, two partners may have
ownership Interests of 70% and 30% but share profits and losses equally.
IV. Dissolution
A. Admission of a New Partner
A new partner may be admitted to the partnership by purchasing the interest of one or more of the
existing partners or by contributing cash or other assets (i.e, investment of additional capital). These two
situations are discussed below.
1. Purchase of interest - When a new partner enters the partnership by purchasing the interest of an
existing partner, the price paid for that interest is relevant to the partnership accounting records
because it is a private or personal transaction between the buyer and the seller. The assets and
liabilities of the partnership are not affected. The capital account of the new partner is recorded
by merely reclassifying the capital account of the old partner.

2. Admission by an investment of Additional Assets - A new partner may be granted an interest in

the partnership in exchange for contributed assets and or goodwill (e.g. business expertise, an
established clientele, etc.) The admission of the new partner and contribution of assets may be
recorded based on the bonus method.

 Bonus method - This method is based upon the historical cost principle. Admittance of a new
partner involves debiting cash or other assets for the FMV and of the assets contributed and
crediting the new partner’s capital for the agreed (i.e., purchased) percentage of total capital.
Total capital equals the book value of the net assets before admittance of the new partner plus the
FMV of the assets contributed by the new partner. A difference between the FMV of the assets
contributed and the interest granted to the new partner results in the recognition of a bonus.

a. No bonus is recognized - When an incoming partner's capital account (ownership interest) is to be

equal to his purchase price, the partnership books merely debit cash or other assets and credit
capital.
b. Bonus granted to the old partners - When the FMV of the assets contributed by an incoming
partner exceeds the amount of ownership interest to be credited to a capital account, the old
partners recognized a bonus equal to this excess. This bonus is allocated based on the same ratio
used for income allocation (unless otherwise specified in the partnership agreement). Recording
involves crediting the old partner’s capital accounts by the allocated amounts.
c. Bonus granted to a new partner - An incoming partner may contribute assets having an FMV
smaller than the partnership Interest granted to that new partner. Similarly, the new partner may
not contribute any assets at all. The incoming partner is therefore presumed to contribute
intangible assets, such as managerial expertise or personal business reputation. In this case, a
 bonus is granted to the new partner, and the capital accounts of the old partners are reduced on
both the profit and loss ratio.

 Goodwill method
In PFRS NO. 3. Goodwill represents the excess of the cost of the business combination
over the fair value of the identifiable net assets obtained. Therefore, the standard provides that
goodwill attaches only to a business as a whole and is recognized only when a business is
acquired. This provision of PFR NO. 3 outlawed the use of the goodwill method in partnership
accounting particularly admission and retirement of a partner because there is no business
involved. The term “business” is defined in Appendix A of PFRS NO. 3 as:
An integrated set of activities and assets conducted and managed to provide:
a. A return to the investor or
b. Lower costs or other economic benefits directly and proportionately to policyholders or
participants.
A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are,
or will be used to generate revenues. If goodwill is present in a transferred set of activities and assets, the
transferred set shall be presumed to be a business.
B. Withdrawal of a Partner
Admission of a new partner is not the only manner by which a partnership can change its composition.
Over the life of any partnership, partners may leave the organization. Thus, some method of establishing
an equitable settlement of the withdrawing partner's interest in the business property is necessary.
For a partner to withdraw or retire from the partnership, the total interest of a partner should be properly
determined which includes the following:
1. Share in the profit and loss of the partnership
2. Adjustments in assets and liabilities to reflect FMV
3. Loans to and from the partnership
4. Drawing accounts, and
5. Capital interest/ accounts
Withdrawal or retirement from the partnership may either be:
1. Selling of interest to an outsider. This is similar to admission by purchase.
2. Selling of interest to an existing partner. The interest of the retiring partner will be purchased with
the personal assets of existing partners rather than with the assets of the partnership
3. Selling of interest to the partnership/ payment from the partnership. Under this approach, the
withdrawal of a partner may be treated as:
a. Payment at book value
b. Payment at less than book value - bonus method
c. Payment at more than book value - bonus method

