Accounting For GOVpdf

CHAPTER 1
1
PROBLEM 1-1:
1-1: TRUE
TRUE OR FALSE FALSE
True
True 1.
1. Compared
Compared to to the
the accounting
accounting for for business
business entities,
entities, government
government accounting
accounting
places
places greater
greater emphasis
emphasis on on the
the sources
sources and
and utilization
utilization of
of government
government fundsfunds
and
and the
the management's
management's stewardship
stewardship over over government
government resources.
resources.
True
True 2.
2. Taxes
Taxes areare thethe main
main source
source of of funds
funds of
of the
the government.
overnment.
True
True 3.
3. Other
Other sources of funds of the government include fees,
sources of funds of the government include fees, borrowings,
borrowings, and and grants
grants
from
from other
other governments
overnments and and international
international bodies.
bodies.
False
False 4.
4. Currently,
Currentl the the financial
, financial reporting
re ortin of of government
overnment entities
entities is
is based
based onon NGAs.
NGAs.
False
False 5.
5. The
The principles
principles used used in the financial
in the financial reporting
reporting of of government
government entities
entities are very
are very
unique that only
unique that only a very few
a very few of of these
these principles
principles are
are similar to those
similar to those that
that are
are
applied
a lied to to business
business entities.
entities.
True
True 6.
6. The
The principles
principles in in the
the GAM for for NGAs
NGAs areare similar
similar to
to the
the principles
princi les in the PFRSs.
in the PFRSs.
False
False 7.
7. The
The GAM
GAM for for NGAs
NGAs is is promulgated
promulgated by by the
the Philippine
Philippine Congress
Congress under
under thethe
authority
authority conferred
conferred to to it under
itunder thethe Philippine
Philippine Constitution.
Constitution.
True
True 8.
8. A unique financial reporting requirement of government entities
A unique financial reporting requirement of government entities is
is the
the use
use of
of
fund
fund cluster
cluster accounting.
accounting. UnderUnder fundfund cluster
cluster accounting,
accounting, separate
separate books
books andand
reports
re orts are
are prepared
re ared forfor each
each type e of
of fund
fund held
held by
b a a government
overnment entity.
enti
False
False 9.
9. The
The GAM
GAM for for NGAs
NGAs is is promulgated
promulgated primarily
primarily toto harmonized
harmonized government
government
accounting
accountin standards
standards with with the
the U.S.
U.S. GAAP.
GAAP.
False
False 10. An item
10. An item is is recognized
recognized as as an
an asset
asset if it meets
if itmeets both the "probable"
both the future
"probable" future
economic
economic benefits"
benefits" andand "reliable
"reliable measurement"
measurement" criteria,
criteria, regardless
regardless of whether
of whether
the
the item
item is is aa resource
resource controlled
controlled arising from past
arising from ast events.
events.
PROBLEM 1-2:1-2: MULTIPLE

MULTIPLE CHOICE
CHOICE
1.
1. Which of
Which of the following is
the following is a
a unique
unique requirement
requirement of
of government
accounting that
that is
is not
not required
required
in
in the
the accounting
accounting for
for business
business entities?
entities?
a.
a. The
The use
use of
of double-entry
double-entry recording
recording system
system
b.
b. The
The use
use of
of single-entry
single-entry recording
recording system
system
c.
c. The
The use
use of
of accrual
accrual basis
basis ofof accounting
accounting
d.
d. The presentation of budget information
The presentation of budget information in
in the
the financial
financial statements
statements
2.
2. What is
What is the
the legal
legal basis
basis of
of the
the COA
COA inin promulgating the GAM
promulgating the GAM for
for NGAs?
NGAs?
a.
a. PD
PD 1445
1445 State Audit Code
State Audit Code of the Philippines
of the Philippines
b.
b. The
The Philippine
Philippine Constitution
Constitution
c.
c. RA
RA 9298
9298 The
The Philippine Accountancy Act
Philippine Accountancy Act of
of 2004
2004
d.
d. Philippine Public Sector Accounting Standards
Philippine Public Sector Accounting Standards
3. Which of
3. Which of the following is
the following is tasked
tasked in
in keeping
keeping the
the general
general accounts
accounts of
of the
the government,
government,
supporting vouchers, and
supporting vouchers, and other
other documents?
documents?
a.
a. COA
b.
b. DBM
c.
c. NGAs
NGAs
d.
d. Congress
Congress
4.
4. The
The Bureau
Bureau ofof Treasury
Treasury (BTR)
(BTR) is
is responsible for
responsible for
a.
a. promulgating
promulgating accounting and auditing rules and
accounting and auditing rules and regulations.
regulations.
b.
b. the
the formulation and implementation of the national budget
formulation and implementation of the national with the
budget with the goal
goal of
of attaining
attaining the
the
nation’s
nation's socio-economic
socio-economic objectives
objectives
c.
c. receiving
receiving and
and keeping
keeping national
national funds
funds andand managing
managing andand controlling
controlling the
the
disturbances thereof.
disturbances thereof.
d.
d. directly
directly implementing
implementing the
the projects
projects of
of the
the government.
government.
5.
5. According to
According the GAM
to the GAM for
for NGAs,
NGAs, the
the basis
basis of
of accounting
accounting to
to be
be applied
applied by
by government
government
entities
entities is
is the
the
a.
a. Cash
Cash basis
basis
b.
b. Accrual
Accrual basis
basis
c.
c. Modified
Modified accrual
accrual basis
basis
d.
d. Any of
Any of these
these as
as a
a policy
policy choice
choice
6.
6. Government
Government resources
resources must
must be
be utilized
utilized efficiently
efficiently and
and effectively
effectively in
in accordance with the
accordance with the law.
law.
According to
According to P.D.
P.D. No.
