CFAS Lecture Notes - Zeus Millan (2021-2022)

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CFAS notes - To understand the conceptual framework and

accounting standards (e.g., Philippine
Conceptual Framework and Accounting Standards (Western Mindanao State University)
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Conceptual Framework and Accounting Standards

Notes
OVERVIEW OF ACCOUTING
Accounting is the <process of identifying, measuring, and communicating economic information to

permit informed judgments and decisions by users of the information= (AAA).
Important Activities in Accounting

1. Identifying – analyzing events and transactions to determine whether or not they will be recognized
Recognition – including the effects of an accountable event through journal entry
Accountable Events Non-accountable Events
not recognized as accounting; but if it has accounting
one that affects economic activities
relevance it is recorded in memorandum entry
Type of Events or Transactions
• External Events – involve external party
i. Exchange (reciprocal transfer) – give and receive
ii. Non-reciprocal transfer – give but not receive (e.g., donation, tax)
iii. External event other than transfer- changes in economic resources or obligations but
no transfer happened (e.g., price levels, technological changes)
• Internal Events – do not involve external party
i. Production - resources are transformed into finished goods
ii. Casualty – unanticipated loss
2. Measuring – assigning numbers in monetary terms
- FS are prepared using mixture of costs and values.
- FS are mixture of fact and opinion
• Valued by Opinion – measurement affected by estimates
• Valued by Fact – measurement not affected by estimates
3. Communicating – transferring economic data into useful accounting information for dissemination
and interpretation
Three Aspects of Communicating Process in Accounting:
1. Recording – writing the accountable events through journal entry
2. Classifying – grouping of similar items into their respective classes through posting
3. Summarizing – expressing in condensed form which include preparations of accounting reports
NOTE: Interpreting the processed information is computing of financial statement ratios.
BASIC PURPOSE OF ACCOUNTING

• To provide information useful in making economic decisions
• Economic entity – combination of people and property that uses economic resources to achieve
certain goals. Types of economic entity:
➢ Not-for-profit entity
➢ Business entity
Economic activities are activities that affect the economic resources, obligations and the equity of an
economic entity. Economic activities involve:
1. Production 3. Consumption 5. Savings
2. Exchange 4. Income Distribution 6. Investments
Types of Information Provided by Accounting

1. Quantitative Information – numbers, quantities or units
2. Qualitative Information – words or description form; usually found in notes
3. Financial Information – money
Types of Accounting Information Classified to User’s Need

1. General Purpose Accounting Information – common need of most statement users
2. Special Purpose Accounting Information – specific needs of particular users
The practice of accounting requires the exercise of:

Creative Thinking using imagination and insight identifies alternative solutions
Critical Thinking logical analysis evaluates alternative solutions
ACCOUNTING CONCEPTS - principles upon which the accounting process is based (accounting
assumptions or accounting theory)
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Notes
• Double-entry system – debit and credit

• Going Concern Assumption – assumes continual operation and not expect to end
• Separate Entity – owners9 personal transactions are separated from the business
• Stable Monetary Unit – accountable events are expressed in terms of common unit
- purchasing power is considered stable regardless of instability
• Time Period – life of reporting period of entity, usually 12 months
➢ Calendar Year –starts at January 1
➢ Fiscal Year – starts on a date other than January 1
• Materiality Concept – a judgment that is based on its size and nature
• Cost-benefit – cost must equal benefit
• Accrual Basis – the effects of transactions are recognized when they occur and not as cash is
received or paid
• Historical Cost Concept (Cost Principle) – the asset value is based on the acquisition cost
• Concept of Articulation – all the components of a complete set of financial statements are
interrelated
• Full Disclosure Principle – including enough details to make information understandable
• Consistency Concept – using the same accounting principle of different periods
• Matching – costs are recognized as expenses when the related revenue is recognized
• Entity Theory – proper income determination (A=L+C) – income statement
• Propriety Theory – proper valuation of assets (A-L=C) – balance sheet
• Residual Equity Theory – applicable when there are two classes of shares issued (ordinary and
preferred (A-L-Preferred Shareholder’s Equity=Ordinary Shareholders Equity)
• Fund Theory – custody and administration of funds (cash inflows - cash outflows=funds)
• Realization – converting non-cash assets into cash or claims for cash
• Prudence (Conservatism) – use of caution when making estimates; does not allow deliberate
assets9 understatement or liabilities9 overstatement (e.g., cookie jar reserve); choosing least effect on
equity
EXPENSE RECOGNITION PRINCIPLES

• Matching Concept (Direct Association of Costs and Revenues) – cost that are directly related
to the revenue are recognized as expenses in the same period
• Systematic and Rational Allocation – cost that are not directly related to the revenue are
recognized are assets first and are recognized as expenses when consumed using some method of
allocation (e.g., depreciation, amortization)
• Immediate Recognition – cost that do not meet or ceases to meet the definition of assets are
expensed immediately (e.g., casualty and impairment losses)
COMMON BRANCHES OF ACCOUNTING

• Financial Accounting – focuses on general purpose financial statements
➢ Financial Statement (FS) – entity9s financial position and results of its operations and are
communicated to users
➢ Financial Report – FS plus other information to help in making efficient economic decisions and
is useful to external users. Objectives of financial reporting is to provide information:
1. Entity9s economic resources, claims and changes
2. Useful in assessing the entity9s management stewardship
• Management Accounting – communication of information for use by internal users
• Cost Accounting – systematic recording and analysis of cost of materials, labor and overhead
incident to production
• Auditing – evaluating with established criteria and express opinion to ensure fairness and reliability
• Tax Accounting – preparations of tax returns and rendering of tax advice
• Government Accounting – custody of public funds, its purpose, and the responsibility and
accountability of entrusted individual
• Fiduciary Accounting – handling accounts managed by a person for the benefit of other
• Estate Accounting – handling accounts for fiduciaries who wind up the affairs of deceased person
• Social Accounting - communicating the social and environmental effects of an entity9s economic
actions to the society
• Institutional Accounting – for non-profit entities other than government
• Accounting Systems – installation of accounting procedures for the accumulation of financial data
and designing of accounting forms for data gathering
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Notes
• Accounting Research – careful analysis of economic events and other variables to understand
their impact of decisions
Bookkeeping – recording the account or transaction of an entity

- ends with the preparation of trial balance
- does not require interpretation
Accountancy – profession or practice of accounting either public or private practice
PHILIPPINE ACCOUNTANCY ACT OF 2004 (R.A. 9298)

Sectors in the Practice of Accountancy
1. Practice in Public Accountancy – rendering service to more than one client on fee basis
2. Practice in Commerce and Industry – employment in private sector
3. Practice in Education/Academe – employment in educational institutions
4. Practice in Government – employment in government or controlled corporations
NOTE: 2 and 4 are considered private practice.
ACCOUNTING STANDARDS USED IN THE PHILIPPINES

• Philippine Financial Reporting Standards (PFRS) – Philippines GAAP is based on IFRS
PFRS is comprised of:
a. Philippine Financial Reporting Standards (PFRS)
b. Philippine Accounting Standard (PAS)
c. Interpretations
Reporting standards is necessary to become comparable, avoid fraudulent reporting, and right
economic decisions.
Selection of appropriate accounting policies is the entity9s management responsibility. However, the
proper application of accounting principles is the accountant9s responsibility.
ACCOUNTING STANDARD SETTING BODIES AND OTHER RELEVANT ORGANIZATION

1. Financial Reporting Standard Council (FRSC) – official accounting standard setting body of the
Philippine created under RA 9298
2. Philippine Interpretations Committee (PIC) – predecessor of FRSC which reviews the
interpretations of International Financial Reporting Interpretations Committee (IFRIS) for approval
and adoption by the FRSC
3. Board of Accountancy (BOA) – supervise the registration, licensure and practice of accountancy
in the Philippines
4. Securities and Exchange Commission (SEC) – regulates corporations and partnership, capital
and investment marks, and the investing public
5. Bureau of Internal Revenue (BIR) – administers the provisions of the National Internal Revenue
Code
6. Cooperative Development Authority (CDA) – influences the selection and application of
accounting policies by cooperatives
NOTE: Accounting policies prescribes by a regulatory body are sometimes referred to as regulatory
accounting principles.
International Accounting Standards Board (IASB) – standard setting body of the IFRS Foundation
with the main objectives of developing and promoting global accounting standards. Standards issued:
• International Financial Reporting Standards (IFRS)
• International Accounting Standards (IASs)
• Interpretations
The move to IFRS was primarily brought by the increasing acceptance of IFRSs world-wide and
increasing internalization of business thereby increasing the need for a common financial reporting
standards that minimize, if not eliminate, inconsistencies of financial reporting among nations
Norwalk Agreement – a memorandum of FASB (USA) and IASB to produce a single set of global
accounting standards, in which they agree to make financial reporting standards that are:
a. Fully compatible; and
b. Coordinate future work programs
Changes to reporting standards are primarily made in response to users9 needs and continually provide
useful information.
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Notes
CONCEPTUAL FRAMEWORK AND REPORTING STANDARD
Prescribes the concept for general purpose financial reporting to assist IASB in developing standards,
assist prepares in developing consistent accounting policies when no standard applies to a transaction
and assist all parties in understanding and interpreting standards.
CONCEPTUAL FRAMEWORK
• Provide foundation for the development of standards that promote transparency, strengthen
accountability, and contribute to economics efficiency
• Do not provide requirements for specific transactions or events
• Conceptual framework is not a standard. Any conflict between the two, standard will prevail.
• Use the hierarchy of standard for guidance in authoritative status. (See PAS 2 for reference)
• This can be revised but not automatically result to change of Standards not until the IASB due
process
• Scope of Conceptual Framework:
OBJECTIVE OF FINANCIAL REPORTING Primary Users

• Foundation of the Conceptual Framework ➢ Existing and potential investors
• Provide financial information that is useful to primary users ➢ Lenders and creditors
in making decisions about providing resources to the entity. Cannot demand specific information
Entity only provides the common
• Decisions of primary users are based on assessment of an
needed data of most primary users
entity9s prospect for future net inflows and management
stewardship. Hence, users need information of entity9s financial position, financial performance, and
other changes in financial position, and assets9 utilization.
Objective of Financial Reporting Conceptual Framework Standard
General Purpose Financial Reporting

