Mary Rose D.

Losis
FINANCIAL ASSET AT FAIR VALUE

Investment are assets held by an entity for the accretion of wealth through distribution such royalties, dividends and
rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading
relationships.

Investments are assets not directly identified with the operating activities of an entity and occupy only an auxiliary
relationship of the central revenue producing activities of the entity.

Purpose of investment:

 For accretion of wealth

 For capital appreciation
 For ownership control (subsidiaries and associates)
 For meeting business requirements
 For protection

Investments are classified as either current or non-current

Current investment- readily realizable and are intended to be held for not more than one year.

Ex. Trading securities

A financial asset is any asset that is:

 Cash
 A contractual right to receive cash or another financial asset from another entity.
 A contractual right to exchange financial instrument with another entity under conditions that are potentially
favorable. (When such exchange will result to gain or additional cash inflow to the entity)
 An equity instrument of another entity.

Ex. Cash or currency, deposit of cash, trade accounts receivable, notes receivable, and loans receivable and investment
in shares or other equity instruments such as trading securities.

Not financial asset

 Intangible asset
 Physical asset (inventory, pep) because it does not give rise to a present right to receive cash or another
financial asset)
 Prepaid expenses
 Leased assets

Classification of financial asset:

1. Financial asset at fair value through profit or loss (income statement)- include both equity securities and debt
instrument.
2. Fa at fair value through other comprehensive income - include both equity securities and debt instrument.
3. Fa at amortized cost- debt securities

The classification depends on the business model for managing fa which may be:

1. To hold investments in order to realize FV changes (current)

2. To hold investments in order to collect contractual cash flows (non-current)
3. To hold investments in order to collect contractual cash flows and sell the investment.

Equity security

- Any instrument representing ownership shares and right, warrants or options to acquire or dispose of
ownership shares at a fixed or determinable price.
- Ownership interest in an entity
- Includes, ordinary shares, preference shares and rights or options to acquire ownership shares.
- Shareholders, owners of equity securities.
- Share, ownership interest or right (share in earnings, election of directors, subscription for additional
shares and share in net assets upon liquidation) of a shareholder in an entity.
- Share certificate, instrument

Debt security

- Is any security that represents a creditor relationship with an entity.

- It has a maturity date and maturity value.
- Includes, corporate bonds, bop treasury bills, government securities, commercial papers, preference
shares with mandatory redemption date or are redeemable at the option of the shareholders.
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Initial measurement of financial asset

- Fair value plus, transaction costs that are directly attributable to the acquisition of the financial asset. (If not
at fair value through profit or loss)
- Fair value is normally the transaction price, FV of the consideration given
- Recognizes initially at FV.
- Transaction cost in OCI is capitalized as cost of the fa.
- Transaction cost in p/l is expensed outright

Subsequent measurement

- Fair value through profit or loss

- Fair value through other comprehensive income
- Amortized cost

1. Financial asset at fair value through profit or loss

- Financial asset held for trading or popularly known as trading securities (by requirement)
- All other investments in quoted equity instruments. (By consequence)
- Financial assets that are irrevocably designated (by irrevocable designation)
- All debt instrument that does not satisfy the requirements for measurement at amortized cost and at fair
value through OCI (by default)

Financial assets held for trading or trading securities are debt and equity securities.

2. Equity investment at fair value through other comprehensive income

- Investment in equity instrument that is not held for trading (by irrevocable election)
- On derecognition of the amount in OCI, the amount should be transferred to retained earnings.
3. Debt investment at amortized cost

Measured at amortized cost if both of the following conditions are met:

A. The business model is to hold the fa in order to collect contractual cash flow on specified date.
B. The contractual cash flows are solely payments of the principal and interest on the principal amount
outstanding.

4. Debt investment at fair value through other comprehensive income

Measured at FV through OCI if both of the conditions are met:

A. The business model is achieved both by collecting contractual cash flows and by selling or trading the financial
asset.
B. The contractual cash flows are solely payments of principal and interest on the principal outstanding.

On derecognition, the cumulative gain and loss recognized in other comprehensive income shall be reclassified to
profit or loss.

Summary of measurements:

Measurement of equity investments

1. Held for trading- at fair value through p/l

2. Not held for trading- as a rule, at FV through p/l
3. Not held for trading- at FV through OCI by irrevocable election
4. All other investments in quoted equity instruments- at FV through p/l
5. Investment in unquoted equity instruments- at cost
6. Investments of 20% to 50%- equity method of accounting
7. Investments more than 50%- consolidation method to be taken up in an advanced accounting course.

Measurement of debt investments

1. Held for trading- at fair value through p/l

2. Held for collection of contractual cash flows- at amortized cost
3. Held for collection of contractual cash flows – at FV through p/l by irrevocable designation
Or FV option.
4. Held for collection of contractual cash flows and for sale of the fa- at FV through OCI
5. Held for collection of contractual cash flows and for sale of the fa- at FV through p/l by irrevocable designation
or FV option.

Fair value
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- The price that would be received to sell an asset in an orderly transaction between market participants at
the measurement date.
- Price agreed upon by a buyer and a seller.

Quoted price

- Fl of securities in the securities market

Quoted price (share or equity security)- pesos per share

Quoted price (bond or debt security)- percent of the face amount of the bond

If the fair value is higher than carrying amount, the difference is an unrealized gain.

If the fair value is lower than ca, the difference is unrealized loss.

Gain and loss that result from actually selling the investments are known as realized gain and realized loss.

Impairment- debt investments

Expected credit loss on:

A. Debt investment measured at amortized cost

B. Debt investment measured at FV through other comprehensive income

Credit loss

- Is the present value of all cash shortfalls.

Expected credit loss

- Is an estimate of credit loss over the life of the financial instrument.

Impairment loss

- Difference between the carrying amount and the present value of estimated future cash flows discounted at
the original effective rate.