No. 1445, who is
1445, who is directly
directly responsible
responsible in
in implementing this policy?
implementing this policy?
a.
a. All employees
All employees who who are
are entrusted with the
entrusted with the possession
possession ofof government
resources.
b.
b. The
The head
head of
of the
the government
government agency.
agency.
c.
c. The
The COA.
COA.
d.
d. All elected
All elected officials.
officials.
7.
7. The
The transfer
transfer of
of government funds from
government funds from one
one officer to another
officer to another requires
requires the
the prior
prior authorization
authorization
of
of the
the
a.
a. Commission
Commission on on Audit
Audit
b.
b. Head
Head of Agency
of Agency
c.
c. The
The President
President ofof the
the Republic
Republic of
of the
the Philippines
Philippines
d.
d. Bureau of Treasury
Bureau of Treasury
8.
8. Mr. A, a
Mr. A, a government
government employee
employee entrusted with the
entrusted with the custody
custody of of government funds, was
government funds, was
instructed
instructed by by Mr.
Mr. B,B, a
a politician to release
politician to release funds
funds forfor the
the acquisition
acquisition ofof a
a car
car asas a
a birthday
birthday gift
gift
th
for
for Mr.
Mr. B's
B's daughter
daughter who who will
will be
be having
having her
her 18
18th birthday
birthday next week. To
next week. To relieve
relieve Mr. A from
Mr. A from anyany
liability, what should
liability, what should Mr.Mr. A do?
do?
a.
a. Mr.
Mr. A A shall
shall notnot release
release the
the fund
fund but
but rather
rather notify
notify Mr.
Mr. B,
B, in writing, that
in writing, that his
his
instruction
instruction is is illegal.
illegal.
b.
b. Mr.
Mr. A A shall
shall release
release the
the fund,
fund, and
and then
then notify
notify Mr.
Mr. B,
B, in writing, that
in writing, that his
his instruction
instruction is
is illegal.
illegal.
c.
c. Mr.
Mr. A shall
shall release
release the
the fund
fund but
but retains
retains 20%
20% commission.
commission.
d.
d. Mr.
Mr. A A shall
shall release
release the
the fund
fund but
but requires
requires Mr.
Mr. BB to
to promise,
promise, in writing, that
in writing, that the
the car
car shall
shall bebe
returned to the government after his daughter's
returned to the government after his daughter's birthday. birthday.
9.
9. Mr.
Mr. C,
C, aa government
government employee
employee entrusted with the
entrusted with the custody
custody of
of government
government funds,
funds, has
has lost
lost the
the
government funds entrusted
government funds entrusted to
to him
him in
in a
a force
force majeure. What should
majeure. What should Mr.
Mr. C
C do to relieve
do to relieve him
him
from
from liability?
liability?
a.
a. Mr.
Mr. CC should
should immediately
immediately notify
notify the
the Head
Head of Agency within
of Agency within 30
30 days
days
b. Mr. C should immediately notify COA within
b. Mr. C should immediately notify COA within 30 days 30 days
c.
c. Mr.
Mr. CC should
should immediately
immediately notify
notify Bureau
Bureau ofof Treasury within 30
Treasury within 30 days
days
d.
d. Mr.
Mr. CC should
should keep the event
keep the event a
a secret
secret and wait for
and wait for next funds to
next funds to arrive
arrive
10.
10. These
These refer
refer to
to the
the attributes
attributes that
that make
make information
information useful
useful to
to users.
users.
a.
a. Usefulness
Usefulness characteristics
characteristics
b.
b. Quantitative
Quantitative characteristics
characteristics
c.
c. Qualitative
Qualitative characteristics
characteristics
d.
d. Fundamental
Fundamental principles
principles
11.
11. Information
Information loses
loses this
this qualitative
qualitative characteristic
characteristic if it is
is not
if it not reported
reported on
on a timely basis.
a timely basis.
a.
a. Relevance
Relevance
b.
b. Reliability
Reliability
c.
c. Neutrality
Neutrality
d.
d. Materiality
Materiality
12. Which of
12. Which of the following qualitative
the following qualitative characteristics
characteristics does
does an
an entity
entity most
most likely would need
likely would need to
to
make
make some
some tradeoffs?
tradeoffs?
a.
a. Faithful
Faithful Representation
Representation and and Substance
Substance Over
Over Form
Form
b.
b. Materiality
Materiality and
and Relevance
Relevance
c.
c. Relevance
Relevance and and Reliability
Reliability
d.
d. Understandability
Understandability andand Comparability
Comparability
13. An entity
13. An entity recognizes
recognizes an
an estimated
estimated loss
loss from
from the
the decline
decline in value of
in value of a
a property. Which of
property. Which of the
the
following is most likely the qualitative characteristic being applied by the entity?
following is most likely the qualitative characteristic being applied by the entity?
a.
a. Reliability
Reliability
b.
b. Substance
Substance over
over Form
Form
c.
c. Faithful
Faithful representation
representation
d.
d. Prudence
Prudence
14. Which of
the following is not
not one
one of
of the
the fund
fund clusters
clusters of
of a
a government
government entity?
entity?
a.
a. Regular Agency Fund
Regular Agency Fund
b.
b. Foreign Assisted Projects
Foreign Assisted Projects Fund
Fund
c.
c. Special Account-Locally Funded/Domestic
Special Account-Locally Funded/Domestic Grants
Grants Fund
Fund
d.
d. Business
Business Related
Related Funds
Funds
e.
e. Petty
Petty Cash
Cash Fund
Fund
15.
15. To
To achieve
achieve a a proper
proper balance
balance between
between relevance
relevance and
and reliability,
reliability, the
the overriding
overriding consideration
consideration
is
is
a.
a. how
how users’
users' needs
needs are
are best
best satisfied.
satisfied.
b.
b. relevance
relevance is is always
always more
more important that reliability.
important that reliability.
c.
c. reliability
reliability is
is always
always more
more important than relevance.
important than relevance.
d.
d. greater weight shall
greater weight shall be
be given
given to
to relevance
relevance compared
compared to to reliability.
reliability.