Caters most of the common need of most primary users
Do not directly show the value of entity but only information that help users estimates entity value.
Providing information requires estimates and judgment
1. Financial Position – information on resources (assets) and claims (liabilities and equity)
➢ This can help users in assessing entity9s:
• Liquidity and solvency – able to pay short and long-term obligations, respectively
• Needs for additional financing
• Management9s stewardship
2. Changes in economic resources and claims – information on financial performance and other
events or transaction that led to the said change
QUALITATIVE CHARACTERISTICS
Identifies the most useful information to primary users in making decisions using entity9s financial report
Applicable to information in FS and to financial information provided in other ways
1. Fundamental Qualitative Characteristics – information useful to users
a. Relevance – can affect decision of users
• Predictive Value – making predictions using past info
• Confirmatory Value – confirming previous decisions
➢ Materiality
• Information is material if omitting or misstating it could influence primary users9 decision
• Entity-specific
• IFRS Practice Statement 2 Making Materiality Judgments provide non-mandatory guidance
called materiality process. Below are the four steps:
1. Cost-Benefit Principle. However, cost is not a factor when making materiality judgment.
2. Assess whether step 1 information could influence the user9s decisions by:
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Notes
a. Items nature or size or both

b. Quantitative and qualitative factors
➢ Quantitative factors – size of impact and can be assessed in relation to another
amount percentage or a threshold amount
- CF and the standard do not specify a quantitative threshold since it is a judgment
➢ Qualitative factors – characteristic of item or context; (i) entity specific and (ii) external
qualitative factors
No hierarchy among factors, but an entity normally assesses an item first in
quantitative factors:
➢ If it is quantitatively material, no need to reassess qualitative factors.
➢ If not quantitatively material, needs to reassess qualitative factors
3. Maximizes understandability to users by organizing FS draft
4. Reviewing the draft allows overview. An item might be immaterial on its own, but might be
material in conjunction with other FS information
b. Faithful Representation – true, correct and complete depiction (when an economic
phenomenon9s substance differs from its legal form (i.e., substance over form), it requires
depiction)
➢ Completeness – must provide all information needed in understanding
➢ Neutrality – not manipulated or without bias
➢ Free from Error – accurate but not precise; supported by prudence (use of caution when
making judgment)
2. Enhancing Qualitative Characteristics – enhance usefulness of information
a. Comparability – to identify similarities and differences of different information through intra-
comparability or inter-comparability
b. Verifiability – different users should reach a general agreement
i. Direct verification – can be observe directly (e.g., counting of cash)
ii. Indirect verification – redo the methodology used by the entity
c. Timeliness – available to users on time
d. Understandability – presented in clear and concise manner but does not mean excluding
complex matter
Applying Qualitative Characteristics

➢ Information must be both relevant and faithfully represented
➢ Enhancing qualitative information cannot make irrelevant information useful
➢ One enhancing qualitative characteristic may be sacrificed to maximize another
➢ Cost constraint – pervasive constraint; providing information has cost; cost must equal benefits
FINANCIAL STATEMENTS AND THE REPORTING ENTITY

• The objective of general purpose financial statements is to provide financial information about the
reporting entity9s financial position, financial performance, and other statements and notes
• Reporting Period
• Information must be comparative, forward-looking, and entity9s perspective
• Going concern assumption – an underlying assumption that is based on management9s decision
• Reporting Entity – can be single or group or combination of two or more entities
An entity controls another entity:
1. Parent – controlling entity
2. Subsidiary – controlled entity
➢ Consolidated Financial Statement – combined report of parent and subsidiary
➢ Unconsolidated Financial Statement – report from parent only
➢ Individual Financial Statement – report from subsidiary only
➢ Combined Financial Statement – report of two or more entities not linked by parent-subsidiary
ELEMENTS OF FINACIAL STATEMENTS
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Notes
• Assets – present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.
- ability to prevent others from accessing the benefits of controlled resources
- control normally stems from legally enforceable rights (e.g., ownership or legal title). However,
ownership is not always
• Liability – present obligation of the entity to transfer an economic resource as a result of past events
- transfer of economic benefits need not be certain
a. Legal obligation – result from contact, legislation, or other law of operation
b. Constructive obligation – result from entity9s action (e.g., warranty, environmental
damages)
Executory Contract – a contract that is equally unperformed by both parties or have partially
fulfilled with equal extent; combined right or obligation
Executed Contract – fulfilled by other party
• Equity – residual interest after deducting assets from liabilities
Reserves - amount set aside to protect the entity9s creditors or shareholders from losses
• Income – revenue; increase in assets or decrease in liabilities that result in increase in equity
• Expenses – costs; decrease in assets or increase in liabilities that result in decrease in equity
NOTE: The new conceptual framework removes the notion of 8expected9 and 8probability9 of economic
flow, and 8reliable measurement9
Financial Position – balance sheet; assets, liabilities and equity
Financial Performance – income statement; income and expenses
RECOGNITION
• Items are recognized if it meets the two criteria:
➢ Meets the definition of financial element; and
➢ Provides useful information (relevance and faithfully represented information)
• An asset (liability) can exist even if producing (transferring) benefits has low probability, but can
affect the recognition, how it is measured, what and how information is provided
• Unresolve dispute of asset or liability will mostly affect the recognition
• Existence uncertainty and low probability of an inflow or outflow of economic benefits may result in
but does not automatically lead to the non-recognition of asset or liability. Other factors should be
considered.
• Measurement uncertainty
➢ Exist if the asset or liability needs to be estimated
➢ High level of measurement uncertainty does not necessarily lead to non-recognition if it provides
relevant information and is clearly and accurately described and explained
➢ However, it can lead to non-recognition if making estimate is exceptionally difficult or subjective
(can affect faithful representation) or especially if one or more of the circumstances exist:
▪ Exceptionally wide range of possible outcome and is difficult to estimate
▪ Highly sensitive to small changes
▪ Exceptionally subjective allocations of cash flows that do not relate solely to the asset or
liability being measured
DERECOGNITION
• Removal of previously recognized asset or liability when the item no longer meets its definition
• Derecognizes asset or liability that have expired, consumed, collected, fulfilled or transferred and
continues to recognize any assets or liabilities that have retained after derecognizing
Unit of Account is <the right or the group of rights, the obligation or the group of obligations, or the
group of rights and obligations, to which recognition criteria and measurement concept are applied9
MEASUREMENT
• Measurement basis is needed since recognition requires quantifying item in monetary terms.
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Notes
• Standards prescribe specific measurement bases for different types of assets, liabilities, income and
expenses.
Measurement bases describe by Conceptual Framework
1. Historical Cost – acquired (incurred) cost of assets (liability) plus (minus) transaction costs
- do not reflect changes in value but may need to be updated (e.g., depreciation,
amortization cost) so, the value can be changed
2. Current Value – reflect changes in value at the measurement date
• Fair Value – price that would be received to sell (paid) an asset (liability) that reflects the
perspective of market participants at the measurement date
• Value in use of assets and fulfillment value of liability – reflect entity9s assumption
➢ Value in Use - present value of economic benefits from the use or ultimate disposal of
asset
➢ Fulfillment Value - present value of economic resources to transfer or fulfilling liability
Both do not include transaction cost from acquiring or incurring, but include transaction cost of
disposal or fulfillment
• Current Cost – cost at the measurement date plus (minus) transaction cost at that date
Entry Values Exit Values
Historical cost and current cost Fair value, value in use and fulfillment value
Reflect prices in acquiring assets or Reflect prices in selling or using an asset or
incurring liability transferring or fulfilling a liability
Considerations when selecting a measurement basis:

a. The nature of information provided by a particular measurement basis
b. Considerations of other factors rather than only a single isolated factor. Example:
• Faithful representation. If measurement of uncertainty is high to a particular measurement
basis, consider other measurement basis
• Comparability. Using the same measurement basis consistently is important for comparability,
but a change is appropriate if it result to a more relevant information
• Understandability. The more different measurement bases are used, the more complex.
PRESENTATION AND DISCLOSURE

Objectives are specified in standards that strive for a balance between:
a. Giving entities the flexibility to provide relevant and faithfully represented information; and
b. Requiring information that has both intra-comparability and inter-comparability
Principles for effective communication considers:
a. Entity-specific information is more useful than standardized description, also known as
8boilerplate9; and
b. Duplication of information is usually unnecessary at it can make financial statement less
understandable
Definition Example
➢ Sorting elements of FS with similar
Classification Accounts receivable
nature, function and measurement basis
➢ When asset and liability with separate
units of accounts are combined and only Accounts receivable and accounts
Offsetting the net amount is presented payable are netted and presented in
➢ Combines dissimilar items, hence not an net amount
appropriate practice
➢ Adding together of FS elements that All receivables (e.g., accounts
share characteristics and are included in receivable, interest receivables) are
Aggregation
the same classification aggregated and presented under
➢ Summarizes large volume of detail <Trade and other receivables=
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Notes
CAPITAL AND CAPITAL MAINTENANCE
FINANCIAL PHYSICAL
Invested money or investment
Capital Concept Entity9s productive capacity
purchasing price
Concept used with the maintenance of nominal

for users invested capital of purchasing power of To the entity9s operating capability
concerned the invested capital
Capital Profit is earned only if entity’s

Profit is earned if net assets at the end
Maintenance productive capacity at the end
period exceeds the beginning period
(or profit determination) period exceeds the beginning period
Capital Maintenance
Measurement Does not require particular
Current Cost
Basis measurement basis
➢ Both capital maintenances exclude the distributions to, contributions from owners during the period.
➢ Capital Maintenance is essential in distinguishing between return on capital and return of capital.
Capital Maintenance Adjustments – the revaluation or restatement of assets and liabilities results in
increase or decrease in equity. Although these increases or decreases meet the definition of income or
expense, they are not recognized in profit or loss under certain concepts of capital maintenance.
Accordingly, these items are included in equity as capital maintenance adjustments or revaluation
reserves.
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Notes
PAS 1 PRESENTATION OF FINANCIAL STATEMENT
It prescribes the basis for the presentation of general purpose financial statements, its structure
guidelines and content9s minimum requirements to ensure comparability (inter-comparability and intra-
comparability). The terminology of PAS 1 is suitable for profit-oriented entities.
Financial Statements
• Structured presentation of an entity9s financial position and result of its operation
• Pertain only to the entity not the industry
• General purpose financial statements – cater most of the common needs of a wide range of external
users (cannot demand specific reports for their own needs)
Purpose of Financial Statements
• To provide useful information useful to a wide range of users in making economic decision
• To show result of management stewardship over the entity9s resources
Complete Set of General Purpose Financial Reporting Statement
1. Statement of Financial Position (or Balance Sheet)
2. Statement of Profit or loss and other comprehensive income (not the same as income statement)
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes – qualitative info to explain the quantitative info 1-4
- comparative information in respect of the preceding period
6. Additional statement of financial position - required under certain instances
GENERAL FEATURES OF FINANCIAL STATEMENTS