EQUITY INVESTMENTS

Dividends, share split and share right

Lump sum acquisition

- If two or more equity securities acquired at a single cost or lump sum, the single cost is allocated to the
securities acquired on the basis of their fair value.
- If only one security has a known market value, an amount is allocated to the security with a known market
value equal to its market value.
- The remainder of the single cost is allocated to the other security with no known market value.

Cash dividends

- If the equity securities are measured at FV through p/l or at FV through OCI, dividends are considered as
income.
- It does not affect the investment account

When are the dividend considered earned?

A. Date of declaration- payment of dividends is approved by the bod

B. Date of record- stock and transfer book of corporation is closed for registration
C. Date of payment- dividends declared shall be paid.

Dividend-on – when shares are sold after the date of declaration but prior to date of record, they carry with them the
rights to receive dividends.

Ex-dividend- between the date of record and the date of payment, shares can be sold and still the original shareholders
have the right to receive the dividends on payment date.

When to recognize dividend as income

- The dividends shall be recognized as revenue on the date of declaration.

- The sale price normally includes the accrued dividends.
 Mary Rose D. Losis

Property dividends

- Dividends in kind, dividends in the form of property or noncash assets.

- Considered as income and recorded at fair value.

Liquidating dividends

- Return on invested capital, and therefore, are not income.

- When dividends are received from wasting asset corporation, the dividends are designated as partly income
and partly return of investment

Share dividends or stock dividends

- In the form of the issuing entity’s own share.

- Bonus issue
- Not income because no additional asset is received by the entity

Kinds of share dividends

- Share dividends may be the same as those held or different from those held.
- The shareholder may have more shares but at reduced market value.

Share dividends of the same class

- Recorded by means of memorandum entry on the part of the shareholder.

- Share dividends do not affect the total cost of investment but reduce the cost of the investment per share.

Share dividends different from those held

- Total cost is apportioned between the original shares and the share dividends on the basic of market value.

Shares received in lieu of cash dividends

- Income at fair value of the shares received because such share in effect are property dividends.
- In the absence of FV of the shares received, the income is equal to the cash dividends that would have
been received.

Cash received in lieu of share dividends

- The “as if” approach is followed, share dividends are assumed to be received and subsequently sold at the
cash received. Therefore, gain or loss may be recognized.

Share split

- Restructuring its capital without capitalizing retained earnings or changing the amount of its legal capital.
- Share split may be split up (decrease in par or stated value) or split down (increase in par or stated value)
- Memorandum entry to record the revolt of new shares by virtue of shares split.

Special assessments

- Additional capital contribution of shareholder

- Additional cost of investment

Redemption of shares

- Recorded in the same manner as sale of share.

- The redemption price is treated as the sale price.

Share right or stock right

- Preemptive right
- A legal right granted to shareholders to subscribe for new shares issued by a corporation ate specified price
during definite period.
- A shareholder receives one right for every share owned.
- Evidenced by a share warrant.

Accounting for share rights

- Share right is a form of financial asset.

1. Share rights are accounted for separately
2. Share rights are not accounted for separately
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Accounted for separately

- Share rights shall be measured initially at fair value.

- Share rights are independent of the original shares for which they are derived.
- When share rights are issued, the investor is now the owner of two financial assets namely the original
shares and the related share rights.
- Current assets

Not accounted for separately

- Embedded derivative but not “stand- alone” derivative.

- If the host contract is a financial asset the embedded derivative is not separated.
1. Date of declaration- the issuance of share rights is approved by bod.
2. Date of record (date of issuing the share warrants) - the date on which the stock and transfer book of the entity
will be closed for registration.
3. Date of expiration- date up to which the share rights shall be exercised.

Right-on

- Between the date of declaration and date of record.

- The share and right are inseparable and are treated as one.
- The share cannot be sold without also selling the right or vice versa.

Ex-right

- Between the date of record and the date of expiration

- The share can now be sold separate from the right or vice versa

The original investment account is credited when the rights are received because the share rights are derived from the
original investment.

If the share rights do not have a market value, the theoretical or parity value of the share rights is used in measuring the
fair value of the share rights.

Theoretical or parity value of share right

- Is the assumed fair value of the right that is derived from the market value of the share.

INVESTMENT IN ASSOCIATE

BASIC PRINCIPLES

Intercorporate share investment

- Is the purchase of the equity shares of one entity by another entity.

- One entity investing in another entity through the acquisition of share capital.

Significant influence

- Assessment of significant influence is a matter of judgement

- The power to participate in the financial and operating policy decisions of the investee but not control or
joint control over those policies.
- 20% or more of the voting power of the investee, the investor has significant influence.
- Less than 20% of the voting power of the investee, the investor does not have significant influence.

Loss of significant influence

- When it loses the power to participate in the financial and operating policy decisions of the investee.
- When an associate becomes subject to control of a government, court, administrator or regulator.
- Contractual agreement

Equity method

- Based on the economic relationship between the investor and the investee.
- The investor and the investee are viewed as a single economic entity. They are one and the same.
- The investor has a significant influence over the investee.

Accounting procedures:

1. The investment is initially recognized at a cost.

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2. The carrying amount is increased by the investor’s share of the profit of the investee and decreased by the
investor’s share of loss of the investee.
-investment income
3. Distributions or dividends received from an equity investee reduce the carrying amount of the investment.
4. The investment must be in ordinary shares.
5. If the investor has significant influence over the investee, the investee is said to be an associate.
-investment in associate

6. Noncurrent asset

Excess of cost over carrying amount

- If the investor pays more than the carrying amount of the net assets acquired, the difference is commonly
known as excess of cost over carrying amount, and may be attributed to the following:
A. Undervaluation of the investee’s assets, such as building, land, and inventory.
B. Goodwill
 Undervaluation of depreciable asset- amortized over the remaining life of the depreciable asset.
 Undervaluation of land- the amount is expensed when the land is sold.
 Inventory- the amount is expensed when the inventory is already sold.
 If the excess is attributable to good will- it is included in the carrying amount of the investment and not
amortized.