PROBLEM 1-3:1-3: FOR
FOR CLASSROOM DISCUSSION
DISCUSSION
1.
1. How
How does
does government
accounting differ from the
differ from the accounting
accounting for for business
business entities?
entities?
a.
a. Government accounting places more emphasis on profit-making.
Government accounting places more emphasis on profit-making.
b.
b. Government
Government accounting
accounting is very complex
is very complex that
that only
only highly
highly intellectual
intellectual individuals
individuals can
can
understand
understand it. it.
c.
c. Government
Government accounting
accounting places
places greater
greater emphasis
emphasis on on sources
sources andand utilization
utilization of
of
funds
funds inin accordance with the
accordance with the law
law and
and management’s
management's stewardship
stewardship over
over
government
government resources
resources entrusted
entrusted to the entity.
to the entity.
d.
d. Government
Government accounting is specialized in nature that
accounting is specialized in nature that the
the principles
principles applicable to business
applicable to business
entities
entities are
are never
never applicable
applicable to
to government
government entities.
entities.
2.
2. Which of
not a
a source
source of
of revenue
revenue for
for the
the government?
government?
a.
a. Taxes
Taxes
b.
b. Fees
Fees collected
collected by
by government
government agencies
agencies
c.
c. Grants
Grants and donations from
and donations from other
other governments
governments
d.
d. Contract
Contract price
price on
on government
government contracts
contracts awarded
awarded to to private
private companies.
companies.
3.
3. Entity A (a
Entity A (a government
government agency)
agency) is
is entrusted with government
entrusted with government resources. According to
resources. According to P.D.
P.D.
1445, who is
1445, who is directly
directly responsible
responsible for the efficient
for the efficient and
and effective
effective utilization
utilization of
of these
these resources?
resources?
a.
a. The
The government
government employees who have
employees who have custody
custody over the resources.
over the resources.
b.
b. The
The Head
Head ofof Entity
Entity A.A.
c.
c. The
The COA
COA staff
staff stationed
stationed in
in Entity A.
Entity A.
d.
d. The
The Foot
Foot of
of Entity A.
Entity A.
4. which of
4. which of the
the following
following is
is not
not charged with government
charged with government accounting
accounting responsibility
responsibility under the
under the
GAM for
for NGAs?
NGAs?
a.
a. COA
b.
b. DBM
DBM
c.
c. NGAs
NGAs
d.
d. House
House of of Representatives
Representatives
5.
5. The
The Department
Department ofof Budget
Budget and
and Management
Management (DBM)(DBM) is
is responsible
responsible for
for
a. promulgating accounting and auditing rules and regulations.
a. promulgating accounting and auditing rules and regulations.
b.
b. the
the formulation
formulation and
and implementations
implementations of of the
the national
national budget with the
budget with the goal
goal of
of
attaining
attaining the
the nation’s
nation's socio-economic
socio-economic objectives.
objectives.
c.
c. receiving
receiving and
and keeping
keeping national funds and
national funds and managing
managing and
and controlling the disbursements
controlling the disbursements
thereof.
thereof.
d.
d. directly
directly implementing
implementing the
the projects
projects of
of the
the government.
government.
6.
6. Which of
not one
one of
of the
the objectives
objectives of
of the
the GAM forfor NGAs?
NGAs?
a.
a. to
to harmonize
harmonize government
accounting standards with international
standards with international standards.
standards.
b.
b. to
to update
update the
the coding
coding structure
structure and
and accounts.
accounts.
c.
c. to
to update
update accounting
accounting books,
books, registries,
registries, records,
records, forms,
forms, reports
reports and
and financial
financial statements.
statements.
d.
d. to
to update
update government
accounting standards
standards to to be
be consistent with the
consistent with the provisions
provisions
of
of U.S.
U.S. GAAP.
GAAP.
7. All of
7. All the following
of the following are
are requirements
requirements peculiar
peculiar to
to a
a government
government entity. Which is
entity. Which is not?
not?
a.
a. Presenting
Presenting budget
budget information
information in the financial
in the financial statements.
statements.
b.
b. Fund
Fund cluster
cluster accounting.
accounting.
c.
c. Incorporating
Incorporating budgetary
budgetary controls
controls inin the
the financial
financial reporting
reporting system.
system.
d.
d. Accrual basis
Accrual basis of
of accounting.
accounting.
8.
8. Which of
Which of the following qualitative
the following qualitative characteristics
characteristics is
is improved when information
improved when information is
is reported
reported on
on
a timely basis?
a timely basis?
a.
a. Relevance
Relevance
b.
b. Reliability
Reliability
c.
c. Understandability
Understandability
d.
d. a
a and
and b b
9.
9. The
The best
best estimate for a
estimate for a loss
loss is
is P100,000.
PIOO,OOO. However, the entity
However, the entity deliberately
deliberately overstated the
overstated the
loss to P200,000. Which of the following qualitative characteristics is violated?
loss to P200,000. Which of the following qualitative characteristics is violated?
a.
a. Prudence
Prudence
b.
b. Reliability
Reliability
c.
c. a
a and
and b b
d.
d. Nothing
Nothing is violated
is violated
10. Which of
10. Which of the following financial
the following financial statements
statements is
is peculiar
peculiar to
to a
a government
government entity?
entity?
a.
a. Balance
Balance Sheet
Sheet
b.
b. Statement
Statement ofof Cash
Cash Flows
Flows
c.
c. Statement
Statement of of Comparison
Comparison of of Budget
Budget and
and Actual
Actual Amounts
Amounts
d.
d. Statement
Statement ofof Changes
Changes inin Equity
Equity
CHAPTER 2
2
PROBLEM 1-1:
1-1: TRUE
TRUE OR FALSE FALSE
False
False 1.