C. Incorporation of a Partnership
For o variety of reasons, including legal and/or tax reasons, the partner of a partnership may choose to
incorporate. Two Approaches to opening the corporate book are in general use. One is to retain the books
of the partnership and to record the assets and liabilities at FMV concomitant with the closing of the
partner’s capital accounts and the opening of a Common Stock account. The other approach is to close
out the partnership books completely and open a new set of books for the corporation. In this case, the
FMV is used as the basis for recording all assets and liabilities with the balancing amount credited to
Common Stock. Occasionally, additional cash or other assets may be invested in the corporation.
V. Liquidation
Liquidation is the process of converting partnership assets into cash and distributing the cash to creditors
and partners. Frequently, the sale of assets will not provide sufficient cash to pay both creditors and
partners. The creditors have priority On any distribution. The basic rule is that no distribution is made to
any partner until all possible losses and liquidation expenses have been paid or provided for. An
individual prematurely distributing cash to a partner whose capital account later shows a deficit may be
held personally liable if the Insolvent partner is unable to repay such a distribution. The proceeds of
liquidation may be distributed in a lump sum after all assets have been sold and all creditors satisfied, or
the proceeds may be distributed to partners in installments as excess cash becomes available.
A. Lump sum Distributions –
1. The first step in the liquidation process is to sell all noncash assets and allocate the resulting
gain or loss to the capital accounts of the partners per their profit and loss sharing ratio.
2. The second step is to satisfy the liabilities owing to creditors other than partners.
3. The third step is to satisfy liabilities owing to partners other than for capital and profits.
4. The final step is to distribute any cash remaining to the partners for capital and finally for
profits. Any deficiency (i.e., debit balance) in a solvent partner's capital will require that
partner to contribute cash equal to the debit balances. If the deficient partner is insolvent, the
debit balance must be absorbed by the remaining partners (usually per their profit and loss
sharing ratio.
Note, however, that to achieve an equitable distribution a partner's loan to the partnership will
first be used to offset a debit balance in his capital account. Therefore, under this so-called
right of offset doctrine, a partner's loon to the partnership will have distribution priority only
to the extent it exceeds a debit balance in the partner's capital account.

B. Installment Distributions - The liquidation of a partnership may take place over several months.
Installment distributions may be made to partners based on a Schedule of Safe Payments or Cash
Priority Program, in conjunction with a Liquidation Schedule similar to the one used for lump
sum liquidations. The Schedule of Safe Payments takes a conservative approach to the
distribution by assuming that noncash assets are worthless: thus distribution may be made to
partners on the bank of the value of partnership assets until the assets are sold.

BUSINESS COMBINATIONS – STATUTORY MERGERS AND STATUTORY

CONSOLIDATIONS
I. Introduction
A business combination occurs when a corporation and one or more other businesses are brought together
as a single entity to carry on the activities of the previously separated enterprises.
It is the result of the acquiring of control of one or more enterprises by another enterprise, or the union of
ownership interests of two or more entities.
 II. Legal Point of View
From the legal point of view, a business combination is classified as follows:
1. Acquisition of Assets - The acquiring corporation must negotiate with management to obtain the
assets and assume the liabilities of the company being acquired in exchange for cash, securities,
or other consideration. Upon consummation, the acquired company ceases to exist as a separate
economic, legal, and accounting entity. The surviving corporation records in its books the assets
and liabilities of the acquired company. Note that this results in automatic consolidation for the
current and subsequent periods since the assets and liabilities of both companies are recorded in
the same set of books. Acquisition of assets and assumption of liabilities may either be:

a. Statutory Merger - when two or more corporations merge into a single entity which shall be one
of the constituent corporations. In other words. One constituent corporation acquires the other
constituent corporations and retains their original identity, while the acquired corporations are
automatically dissolved. It may be expressed as follows:
A Corp. + B Corp. = A Corp. or B Corp.

b. Statutory Consolidation - when two or more consolidate and for a new corporation from then on.
It may be expressed as follows:
A Corp. + B Corp. = Z Corp.

2. Stock Acquisition or Acquisition of Common Stock

An acquiring corporation may acquire majority ownership Interest of outstanding common stock
or control of a corporation and the separate legal entities of each enterprise are preserved or they
both continue their legal existence. In this case, the acquiring corporation is known as the parent
and the acquired corporation as the subsidiary for financial reporting purposes. However, the two
companies may be viewed as a single reporting entity, under PAS No. 2 (2004): this creates the
need for a consolidated financial statement.