Excess of net fair value over cost

- Any excess of the investor’s share of the net fair value of the associate identifiable assets and liabilities over
the cost of the investment is included as income in the determination of the investor’s share of associate’s
profit or loss in the period in which the investment is acquired.

Investee with heavy loss

- If an investor’s share of losses of an associate equal or exceeds the carrying amount of an investment, the
investor discontinues recognizing its further losses.
- The investment is reported at nil or zero value.

Impairment loss

- The carrying amount of the investment in associate exceeds recoverable amount.

Recoverable amount

- Higher between fair value less cost of disposal and value in use.

Value in use

- The present value of the estimated future cash flows expected to arise from the continuing use of an asset
and from its ultimate disposal.

Investee with preference shares

When an associate has outstanding cumulative preference shares, the investor shall compute its share of earnings or
losses after deducting the preference share dividends, whether or not such dividends are declared.

When an associate has outstanding non-cumulative preference shares, the investor shall compute its share of earnings,
after deducting the preference share dividends only when declared. If no declaration forfeited.

INVESTMENT IN ASSOCIATE

OTHER ACCOUNTING ISSUES

Adjustment of investee’s operations

- The difference between the reporting date of the associate and that of the investor shall be no more than 3
months.
- Profits and losses resulting from upstream and downstream transactions are recognized in the investor’s
financial statements only to the extent of the unrelated investors’ interest in the associate.
- The investor’s share in the associate’s profit and losses resulting from these transactions is eliminated.

Upstream transactions

- Sales of assets from an associate to the investor.

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- The unrealized profit from these transactions must be eliminated in determining the investor’s share in
profit or loss of the associate.

Downstream transactions

- Sales of assets from the investor to an associate.

- The unreleased profit from these transactions must be also eliminated.

Discontinuance of equity method- change from equity

- From the date the investor ceases to have a significant influence over an associate.
- Consequently, the investor shall account the investment as any of the following:
1. Financial asset at FV through p/l
2. Financial asset at FV through OCI
3. Nonmarketable investment at cost or investment in unquoted equity instrument

Measurement after loss of significant influence

- The investor shall measure any retained investment in associate at fair value.
- The difference between the ca of the retained investment and FV of the retained investment shall be
included in the profit or loss.
- Net proceeds and ca of the invest sold is also included in the profit or loss
- Fair value on initial recognition as a financial asset.

Equity method not applicable

- If the investor is a parent that is exempt from preparing consolidated financial statements or if all of the
following apply:
A. The investor is a wholly-owned subsidiary
B. The investor’s debt and equity instruments are not traded in a public market or “over the counter”
market.
C. The investor did not file or it is not in the process of filing financial statements with the sec.
D. The ultimate or any intermediate parent of the investor produces consolidated financial statements
available for public use.

The investor shall account the investment as any of the following:

- Financial asset at FV through p/l

- Financial asset at FV through OCI
- Nonmarketable investment at cost or investment in unquoted equity instrument

Associate held for sale

- The investment in associate classified as held for sale shall be measured at the lower of carrying
amount and fair value less cost of disposal.

Accounting for investment of less than 20%

A. Fair value method

- Fa measured at FV through p/l and fa measured at FV through OCI
B. Cost method
- Investment in unquoted equity instrument or nonmarketable investment.

 Under the fair value and cost method, the investor does not share in the profit or loss of the investee
because of the legal relationship between the investor and the investee.
 The investor and the investee are independent of the other.
 Dividends received by the investor from the investee are accounted for as dividend income.

Investment in associate achieved in stages

- the acquirer shall remeasure the previously held equity interest at fair value and recognize the
resulting gain or loss in profit or loss.
- This fair value approach should be followed when an associate is acquired in stages.

Fair value approach

A. The existing interest in the associate is remeasured at fair value with any change in fair value included in profit
or loss.
B. However, if the existing interest is accounted for at FV through OCI, any unrealized gain or loss at the date the
investee becomes an associate is reclassified to retained earnings.
 Mary Rose D. Losis
C. The fair value of the existing interest plus the cost of the additional interest acquired constitutes the total cost
of the investment for the initial application of the equity method.
D. The total cost of the investment for the initial application of the equity method minus the carrying amount of
the net assets acquired at the date of significant influence is obtained equals excess of cost over carrying
amount or excess of net fair value.

FINANCIAL ASSET AT AMORTIZED COST

BOND INVESTEMENT

BOND

- A formal unconditional promise made under seal to pay a specified sum of money at a determinable future date,
and to make periodic payments at a stated rate until the principal sum is paid.
- Contract of debt, whereby one party called the issuer borrows fund from another party called the investor.
- Bond indenture, certificate

Interest payment date

- The interest on the bond investment is usually paid semiannually or every six months.
Ex. Jan 1 to Jun 1

Classification of bond investment

- Current or noncurrent investment

- Classified and accounted for as follows:
A. Financial asset held for trading
B. Fa at amortized cost
C. Fa at FV through OCI
D. Fa at FV through p/l by irrevocable designation or fair value option

Initial measurement

- Bond investments are recognized initially at fair value plus transaction cost that are directly attributable to the
acquisition

Subsequent measurement

A. At FV through P/L
B. At amortized cost
C. At FV through OCI

Acquisition of bond investment

- Bonds may be acquired on interest rates (purchase price is initially recognized as the acquisition cost) or
between interest dates (purchase price normally include accrued interest)
- Accrued interest is accounted for separately (bonds and accrued interest)
- When accrued interest is debited, upon the receipt of the first semiannual interest, the accrued interest
receivable account is closed and interest income is credited for the excess.
- When interest income is debited, the receipt of the first semiannual interest is credited entirely to interest
income.

Investment in bonds at amortized cost

Amortized cost

- Is the initial recognition amount of the investment minus repayments, plus amortization of discount, minus
amortization of premium, minus reduction of impairment or collectability?
- Bond investment at amortized cost is classified as noncurrent investments.