1. The
The budget
budget preparation
preparation in the Philippines
in the Philippines uses
uses a a “bottom-up”
"bottom-up" approach.
approach. UnderUnder
this
this approach,
approach, the the budget
budget preparation
preparation starts from the
starts from the highest
highest levels
levels of
of the
the
government
overnment downdown to to the
the lowest
lowest levels.
levels.
False
False 2. An entity
2. An entity prepares
prepares its its budget
budget by by simply
simply rolling-over
rolling-over the
the budget
budget in the previous
in the previous
year and
year and adjusting
adjusting each
each line
line item
item byby 10%
10% increment
increment to to reflect
reflect inflation.
inflation. This
This
process is described as zero-based
rocess is described as zero-based bud etin budgeting.
False
False 3. After the
3. After the budget
budget call from the
call from the DBM,
DBM, the
the proposed
proposed budget
budget of various agencies
of various agencies
are
are submitted
submitted to to the
the Office
Office of of the
the President
President for
for review.
review.
False
False 4. An entity
4. An entity can
can incur
incur obligations
obligations afterafter receiving
receiving notice
notice of
of its
its appropriation
appropriation but but
before
before receiving
receivin the the allotment.
allotment.
False
False 5.
5. Budget
Budget deliberations
deliberations in in the
the Congress
Congress startstart in
in the
the House
House of of Senate.
Senate.
True
True 6.
6. A government
government entity
entity must
must first
first receive
receive anan allotment
allotment before
before it can
it can incur
incur
obligations.
obli ations.
False
False 7.
7. A government
government entity
entity can
can make
make disbursements
disbursements even even before
before it receives
it receives a a
disbursement
disbursement authority.
authori
False
False 8.
8. AAppropriation
ro riation isis also
also called
called obligational
obli ational authority.
authori
True
True 9.
9. The
The Notice
Notice ofof Cash Allocation (NCA)
Cash Allocation (NCA) isis an
an authority
authority issued
issued by the DBM
by the DBM to to
central,
central, regional
regional andand provincial
provincial offices
offices and
and operating
operating units
units to
to cover their cash
cover their cash
requirements.
requirements.
True
True 10.
10. Responsibility
Responsibility accounting
accounting greatly
greatly enhances
enhances budget
budget accountability
accountability because
because
managers
managers are are evaluated
evaluated onlyonly in terms of
in terms the costs
of the costs or
or other variables that
other variables that they
they
control,
control, and therefore, budget
and therefore, budget deviations
deviations can
can bebe readily
readily attributed
attributed to the
to the
managers
mana ers accountable
accountable therefor.
therefor.
PROBLEM
MULTIPLE CHOICE
CHOICE
1.
1. Which of
Which of the following does
the following does not
not properly
properly described
described the
the budget
budget process
process used
used in the
in the
Philippines?
Philippines?
a.
a. Bottom-up
Bottom-up budgeting
budgeting
b.
b. Top-down
Top-down budgeting
budgeting
c.
c. Zero-based
Zero-based budgeting
budgeting
d.
d. Non-incremental
Non-incremental budgeting
budgeting
2.
2. Arrange the
Arrange the following
following steps
steps according
according toto the
the sequence
sequence that
that they
they appear
appear in the budget
in the budget cycle.
cycle.
I. l. Allotment
Allotment
II. Bicameral
Bicameral Deliberations
Deliberations
III. Budget Accountability Reports
Budget Accountability Reports
IV.
IV. President’s
President's enactment
enactment of the GAA
of the GAA
V.
V. Budget
Budget hearings with the
hearings with the DBM
DBM
a.
a. V, IV,
V, IV, II, I and
and III
II, I Ill
b. V, II, IV,
b. V, IV, I and
II, and III I Ill
c.
c. II, V,
V, II, I and
II, and III
II, I Ill
d.
d. V, I, II, IV and
V, l, and III
II, Ill
3. Arrange the
3. Arrange the following
following steps
steps according to the
according to the sequence
sequence that
that they
they appear
appear in the budget
in the budget cycle.
cycle.
I. Allotment
Allotment
II. II. Disbursement Authority
Disbursement Authority
III. Ill. Disbursement
Disbursement
IV.
IV. Appropriation
Appropriation
V.
V. Incurrence
Incurrence ofof obligation
obligation
a.
a. IV,
1\/, I, II, V
l,V and
and III
II, Ill
b.
b. IV,
IV, I v,
V, III and
I and IIIll II
c.
c. IV,
IV, I, V,
V,l,II and
and IIIII Ill
d.
d. IV, V, I, II and
1\/, V, and III
l, II Ill
4.
4. This
This type
type of
of budget
budget is
is prepared
prepared in
in such
such a way that
a way that estimated
estimated revenues
revenues exceed
exceed estimated
estimated
expenditures.
expenditures.
a.
a. Balance
Balance budget
budget
b.
b. Excess budget
Excess budget
c.
c. Obligations
Obligations budget
budget
d.
d. Budget
Budget meal
meal
5.
5. This
This summarized
summarized an an agency’s
agency's fiscal year plans
fiscal year plans and
and performance
performance targets.
targets. It shows
shows the
It the
agency’s physical and financial plan, monthly cash program, estimate of monthly
agency's physical and financial plan, monthly cash program, estimate of monthly income, income,
and
and list
list of
of obligations
obligations that
that are
are not year due
not year due and
and demandable.
demandable.
a.
a. Budget
Budget Execution
Execution Documents
Documents (BEDs)
(BEDs)
b.
b. Special Allotment Release
Special Allotment Release Order
Order
c.
c. Statement
Statement of Approved Budget,
of Approved Budget, Utilizations,
Utilizations, Disbursements
Disbursements and
and Balances
Balances
d.
d. Aging of
Aging of Due
Due and
and Demandable
Demandable Obligations
Obligations
6.