It may be expressed as follows:

Financial Statement of P Corp. + Financial Statement of S Corp. = Consolidated Financial
Statement of P Corp. and S Corp

The following summaries are based on the PFRS No. 3

1. Definition of Business Combination - a transaction of an event in which an acquirer obtains

control of one or more businesses.

2. Scope. It does not apply to the following:

 The formation of a joint venture

 The Acquisition of an asset or group of assets that is not o business, though general guidance is
provided on how such transactions should be accounted for [IFRS 3.2 (b)]
 Combination of entities or businesses under a common control (the IASB has a separate agenda
project on common contract transactions (IFRS 3.2 (c)]
 Acquisition by an investment entity of a subsidiary that is required to be measured at fair value
through profit or loss under IFRS 10 Consolidated Financial Statement [IFRS 3.2A]
  Annual improvements to IFRS 2011- 2013 Cycle, effective for the annual period beginning on or
after 1 July 2014, amends this scope exclusion to clarify that it applies to the accounting for the
formation of a joint arrangement in the financial statements of the joint arrangement itself.

3. Determining whether a transaction is a business combination

PFRS 3
Provides additional guidance on determining whether a transaction meets the definition of a
business combination, and is so accounted for in accordance with the requirement. This guidance
includes:

Business combinations can occur in various ways such as by transferring cash, incurring
liabilities, issuing equity instruments (or any combination thereof), or by not issuing
considerations at all (i.e., by contract alone) [IFRS 3.B5]

Business combinations can be structured in various ways to satisfy legal, taxation, or other
objectives, including one entity becoming a subsidiary of another, the transfer of net assets from
one entity to another or a new entity [IFRS 3.B6]

The business combination must involve the acquisition of a business, which generally has three
elements: [IFRS 3.B7]
1. Inputs
2. Process
3. Outputs

4. Method of Accounting
All business combinations within the scope of the standard must be accounted for using the acquisition
method. The pooling of interest method is strictly prohibited. The acquisition method consists of:

 identifying the acquirer

 determining the acquisition date and consideration transferred (purchase price)
 recognizing and measuring
- the identifiable assets acquired, the liabilities assumed
- any non-controlling interest in the acquiree
 recognizing goodwill or in the case of a bargain purchase, a gain
Identifying the Acquirer
Controls the power to govern the financial and operating policies of an entity to obtain benefits from its
activities.
The acquirer is the combined entity that obtains control of the other combining entities or businesses.
Other indications of which party was the acquirer in any given business combination are as follows:
(these are suggestive only, not conclusive)
1. The fair value of one entity is significantly greater than that of the other combining enterprises; in such
case, the larger would be deemed the acquirer
2. The combination is effected by an exchange of voting dock for cash; the entity paying the cash would
be deemed to be the acquirer.
3. Management of one enterprise can dominate the selection of management of the combined entity; the
dominant entity would be deemed to be the acquirer
Acquisition Date
The acquisition date is defined as the date on which the acquirer obtains control of the acquiree. This is
the date the acquirer legally transfers the consideration, acquires the assets, and assumes the liabilities of
the acquiree – the closing date.
Identifying and Measuring Consideration Transferred.
 Measured at FV at the acquisition date
 Is calculated as the sum of the acquisition-date FV of:
o The assets transferred by the acquirer;
o The liabilities incurred by the acquiree to former owners of the acquire, and;
o The equity interest that is issued by the acquirer.