Amortization of premium or discount

- Investment in bonds shall be measured subsequently at amortized cost

- Any premium or discount on the acquisition of long-term investment in bonds must be amortized.
- Bond premium or discount, is amortized over the remaining life of bonds from the date of acquit ion to the date
of maturity.
- Amortization may be made on interest dates or at the end of the reporting period.

Philosophy on amortization
 Mary Rose D. Losis
- Such process of allocating the bond premium as deduction from the interest income and the bond discount as
addition to interest income is what is traditionally called amortization.

Sales of bonds prior to maturity

- Amortization of the premium or discount should be recognized up to the date of sale.

- If the sale is between interest dates, the sale price normally includes the accrued interest.
- Accordingly, that portion of the sale price pertaining to the accrued interest should be credited to interest
income.

1. Callable bonds
- Which may be called in or redeemed by the issuing entity prior to their date of maturity.
- The call price or redemption price is at a premium or more than the face amount of the bond.
- The difference between the redemption price and the carrying amount of the bond investment on the date of
redemption is recognized in profit or loss.
2. Convertible bonds
- Those which give the bondholders the right to exchange their bonds for share capital of the issuing entity at any
time prior to the maturity.
- It can be classified as financial assets measured at fair value.
3. Serial bonds
- Those which have a series of maturity dates or those bonds which are payable in installments.
4. Term bonds
- Those bonds that mature on a single date.
- Callable and convertible bonds

Methods of amortization

A. Straight line method

- Provides for an equal amount of premium or discount amortization each accounting period.
- Annual amortization is equal to amount of discount or premium divided by the life of bonds.
B. Bond outstanding method
- Applicable to serial bonds
- Provides for decreasing amount of amortization
C. Effective interest method or simply “interest method” or scientific method
- Provides for increasing amount of amortization
- Recommended

EFFECTIVE INTEREST METHOD

AMORTIZED COST, FVOCI AND FVPL

Effective interest method

- Comparison between the interest earned or interest income and the interest received
- The difference represents premium or discount amortization

Interest earned or income

- Multiplying the effective rate by the carrying amount of the bond investment

Effective rate

- Yield rate or market rate which is the actual or true rate of interest.

Interest received

- Multiplying the nominal rate by the face amount of the bond.

Nominal rate

- Coupon rate or stated rate appearing on the face of the bond

The carrying amount of the bond investment is the initial cost gradually increased by periodic amortization of
discount or gradually reduced by periodic amortization of premium.

Effective rate is lower than the nominal rate

- Premium (loss)
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Effective rate is higher than the nominal rate

- Discount (gain)

Effective interest method-serial bonds

- Interest received equals outstanding face amount times nominal rate

Bond investment-fvoci

- Bond investment – reclassified to profit or loss

- Equity investment – reclassified to retained earnings

Fair value option

- All changes in fair value recognized in profit or loss.

- Any transaction cost incurred is expensed outright
- Interest income is based on the nominal rate rather than the effective interest rate.

Market price of bonds

- Present value of the principal plus the present value of future interest payments using the effective rate.

Reclassification of financial asset

- Changing the business model

- Not restate any previously recognized gains, losses and interest,

Exemptions from reclassification

- Equity investment held for trading or measured at fvpl.

- All equity investment
- Equity investment measured at fvoci
- Debt investment measured at fvpl through irrevocable election.

Reclassification from fvpl to amortized cost

A. The fair value at the reclassification date becomes the new carrying amount of the fa at amortized cost
B. Difference between the new carrying amount of the fa at amortized cost and the face amount of the financial
asset shall be amortized through profit or loss over the remaining life of the financial asset using effective
interest method.
C. A new effective interest rate must be determined based on the new carrying amount or fair value at
reclassification date.

Reclassification from amortized cost to fop

A. The fair value is determined at the reclassification date.

B. Difference between the previous carrying amount and fair value is recognized in profit or loss.

Reclassification from amortized cost to fvoci

A. The financial asset is measured at fair value at the reclassification date

B. The difference between the amortized cost carrying amount and the fair value at the reclassification date is
recognized in other comprehensive income.
C. The original interest rate is not adjusted.

Reclassification from fvoci to amortized cost

A. The fair value at reclassification date become the new amortized cost carrying amount
B. The cumulative gain or loss previously recognized in other comprehensive income is eliminated and adjusted
against the fair value at the reclassification date
C. The original rate is not adjusted.

Reclassification from fop to fvoci

A. The fair value of the reclassification date becomes the new carrying amount
B. A new effective interest rate must be determined based on the new carrying amount or fair value at
reclassification date.

Reclassification from fvoci to fop

A. The fair value of the reclassification date becomes the new carrying amount
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B. The cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss
at reclassification date.

Investment property

- Is defined as property (land or building or part of a building or both) held by an owner or by the lessee under a
finance lease to earn rentals or for capital appreciation.
- Only land and building can qualify as investment property.
- An equipment or any movable property cannot qualify as investment property.

An investment property is not held:

1. For use in the production or supply of goods or services or administrative purposes. (owner-occupied
property)
2. For sale in the ordinary course of business (inventory)

Examples of investment property:

1. Land held for long-term capital appreciation

2. Land held for currently undetermined use
3. Building owned by the reporting entity leased out under an operating lease
4. Building that is vacant but is held to be leased out under an operating lease
5. Property that is being constructed or developed for future us as investment property

Items not considered as investment property:

1. Owner-occupied property
2. Property held for future use as owner occupied
3. Property held for development and subsequent use as owner occupied
4. Property occupied by employees whether or not the employees pay rent at market rate
5. Owner-occupied property awaiting disposal
6. Property held for sale in the ordinary course of the business or in the process of construction or development
for such sale
7. Property being constructed or developed on behalf of third parties
8. Property leased to another entity under a finance lease

Investment property held by lessee

The right of use asset is initially recognized at cost which includes the following:

A. Present value of the lease payment

B. Lease payment made to the lessor at or before commencement date less any lease incentive
C. Initial direct cost incurred by the lessee
D. Estimate cost of dismantling and restoring the underlying asset for which the lessee has a present obligation

Subsequent measurement

- If a lessee applies the fair value model in measuring the investment property, the lessee shall also apply the fair
value model to the right of use asset that meets the definition of investment property.