6. It is
Itis an
an authorization
authorization issued
issued by
by the
the DBM
DBM to
to NGAs to incur
NGAs to incur obligations.
obligations. It is
is also
also referred
It to as
referred to as
Obligational Authority.
a.
a. Appropriation
Appropriation
b.
b. Allotment
Allotment
c.
c. Budget
Budget call
call
d.
d. Budget hearings
Budget hearings
7.
7. ItIt refers
refers to
to the
the amount
amount contracted
contracted by
by a
a duly
duly authorized
authorized administrative
administrative officer for which
officer for which the
the
government
government is is held
held liable.
liable.
a.
a. Appropriation
Appropriation
b.
b. Allotment
Allotment
c.
c. Obligation
Obligation
d.
d. Disbursement
Disbursement
8.
8. Which of
Which of the following best
the following best describes
describes the
the Notice
Notice of
of Cash Allocation (NCA)?
Cash Allocation (NCA)?
a.
a. It is
Itis aa form
form of
of legislative
legislative authorization
authorization in
in the
the allocation
allocation of
of funds
funds for
for specified
specified purposes.
purposes.
b.
b. It is
Itis aa form
form of
of authorization
authorization to
to a
a government
government agency
agency to to incur
incur obligations
obligations onon behalf
behalf of the
of the
government.
government.
c.
c. It
It is is a form of
a form of authorization
authorization toto a
a government
government agency
agency to to make
make disbursements
disbursements out out of
of
government
government funds. funds.
d.
d. ItIt is
is aa notice
notice received
received from the Congress
from the Congress that
that cash
cash is
is allocated for the
allocated for the payment
payment of
of
planned
planned expenditures.
expenditures.
9.
9. Disbursements
Disbursements by
by government
government entities
entities are
are most
most commonly
commonly made through
made through
a.
a. MDS Checks
Checks
b.
b. Cash
Cash
c.
c. Petty
Petty Cash
Cash Fund
Fund
d.
d. Credit
Credit Card
Card
10.
10. Responsibility
Responsibility accounting
accounting requires
requires all
all of the following
of the following except
except
a.
a. separate
separate books
books ofof accounts
accounts toto segregate
segregate controllable
controllable and
and non-controllable
non-controllable costs
costs
b.
b. identification of responsibility centers
identification of responsibility centers
c.
c. distinction
distinction between
between controllable
controllable and
costs
d.
d. coding
coding structure
structure for
for responsibility
responsibility centers
centers
PROBLEM 2-3: 2-3: MULTIPLE

MULTIPLE CHOICE
CHOICE
Fact pattern:
Fact pattern:
A legislation
A legislation approves
approves thethe allocation
allocation ofof P100B
PIOOB funds
funds toto support
support thethe operations
operations ofof Entity
Entity AA (a
(a
government
government agency)
agency) in the current
in the year. At
current year. At the
the start
start of
of first
first quarter,
quarter, Entity A receives
Entity A receives
authorization
authorization toto incur
incur obligations
obligations for
for aa maximum
maximum amount
amount of of P45B
P45B inin that
that quarter.
quarter. Entity A
Entity A
extends
extends half
half of
of that
that authorization
authorization toto its
its lower
lower operating
operating units.
units. During
During the
the quarter,
quarter, Entity
Entity AA
receives
receives monthly
monthly authorization
authorization to
to disburse funds not
disburse funds not to
to exceed
exceed P15B
P15B per
per month.
month. Entity
Entity A
extends
extends half
half of
of those
those monthly
monthly authorizations
authorizations to to its
its lower
lower operating
operating units. At the
units. At the end
end ofof the
the
quarter,
quarter, total
total obligations
obligations incurred
incurred amounted
amounted to to P40B while total
P40B while total disbursements
disbursements amounted
amounted to to
P35B.
P35B.
1.
1. The
The allocation
allocation of
of the
the P100B funds to
PIOOB funds to Entity A is
Entity A is referred to as
referred to as
a.
a. Allotment
Allotment
b.
b. Appropriation
Appropriation
c.
c. Obligation
Obligation
d.
d. Sub-allotment
Sub-allotment
2.
2. The
The allocation
allocation of
of the
the P100B funds to
PIOOB funds to Entity
Entity A is
is authorized
authorized by
by
a.
a. Department of Budget and Management
Department of Budget and Management (DBM) (DBM)
b.
b. Commission
Commission on Audit (COA)
on Audit (COA)
c.
c. Bureau of Treasury (BTr)
Bureau of Treasury (BTr)
d.
d. Congress
Congress
3.
3. The
The P45B
P45B authorization
authorization is
is referred
referred to
to as
as
a.
a. Allotment
Allotment
b.
b. Appropriation
Appropriation
c.
c. Obligation
Obligation
d.
d. Sub-allotment
Sub-allotment
4.
4. The
The P45B
P45B authorization
authorization is
is received
received by
by Entity A from
Entity A from
a.
a. DBM
b.
b. COA
c.
c. BTr
BTr
d.
d. Congress
Congress
5.
5. The
The half
half of
of the
the P45B
P45B authorization
authorization extended
extended by
by Entity A (Central
Entity A (Central Office)
Office) to
to its
its lower
lower
operating
operating units
units is
is referred
referred to
to as
as
a.
a. Allotment
Allotment
b.
b. Appropriation
Appropriation
c.
c. Obligation
Obligation
d.
d. Sub-allotment
Sub-allotment
6.