Acquisition-related costs
Costs the acquirer incurs to effect a business combination. Those costs include:

 Finder’s fee; advisory, legal, accounting, valuation, and other professional or consulting fees;
 General administrative costs, including the costs of maintaining an internal acquisitions
department; and
 Costs of registering and issuing debt and equity securities.
 Under PFRS 3, the acquirer is required to recognize acquisition-related cash as expenses in the
periods in which the costs are incurred and the services are received, with one exception, i.e. the
costs to issue debt or equity securities are recognized under PAS No. 32 (for equity) and IFRS 9
(for debt).
It is suggested that since the IAS Board has introduced the requirement to expense acquisition costs
within PFRS 3.
Costs of Issuing Debt and Equity Securities (or Instruments).
 Cost of issuing equity instruments. In issuing equity instruments such as shares as part of the
consideration paid, transaction costs such as stamp duties, professional adviser's fees,
underwriting costs, and brokerage fees may be incurred. Par. 35 of PAS 32 states that these
outlays should be treated as a reduction in the share capital (debited to APIC/Share Premium) of
the entity as such costs should reduce the proceeds from the equity issue, net of any related
income tax benefit.
 Similarly, the costs of arranging and issuing financial liabilities are an integral part of the
liability issue transaction. These costs are included in the initial measurement of the liability as
Bond Issue Costs.
Therefore:

 Direct costs of combination - expense.

 Indirect costs of combination - expense.
  Costs to issue and register stock - debited to APIC/Share premium account
 Costs to issue debt securities (bonds) - bond issue costs.
Contingent Consideration
Consistent with other measurements in transferred consideration, the acquirer shall recognize the
acquisition-date fair values of contingent consideration as part of the consideration transferred.
The consideration of the acquirer transfer in exchange for the acquiree includes any asset or liability
resulting from a contingent consideration arrangement.
Recognition Principle of Assets Acquired and Liabilities Assumed. It requires that as of the
acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired,
the liabilities assumed, and any non-controlling interest in the acquiree.
It should also be noted that the acquirer may recognize some of the assets and the liabilities that the
acquiree had not previously recognized (unrecognized assets and liabilities in its financial statements.
For example, the acquirer recognizes the acquired identifiable intangible assets (e.g. brand names,
patents, or customer relationships that the acquiree did not recognize as assets in its financial statements
because it developed them internally and charged the related costs to expense,
Measurement Principle of Assets Acquired and Liabilities Assumed. Par. 18 of PERS, 3 requires that
identifiable assets acquired and liabilities assumed are measured at their acquisition date fair values.
One of the problems that may arise in measuring the assets and liabilities of the acquiree is that the initial
accounting for the business combination may be incomplete by the end of the reporting period. For
example, the acquisition date may be August 18 and the end of the reporting period may be August 31. In
this situation, under par. 45, the acquirer must report provisional amounts in its financial statements. The
provisional amounts will be the best estimates and will need to be adjusted to fair values when those
amounts can be determined after the end of the reporting period.
Measurement Period
If the initial accounting for a business combination can be determined only provisionally by the end of the
first reporting period, the business combination is accounted for using provisional amounts. Adjustments
to provisional amounts, and the recognition of newly identified assets and liabilities, must be made within
the measurement period" where they reflect new information obtained about facts and circumstances that
were in the existence of the acquisition date. (IFRS 3.45]
The measurement period cannot exceed one year from the acquisition date and no adjustments are
permitted after one year except to correct an error under IAS 8. (IFRS 3.50]
Non-controlling Interest in the Acquiree. This will affect calculations only where the acquirer obtains
control acquisition of share or stock acquisition - Chapter 8) in the acquiree and not an acquisition of
assets and assumption of liabilities (statutory merger and statutory consolidation - Chapter 7). Par. 19 of
PFRS 3 states that for each business combination any non-controlling interest in the acquiree is measured
either:
 at fair value (using the full goodwill approach); or
 at the non-controlling interest's proportionate share of the acquiree's identifiable net assets (using
the partial goodwill approach).
Recognizing and Measuring Goodwill or a Gain from Bargain Purchase.
Statutory Merger and Statutory Consolidation (Acquisition of Assets and Assumption of Liabilities). For
this type of business combination, the comparison should be between the following:
The consideration transferred, and the Acquirer's interest in the net fair value of the acquiree's identifiable
assets acquired and liabilities assumed.
Goodwill arises when I exceed II. On the other hand, bargain purchase arises when Il exceeds I. When a
bargain purchase occurs, a gain on acquisition is recognized in the profit or loss.
It should be noted that bargain purchase gain would arise only in exceptional circumstances. Therefore,
before determining that gain has arisen, the acquirer has to:

 Reassess whether it has correctly identified all of the assets acquired and all of the liabilities
assumed. The acquirer should recognize any additional assets or liabilities that are identified in
that review.
 Any balance should be recognized immediately in profit or loss.
For Stock Acquisition or When Control Exists (Acquisition of shares). Refer to Chapter 8 for the
procedures to compute goodwill or gain on bargain purchase.