Management is responsible for preparation and the fair presentation of entity9s FS in accordance to
PFRS
1. Fair presentation and compliance with the PFRS
• Make an explicit and unreserved statement
• Application of PFRS with additional disclosure when necessary
• If management concludes that PFRS requirement compliance is misleading, PAS 1 permits
departure from it if relevant regulatory framework (prescribed by a government regulatory body)
requires or allows such departure
• If it departs, the entity shall disclose which PFRS it departs, why, and the effect of departure
• Compliance or departure is written in the note section
2. Going Concern
• If there are uncertainties of going concern, it shall be disclosed
• If entity is not a going concern, it shall be disclosed and the reason why, and FS shall be
prepared using another basis
➢ Not a going concern if as of the reporting period date or the authorization of FS issuance,
management either:
a. Intends to liquidate the entity to cease trading
b. Has no realistic alternative but to do so (e.g., bankruptcy)
3. Accrual Basis of Account
• All FS shall use this except cash flow statement, which uses cash basis to know the amount of
cash the company has because it is easier to liquidate (ability to pay short-term obligation)
4. Materiality and Aggregation
• Each material class of similar item (line item) is presented separately.
• Immaterial items can be aggregated
5. Offsetting
• Not offsetting if it measure asset net valuation allowance, for example, allowances for obsolete
inventories and of doubtful accounts on receivables, and accumulated PPE depreciation
• Shall not use it unless permitted by PFRS
• Only permitted when it reflects substance of the transaction
• Example of offsetting: Using two bank accounts in the same bank (not the same is prohibited). If
the other has negative balance and the other is positive, therefore offsetting is okay.
6. Frequency of reporting
• Prepared at least annually
• Changes in reporting period shall disclose the period covered, the reason for changing, and the
fact that amount presented are not entirely comparable
7. Comparative Information
• Minimum requirement for comparison is two different statements and related notes
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Notes
• PAS 1 permits addition to the minimum requirement

• Additional Statement of Financial Position – instances to add are:
1. Application of accounting policy retrospectively
2. Makes a retrospective restatement on items in its financial position, or
3. Reclassifies items in its FS
These instances have a material effect on the information of statement of financial position at the
beginning of the preceding period.
8. Consistency of Presentation
• Retainment of one method from one to next period unless change is needed for a more relevant
information
STRUCTURE AND CONTENT OF FINANCIAL STATEMENT

1. Name of the reporting entity Example:
2. For whom the statements (individual or group entity) ABC Group
3. Date (end or covered period) Statement of Financial Position
4. Presentation currency As of December 31, 20x2
(in thousand of Philippine Peso)
5. Rounding level used (e.g., thousands, millions)
STATEMENT OF FINANCIAL POSITION

Presentation of Statement of Financial Position
CLASSIFIED PRESENTATION UNCLASSIFIED PRESENTATION
➢ shows distinction between current and non-current
assets or liabilities
➢ shows no distinction between
➢ most commonly used
current and noncurrent
➢ highlights working capital and facilitates the computation
➢ based on liquidity
of liquidity and solvency ratios
➢ ĂąĈāÿĄą āÿĆÿĊÿĂ = ÿċĈĈăĄĊ ýĉĉăĊĉ 2 ÿċĈĈăĄĊ ÿÿÿĀÿĂÿĊÿăĉ
PAS 1 does not prescribe the order or format in which an entity presents items,
PAS 1 permits mixed presentation especially if the entity9s operation is diverse.
Current and Non-Current Assets or Liabilities
CURRENT NON-CURRENT
➢ Used for trading during the entity9s normal ➢ Used more than 1 year
operating cycle (12 months) ➢ Cash and cash equivalents restricted for
➢ Cash or cash equivalents restricted from exchange (e.g., maintaining balance of bank
being account)
➢ Includes accruals ➢ Includes deferrals
➢ Ex. Trade Receivables ➢ Ex. Non-trade Receivables
Currently Maturing Long-Term Liabilities
• Must be presented as current liabilities
• Example: A 10-year loan payable acquired 10 years ago must be fulfilled within this year. Hence, it
must be presented current liabilities
• Exception is refinancing agreement (defer settlement of currently maturing long-term liability)
when:
➢ Refinancing agreement is fully completed on or before balance-sheet date; or
➢ Refinancing agreement after balance sheet date but before FS are authorized for issue
Breach of Loan Contract

• A liability that is payable on demand is a current liability
• Exception is if a lender provides on or before balance sheet date a grace period ending at least 12
months after the balance sheet date to rectify the breach
Presentation of Deferred Taxes

• Presented as non-current in a classified presentation, irrespective of their expected date of reversal
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Income and expenses may be presented either:
a. Single statement of profit or loss and other comprehensive PAS 1 requires entity to present
information on the following:
income, called statement of comprehensive income a. Profit or loss
b. Other comprehensive income; and
c. Comprehensive income 10 | P a g e
Presenting only an income statement is
prohibited.

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Notes
b. Two statements:
1. statement of profit or loss (income statement)
2. statement presenting comprehensive income
Profit or Loss
• Income minus expenses, excluding the components of comprehensive income
• Not included in determining profit or loss
1. Correction of prior period error
2. Change in accounting policy
3. Other comprehensive income
4. Transactions with owner/s
Presentation of Expense
NATURE OF EXPENSE METHOD FUNCTION OF EXPENSE METHOD
➢ According to their function
➢ According to their nature ➢ Ex. Cost of sales, distribution costs,
➢ Ex. Transportation cost, advertising administrative expense
cost, purchase of materials ➢ More difficult to apply but has potential of
providing more relevant information
NOTE: If an entity classifies expenses by function, it shall disclose additional information
on the nature of expenses
OTHER COMPREHENSIVE INCOME (OCI)

• May presented in net tax or gross of tax
• Comprises items of income and expense (including reclassification adjustments) that are not
recognized in profit or loss as required or permitted by other PFRS
• Amounts in OCI are usually accumulated as separate components of equity
Reclassification of adjustments – amounts from OCI reclassified to profit or loss
a. Gain is deduction to OCI and addition to profit or loss
b. Loss is addition to OCI and deduction to profit or loss
Presentation of OCI – shall group items into reclassification adjustment is allowed and not allowed
Types of OCI Reclassification adjustment
a. Changes in revaluation surplus Not allowed
b. Remeasurement of the net defined benefit
Not allowed
liability (asset) (e.g., employee benefit)
c. Fair Value changes in FVOCI
- Equity instrument (election) Not allowed
- Debt instrument (mandatory) Allowed
d. Translation difference in foreign operations Allowed
e. Effective portion of cash flows Allowed
Total Comprehensive Income

• The sum of profit or loss and OCI
• Presented here is also the change in non-owner9s equity during a periods; owner9s is excluded
STATEMENT OF CHANGES IN EQUITY

• Owner/s only
• Shows the following:
a. Effect of change in accounting policy and correction of error retrospectively
b. Total comprehensive income for the period
c. For each component of equity, a reconciliation between the carrying amount at the
beginning and end of period, showing separately changes resulting from profit or loss, other
comprehensive income, and transaction with owners
STATEMENT OF CASH FLOWS

Refer to PAS 7
NOTES
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Notes
• Provides qualitative information to the other FS, therefore other FS should be cross-refenced to the
notes
• Integral part of a complete FS
• PAS 1 requires entity to present the notes in system manner. It is structured as follows:
1. General information on the reporting entity
2. Statement of compliance with the PFRS and Basis of preparation of FS
3. Summary of significant accounting policies
4. Disaggregation (breakdowns) of line items in the other FS and other supporting information
5. Other disclosure required by PFRS
6. Other disclosure not required y PFRS but is relevant in understanding
PAS 2 INVENTORIES
Determination of costs to recognize as asset to expense is the primary issue in accounting inventories.
Hence, PAS 2 provides guidance in the determination of costs of inventories, including use of cost
formulas, and their subsequent measurement and recognition as asset then expense.
Inventories as assets
• Finished goods
• Work in progress
• Raw materials and manufacturing supplies
PAS 2 applies to all inventories except:

• Assets accounted for under other standards
a. Financial instruments (PAS 32 and PFRS 9)
b. Biological assets and agricultural produce at the point of harvest (PAS 41)
MEASUREMENT OF INVENTORIES
Inventory is not always valued at its <cost= price.
Measurement of Inventories
Exception to the measurement:
a. Producers of agricultural, forest products,
minerals and mineral products measured at
NRV of the practices in those industries Lower of Cost Net Realizable Value
b. Commodity if dealers and brokers measured
at fair value less costs of sell LCNRV
Cost of Inventories
• Purchase cost – trade discounts, rebates, and other Excluded in Cost
similar items are deducted to purchase cost • Abnormal waste
• Conversion cost – costs in converting raw materials into • Storage cost (but include those
finished goods (e.g., labor and production, exclude direct necessary in the production
materials because it is already included in purchase cost) process)
• Other cost necessary in bringing inventories to their
• Administrative overheads
present location and condition (e.g., costs of factory
management and maintenance cost of machines) • Selling cost
When a purchase transaction effectively contains a financing element, such as when payment
of the purchase price is deferred, the difference between the purchase price for normal credit terms and
the amount paid is recognized as interest expense over the period of financing
COST FORMULAS
• Deal with the computation of cost of sales or cost of goods sold and the ending inventory.
• Applies matching concept
• Considered cost flow assumptions. Therefore, not necessarily the actual flow of inventory.
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Notes
Are the inventories not interchangeable?

Are the goods or services produces and segregated for specific project?
yes no
Specific cost First-In-First-Out (FIFO) Weighted Average

periodic basis or moving average
Formula:
ÿăýþ ÿĄ Ćăĉąĉ
Ăý ÿąĉĊ =
ÿăýþ ÿĄ ċĄÿĊĉ
NOTE:
➢ Use the same cost formula for inventories with similar nature and use, unless it9s different.
➢ Last-In-First-Out not permitted.
➢ TGAS – Total Goods Available on Sale
NET REALIZABLE VALUE (NRV)

• Estimated selling price – estimated cost of completion – estimated selling cost
• Not equal to fair value – costs of sales
• Different from fair value
• Inventories in FS must not be stated above NRV value of an item – cost of making the sale
• If NRV < costs, write-down
• If NRV > costs, need not to write-down
Write-down
• Residual from deducting costs from NRV, when cost > NRV
• Written in an item-by-item basis; some circumstances may be appropriate to group similar item
• Not appropriate on classification basis
• If NRV subsequently increases, the previous write down is reversed.
• Reversal of write-down shall not exceed original write-down. Therefore, the inventory shown in
FS is cost plus original write-down
Inventories as expense <The amount of any reversal of any write-down of inventories

• Sold inventories shall be recognized as reduction in the amount of inventories
• Write-down or loss recognized as expense in the period in which the reversal
occurs.= of another asset are not expensed rather capitalized as
Inventories that are used in the construction
cost of the constructed asset.
Note: Total inventory shown in FS must be the lowest cost (lower of cost or NRV)
PAS 7 STATEMENT OF CASH FLOWS
Statement of cash flows and it provides information about:

➢ the sources and utilization (i.e., historical changes) of cash and cash equivalents
➢ quality of earnings
➢ enhances inter-comparability
Presented in cash basis – income (expense) is recognized only when collected (paid). Hence, only
transaction that affected cash and cash equivalent are reported; non-cash are excluded.
Cash – either cash on hand or cash on bank

Cash Equivalents – short term, highly liquid investments that are acquired within 3 months or less
before maturity date
Cash Flows – inflows (sources) and outflows (uses) of cash and cash equivalents
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Notes
Classification of Cash Flows