6. Which of
Which of the following best
the following best describes
describes the
the P15B
P15B monthly
monthly authorizations?
authorizations?
a.
a. Allotment
Allotment
b.
b. Obligation
Obligation authority
authority (e.g.,
(e.g., Notice
Notice ofof Cash Allocation ‘NCA’)
Cash Allocation 'NCA')
c.
c. Disbursement
Disbursement authority
authority (e.g.,
(e.g., Notice
Notice of
of Cash Allocation ‘NCA’)
Cash Allocation 'NCA')
d.
d. Disbursement
authority (e.g.,
(e.g., Notice
Notice of
of Transfer
Transfer of Allocation ‘NTA’)
of Allocation 'NTA')
7.
7. The
The P15B
P15B monthly
authorizations are
are received
received by
by Entity A from
Entity A from
a.
a. DBM
b.
b. COA
c.
c. BTr
BTr
d.
d. Congress
Congress
8.
8. The
The half
half of
of the
the P15B
P15B monthly
authorizations extended
extended by
by Entity A (Central
Entity A (Central Office)
Office) to
to its
its lower
lower
operating
operating units
units is
is referred
referred to
to as
as
a.
a. Cash
Cash Disbursement
Disbursement Ceiling
Ceiling
b.
b. Non-Cash Availment Authority
Non-Cash Availment Authority
c.
c. Notice
Notice ofof Cash Allocation (NCA)
Cash Allocation (NCA)
d.
d. Notice
Notice of of Transfer
Transfer of
of Allocation
Allocation (NTA)
(NTA)
9.
9. In
In Entity A’s first
Entity A's first quarter
quarter Statement
Statement of Appropriations, Allotments,
of Appropriations, Allotments, Obligations,
Obligations,
Disbursements
Disbursements and Balances, how much is shown as “unreleased
and Balances, how much is shown as "unreleased appropriations?”
appropriations?"
a.
a. P65B
P65B
b.
b. P60B
P60B
c.
c. P55B
P55B
d.
d. P45B
P45B
10.
10. In
quarter Statement
Obligations,
Disbursements
Disbursements and and Balances,
Balances, how
how much
much isis shown
shown as
as “unobligated
"unobligated allotments?”
allotments?"
a.
a. P6B
P6B
b.
b. P5B
P5B
c.
c. P10B
PIOB
d.
d. P15B
P15B
11.
11. In
quarter Statement
Obligations,
Disbursements
Disbursements and and Balances,
Balances, how
how much
much isis shown
shown as
as “unpaid
"unpaid obligations?”
obligations?"
a. P6B
P6B
b.
b. P5B
P5B
c.
c. P10B
PIOB
d.
d. P15B
P15B
DISCUSSION
1.
1. All disbursements
All disbursements ofof government
government entities
entities must
must be
be in
in conformance with the
conformance with the law
law and the
and the
a. National budget
a. National budget
b.
b. COA
COA audit findings
audit findings
c.
c. PPSASs
PPSASs
d.
d. PFRSs
PFRSs
2.
2. An entity
An entity prepares
prepares its
its budget
budget for the upcoming
for the year from
upcoming year from scratch.
scratch. It
It scrutinizes
scrutinizes each
each item
item in
in
the budget irrespective of whether the item was included in the previous budget.
the budget irrespective of whether the item was included in the previous budget. This This
process
process isis called
called
a.
a. zero
zero budgeting
budgeting
b.
b. incremental
incremental budgeting
budgeting
c.
c. scratch
scratch budgeting
budgeting
d.
d. zero-based
zero-based budgeting
budgeting
3.
3. Under
Under this
this approach
approach to
to budgeting,
budgeting, several
several parties
parties participate
participate in the budget
in the budget preparation
preparation —–
from
from the
the lowest
lowest levels
levels of
of government
government to to the
the highest
highest levels,
levels, and
and sometimes
sometimes even
even citizen-
citizen-
stakeholders
stakeholders participate
participate in
in the
the budget
budget preparation.
preparation.
a.
a. bottoms-up
bottoms-up budgeting
budgeting
b.
b. zero-based
zero-based budgeting
budgeting
c.
c. top-down budgeting
top-down budgeting
d.
d. bottom-up
bottom-up budgeting
budgeting
4. What is
4. What is the
the correct
correct sequence
sequence of the following
of the following steps
steps in
in the
the budget
budget process?
process?
I. Budget Legislation
Budget Legislation
II. Budget Accountability
Budget Accountability
III. Budget
Budget Preparation
Preparation
IV.
IV. Budget
Budget Execution
Execution
a.
a. II, III, I and
II and IV
Ill, IVI
b.
b. III,
Ill, I, IV
IV and
and II
l, II
c.
c. III, I, II and
Ill and IV
l, IV
II
d.
d. III, IV,
IV, I and
Ill, and II I II
5.
5. After deliberation
After deliberation inin both
both houses
houses in the Congress
in the Congress are
are finished,
finished, a
a committee
committee is
is formed
formed to
to
harmonize
harmonize any
any conflicts
conflicts between the Representatives
between the Representatives and
and Senate versions of
Senate versions of the
the General
General
Appropriations Bill.
Appropriations Bill. This
This committee
committee is
is called the
called the
a.
a. Adjudication Conference
Adjudication Conference Committee
Committee
b.
b. Bicaramel
Bicaramel Conference
Conference Committee
Committee
c.
c. Referee
Referee Conference
Committee
d.
d. Bicameral
Bicameral Conference
Committee
6.
6. It is
It the authorization
is the authorization made
made byby aa legislative
legislative body to allocate
body to allocate funds
funds for
for purposes
purposes specified
specified by
by
the
the legislative
legislative or
or similar
similar authority.
authority.
a.
a. Appropriation
Appropriation
b.
b. Allotment
Allotment
c.
c. Obligation
Obligation
d.
d. Disbursement
Disbursement
7.