Partly investment and partly owner- occupied

- If portions could be sold or leased out separately, an entity shall account that portion separately as investment
property or owner-occupied property.
- If the portions could not be sold separately, the property is investment property if only an insignificant portion
is held for manufacturing or administrative purposes.
- If the services provided are a more significant component of the arrangement, the property is treated as
owner-occupied property.

Property leased to an affiliate

- From the perspective of the individual entity that owns it, the property leased to another subsidiary or its
parent company is considered as investment property
- However, from the perspective of the group as a whole and for the purpose of consolidated financial
statements, the property is treated as owner-occupied property

Initial measurement of investment property:

- An investment property is measured initially at cost.

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- The cost of a purchased investment property comprises the purchase price and any directly attributable
expenditure.
- Directly attributable expenditure includes professional fees for legal services, property transfer taxes and other
transaction costs.

Cost excluded from cost of investment

A. Start-up cost
- Unless necessary to bring the property to the condition necessary for its intended use.
B. Operating losses
- Incurred before the investment property achieves the planned level of occupancy.
C. Abnormal amounts
- Of wasted material, labor or other resources incurred in constructing or developing the property.

Subsequent measurement of investment property

A. Fair value model- the investment property is carried at fair value

B. Cost model- the investment property is carried at cost less any accumulated depreciation and any accumulated
impairment loss.

Fair value of investment property

- Excludes prepaid or accrued operating lease income

Measurement of transfers

1. Cost model, transfers between invest mint property, owner-occupied, and inventory shall be measured at cost
2. From investment property carried at fair value to owner-occupied or inventory shall be accounted for at fair
value
3. From owner occupied to investment property that is to be carried at fair value, revaluation of PPE
4. From inventory to investment property that is to be carried at fair value, the remeasurement shall be included
in profit or loss.
5. Investment in property under construction is completed and to be carried at fair value, the difference
between the fair value and carrying amount shall be included in profit or loss.

Derecognition of investment property

A. On disposal
B. When the investment property is permanently withdrawn from use
C. When no future economic benefits are expected from the investment property.

Cash surrender value

- If the beefier is the officer insured, the payment of the premium is simply charged to insurance expense.

Cash surrender value

- The amount which the insurance firm will pay upon the surrender and cancelation of the life insurance policy.
- Arises if the following requisites are present:
1. The policy is a life policy
2. Premiums for three full years must have been paid
3. The policy surrendered at the end of the third year or anytime thereafter.
- Noncurrent investment

Loan value

- The amount which the insured can borrow from the insurance firm with the cash surrender value as collateral
security.
- The loan shall not be deducted from the cash surrender value but accounted for as an ordinary obligation.

Theory on cash surrender value

- Such excess in the premium paid over the annual cost of insurance, with accumulated interest, constitutes the
cash surrender value.
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PROPERTY, PLANT AND EQUIPMENT

MAJOR CHARACTERISTICS:

1. Tangible assets, meaning with physical substance

2. Used in business, meaning used in production or supply of goods or services, for rental purposes and for
administrative purposes.
3. Expected to be used over a period of more than one year.

Spare parts and servicing equipment

- Usually carried as inventory and recognized as an expense when consumed

- Major spare parts and stand-by equipment qualify as ppe when an entity expects to use them during more
than one period.

Measurement at recognition

- Shall be measured initially at cost if it qualifies for recognition as an asset

Cost

- The amount of cash and cash equivalent paid and the fair value of other consideration given to acquire an asset
at the time of acquisition or construction.

Elements of cost

A. Purchase price
B. Cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of
operating in the manner intended by management.
C. Initial estimate of the cost of dismantling and removing the asset and restoring the site on which it is located.

Directly attributable cost

1. Costs of employee benefits

2. Cost of site preparation
3. Initial delivery and handling cost
4. Installation and assembly cost
5. Professional fees
6. Cost of testing whether the asset is functioning properly

Proceeds from samples

- Included in profit or loss

- If not yet sold, the samples are accounted for as inventory

Cost not qualifying for recognition

- Expensed
A. Opening new facility
B. Introducing new product or service, cost of advertising and promotion
C. Conducting business in a new location or with a new class of customer, including cost of staff training
D. Administration and other general overhead costs
E. Cost that has yet to be brought into use or is operated at less than full capacity
F. Initial operating losses
G. Relocating or reorganizing part or all of an entity’s operations

Measurement after recognition

1. Cost model- the ppe are carried at cost less any accumulated depreciation and any accumulated impairment
loss
2. revaluation model- the ppe are carried at revalued carrying amount
Revalued carrying amount- fair value at the date of revaluation less any subsequent accumulated depreciation
and any subsequent accumulated impairment loss

Acquit ion of property

1. Cash basis
2. On account subject to cash discount
3. Installment basis
4. Issuance of share capital
5. Issuance of bonds payable
6. Exchange
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7. Donation
8. Government grant
9. Construction

1. Acquisition of cash basis

- Cash price equivalent at the recognition date.

- Cash paid plus directly attributable costs such as freight, installation cost, and other necessary cost.
- Basket price or lump sum, the allocation of single price is based on relative fair value

2. Acquisition account

- The invoice price minus the discount, regardless of whether the discount is taken or not.
- Purchase discount loss, when the discount is not taken
- Cash discount is a reduction of cost and not as income.

3. Acquisition on installment basis

- Cash price
- The excess of the installment price over the cash price is treated as an interest expense to be amortized over
the credit period.

No available cash price

- Present value of all payments, using an implied interest rate

4. Issuance of share capital

1. Fair value of property received

2. Fair value of the share capital
3. Par or stated value of the share capital

5. Issuance of bonds payable

1. Fair value of bonds payable

2. Fair value of asset received
3. Face amount of bonds payable

6. Exchange

1. Measured at fair value

2. The exchange is recognized at carrying amount under the following circumstances:
 Lacks commercial substance
 The fair value of the asset given or the fair value of the asset received is not reliably measured.