Operating Activities Investing Activities Financing Activities
acquisition and disposal of
revenue-producing activities that affect the equity capital and
noncurrent assets and other
affect profit or loss borrowing structure of entity
investment
• Making and collecting loans • Include obtaining resources
• income and operating
• Acquiring and disposing (sale) from owners and creditors
expenses from the ordinary
of investment debt or equity • Cash flows on non-operating
operation
securities or non-trade liabilities
• changes in current assets and
• Obtaining and selling of PPE • Changes in equity and
liabilities
and other productive assets noncurrent liabilities
Presented either:
1. Direct Method – classifying
gross cash receipts and gross Presented in gross amount, Presented in gross amount,
cash payments unless they qualify for net unless they qualify for net
2. Indirect Method – accrual presentation: presentation:
method of P/L before tax is • On behalf of customers • On behalf of customers
adjusted for the effects of • Quick turnover, large • Quick turnover, large
non-cash items and operating amounts, short maturity amounts, short maturity
assets and liabilities changes
PAS 7 does not require any particular method. But it encourages direct method because it
provides information that may be useful in estimating cash flows. In practice, indirect method is
commonly used because it is easier to apply.
INDIRECT METHOD
Asset other than cash Liabilities
➢ Increase Asset → Deduct ➢ Increase Liabilities → Add
➢ Decrease Asset → Add ➢ Decrease Liabilities → Deduct
Changes in ownership interest in business

Acquisition and disposals of subsidiaries or other business units:
• Investing Activities - resulting to loss or obtaining of control
• Financing Activities – do not result to loss or obtaining control
Entities except financial institutions may classify Interest and Dividends as follows:
Cash Flows Option 1 Option 2 • Only those were received or paid are
Interest income received Operating Investing included.
Interest expense paid Operating Financing • Only option 1 is for financial institutions
Dividend income received Operating Investing • In CPABE, when problem is silent, use
Dividend paid to owners Financing Operating option 1
Cash flows excluded from the activities sections

• Cash and cash equivalents are not presented
separately
• Bank overdrafts that cannot be offset to cash are
presented as financing activities
• Cash flows in foreign exchange is reported in SCF to
reconcile cash and cash equivalents at the beginning
and the end of the period. But, separate from
activities section.
Additional Term:
• Treasury Bill – short term
financial instrument that 14 | P a g e
investors are lending money
to the government and interest
is acquired on maturity date
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Notes
PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS
PAS 8 prescribes criteria for selecting, applying, and changing accounting policies and the
accounting and disclosure of changes in accounting policies, changes in accounting estimates, and
correction of prior period errors. Intended to enhance relevance, reliability and comparability of FS.
Retrospective Prospective
Adjusting the opening balance of the prior period Recognizing the effects of change in profit or
that is used for comparison to the current period as loss in the period of change and/or future
if new accounting policy has always been applied period; not the beginning balance
Only from this day onward and does not
Going back to prior periods to restate FS
restate the previous FS
• Retrospective application – applying new policy • Prospective application – applying new
to prior period policy in current
• Retrospective restatement – correcting error of • Prospective restatement – correcting error in
prior period current
It is impracticable if the prior period effects:
• Cannot be determined in the current period
• Requires significant estimates and
assumptions
Impracticable – cannot be done after making reasonable efforts
Accounting Policies Accounting Estimates Errors
Not all FS can be accurately Misapplication of

Definition
Specific principles, bases,

measure because of uncertainties policies, mathematical
conventions, rules and
(e.g., depreciation, bad debts). mistakes, oversights or
practices applied by entity in
Hence, estimate is necessary to misinterpretations of
preparing and presenting FS
provide relevant information. facts, and fraud
• Adjustments of the carrying

• PAS 8 permits change only
amount of asset or liability
if change:
because of present status or
Reason of
Changes
a. Is required by PFRS; or
new information; and not error Errors should be
b. Results in reliable and
corrections corrected to arrive at
more relevant
information • Changes in the realization reliable information
(incurrence) of expected inflow
• Change in measurement
(outflow) of economic benefits
basis
from assets (liabilities)
1. Transitional provision in a
Accounting
PFRS; if any 1. Retrospective

Treatment
2. Retrospective restatement
application; in the Prospective application 2. Prospective
absence of 1 restatement; if 1 is
3. Prospective application; if impractical
2 is impractical
➢ If a change is difficult to distinguish between accounting policies and accounting estimates, the
change is treated as change in an accounting estimate.
➢ Voluntary change in accounting policy is accounted for retrospective application. An early
application of PFRS is not a voluntary change in accounting policy.
Accounting Policies
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Notes
PAS 8 requires consistent selecting and application of accounting policies. When selecting and
applying, an entity shall refer to hierarchy of reporting standards.
Hierarchy of reporting standards

1. PFRSs
2. Judgment
When making the judgment the management:
➢ shall consider:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
➢ may consider:
a. Pronouncement issued by other standard-setting bodies
b. Other accounting literature and industry practices
Not changes in accounting policies if:

a. Differ in substance, from those previously occurring
b. Did not occur previously or were immaterial
Errors
An FS do not comply to PFRS if they contain either material (can cause FS misstated) or immaterial
errors made intentionally to achieve a particular presentation. This is considered fraud. Errors can be:
• Errors of commission – doing something wrong
• Errors of omission – not doing something that should have been done
Type of errors according to period occurrence
• Current period errors – errors of current period; corrected by correcting entries
• Prior period errors – errors of one or more prior period; corrected by retrospective
restatement, if impracticable, prospective application is allowed
Both are discovered either during the current period or after but before FS are authorized for issue.
PAS 10 EVENTS AFTER THE REPORTING PERIOD
PAS 10 prescribes the accounting for, and disclosures of, events after the reporting period,
including disclosures regarding the date when the FS were authorized for issue.
Events after the Reporting Period

• Those events, favorable and unfavorable, that occur between the end of the reporting period and the
date when the FS are authorized for issue
• Events after the reporting period until FS are authorized for issue
• Date of authorization is when the management authorizes the FS for issue regardless of whether
such authorization is for further approval or final issuance to users
Two Types of Events After the Reporting Period

Adjusting Events Non-adjusting events
➢ existed at the end of the reporting period
➢ Arose after the reporting period
➢ happened within the reporting period but after
➢ Do not require adjustments
the reporting period was known or confirmed
➢ If material, disclosure is needed
➢ requires adjustments and disclosures
PAS 12 INCOME TAXES

Not all income is liable for tax, only those that are taxable profit (taxable loss). Hence,
government don9t base taxes on accounting profit (loss). Income taxes refers to taxes that are based on
taxable profits.
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Notes
Accounting Profit (Loss) Taxable Profit (Taxable Loss)

➢ Computed using PFRSs ➢ Computed using tax laws
➢ Income less expenses, excluding tax expense ➢ Taxable income less tax-deductible expense
➢ Other terms: ➢ Other term:
Pretax income Taxable Income
Financial Income
Accounting Income
Income tax expense – total amount included to determine P/L; computed using PFRS also called tax
expense or tax income
Current tax expense – payable (recoverable) taxes to BIR based on taxable profit; computed using tax
laws; also called current tax
Varying treatment of economic activities between PFRS and tax laws result to:
1. Permanent differences – arise when income and expenses enter in the computation of either
accounting profit or taxable profit but not both; do not have future tax consequences
2. Temporary differences – difference between the carrying amount of an asset or liability in the
statement of financial position and its tax base; have future tax consequences; either:
Taxable Temporary Differences Deductible Temporary Differences
• Future taxable amounts • Future deductible amounts
• Arise when: • Arise when:
➢ Assets9 carrying amount > tax base; or ➢ Assets9 carrying amount < tax base; or
➢ Financial Income > Taxable income ➢ Financial Income < Taxable Income
If multiplied to tax rate, results to deferred If multiplied to tax rate, results to deferred
tax liability tax asset
➢ Deferred tax is the difference of assets (income) and tax base (income tax). PAS 12 requires
use of asset-liability method
➢ Deferred taxes are presented separately as non-current in a classified FS.
➢ PAS 12 prohibits the discounting of deferred taxes.
➢ Temporary differences include timing differences – the timing or period of income and
expenses recognition differs between financial reporting and taxation
If DT liability > DT assets, their difference is deferred tax expense.
If DT liability < DT assets, their difference is deferred tax income
• Tax base – amount of asset or liability that is taxable
• Current tax liability – unpaid current taxes

• Current tax asset – excess tax payments over the current tax due
Current Income Tax Deferred Income Tax
➢ Actual amount payable to tax office ➢ An accounting measure to measure tax
➢ Payable in respect on current period effect to accounting
āÿąÿĀýă āÿĀĄćā (ýĀĀĀ) × āÿą ÿÿāă (%) = ÿ�㕰ă ➢ Settled or recovered in future period
āăþāĀÿÿÿĆ ĂćĄĄăÿăÿāă × āÿą ÿÿāă = Ā�㕰ă
PAS 12 permits offsetting of deferred tax assets and liabilities only if,
➢ Legally enforceable right to offset current tax and liability; and
➢ Levied by the same taxation authority
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Notes
PAS 12 permits offsetting of current tax assets and liabilities only if:
➢ Legally enforceable right;
➢ Intention to realize in net basis
Presentation in Statement of Comprehensive Income

Tax consequences are accounted for the same way as the related transactions or events. Thus,
➢ If transaction is recognized in profit or loss, as well as its tax effect
➢ If transaction is recognized outside profit or loss (e.g., OCI and equity), as well as its tax effect
Tax effect recognized directly in equity is accounted for as direct adjustment to related
component of equity.
PAS 16 PROPERTY, PLANT AND EQUIPMENT
PAS 16 applies to all items of PPE except:

a. Held for sale
b. Biological assets other than bearer plants but not produce on bearer plants
c. Exploration and evaluation assets
d. Mineral rights and mineral reserves (non-renewable resources)
Characteristics of PPE
Recognition
a. Tangible assets;
1. Future economic benefits will flow to the entity; and
b. Used in normal operation; and
2. Cost can be measured reliably
c. Long-term in use (>1 yr.)
• Spare-parts, stand-by equipment and servicing equipment are PPE if it meets its definition. If not,
then recognized as inventory.
• Safety and environmental equipment are PPE. It does not increase the future benefits, but it is
necessary in obtaining future benefits of other assets.
Initial Measurement
Measured at cost
a. Purchase price
b. Direct costs of bringing the asset to the location and condition
c. Initial estimate of dismantlement, removal and site restoration costs
Except cost of opening new facility, introducing new product or service, new business location or new
class customers, and administration and general overheads.
• Recognition of initial cost stops when the item is in the location and condition necessary
• Cost of PPE is the cash equivalent at the recognition date. If deferred payment (installment), the
excess amount is interest.
• Acquisition through exchange:
Additional Cost
1. Replacement Cost
➢ Replaced parts carrying amount is derecognized as loss
➢ If replaced part cannot be determined, replacement part is used as indication
2. Major Inspections
➢ Major inspection cost is capitalized while previous inspection cost is derecognized
➢ If it has commercial substance, cost is measured using:

1. Fair value of asset given up
2. Fair value of asset received; if 1 can9t be determined
3. Carrying amount of asset given up; if 2 can9t be determined
➢ If exchange lacks commercial use, use number 3.
Subsequent Measurement
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Notes
a. Cost Model
b. Revaluation Model
Entity can choose either the two, and then applies the accounting policy to an entire class of PPE
COST MODEL - cost less any accumulated depreciation and any accumulated impairment losses
Depreciation
• Each significant part of item of PPE is depreciated separately.
• Depreciation is recognized as expense, unless it is included in the cost of producing another asset.
• Depreciation starts when used.
• Depreciation stops when:
a. Derecognized (sold or disposed); or
b. Classified as held for sale; or
c. Fully depreciated; however, if the residual value decreases below the carrying amount, the
decrease is recognized as an additional depreciation
• Carrying amount (Book Value) – recognized asset amount after deducting accumulated depreciation
and impairment loss
• Depreciation does not cease when the asset becomes idle or is retired from active use.
• Land and building are accounted separately. Land is not depreciated while building is depreciated.
Depreciation Methods ➢ Does not prescribe any method. It depends on the
• Straight-line Method management9s judgment, but the choice must be the method
ÿąĉĊ 2 þÿĂČÿąă āÿĂċă that best reflects the expected pattern of consumption.
ĀĉăĄċĂ ÿÿĄă ➢ Prohibits the use of depreciation based on revenue
• Diminishing Balance Method ➢ Requires annual review of depreciation method, useful life
• Units of Production Method and residual value. Any changes are treated as changes in
accounting estimates
REVALUATION MODEL
• Fair value less any subsequent accumulated depreciation and impairment losses
• Frequency of revaluation:
➢ If fair value fluctuates significantly, annually
➢ If fair value does not fluctuate significantly, every 3-5 years.
• Revaluation applied to entire class of PPE
• Revalued simultaneously. If not possible, use rolling basis (i.e., one asset after another)
Accounting for Revaluations

An increase or decrease in the carrying amount of PPE resulting from revaluation is recognized in OCI
and equity under <Revaluation Surplus= account. Except:
a. Impairment gain – increase to carrying amount; reversal of previous impairment loss
b. Impairment loss – below carrying amount; excess credit balance in the Revaluation Surplus
Both are recognized in P/L.
Revaluation Surplus – excess from carrying amount Increase Decrease
Revaluation Revaluation
Surplus Surplus
Fair Value xx
Less: Carrying Amount (xx) ORIGINAL COST
Revaluation Surplus (Impairment Loss or Gain)

Depreciation xx
xx
Impairment Impairment
Gain
After revaluation, depreciation will be based on its fair value Loss
Fair Value xx
Divided by: Remaining useful life (xx)
Annual Depreciation xx
Subsequent accounting for revaluation surplus
➢ Non-depreciable revalued asset, transferred directly to retained earning when derecognized
➢ If depreciable, a portion is transferred periodically to retained earning when used
or
Depreciation based on revalued carrying amount xx
ýăČÿĂċÿĊÿąĄ þċĈĆĂċĉ
Less: Depreciation based on original cost (xx)
ýăăÿÿĄÿĄą ĀĉăĄċĂ
19ÿÿĄă
|Page
Revaluation surplus transferred each year xx

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Notes
Derecognition of PPE
a. It is disposal; or
b. No future economic benefits expected from the asset9s use or disposal
ăÿćÿ Āÿ ýĀĀĀ = ýăā ĀćĀāĀĀÿý ÿÿĀāăăĂĀ 2 ÿÿÿÿĆćÿą ýþĀĂÿā
If the asset derecognized is revalued, any balance in the related revaluation surplus is transferred
directly to retained earnings and will not affect the amount of gain or loss recognized in profit or loss.
PAS 19 EMPLOYEE BENEFITS
Employee benefits are all forms of considerations given by an entity in exchange for service rendered
by employees.
Recognition
➢ Expense, when employees have rendered service unless it forms part of an asset
➢ Liabilities, if unpaid
➢ Asset, if payment exceeds the benefits
SHORT-TERM EMPLOYEE BENEFITS

• Due to be settled within 12 months after reporting period
• Recognized as expense, liability, or asset in an undiscounted amount
• Short-term compensated absences:
a. Accumulating – unused entitlement in the current period can be claimed in the future period
i. Vesting – all unused entitlements are monetized
ii. Non-vesting – unused entitlements are not monetized
b. Non-accumulating – for current period only
POST-EMPLOYEE BENEFITS
• Payable after the completion of employment (e.g., retirement plans and pension plans)
Contributory Non-contributory
Both employee and employer contribute Only the employer contributes
Funded Non-funded
fund is transferred to a trustee to No fund is transferred to a trustee thus,
manage the fund and obliged to pay the the employer has obligations of paying
benefits; have third-party the benefits
Classification of Post-Employee Benefits

Defined Contribution Plan Defined Benefit Plan
➢ Based on the total contribution ➢ Based on a definite amount
➢ Contribute to fund to save for retirement ➢ Specified payment amount of retirement
➢ Insufficiency rest with the employee ➢ Insufficiency rest with the employer
➢ Straightforward computation ➢ Requires actuarial assumption
➢ Undiscounted amount ➢ Discounted amount
Defined Benefit Plan Accounting Procedure

Future Value of Plan Asset (FVPA) –
Step 1. Determine the deficit or surplus balance of fund
Present Value of Defined Benefit
Ăýÿý 2 ÿý ĀĄ Āþþ = (ĀăĄćāćā)ĂĂÿāýĂĀ Obligation (PV of DBO) – obligation to
employee
➢ If FVPA < PV of DBO, the difference is deficit Based on ending
➢ If FVPA > PV of DBO, the difference is surplus
Step 2. Determine the Net Defined Benefit Liability (Asset)
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Notes
➢ If deficit, then net defined benefit liability

➢ If surplus, then net defined benefit asset is the lower of the surplus and asset ceiling
Presented in statement of financial position under non-current item.
Step 3. Determine the Benefit Cost
Service Cost: (recognized in P/L)

(a) Current Service Cost xx
(b) Past Service Cost xx
(c) Any (gain) loss on settlement xx xx
Net interest on the net defined benefit liability (asset): (recognized in P/L)
(a) Interest cost on the DBO (ĀăąÿĄĄÿĄą Āā ąĄ Āþÿ Ď %) xx
(b) Interest income on plan assets (ĀăąÿĄĄÿĄą ĂāĀý Ď %) xx
(c) Interest on the effect of the asset ceiling xx xx
Remeasurement of the net defined liability (asset): (recognized in OCI)

(a) Actuarial (gains) losses xx
(b) Difference between interest income on plan asset and return on plan assets xx
(c) Difference between the interest on the effect of the asset ceiling and change
in the effect of the asset ceiling xx xx
Total Defined Benefit Cost xx
Definition of Terms
1. Current Service Cost – increase in the PV of DBO resulting from employee service in current
period
2. Past Service Cost – change in the PV of DBO resulting from a plan amendment or curtailment
3. Gain or loss on settlement – difference between PV of DBO and the settlement price
4. Interest cost on the defined benefit liability (asset) – change in the net defined benefit liability
(asset) during the period that arises from the passage of time
5. Actuarial gain or loss – changes in PV of DBO resulting from changes in actuarial assumptions
Actuarial Assumption – give value or best estimate of the variables that will determine the
ultimate cost of providing post-employment benefits
1. Demographic assumptions – e.g., mortality, health condition
2. Financial assumptions – i.e., discount rate and future salary levels
Discount rate used to discount post-employment benefits obligation is based on high quality
corporate bonds. If no deep market, use government bonds.
6. Return on plan of assets – investment income earned by the plan assets during the year after
deducting the cost of managing the fund
Multi-employer plan – unrelated employers contribute to common fund

State Plan - established by law and operated by gov9t; absence of one definition is not a state plan
Insurance Plan – employer pays insurance premium to fund a post-employee benefit
OTHER LONG-TERM EMPLOYEE BENEFITS

• Due to be settled beyond 12 months after the end of the reporting period other than post-employment
and termination benefits
• Accounted similar to defined benefit plan. However, all the components are recognized in profit or
loss.
TERMINATION BENEFITS
• Employer9s act of terminating an employee as a result, either:
➢Entity9s decision to terminate an employee before the normal retirement date; or
➢Employee9s decision to accept the benefits in exchange of termination
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Notes
• Employee9s request for termination, is considered post-employee benefits

• Termination benefits are accounted:
➢If payable within 12 months, same as short-term employee benefits
➢If payable beyond 12 months, same as long-term employee benefits
➢If are in substance, enhancement to post-employee benefits, same as post-employee benefits
PAS 20 ACCOUNTING FOR GOVERNMENT GRANTS

AND DISCLOSURE OF GOVERNMENT ASSISTANCE
Government grants are assistance received from the government in the form of transfers of
resources in exchange for compliance with certain conditions.
Recognition
a. Conditions will be complied; and
b. Grants will be received
Types of government grants according to attached condition

1. Grants related to assets – primary condition is to acquire or construct long-term assets
2. Grants related to income – grants other than those related to assets
Measurement
Monetary Grants Non-monetary Grants
➢ Amount of cash received; or ➢ Fair value of the non-monetary asset
➢ Fair value of amount receivable received
➢ Alternatively, at nominal amount
Grants in the form of loan, such as:

➢ Forgivable loan measured the carrying amount of the loan forgiven
➢ Loan at below-market rate of interest or zero interest measured at the discounted amount
Accounting
➢ PAS 20 uses income approach in which grant is recognized in P/L.
➢ Not automatically that when you received the grant, it is recognized in P/L.j
➢ Uses matching concept
➢ Recognized in P/L in systematic basis as related condition expenses are recognized. Analyze the
recognition of income in the following cases:
a. Grants related to depreciable assets
b. Grants related to non-depreciable assets
c. Grants received as financial aid for expenses or losses
The depreciation method used for computing related must also be the same for computing grants.
Presentation of Grants related to assets
In statement of cash flows, the cash flows from the receipt of the grant and the purchase of the
related asset are presented separately, even if the entity uses the net presentation
Presentation of grants related to income
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Notes
Repayment of Grants
Treated as change in accounting estimate
There are government assistances that are not recognized as government grants. These are whose:
1. Value cannot be reasonably measured; or
2. Cannot be distinguished from the entity9s normal trading transactions
Examples are:
a. Tax benefits
b. Free technical or marketing advice
c. Provision of guarantees
d. Government procurement policy that is responsible for a portion of the entity9s sales
If significant, only disclosed.
PAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
Two ways of conducting foreign activities

1. Foreign currency transactions
2. Foreign operations
Functional Currency
• The currency of the primary economic environment in which the entity operates.
• The currency that is mostly used by the entity9s operation and not necessary the country9s currency
• Factors to consider:
➢ Currency of sales and cost
➢ Currency of cash flows from financing and operating activities
• Cannot be changed once determined, unless necessary. The changes are then treated prospectively.
• All currencies other than the entity9s functional currency are foreign currencies.
Presentation Currency – currency used in presenting FS
FOREIGN CURRENCY TRANSACTIONS