7. These
These are
are the
the authorizations
authorizations programmed
programmed annually
annually or for some
or for some other
other period
period prescribed
prescribed by
by
law, by virtue of outstanding legislation which does not require periodic action by Congress.
law, by virtue of outstanding legislation which does not require periodic action by Congress.
a.
a. Automatic
Automatic Appropriations
Appropriations
b.
b. New
New General Appropriations
General Appropriations
c.
c. Continuing Appropriations
Continuing Appropriations
d.
d. Supplemental Appropriations
Supplemental Appropriations
8.
8. Entity A, a
Entity A, a government
government entity, wants to
entity, wants to make
make disbursements. Arrange the
disbursements. Arrange the following
following events
events in
in
the correct sequence before Entity A can make valid disbursements.
the correct sequence before Entity A can make valid disbursements.
I. Allotment
Allotment
II. Disbursement Authority
Disbursement Authority
III. Appropriation
Appropriation
IV. Incurrence
Incurrence of
of obligation
obligation
a.
a. II, III, I, and
II Ill,and IV
IV
l,
b.
b. III,
Ill, I, IV,
IV, and
l, and II II
c.
c. III, I, II, and
Ill l, and IV
IV
II,
d.
d. III, IV,
Ill,IV, I, and
and II
l, II
9.
9. This
This is
is necessary
necessary before
before government
government entities
entities can
can enter
enter into
into contracts
contracts that
that bind
bind the
the
government
government forfor the
the eventual
eventual disbursement
disbursement of
of government
government funds.
funds.
a.
a. Disbursement
authority
b.
b. Notice
Notice of
of cash
cash allocation
allocation
c.
c. Allotment
Allotment
d.
d. Incurrence
Incurrence ofof obligation
obligation
10.
10. Under
Under responsibility
responsibility accounting,
accounting, aa manager’s
manager's performance
performance isis evaluated
evaluated
a.
a. based
based onon all
all resources
resources under
under his
his custody.
custody.
b.
b. only
only in terms of
in terms the costs,
of the costs, or
or other
other variables,
variables, that
that he
he controls.
controls.
c.
c. on
on the
the basis
basis of
of both
both controllable
controllable and
non-controllable costs.
costs.
d.
d. only
only at year-end.
at year-end.
CHAPTER
CHAPTER 33
PROBLEM 3-1:
3-1: TRUE
TRUE OR FALSE FALSE
True
True 1.
1. Technically,
Technically, only the Journals
only the Journals andand Ledgers
Ledgers are are considered
considered accounting
accounting records;
records;
the
the Registries
Re istries are are budget
bud et records.
records.
True
True 2.
2. Separate
Separate accounting
accounting records
records andand budget
budget registries
registries are
are maintained
maintained for for each
each
fund
fund cluster.
cluster.
False
False 3.
3. Government
Government entitiesentities and
and business
business entities
entities use the term
use the term "obligation"
"obligation" or or the
the
phrase
hrase "incurrence
"incurrence of of obligation"
obli ation" similarly.
similarl .
True
True 4.
4. The various registries
The various registries maintained
maintained by by government
government entities
entities primarily
primarily serve
serve asas
internal
internal control
control forfor controlling
controlling andand monitoring
monitoring the the conformance
conformance of of actual
actual results
results
with the
with the approved
approved budget.budget.
True
True 5.
5. A check
check disbursement
disbursement is is normally
normally recorded
recorded as as credit
credit to the "Cash-Modified
to the "Cash-Modified
Disbursement
Disbursement System System (MDS)(MDS) Regular"
Regular" account.
account.
True
True 6.
6. Both
Both the
the ORS
ORS and and RAOD
RAOD are are updated
updated each time an
each time an obligation
obligation is is incurred,
incurred, a a
payable
payable is is recorded
recorded for for the
the obligation
obligation incurred,
incurred, and
and disbursements
disbursements are are made
made to to
settle the recorded
settle the recorded payables.
a ables.
True
True 7. At the
7. At the end
end of of each year, an
each year, an adjustment
adjustment is is made
made to to revert
revert any
any unused
unused NCA NCA of of a
a
government
overnment entity.
enti
False
False 8.
8. The
The GAM
GAM for for NGAs
NGAs requires
requires thethe Collecting
Collecting Officer to issue
Officer to issue anan official
official receipt
receipt toto
acknowledge
acknowled e the the receipt
recei t of of the
the Notice
Notice ofof Cash Allocation.
Cash Allocation.
True
True 9.
9. The
The entry
entry toto record
record thethe reversion
reversion ofof unused
unused NCA NCA at at the
the end
end ofof the
the period
period isis the
the
exact
exacto opposite
osite ofof the
the entry
ent usedused to
to record
record thethe receipt
recei t ofof NCA.
NCA.
False
False 10.
10. The
The remittance
remittance of of amounts withheld to
amounts withheld to other
other government
government agencies,
agencies, suchsuch as
as the
the
BIR,
BIR, BOC,
BOC, GSIS,
GSIS, PhilHealth,
PhilHealth, and and Pag-IBIG,
Pa -IBIG, is is done
done through
throu h thethe TRA.
TRA.
PROBLEM
PROBLEM 3-2:
3-2: MULTIPLE
MULTIPLE CHOICE
CHOICE
1.
1. The various registries
The various registries maintained
maintained by
by government
government entities
entities are
are considered,
considered, technically,
technically, as
as
a.
a. Book
Book of Accounts
of Accounts
b.
b. Budget
Budget Records
Records
c.
c. General
General Ledgers
Ledgers
d.
d. Log
Log books
books
2.
2. Which of
the following is recorded
recorded in
in the
the Obligation
Obligation Request
Request and
and Status
Status (ORS)?
(ORS)?
a.
a. Receipt
Receipt of
of notice
notice of
of appropriation
appropriation
b.
b. Receipt
Receipt of
of allotment from DBM
allotment from DBM
c.
c. Receipt
Receipt of
of Notice
Notice of
of Cash Allocation from
Cash Allocation the DBM
from the DBM
d. Entering into employment contracts with
d. Entering into employment contracts with employeesemployees
3.