Commercial substance

- Is a new motion and is defined as the event or transaction causing the cash flows of the entity to change
significantly by reason of exchange?
- When the cash flow of the asset received differ significantly from the cash flows of asset transferred.
- Amount, timing and risk

Entity- specific value

- The present value of the cash flows an entity expects to arise from the continuing use of an asset and from the
disposal at the end of useful life or expects to incur when settling a liability.

Exchange-with commercial substance

A. Fair value of the asset given plus any cash payment – on the part of the payor.
B. Fair value of the asset given minus any cash received – on the part of the recipient.

Exchange with no commercial substance

- Carrying amount of the asset given

- No gain or loss

Trade in

- A form of exchange
- Involves a nondealer acquiring asset from a dealer
- Transaction has a commercial substance
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1. Fair value of asset given plus any cash payment
2. Trade in value of asset given plus cash payment (in effect, this is the fair value of the asset received)

7.Donation

- Contributions received from shareholders shall be recorded at fair value with the credit going to donated
capital.
- Expenses incurred in connection with the donation, like payment of registration fees and legal fees shall be
charged to the donated capital.
- However, directly attributable costs incurred subsequently, such us installation and testing cost necessary to
bring the donated asset to the location and condition intended use shall be capitalized
- Capital gifts or grants shall be recorded at fair value when received or receivable
- Capital gifts or grants are generally subsidies and therefore recognized as income.

8.Constructon

- Self-constructed asset
- Cost includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental overhead specifically identifiable or traceable to the construction
- If the incremental overhead is not specifically identifiable, allocation of overhead may be done on the basis of
direct labor cost or direct labor hours.

GOVERNMENT GRANT

- Assistance by government in the form of transfer of resources to an entity in return for part or future
compliance with certain conditions relating to the operating activities of the entity.
- Subsidy, subvention or premium

Recognition and measurement

- Measured at fair value, government grant

- Reasonable assurance that:
A. The entity will comply with the conditions attaching to the grant
B. The grant will be received
- Government grant shall be recognized on the accrual basis when received or receivable rather than cash basis.

Classifications of government grant

A. Grant related to asset

- An entity shall purchase, construct or otherwise acquire long-term asset.
B. Grant related to income
- By residual definition, this is the government grant other than grant related to asset.

Accounting for government grant

- The grant is taken to income over one or more periods in which the related cost is incurred.

Presentation of government grant

1. Related to asset:
A. By setting the grant as deferred income
B. By deducting the grant from the cost of the asset
2. Related to income:
-presented in the income statement either separately or under the general heading “other income”
- deducted from the related expense

Repayment of government grant

- Change in accounting estimate

Grant of interest-free loan

- Forgivable loan from government - government grant

- Benefit of a government loan with a nil or below market rate of interest – government grant
- Benefit is measured as the difference of the face amount and present value of the loan
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Government assistance

- Action by government designed to provide an economic benefit specific to an entity or range of entities
qualifying under certain criteria.
- No value can be reasonably be placed upon.
- Examples of government assistance are:
1. Free technical or marketing advice
2. Provision of guarantee
3. Government procurement policy that is responsible for a portion of the entity’s sales.
- Government grant does not include the following indirect benefits or benefits not specific to an entity:
1. Infrastructure in development areas such as improvement to the general transport and communication
network
2. Imposition of trading constraints on competitors
3. Improved facilities such as irrigation for the benefit of an entire local community.

DEPRECIATION

- Expense, the difference between original cost of a property and any remaining value when it is retired or worn
out.
A. Depreciation- ppe
B. Depletion- wasting assets
C. Amortization- intangible assets
- Systematic allocation of depreciable amount of an asset over the useful life.
- A matter of cost allocation in recognition of the exhaustion of the useful life of an item of ppe.
- Objective: to have each period benefitting from the use of the asset bear an equitable share of the asset cost

Depreciation in the financial statements

- An expense, it may be part of the cost of goods manufactured or an operating expense

Depreciation period

- Begins when it is available for use, meaning when the asset is in the location and condition necessary for it to
be capable of operating in the manner intended by management.
- It ceases when the asset is derecognized
- Depreciation does not cease when the asset becomes idle temporarily
- If the asset is classified as held for sale, depreciation shall be discontinued.

Kinds of depreciation

1. Physical depreciation
- Depreciable asset’s wear and tear and deterioration over a period.
- May caused by:
A. Wear and tear due to frequent use
B. Passage of time
C. Acton of elements
D. Casualty or accident
E. Disease or decay
2. Functional or economic depreciation
- Arises from inadequacy, supersession, and obsolescence
A. Inadequacy- the asset is no longer useful to the entity because of the increase in volume of operations.
B. Supersession- new asset becomes available
C. Obsolescence- the catchall for economic or functional depreciation, no future demand for the product
which the asset produce. (Inadequate and superseded)

Factors of depreciation

1. Depreciable amount/cost – cost of an asset less the residual value

2. Residual value- the estimated net amount currently obtainable if the asset is at the end of the useful life.
(Change in an accounting estimate)
3. Useful life- either the period over which an asset is expected to be available for use by the entity, of the number
of production or similar units expected to be obtained from the asset by the entity.
A. Time periods as in years
B. Units of output or production
C. Service hours or working hours

Factors in determining the useful life

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1. Expected usage of the asset
2. Expected physical wear and tear
3. Technical or commercial obsolescence
4. Legal limits

Service life

- The period of time an asset shall be used by an entity.

- Useful life

Physical life

- How long the asset shall last

Depreciation method

- It shall reflect the pattern in which the future economic benefits from the asset are expected to be consumed
by the entity.
- Change in depreciation method shall be accounted for as change in accounting estimate.