PFRS for Small and Medium-Sized Entities (SMEs) - Business Combination and Goodwill
Scope
This section applies to all business combinations, as defined in the standard. Furthermore, the section also
addresses accounting for goodwill at the time of the business combination and subsequently.
This section specifically excludes combinations of entities or businesses under common control the
formation of joint ventures and the acquisition of a group of assets that does not constitute a business.
Definition
A business combination is the bringing together of separate entities or businesses into one reporting
entity.
A business is an integrated set of activities and assets conducted and managed to provide a return to
investors or lower costs or other economic benefits directly and proportionately to policyholders or
participants. Furthermore, a business generally consists of inputs, processes applied to those inputs, and
resulting outputs that are or will be used to generate revenues. If goodwill is present in a transferred set of
activities or assets, the transferred set is presumed to be a business.
Identifying the acquirer.
The acquirer is the combining entity that obtains control of the other combining entities of businesses.
Cost of a business combination
The cost of a business combination is the aggregate of:
  The fair values of the assets given, liabilities incurred or assumed, and equity instruments Issued
by the acquirer plus
 Any costs directly attributable to the business combination
Contingent consideration
When a business combination agreement provides for an adjustment to the cost of the bu combination
contingent on future events, the acquirer includes the estimated amount of adjustment in the cost of the
combination at the acquisition date if the adjustment is probable and can be measured reliably. If the
potential adjustment is not recognized at the acquisition date, but subsequently becomes probable and can
be measured reliably, the additional consideration is treated as an adjustment to the cost of the
combination.
Allocating the cost of a business combination
The acquiree's identifiable assets and liabilities and any contingent liabilities that can be measured
reliably are recognized at their acquisition date fair values.
Any difference between the cost of the business combination and the acquirer's interest in the net fair
value of the identifiable assets. liabilities and contingent liabilities must be accounted for as goodwill for
negative goodwill).
Recognition of assets and liabilities
The following criteria must be satisfied for the acquirer to recognize the acquiree's identifiable assets and
liabilities and any provisions for contingent liabilities at the acquisition date:

 Assets other than an intangible asset - the future economic benefits must be probable and the fair
value can be measured reliably:
 Liability other than a provision for contingent liability the outflow of resources must be probable
and the fair value can be measured reliably
 Intangible asset or provision for contingent liability - the fair value can be measured reliably

Provisional accounting
Retrospective adjustments to provisional amounts recognized in initial accounting for a business
combination may be made up to 12 months after the acquisition date. This time limit does not apply to
adjustments to the cost of the combination contingent on future events which becomes probable and can
be reliably measured after the acquisition date. (See discussion under Contingent consideration)
Measurement of goodwill
Goodwill is initially measured at cost, being the excess of the cost of the business combination over the
acquirer's interest in the net fair value of the identifiable assets, liabilities, and contingent liabilities
recognized.
After initial recognition, goodwill is measured at cost less accumulated amortization and accumulated
impairment losses.
Goodwill is amortized under the principles of amortization of intangible assets in Section 18. If a reliable
estimate of the useful life of goodwill cannot be made the life is presumed to be 10 years
Detailed requirements concerning impairment testing of goodwill are contained in Section 27. This
includes the requirement that the acquirer tests it for impairment where there is an indication that it may
be impaired.
Definition of goodwill
Goodwill is defined as future economic benefits arising from other assets that are not capable of being
individually identified and separately recognized
Non-controlling Interests
Where the acquirer obtains less than a 100% interest in the acquiree, g non-controlling interest (NCI) in
the acquiree is recognized at the NCI's proportion of the net identifiable assets, liabilities, and provisions
for contingent liabilities of the acquiree at their attributed fair values at the date of acquisition: no amount
is included for any goodwill relating to the NCI.
Bargain purchase
An excess arises where the acquirer's interest in the net fair value of the acquiree's identifiable assets,
liabilities, and provisions for contingent liabilities exceeds the cost of the combination. The standard
recognizes that this is sometimes referred to as 'negative goodwill. Where such an excess arises, the
acquirer must:

 Reassess the identification and measurement of the acquiree's assets. liabilities and provisions for
contingent liabilities and the measurement of the cost of the combination
 Recognize immediately in profit or loss any excess remaining after that reassessment
Areas covered in Full IFRS but not in IFRS for SMEs include:

 Subsequent adjustments to assets and liabilities (re-measurement period).