A transaction that is denominated or requires settlement in a foreign currency.
Initial
using spot exchange rate at the date of transaction
Recognition
➢ Monetary items – retranslated using closing rate
➢ Nonmonetary items measured at historical cost – exchange rate at the date of
Subsequent transaction
Recognition ➢ Nonmonetary items at fair value – exchange rate at the date when the fair value
was determined
Hence, nonmonetary items do not need translation at the end of the reporting period.
Monetary items - amount received or paid in fixed or determinable (e.g., cash, receivables, payables)
Non-monetary items - do not give rise to monetary items (e.g., inventories, prepaid assets, PPEs)
Exchange Differences – the difference of translating one currency into another currency at different
exchange rates
Recognition of exchange difference:
a. Monetary items – recognized in P/L
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b. Nonmonetary items – recognition of exchange component is the same as how gain or loss are
identified, whether in OCI or P/L
• When foreign currency transaction occurred in one period and settles in another:
➢ Exchange difference between the transaction date and end of reporting period
➢ Then, exchange difference between the previous reporting period and settlement date.
FOREIGN OPERATIONS
A subsidiary, associated, joint venture or branch that is based in foreign country and using foreign
currency.
Before financial statements of the branch is incorporated to the FS of main branch or other necessary
translations (e.g., gov9t requirements), it is translated using the procedures below.
Translation of Financial Statements

a. Assets and liabilities are translated using closing rate at the date of balance sheet
b. Income and expense are translated, using spot exchange rates
c. All resulting exchange differences are recognized in OCI.
Average rate for the period may be used, except when exchange rates fluctuate significantly.
PAS 23 BORROWING COST
Borrowing cost is capitalized to qualifying asset – long term to get ready for use or sale
Types of borrowing cost:
1. Interest expense
2. Finance charge on finance leases
3. Exchange differences on borrowings in foreign currencies
Other borrowing cost not used for qualifying asset is expense.
Capitalization starts when it meets all the conditions:

a. Incurs expenditures for the asset;
b. Incurs borrowing cost; and
c. Activities necessary to prepare the asset for its intended use or sale are being undertaken
Interest incurred during the suspended period are not capitalized, instead expense.
Capitalization ceases when qualifying asset is substantially complete or shall no longer incur borrowing
cost, whichever comes first.
ACCOUNTING FOR BORROWING COST

Specific borrowing – funds borrowed only for the qualifying asset
ÿÿāćāÿýććăĂ þÿ = ýāāĂÿý þÿ 2 �㕰ÿăăĀāþăÿā �㕰ÿāĀþă
General borrowing – funds borrowed for multiple purposes
ÿÿāćāÿýććăĂ þÿ = ýăă. āąāăÿĂćāĂÿăĀ ą ÿÿāćāÿýććÿāćĀÿ āÿāă
ĀąĄĊ/ĉ ÿċĊĉĊÿĄĂÿĄą ÿąĊÿĂ ąĄĊăĈăĉĊ ąĄ ăăĄăĈÿĂ þąĈĈąčÿĄąĉ

∑ ăĎĆăĄĂÿĊċĈăĉ
12 ăąĄĊ/ĉ ÿąĊÿĂ ăăĄăĈÿĂ þąĈĈąčÿĄąĉ
Compare the value of actual BC vs. capitalized BC, the lowest value will be capitalized as
general borrowing cost.
ÿĀĀā ĀĄ ĀĂÿýćĄĆćÿą ýĀĀăā = āąāăÿĂćāĂÿăĀ + ĀĀÿÿĀĄćÿą āĀĀā
Question: Why is borrowing cost capitalized to qualifying asset?
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PAS 24 RELATED PARTIES
Related parties have the ability to affect the financial and operating decision of the other party through
control, significance influence or joint control.
Importance of disclosures of related parties

➢ Its transactions or existence can affect an entity9s financial position and performance
➢ To help users better assess the risks and opportunities surrounding the entity
➢ For transparency because there might be a conflict of interest
DISCLOSURES
➢Close Family Members
➢Parent-subsidiary relationship
➢ Subsidiary discloses the parent name, even if no transaction happened in the period.
➢Key management personnel – CEO, CFO, COO
➢ Discloses his compensation by breaking down respectively into: short-term, post-employment,
other long-term, termination; and share-based payment
➢Related party transaction
➢ Discloses:
a. Nature or related party relationship
b. Nature terms and amount of the transaction and outstanding balances
c. Doubtful debts on the outstanding balances
➢ Outstanding balances are disclosed in individual FS, and eliminated in consolidated FS.
➢Government-related entities – entity that is controlled, jointly controlled or significantly influenced by
a government
➢ Discloses if there is related party transaction
a. Name of the gov9t and the nature of the relationship
b. Nature and amount of each individually significant transaction
c. Other transactions that are collectively significant but are individually insignificant.
Questions:
1. What makes parties related and not related?
2. Elaborate significance of related parties9 disclosures.
PAS 26 ACCOUTING AND REPORTING RETIREMENT BENEFITS PLANS
➢ Preparation of FS of retirement benefits plans to account and report all participants of the plan,
instead of individual. Hence, PAS 26 views retirement benefits plan as a reporting entity.
➢ Applies to all retirement benefits plan, except gov9t social security type arrangements and
employee benefits other than retirement benefits.
➢ Hybrid plans are considered defined benefit plans.
FS of Defined Contribution Plan contains the ff.:

a. a statement of net asset available for benefits
b. a statement of changes in net asset available for benefits; and
c. accompanying notes to the FS
FS of Defined Benefit Plan contains either of the ff.: (actuarial report is needed)
1. a. net asset available for benefits
b. actuarial PV of promised retirement benefits, distinguishing vested and non-vested; and
c. resulting excess or deficit
2. statement of net asset available for benefits including either:
a. note disclosing the APV of PRV, distinguishing vested or non-vested benefits; or
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b. a reference to this information in an accompanying actuarial report

Plan assets are measured at fair value.
Questions:
1. Why defined contribution plan contains that info in FS, as well as the defined benefit plan?
2. What makes defined benefit plan FS different from defined contribution plan FS?
PAS 27 SEPARATE FINANCIAL STATEMENTS
• Accounting and disclosure requirements for investments in subsidiaries, associates and joint
ventures, when entity prepares separate FS
• No entity is mandated to produce
• Applicable if entity chooses to prepare or is required by law
Separate FS is an addition to:

a. consolidated FS; or
b. FS of entity with an investment in associates or joint ventures using equity method under PAS 28
Preparation of Separate FS:

Prepared in accordance to applicable PFRS, except/however that investment in subsidiaries,
associates or joint ventures are accounted for either:
a. at cost; or
b. in accordance of PFRS 9; or
c. using equity method under PAS 28
Entity shall apply the same accounting for each category of investment.
The measurement used for investment in separate FS is the same to non-separate FS.
PAS 28 INVESTMENT IN ASSOCIATES AND JOINT VENTURE
Nature of relationship
Type of Investment Percentage of ownership interest
with investee
Financial asset at FV <20% Regular investor
Investment in associate 20% - 50% Significant influence
Investment in subsidiary 51% - 100% Control
Investment in joint venture Contractually agreed sharing of control Joint control
Associate is an entity, which the investor has significant influence.

Significant influence
➢ Power to participate in financial and decision but has no control or joint control
➢ Exist if investor holds 20% ≤ 50% voting power
➢ Investor may have significant influence if <20% or may not have significant influence even if
>20%, unless it provides any of the ff. evidences:
a. Representation on the governing body of the investee
b. Participation in policy-making process
c. Material transactions between the entity and its investee
d. Interchange of managerial personnel; or
e. Provision of essential technical information
ACCOUNTING FOR INVESTMENTS IN ASSOCIATES

Using equity method
➢ Initial recognition – cost
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➢ Subsequent adjustment – share in the investee9s changes in equity (e.g. P/L, dividends, OCI)
Investment in Associate or Joint Venture

Beg. xx
Share in profit xx xx dividends
xx end
Share in associate’s Effect on investment in associate Effect on investment income

➢ Increase for share in profit ➢ Increase for share in profit
P/L
➢ Decrease for share in loss ➢ Decrease for share in loss
Dividends Decrease No effect
➢ Increase for share in gain No effect; the share in OCI is
OCI
➢ Decrease for share in loss included in the investor9s OCI
Application of the Equity Method

➢ Investor start using when it obtains significant influence; and
➢ Stops when loses significant influence
On acquisition, investment cost and share of net fair value of are accounted as follows:
➢ If cost > FV, the excess is included in the carrying amount of the investment
➢ If cost < FV, deficiency is included in income
If FS reporting period and accounting policies of the investee and investor do not coincide, investee
adjust his accounting policies before investor uses, and prepare FS that coincide to the investor
reporting period (difference should not exceed 3 months).
Preference Share – priority dividends

➢ Cumulative PS → deduct 1 yr. dividends, declared or not
➢ PS computation is not based on latest share but to the past shares
• In losses, investor discontinues sharing losses when his investment becomes 0.

• If the investee reports profit, resume recognition of shares only after its share in the profit equals
share of losses unrecognized.
• Investor is exempted using equity method if exempted in preparing consolidated FS
• Investment in associate or joint venture with a portion of other PFRS or PAS, the remaining portion is
accounted using equity method.
• If investment in joint venture is in accordance to PAS 28 by referring to PFRS 11, then use the equity
method.
Question:
1. Why is investment in associate initially recognized as cost?
2. Explain the effect of P/L, dividends and OCI to investment in associate.
PAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
• Restatement applies if an entity9s functional currency is that of a hyperinflationary economy.