Methods of depreciation

1. Equal or uniform charge methods

A. Straight line method
B. Composite method
C. Group method
2. Variable charge or use- factor or activity methods
A. Service hours or working hours method
B. Units of output or production method
3. Decreasing charge or accelerated or diminishing balance methods
A. Sum of years’ digits
B. Declining balance method
C. Double declining balance method
D. 150% declining balance method
4. Other methods
A. Inventory or appraisal
B. Retirement method
C. Replacement method

Equal or uniform charge methods

1. Straight line method (passage of time)

Annual depreciation = cost minus residual value / useful life in years

Straight line rate= 100% / useful life in years
Annual depreciation= straight line rate x depreciable amount

2. Composite method
- Assets that are dissimilar in nature or assets that have different physical characteristics and vary widely in useful
life, are grouped and treated as single unit.

3. Group method
- All assets that are similar in nature and in estimated useful life are grouped and treated as single unit.

Composite life= total depreciable amount / total annual depreciation

Composite rate = total annual depreciation/ total cost
Annual depreciation= composite rate x total cost

Accounting procedures

- Depreciation is reported in a single accumulated depreciation account

- Periodic depreciation= composite or group rate times total cost of the assets in the group.
- When an asset is retired, no gain or loss is reported, debit the accumulated depreciation which is cost minus
salvage proceeds and credit the cost of the asset retired
- When the asset retired is replaced by a similar asset, the replacement is recorded by debiting the asset account
and crediting cash or other appropriate account
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Variable charge or use- factor or activity methods (function of use)

1. Working hours method

Depreciation rate per hour = depreciable amount/ estimated useful life in terms of service hours
Depreciation for certain period = depreciation rate per hour x actual hours worked in one period

2. Output or production method

Depreciation rate per unit= depreciable amount / estimated useful life in terms of units of output
Annual depreciation= depreciation rate per unit x yearly output

Decreasing charge or accelerated or diminishing balance methods

- Higher depreciation in the earlier years and lower depreciation in the later years.

1. Sum of year’s digit

Annual depreciation= depreciable amount / series of fractions, whose numerator is the digit in the useful life of
the asset and whose denominator is the sum of the digits in the useful life.

Life +1
SYD=Life(¿ 2 )¿

Sum of half year’s digits

- Useful life x 2

2. Declining balance method (fixed rate on diminishing carrying amount method)

Annual depreciation= fixed or uniform rate x declining carrying amount

Rate=1− √n Residual value−Cost

3. Double declining balance method (200% declining balance method)

Annual depreciation= fixed or uniform rate x declining carrying amount

Rate = straight line rate x 2

4. 150% declining balance method

Annual depreciation= fixed or uniform rate x declining carrying amount

Rate = straight line rate x 1.5

Other methods

1. Inventory method
- Merely estimating the asset at the end of the period

Depreciation= balance of the asset account minus the value at the end of the year

2. Retirement method
- No depreciation is recorded until the asset is retired
Depreciation= the original cost of the asset retired minus salvage proceeds

3. Replacement method
- No depreciation is recorded until the asset is retired and replaced.

Depreciation= replacement cost of asset retired minus salvage proceeds

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- If the asset retired is not replaced, the original cost of the asset retired but not replaced is recognized as
depreciation.

Change in useful life (retrospective)

- Change in accounting estimate

- Depreciation charge for the current and future periods shall be adjusted.
- Past depreciation is not corrected
- Allocate the remaining carrying amount of the asset over the remaining revised useful life in order to get the
subsequent annual depreciation.

Change in depreciation method

- Depreciation charge for the current and future periods shall be adjusted.
- Allocate the remaining carrying amount over the depreciation remaining useful life using the revised
depreciation method

DEPLETION

IFRS 6

- To specify the financial reporting for the exploration and evaluation of mineral resources.
- Mineral resources include, minerals, oil, natural gas and similar nonregenerative resources.

Exploration and evaluation

- The search for mineral resources after the enmity has obtained legal right to explore, in a specific area as well as
the determination of the technical feasibility and commercial viability of extracting the mineral resources.

Exploration and evaluation expenditures

- The expenditures incurred by an entity in connection with the exploration and evaluation of mineral resources
before the technical feasibility and commercial viability of extracting a mineral resource.

Development expenditures

A. Before an enmity has obtained legal right to explore a specific area

B. After the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

Exploration and evaluation asset

- Exploration and evaluation expenditures

- Must develop its own accounting policy for the recognition of such asset

Measurement and classification

- Exploration and evaluation asset shall be measured initially at cost

- After initial recognition, an entity shall apply either the cost model or revaluation model
- Tangible or intangible asset

Wasting assets

- Are material objects of economic value and utility to man produced by nature.
- Natural resources, include coal, oil, ore, precious metals (gold and silver, and timber)
- Physically consumed and once consumed, the assets cannot be replaced anymore.
- Can be replaced only by the process of nature

Two main features of wasting asset

A. The wasting assets are physically consumed.

B. The wasting assets are irreplaceable.

Cost of wasting asset

- Four categories:
A. Acquisition cost
B. Exploration cost
C. Development cost
D. Estimated restoration cost
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1. Acquisition cost
- The price paid to obtain the property containing minerals.
- Initial cost of wasting asset
- Charged to any descriptive natural resource account
- Land value, the residual value of a wasting asset
- Depletable amount, total acquisition cost less land value

2. Exploration cost
- The expenditure incurred before the technical feasibility and commercial viability of extracting mineral resource
is demonstrated.
- The cost incurred in an attempt to locate the natural resource than can economical be extracted or exploited.
- May result in either success or failure

Two methods of accounting for exploration cost

1. Successful effort method

- The exploration cost directly related to the discovery of commercially producible natural resource is capitalized
as cost of the resource property.
- The exploration cost related to “dry holes” or unsuccessful discovery is expensed in the period incurred.

2. Full cost method

- All exploration cost whether successful or unsuccessful, are capitalized as cost of the successful resource
discovery.
- The cost of drilling dry holes is part of the cost of locating productive holes.