 Deferred tax recognized after initial purchase accounting.
 Non-controlling interests.
 Step acquisitions.
 A business combination achieved without the transfer of consideration.
 Indemnification assets.
 Re-acquired rights.
 Shared-based payments.
 Employee benefits.
Business Combination - Full PFRSs versus PFRS for SMEs
Some of the key differences between Full PFRSS (F-PFRS) and PFRS for SME (SMEs) of business
combinations are as follows:

Item F-PFRS SMEs

Definition and terminology
1. Business Combination
2. Contingent
Consideration
is a transaction or other event in bringing together separate
which an acquirer obtains entities or businesses into one
control of one or more reporting entity
businesses."
 Initially recognized as  Initially recognized in
part of the consideration the cost of the
 transferred.
 Non-occurrence of a
future event (e.g. not
meeting earnings target)
is not considered to be a
measurement period
adjustment - therefore
not adjusted against
goodwill.
combination only if it
meets probability and
reliably measurable
criteria.
 If a future event does
not occur, then any
adjustments to the cost
of the business
combination are made
against goodwill.

3. Costs incurred in a
business combination
1. Direct costs Expensed Capitalized
2. Indirect Costs Expensed Expensed
3. Costs to issue and Debited to APIC/Share stocks Debited to APIC/Share stocks
register stocks Premium Premium
4. Cost to issue debts Debited to BIC Debited to BIC
4. Recognizing and
measuring assets
acquired and liabilities
assumed on initial
recognition
5. Identifiable intangible Recognized separately from Requires recognition if their fair
assets goodwill if it is either value can be measured
contractual or separable reliably.
5. Exceptions to
recognition or
measurement
principles, or both, on
initial recognition
6. Contingent liabilities Recognize only where there is a Requires recognition of possible
present obligation that arises obligations if their fair value
from past events and its fair can be measured reliably.
value can be measured
reliably.
6. Accounting Method
Term Used Acquisition Method Purchased Method
Measuring Options: Proportionate share of
goodwill/bargain 1. Full fair value (Full identifiable net assets (partial
purchase gain Goodwill) goodwill)
2. Proportionate share of
identifiable net assets
(partial goodwill)
Valuation of goodwill Cost less impairment losses Cost less impairment losses and
amortization (life should be
presumed to be 10 years)

Corporate Liquidation
 I. Introduction
 When the financial position of the debtor is such that it cannot resolve its financial
difficulties, it will have to resort to a liquidation.
o By a debtor filing a voluntary petition
o By creditors filing an involuntary petition

II. Accounting and Reporting for Liquidation

 “Quitting concern” rather than a “going concern”
 Statement of affairs – devised to address the issue of liquidation
 In the process of liquidation – the bankrupt trustee must report to interested parties
periodically
 Objective – a statement of realization and liquidation must be prepared

III. Statement of Affairs

 A statement of financial condition that emphasizes liquidation values and provides
relevant information for the trustee in liquidating the debtor corporation.
o Prepared as of specific date
o It shows balance sheet information – assets measured at expected net
realizable values
o Assets classified on the basis of availability for fully secured, partially
secured, priority, and unsecured creditor.
o Liabilities are classified – priority, fully secured, partially secured, and
unsecured.
o Historical cost – included for reference purposes

The following are captions commonly found in the statement of affairs:

1. Assets Pledged to Fully Secured Creditors
 Assets with realizable values equal to, or in excess of the liabilities, pledged as
collateral.
2. Assets Pledged to Partially Secured Creditors
 Assets with realizable values that are less than the liabilities, pledged as security.
3. Free Assets
 Assets not pledged to specific secured liabilities
 Pledged assets with a realizable value in excess of the amount needed to satisfy
claims of secured creditors.
4. Unsecured Liabilities with Priority
 Liabilities that must, by statute, be paid off before any secured debts can be
satisfied.
5. Fully Secured Creditors
 Liabilities covered by a pledge of specific assets of realizable value equal to or in
excess of such liabilities
6. Partially Secured Creditors
 Liabilities covered by a pledge of specific assets of realizable value that is less than
such liabilities
7. Unsecured Liabilities without Priority
 Liabilities that have no legal priority nor a security interest in specific property
  They are paid off (pro-rated when there is an asset deficiency) after all priority and
secured liabilities have been satisfied.
8. Stockholders’ Equity
 The balances on this accounts depends on the amount of free assets available.
 If there is a deficiency of assets to satisfy unsecured creditors – all claims of equity
holders are extinguished.
 Only if there are free assets in excess of unsecured liabilities – can stockholders share
in any distributions.

IV. Statement of Realization and Liquidation

 An activity statement that is intended to show progress toward the liquidation of a
debtor’s state
 Original Purpose – to inform the bankruptcy court and interested creditors of the
accomplishment of the trustee

V. Deficiency Statement/Statement of Estate Deficit

 Usually prepared to accompany the statement of affairs to prove the deficiency to
unsecured creditors
 Shows the causes of deficiency – by summarizing losses and gains from realization
and unrecorded adjustments to assets and liabilities.

REVENUE RECOGNITION – CONTRACT WITH CUSTOMERS

Introduction
In financial reporting, confusion arises when agreeing on what revenue is and what it isn't. One can be
able to decide that the issues associated with revenue recognition can get relatively problematic. In
practice, there are departures from the revenue recognition principle (the accrual method). Revenue is
sometimes recognized at other points in the earning process, attributing in great measure to the significant
diversity of revenue transactions.
Until most recently revenue recognition was exactly one of the biggest gaps between IFRS (PFRS) and
US GAAP. Finally, these two standards came closer and tried to solve all these differences on May 28,
2014, when a new revenue recognition standard was issued: IFRS (PFRS) 15 Revenue from Contracts
with Customers and it should fill the gap between IFRS and US GAAP.
III. Effect of IFRS (PFRS) 15: What Type of Business will be the most affected?
For some companies, the impact of the new rules for revenue recognition will be minimal and they will
simply continue recognizing revenue just as before. Still, on the other hand, some companies might face
difficult challenges in order to apply with the new rules. The biggest challenges will be mainly in the
areas that are not very precisely arranged by superseded IAS (PAS) 18 and other related standards.
IFRS (PFRS) has lesser room for accounting decisions and specifies a lot more things depending on
the transaction involved.
The major areas of impact that are probably affected:
1. Is the revenue recognized:
 a. Over time (spread between the periods during control duration) or
b. At the point of time (upon completion)?
2. If the revenue is to be recognized over time, how should the company measure the progress
towards completion (in the previous standards the phrase “stage of completion” were used)?
3. How shall companies account for revenue from bundles offers (with multiple deliverables)?
Should they split the contracts into several components?
4. How should companies deal with contact modifications?
5. How shall companies treat the contract costs, including cost of obtaining the contract? Shall they
expense these costs in profit or loss, or capitalize and defer?
6. Are there any financing components in the contract if it is in the affirmative, how to deal with the
time value of money?
7. What disclosures do companies need to make? Do they have all the appropriate and relevant
information?
Different sectors or industries are affected in many different ways along the 5-step model as introduced
by IFRS (PFRS) 15. There are four (4) important industries that will face probably the biggest
challenges:
1. Telecommunications: Identifying individual performance obligations and allocating transaction
price
2. Manufacturers: Contract modifications
3. Software development and technology: Splitting the contract into two (2) separate obligations
4. Real estate and property development: Revenue over time/at the point of time
IFRS (PFRS) 15 will replace the following standards and interpretations:

 PAS 18 Revenue,
 PAS 11 Construction Contracts
 SIC 31 Revenue - Barter Transaction Involving Advertising Services
 PFRIC 13 Customer Loyalty Programs
 PFRIC 15 Agreements for the Construction of Real Estate and
 PFRIC 18 Transfer of Assets from Customers