• No prescribe absolute rate to recognize hyperinflation. It is a matter of judgment.
Indicators of hyperinflation:
a. General population keep its wealth in non-monetary assets or in a stable foreign currency
b. General population regards monetary amounts in terms of stable foreign currency
c. Sales and purchases on credit take place at expected loss of purchasing power of credit period
d. Interest rates, wages and prices are linked to a price index; and
e. Cumulative inflation rate over 3 years is approaching, or >100%
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Core principle
➢ Restate FS using the measuring unit current at the end of the period or General Price Index (GPI)
➢ Restate also the comparative FS, whether monetary or non-monetary items
➢ Prohibits the presentation of this information as a supplement to unrestated FS
GPI – reflects the inflation hence
Restatement of Statement of Financial Position reflect general purchasing power
a. Monetary items → not restate
b. Non-monetary items at FV or NRV → not restated
c. Non-monetary items at historical cost → restated
Statement of Comprehensive Income and Cash Flows - restate all amount
Restatement Formula:
ăĀą (ÿĊ ăĄĂ ąĄ ĈăĆąĈĊÿĄą ĆăĈÿąĂ)
ĄÿĉĊąĈÿāÿĂ ÿąĉĊ ×
ĄÿĉĊąĈÿāÿĂ ĀĈÿāă ąĄĂăĎ (ÿĊ ÿāćċÿĉĊÿąĄ ĂÿĊă)
NOTE: Average price index can be used if historical price index is

undeterminable, such transactions recurring very frequently
Gain or loss on the net monetary position due to restatement (historical amount – restated amount) is
recognized in P/L.
Retained earnings – balancing figure after restatement
Question:
1. Why is FS restated in hyperinflation economy? Understatement of assets and overstatement of
income will happen and it can distort the comparison
2. How will you compute gain or loss on net monetary position?
PAS 32 FINANCIAL INSTRUMENTS: PRESENTATION
Financial Instruments – any contract that give rise to a financial asset of one entity and a financial
liability or equity instrument of another entity
PAS 32 complement PFRS 9 Financial Instruments and PFRS 7 Financial Instruments: Disclosure
Presentation
Classifies financial instrument based on the substance of the contract and not its legal form.
Classification of Financial Instruments
Financial Assets Financial Liabilities Equity Instruments
potentially favorable potentially unfavorable potentially unfavorable; residual A-L
Contractual right to receive Contractual obligation to pay No contractual obligation to pay
cash/financial instruments onfinancial asset or exchange financial asset or exchange
favorable condition instrument instrument
To receive: Requires delivery of:
➢ Variable number of EI for ➢ Variable number of own EI Requires deliver of:
a fixed amount of FA for a fixed amount of FA ➢ Fixed number own EI for a fixed
➢ Fixed number of EI for a ➢ Fixed number own EI for a amount of FA
variable amount FA variable amount of FA
Ex.: Redeemable preference
share – holder redeem
PPE, inventories, intangible Ex.: Callable preference share –
share at a set date
asset are not included issuer will only call holder
Unearned revenues, gov9t
obligations are not included
Compound Financial Instrument – contains both liability and equity; issuer9s perspective
Ex. Convertible bonds – bonds converted into issuer9s shares of stocks
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ýĉĉăĊĉ ÿÿÿĀÿĂÿĊÿăĉ āćċÿĊď

2 =
č/ąĂă Ăā ąĄ ĂăĀĊ č/ąċĊ ăćċÿĊď
ÿĄĉĊĈċăăĄĊ ăćċÿĊď ĄăÿĊċĈă āąăĆąĄăĄĊ
Offsetting of financial asset and liability is permitted if:

a. Legal rights to offset; and
b. Intention to offset
PAS 32 requires offsetting when it reflects entity9s future cash flows.
OTHER
Puttable Instrument – holder9s right to return the instrument in exchange for financial asset or
automatically returned because of specified future event
- Classified as financial liabilities, except when it meets definition of equity instrument
Treasury Shares (Treasury Stocks) – entity9s own shares; reflect transactions to equity
Interest, Dividends, Losses and Gains that relate to:
➢ Financial liability are recognized as income or expenses in P/L
➢ Equity instruments are recognized directly in equity
Transaction cost from issuing:
➢ Financial liability are included in financial liabilities and subsequently amortized as P/L
➢ Equity instrument are deduction from equity
PAS 33 EARNINGS PER SHARE
➢ Publicly-listed entities are required to present
Earnings Per Share – how much profit (loss) each ordinary shares (OS) earned
Ordinary share – subordinate to all other equity instrument
Preference share – prioritize over other classes of shares
Types of EPS
Basic EPS Dilutive EPS
➢ Actual outstanding OS ➢ Includes potential outstanding OS
ýăā �㕰ÿāĀþă 2 ÿÿăĄăÿÿăĂ ĂĆÿÿăĀ ýăā �㕰ÿāĀþă + ÿĄāăÿ āÿą Āÿ ÿþ

þāÿĂ = ĀāÿĂ =
þýýþĂ þýýþĂ + āĀāăÿāćÿý ĀĆÿÿăĀ
• Net Income is after tax Potential OS
• Preferred Shares 1. Convertible Preference Share
➢ Cumulative – deduct 1 yr., declared or not 2. Convertible Bonds Payable
➢ Non-cumulative – deduct declared 3. Options/Warrants
• Ave. Outstanding OS 4. Contingent Ordinary Shares
1. Shares issued
2. Subscribed shares Dilutive decreases EPS
3. Treasury shares Dilutive →included in DEPS computation
➢ Reacquired – deduct Antidilutive →ignored
➢ Reissued (sold) – add
Below are adjusted retrospectively until Test for Dilution:
issuance date: 1. PS/BP → convertible
�㔼Ā�㕐ÿÿÿÿĀāĀ āĀ ý�㔼−ÿ�㕆
4. Share-split – ex. 2-for-1 2. ÿăĉĊ = �㔼Ā�㕐ÿÿÿÿĀāĀ āĀ �㕊�㔴ýþ�㕆
5. Bonus issue – or stock dividend ➢ BEPS > Test →dilutive
6. Preemptive stock rights –or right issue ➢ BEPS≤ Test →anti-dilutive
- issuer is obliged to offer it to the existing Test for options/warrants
shareholder before offering it to the public ➢ MV of shares>option price→dilutive
Āā ąĄ ĉ/ÿĈăĉ Ĉÿą/Ċ ąĄ ➢ MV of shares ≤ option price →anti-
ýĂĀ. ĄÿāĊąĈ =
Āā ąĄ ĉ/ÿĈăĉ ăĎ 2 Ĉÿą/Ċ dilutive
3. Adding potential OS is based on the ranking:
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Āā ąĄ ĉ/ÿĈăĉ ĀăĄąĈă ăĎ. ąĄĈĊĉ 1. Options/Warrants

+ ĆĈąāăăĂĉ ÿĄĊăĈ ăĎ. ąĄ ĈĊĉ 2. PS
ăĎĈÿą/Ċ =
ąċĊĉĊÿĄĂÿĄą ĉ/ÿĈăĉ ÿĄĊăĈ ăĎ. ąĄ ĈĊĉ 3. BP
Adj. factor is multiplied to Ave. outs. OS

Entity with dilutive potential shares presents DEPS in addition to BEPS. If no dilutive, a BEPS is okay.
Question: Why are outstanding shares computed using no. of outstanding OS divided by 12 months?
PAS 34 INTERIM FINANCIAL REPORTING
• No entity are mandated for interim financial reporting

• Applicable if entity choses to or required by gov9t
• Securities and Exchange Commission (SEC) and Philippine Stock Exchange (PSE) quarterly and
issued within 45 days after end of interim period
• Publicly listed entities are encouraged; at least semi-annual issued within 60 days after end of interim
period
Interim Financial Report contains either:

➢ Complete FS; or
➢ Condensed FS, compose of:
1. Condensed Statement of Financial Position
2. Condensed Statement of P/L and OCI
3. Condensed Statement of Changes in Equity
4. Condensed Statement of Cash Flows
5. Selected explanatory notes
For lesser cost and to avoid repetition of information, PAS 34 is better than using PAS 1.
Condensed FS
• Minimum
• Focus on providing info on significant events and transactions occurred since the latest annual
period
• Discloses compliance with PFRS, and other information that is relevant for the interim period
• If highly seasonal, discloses latest and comparatives 12-month period in addition to interim financial
report
• Presented in cumulative basis (year-to-end)
• Comparatives
➢ Statement of financial position – latest annual financial report
➢ Other FS – year-to-date period
Ex. Current Comparative
SFP June 30, 2021 Dec. 31, 2020
Other FS Sept. 30, 2021 Sept, 30, 2020
Materiality
Interim measurements may rely on estimates to greater extent than measurement of annual financial
data.
Recognition and measurement
• Same accounting policies as annual, except if there is changes
• Measurement is on year-to-date basis
• Two views of interim period:
1. Integral view – a part of annual report is included
2. Discrete view – only for the period
• Gains and losses are recognized immediately (discrete view) ex. write-downs, gov9t grants, dividends
• Cost and expenses (income) needs allocation (integral view) ex. depreciation, taxes
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PAS36 IMPAIRMENT OF ASSETS
Applies to non-current assets:

a. PPE
b. Investment property measured at cost model
c. Investment in associates, joint ventures, and subsidiaries
d. Intangible assets
e. Goodwill
Observation: Measured for impairment because they are measured at cost.
CORE PRINCIPLE
• If CA of asset > recoverable amount, impaired
Recoverable amount (higher of FVLCD or VIN) xx
Less: Carrying Amount xx
Impairment Loss xx
• Assets are tested for impairment individually
Indications of Impairment
• Assess at the end of each reporting period, whether there is indication of impairment
• Indications:
External sources:
1. Significant decline in asset value
2. Significant change factors that affect recoverable amount (ex. increase in market interest rates)
3. CA of net asset > market capitalization
Internal sources:
1. Obsolescence or physical damage for an asset
2. Significant change in use of assets that affect recoverable amount (ex. discontinuance)
3. Evidence that asset9s economic performance is worse than expected
• If there is indication, it signify to review and adjusted remaining useful life, depreciation or
amortization method, or the residual value even if no impairment loss is recognized
Exercise: What is your generalization for indications of impairment?
Required testing for impairment annually, whether there is indication or not:

a. Intangible asset with definite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
Exercise: Why they are tested annually?
MEASURING RECOVERABLE AMOUNT

• No need to measure both FVLCD and VIU if one exceeds CA
• If FVLCD is undeterminable, use VIU
• If doubtful of VIU exceeding FVLCD, use FVLCD
Fair Value less Cost of Disposal (FVLCD)

• FV is based in PFRS 13 Fair Value Measurement
• Cost of disposal excludes recognized liabilities
Value in Use (VIU)

PV of the future cash flows expected to be derived from an asset/CGU
Computation:
1. Estimate future cash flows expected from continuing the use of assets to its final disposal
➢ Included any residual value and disposal cost, but excludes cash flows from future enhancement
➢ Cash flow project cover max. of 5 yrs.
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➢ Projects beyond 5 yrs. are extrapolated

2. Then, apply the appropriate discount rate
➢ Discount rate → pre-tax rate that reflects current market assessment
RECOGNIZING AND MEASURING IMPAIRMENT LOSS

• Recognized in P/L
• Unless, asset is carried at revalued amount, revaluation surplus is decrease first and any excess is
recognized in P/L
• Subsequent depreciation uses new CA
• Used also in reversal
CASH-GENERATING UNIT (CGU)

• Smallest group of asset that generates cash inflows independent from cash inflows of other asset
• If impossible to calculate recoverable amount of individual asset, include it in CGU
• Consistency of included items is needed
• Recoverable amount is the higher of CGUs FVLCD and VIU
GOODWILL
• Goodwill = Purchase price – net assets FV
• Does not generate cash flow but contributes to cash flows of multiple CGUs
• Hence, tested for impairment only once allocated to the CGU expected to benefit from combination
• Goodwill from business combination is allocated to each of the acquirer9s CGU
Impairment loss of CGUs

• CGUs CA including goodwill > recoverable amount, impaired
• Impairment loss of CGU is:
1. Deducted to any goodwill included in the CGU; then
2. The excess is to the CGUs other assets carrying amount, pro rata
Corporate Assets
• Assets other than goodwill contributing to future cash flows of both CGU under review and other
CGU
• Testing for impairment is same to goodwill
Exercise: Differentiate corporate asset from goodwill.
REVERSAL OF IMPAIRMENT Reversal shall not exceed d. recoverable amount