3. Development cost
- The cost incurred to exploit or extract the natural resource that has been located through successful
exploration.
- May be in the form of tangible equipment and intangible development cost
- Tangible equipment, transportation equipment, heavy machinery, tunnels, bunker and mine shaft. Not
capitalized as cost of the natural resource but set up in a separate account and depreciated.
- Intangible development cost, capitalized as cost of the natural resource, includes drilling, sinking of mine shaft
and construction of wells.

4. Restoration cost
- The cost to be incurred in order to bring the property to its original condition
- May be added to the cost of resource property or netted against the expected residual value of the resource
property.
- The estimated restoration cost must be an existing present obligation required by law or contract. The
estimated restoration cost must be discounted.

Depletion

- Removal, extraction or exhaustion of a natural resources.

- The systematic allocation of the depletable amount of wasting asset over the period the natural resource is
extracted or produced.

Depletion method

- Normally, depletion method is computed using the output or production method

Depletable amount
Depletion rate per unit= be extracted ¿
Units estimated ¿

Depletion for the period=Depletionrate per unit x Unitsextracted during the year

In the income statement, the depletion is classified as part of the cost of production or cost of goods sold.

Revision of depletion rate

- Handled currently or prospectively

Depletion rate = remaining depletable cost of the wasting asset / revised estimate of the productive output
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Depreciation of mining property

- Depreciation of equipment used in mining operations is based on the useful life of the equipment or the useful
life of the wasting asset, whichever is shorter.
- If the useful life of equipment is shorter, the straight-line method of depreciation is normally used.
- If the useful life of wasting asset is shorter, the output or production method is frequently used.
Useful life of wasting asset in terms of years= units estimated to be extracted/ units extracted each year.
- If the mining equipment is movable and can be used in future extractive project, the equipment is depreciated
over its useful life using the straight-line method.

Shutdown

- Based on the remaining life of the equipment following the straight-line method.
REMAINING CARRYING AMOUNT OF THE EQIOMENT
DEPRECIATION ∈THE YEAR OF SHUTDOWN =
REMAINING LIFE OF THE EQUIPMENT

- When operations are resumed, the depreciation is again computed following the output method.

REMAINING CARRYING AMOUNT OF THE EQUIPMENT

DEPRECIATION RATE PER UNIT =
REMAINING∨REVISED ESTIMATE OF DEPOSIT

Trust fund doctrine

- the share capital of a corporation is conceived as a trust fund for the protection of creditors.
- Such capital cannot be returned to shareholders during the lifetime of the corporation.
- The corporation can pay dividends to shareholders but limited only to the balance of retained earnings.

Wasting asset doctrine

- Can legally return capital to shareholders during the lifetime of the corporation.
- It can pay dividend not only to the extent of retained earnings but also to the extent of accumulated
depreciation.
- The amount paid in excess of the retained earnings is accounted for as liquidating dividend or return of capital.

REVALUATION

Revaluation model

- An item of ppe, whose fair value can be measured reliably can be carried at revalued amount.

Revalued amount

- The fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses.

Frequency of revaluation

- Depends upon the changes in the fair value of ppe being revalued.
- When the fv of a revalued asset differs materially from the carrying amount, a further revaluation is necessary.
- Some ppe may experience significant and volatile changes in fv thus necessity annual revaluation.
- Revaluation every three to five years may be sufficient.
- Ifrs does not mandate that revaluation must be done every three to five years.

Revaluation of all items in an entire class

- When ppe are revalued, the entire class of ppe should be revalued.

A class of ppe

- Is a grouping of assets of a similar nature and use in an entity’s operations?

Examples of separate classes are:

1. Land
2. Land and buildings
3. Machinery
4. Ships
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5. Aircraft
6. Motor vehicles
7. Furniture and fixture
8. Office equipment
- The assets within a class of ppe are revalued simultaneously in order to avoid selective revolution of assets.
- However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets is
completed within a short period of time and provided the revaluations are kept up to date.

Basis of revaluation

The revalued amount of ppe is based on the following:

A. Fair value
- The price that would be received to sell an asset in an orderly transaction between market participants at the
measurement date
B. Depreciated replacement cost
- Where market value is not available, depreciated replacement cost shall be used.
- Is the replacement cost or current purchase price of the asset minus the corresponding accumulated
depreciation.
- Sound value of the asset

Carrying amount

- Historical cost minus the corresponding accumulated depreciation

Appreciation or revaluation increase

- Is the excess of the replacement cost over the historical cost

Net appreciation

- Appreciation minus corresponding accumulated depreciation

Revaluation surplus

- Fair value or depreciated replacement cost or sound value minus the carrying amount of the ppe.
- Revaluation increment

Two approaches in recording revaluation

A. Proportional approach
- The accumulated depreciation at the date of revaluation is restated proportionately with the change in gross
carrying amount of the asset so that the carrying amount of the asset after revaluation equals revalued amount.
- Preferable method because it preserves the gross and net amounts after revolution.
B. Elimination approach
- The accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount
restated to the revalued amount of the asset.

Query

- When an assets carrying amount is increased as a result of the revaluation, the increase shall be credited to
revolution surplus as a component of other comprehensive income.
- The revolution surplus may be transferred directly to retained earnings when the surplus is realized.
- The whole surplus may be realized on the retirement or disposal of the asset.
- However, if the revalued asset is being depreciated, part of the surplus is being realized as the asset is used
- The revaluation surplus is allocated or realized over the remaining useful life of the asset and reclassified
through retained earnings.
- As a matter of procedure, the carrying amount, sound value and the net appreciation or revolution surplus
shall be allocated over the remaining useful life of the asset.

Net appreciation

- Is actually the revolution surplus

The total depreciation on the revalued amount is computed by simply allocating the remaining depreciable amount
on the replacement cost over the remaining revised useful life.

Reversal of a revaluation surplus

- A revaluation decrease shall be charged directly against any revolution surplus to the extent that the decrease
is a reversal of a previous revolution and the balance is charged to expense.

Sale of revolution surplus

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- When a revalued asset is sold, all accounts relating thereto shall be closed.
- The difference between the sale price and the carrying amount of the revalued asset is recognized as gain or
loss on sale.
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