• Recoverable amount of impaired asset > CA
• Indication of reversal is opposite of impairment
c. CA if no impairment loss
• Limitations of reversal: has been recognized
1. Increase of CA shall not exceed to CA after
regular depreciation b. CA on date of reversal
2. Never reserve impairment loss of goodwill

➢ d – c = reversal recognized in OCI, of revalued amount
➢ c – b = reversal recognized in P/L
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PAS 37 PROVISIONS, CONTIGENT LIABILITIES AND CONTINGENT ASSETS
Exemption:
➢ Executory contracts, unless onerous
➢ Those covered by other standards
PROVISIONS
• a liability of uncertain timing or amount
• Estimated
• Ex. Warranty, restructuring cost, environmental damages (define restructuring)
• Presented in balance sheet separately from other types of liabilities (trade payables, accruals,
contingent liabilities
• Reviewed at end of each reporting period
• Recognition:
a. Present obligation→obligating event (legal or constructive)
b. Probable (more likely than not) outflow of resources; and
c. Reliably estimated
➢ Do not recognize future operating cost
CONTINGENT – do not meet all recognition criteria; not recognized

• Contingent Liabilities – disclosed only, except the possibility of outflow is remote
• Contingent Assets – disclosed only, if the inflow is probable
EXERCISE: Why is asset disclosed when probable unlike liabilities that only disclosed when possible?
MEASUREMENT
Nature of the outflow Measurement Basis
General rule Best estimate
Involves a large population of items Expected value → probability weighted ave.
Each possible outcome in a range is
Mid-point of the range
as likely as any other
RECORDING THE PROVISION

Provision is debited to expense and credit to estimated liability account
But sometimes, provision form part of the asset9s cost
Changes in provisions → Prospective

Use of provision → only for expenditure it was originally intended for
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PAS 38 INTANGIBLE ASSETS
Intangible assets – identifiable non-monetary assets without any substance

1. Identifiable
2. Control
3. Future economic benefits
➢ If asset has both intangible and tangible elements, use judgment to asses which is more significant
➢ If integral part to asset, PPE (ex. OS in computer); if not, intangible asset (ex. app software)
➢ Aggregately presented in balance sheet under <intangible assets=
RECOGNITION
a. Meets definition;
b. Probable future economic benefits; and
c. Cost can be measured reliably
INITIAL MEASUREMENT - at cost, but depends on how it is acquired:

a. Separate acquisition – purchase price plus direct cost
- If deferred payment, cost is cash price equivalent; difference is interest exp.
b. Acquisition as part of a business combination – FV at acquisition date
c. Acquisition by way of gov’t grant – either FV or at nominal amount plus direct cost
d. Exchange of assets
i. With commercial substance
1. FV of asset given up
2. FV of asset Received
3. CA of asset given up
ii. Lacks commercial substance – use no. 3
e. Internally generated – classified into:
1. Research Phase – investigation to gain new knowledge; expensed
2. Developmental Phase – application on research findings; capitalized if:
a. Technical feasible;
b. Intention to complete;
c. Ability to use or sell;
d. Probable future economic benefits;
e. Availability of adequate resources; and
f. Reliable measurement of cost
➢ If not clear whether it is a research or developmental cost, treated as research cost
➢ If both do not qualify for capitalization, expensed as <R&D Expense=
NOTE:
• Prohibits reinstatement of cost
• Capitalization of cost stops when ready for its intended use
• Internally generated brands, mastheads, publishing titles, customer lists, goodwill and similar items
are not recognized as intangible assets
SUBSEQUENT MEASUREMENT
Either cost model or revaluation model and applies to entire class of intangible assets
• Cost model – cost less accumulated amortization and impairment loss
• Revaluation model – FV less subsequent accumulated depreciation and impairment loss
- Only used to intangible asset with active market
Intangible asset with:
a. Finite useful life
➢ Amortized
b. Infinite useful life
➢ Not amortized but tested for impairment at least annually
➢ Useful life cannot be forecasted and doesn9t mean no end
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➢ No legal, contractual, and other restriction that limits the period

➢ If legal right can be renewed indefinitely
Exercise: Why are intangible assets uses revaluation model as subsequent measurement, and not FV
model?
AMORTIZATION
o Similar to depreciation of PPE, but uses the term amortization
o If finite useful life, use shorter of its useful life or legal life, if any. (Patent max. life is 20 yrs.)
o Starts when available for use
o Stops when sold, classified for sale under PFRS 5, or fully depreciated
o Do not stops when no longer used
o Recognized as expense
AMORTIZATION METHODS
1. Straight-line method
2. Diminishing balance method
3. Units of production method
➢ No prescribe method
➢ Based on management9s judgment as long as it best reflects the expected pattern of consumption
➢ If pattern is undeterminable, use straight-line method
➢ Prohibits revenue as basis
➢ Residual value is assumed zero, unless sold before the end of its economic life
IMPAIRMENT
o CA > recoverable amount
o Tested using PAS 36
DERECOGNITION
1. Disposed; or
2. No future economic benefits
CA – Net Disposal = Gain or Loss in P/L
In general, accounting for intangible asset is similar to PPE.
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Notes
PAS 40 INVESTMENT PROPERTY
Investment property – land and/or building held to earn rentals or for capital appreciation or both
Investment Property Owner-occupied Property
For rental or capital appreciation
Purpose For operational
or both
Cash flow generation Independent In conjunction with other assets
Scope Land and building Include other than land and building
Standard PAS 40 PAS 16
Partly investment property and partly owner-occupied

o If can be sold separately, accounted separately
o If can9t be sold separately, either investment property or PPE, whichever is significant
Ancillary services to occupants

➢ Investment property if ancillary service is insignificant (ex. Warehouse→utilities)
➢ PPE if significant (Ex. Hotel→utilities)
Property of leased between group members are PPE in consolidated FS
RECOGNITION:
1. Meets definition;
2. Probable future economic benefits
3. Reliable measurement of cost
INITIAL MEASUREMENT - at cost but depends on mode of acquisition

➢ Acquisition by purchase
o Purchase price + direct cost
o If deferred payment, cost is cash price equivalent; difference is interest expense
o Excluding in cost:
a. Start-up cost, unless part of bringing asset to its intended use
b. Operating losses before achieving planned level of occupancy
c. Abnormal amount
o Can be used in accounting self-constructed investment property
➢ Exchange of assets
o With commercial use
1. FV of asset given up
2. FV of asset received
3. CA of asset given up
o If lack commercial use, use no. 3
SUBSEQUENT MEASUREMENT - cost model or fair value model

• Applies to all investment property
• Requires to determine FV, whether cost or FV model is used
• FV is used in FV model for measurement and disclosure; FV in cost model is for disclosure only
➢ Fair Value Model
▪ Changes in FV are recognized in P/L
▪ FV measured every end of reporting period
▪ Not depreciated
▪ If FV is undeterminable in initial measurement, use cost model
➢ Cost Model
▪ Cost – less accu. depreciation and impairment loss (PAS 16)
▪ PFRS 5, if investment property is held for sale
▪ PFRS 16, if investment is right-of-use asset resulting from a lease
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Notes
Exercise: Why do you think cost or FV models are used to subsequently measuring investment
property?
CHANGE IN ACCOUNTING POLICY

▪ Prospective
▪ Cost model → FV model, allowed
▪ FV model → cost model, not allowed
Exercise: Why changing of FV model to cost model not allowed?
TRANSFERS to or from investment property because of change in use

a. Commencement of owner-occupation
b. Commencement of development with a view to sale
c. End of owner-occupation
d. Commence of an operating lease to another party
Exercise: Analyze where a, b, c, and d can be transferred to or from.
• If uses cost model, transferred asset are accounted at CA

• If uses fair value model, transferred asset are accounted for FV
• On transfer date, start changing accounting to PAS 40 or other standards (ex. PAS 16 and PAS 2)
that is appropriate for the change
SUBSEQUENT EXPENDITURES
➢ Expensed
➢ Unless, they meet recognition criteria are capitalized (ex. replacement of assets)
IMPAIRMENT
➢ If using cost model → PAS 36
➢ If using FV model → no separate accounting policy
Exercise: Why FV model has no accounting for impairment?
DERECOGNITION
• Disposed; or
• No future economic benefits
CA – Net Disposal = Gain or Loss recognized in P/L
Vocabulary:
• Finance lease - risks and rewards have been fully transferred
• Operating lease – opposite od finance lease; basically the same as landlord and renter contract
Source: https://corporatefinanceinstitute.com/resources/knowledge/accounting/lease-accounting/
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CFAS Lecture Notes - Zeus Millan (2021-2022)

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CFAS notes - To understand the conceptual framework and

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Conceptual Framework and Accounting Standards

Accounting is the <process of identifying, measuring, and communicating economic information to

Important Activities in Accounting

BASIC PURPOSE OF ACCOUNTING

Types of Information Provided by Accounting

Types of Accounting Information Classified to User’s Need

The practice of accounting requires the exercise of:

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Conceptual Framework and Accounting Standards

• Double-entry system – debit and credit

EXPENSE RECOGNITION PRINCIPLES

COMMON BRANCHES OF ACCOUNTING

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Conceptual Framework and Accounting Standards

Bookkeeping – recording the account or transaction of an entity

PHILIPPINE ACCOUNTANCY ACT OF 2004 (R.A. 9298)

ACCOUNTING STANDARDS USED IN THE PHILIPPINES

ACCOUNTING STANDARD SETTING BODIES AND OTHER RELEVANT ORGANIZATION

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Conceptual Framework and Accounting Standards

CONCEPTUAL FRAMEWORK AND REPORTING STANDARD

OBJECTIVE OF FINANCIAL REPORTING Primary Users

Objective of Financial Reporting Conceptual Framework Standard

General Purpose Financial Reporting

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Conceptual Framework and Accounting Standards

a. Items nature or size or both

Applying Qualitative Characteristics

FINANCIAL STATEMENTS AND THE REPORTING ENTITY

ELEMENTS OF FINACIAL STATEMENTS

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Conceptual Framework and Accounting Standards

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Conceptual Framework and Accounting Standards

Considerations when selecting a measurement basis:

PRESENTATION AND DISCLOSURE

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Conceptual Framework and Accounting Standards

CAPITAL AND CAPITAL MAINTENANCE

Concept used with the maintenance of nominal

Capital Profit is earned only if entity’s

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Conceptual Framework and Accounting Standards

PAS 1 PRESENTATION OF FINANCIAL STATEMENT

GENERAL FEATURES OF FINANCIAL STATEMENTS

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Conceptual Framework and Accounting Standards

• PAS 1 permits addition to the minimum requirement

STRUCTURE AND CONTENT OF FINANCIAL STATEMENT

STATEMENT OF FINANCIAL POSITION

Breach of Loan Contract

Presentation of Deferred Taxes

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

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Conceptual Framework and Accounting Standards

OTHER COMPREHENSIVE INCOME (OCI)

Total Comprehensive Income

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CASH FLOWS

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