3. This
This type
type of
of expenditure
expenditure pertains to all
pertains to types of
all types of employee
employee benefits.
benefits.
a.
a. Personal
Personal Services
Services (PS)
(PS)
b.
b. Maintenance
Maintenance and
and Other
Other Operating
Operating Expenses
Expenses (MOOE)
(MOOE)
c.
c. Financial Expenses (FE)
Financial Expenses (FE)
d.
d. Capital
Capital Outlays
Outlays (CO)
(CO)
4.
4. Entity A, a
government entity,
entity, made
made disbursements
disbursements forfor the travelling expenses
the travelling expenses of
of its
its
personnel.
personnel. These
These expenditures
expenditures are
are most
most likely
likely classified
classified as
as
a.
a. Personal
Personal Services
Services (PS)
(PS)
b.
b. Maintenance
Maintenance andand Other
Other Operating
Operating Expenses
Expenses (MOOE)
(MOOE)
c.
c. Financial
Financial Expenses
Expenses (FE)
(FE)
d.
d. Capital
Capital Outlays
Outlays (CO)
(CO)
5.
5. Which of
the following is charged with the
charged with the responsibility
responsibility of
of keeping the general
keeping the general accounts
accounts and
and
related documents of the government
related documents of the government
a.
a. Commission
Commission on on Audit
Audit (COA)
(COA)
b.
b. Bureau
Bureau ofof Treasury
Treasury (BTr)
(BTr)
c.
c. National
National Government Agencies (NGAs)
Government Agencies (NGAs)
d.
d. Department
Department of of Budget
Budget and
and Management
Management (DBM)
(DBM)
6.
6. A journal
A journal entry with a
entry with a credit
credit to
to the
the "Cash-Modified
"Cash-Modified Disbursement
Disbursement System,
System, Regular"
Regular" account
account
will most
will most likely
likely be
be recorded
recorded inin the
the
a.
a. General Journal
General Journal
b.
b. Special Journal
Special Journal
c.
c. Cash
Cash Disbursements Journal
Disbursements Journal
d.
d. Check
Check Disbursements
Journal
7.
7. Which of
Which of the following accounts
the following accounts is
is debited when a
debited when a government
government entity
entity remits
remits its
its collections
collections to
to
the
the National
National Treasury?
Treasury?
a.
a. Cash-Tax
Cash-Tax Remittance Advice
Remittance Advice
b.
b. Cash-Modified
Cash-Modified Disbursement
Disbursement System
System (MDS),
(MDS), Regular
Regular
c. Cash-Treasury/Agency Deposit,
c. Cash-Treasury/Agency Deposit, Regular Regular
d.
d. Cash
Cash —– Collecting
Collecting Officer
Officer
8.
8. Which of
is credited when a
credited when a government
government entity
entity remits taxes withheld
remits taxes withheld
to
to the
the BIR?
BIR?
a.
a. Cash-Tax
Cash-Tax Remittance
Remittance Advice
Advice
b.
b. Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular
c.
c. Cash-Treasury/Agency Deposit, Regular
Cash-Treasury/Agency Deposit, Regular
d.
d. Cash
Collecting Officer
Officer
9.
9. Which of
is credited when a
credited when a government
government entity
entity remits
remits contributions
contributions to
to
the
the GSIS,
GSIS, PhilHealth
PhilHealth and
and Pag-IBIG?
Pag-lBlG?
a.
a. Cash-Tax
Remittance Advice
b.
b. Cash-Modified Disbursement System
Cash-Modified Disbursement System (MDS),
(MDS), Regular
Regular
c.
d.
d. Cash
Collecting Officer
Officer
10.
10. Obligations
Obligations recorded
recorded in the registries
in the registries but
but not yet in
not yet the accounting
in the accounting books
books are
are referred to as
referred to as
a.
a. Not Yet Due
Not Yet Due and
and Demandable
Demandable
b.
b. Contingent
Contingent liabilities
liabilities
c.
c. Erroneous recording
Erroneous recording
d.
d. Unpaid
Unpaid obligations
obligations
PROBLEM 3-3:
3-3: MULTIPLE
MULTIPLE CHOICE
CHOICE
1.
1. The
The receipt of an appropriation is
receipt of an appropriation is recorded
recorded by
by a
a government
government entity
entity in the
in the
a.
a. RAOD
b.
b. ORS
c.
c. RAPAL
RAPAL
d.
d. a
a and
and cc
2.
2. The
The incurrence
incurrence of
of an
an obligation
obligation for future delivery
for future delivery of
of performance
performance by the obligee
by the obligee is
is recorded
recorded
by
by a
a government
government entity
entity in the
in the
a.
a. RAOD
b.
b. ORS
c.
c. RAPAL
RAPAL
d.
d. a
a and
and b
b
3.
3. The
The receipt
receipt of
of an
an appropriation
appropriation is
is recorded
recorded by
by a
a government
government entity
entity in the
in the
a.
a. RAOD
b.
b. ORS
c.
c. RAPAL
RAPAL
d.
d. a
a and
and bb
4.
4. The
The entry
entry to
to record the receipt
record the receipt of
of Notice
Notice of
of Cash Allocation (NCA)
Cash Allocation (NCA) by
by a
a government
government entity
entity is:
is:
a.
a. (Debit) Cash-Modified Disbursement System (MDS), Regular; (Credit)
(Debit) Cash-Modified Disbursement System (MDS), Regular; (Credit) Accumulated Accumulated
Surplus
Surplus (Deficit)
(Deficit)
b.
b. (Debit)
(Debit) Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular;
Regular; (Credit)
(Credit) Subsidy
Subsidy
form
form National
National Government
Government
c.
c. (Debit)
(Debit) Cash-Collecting
Cash-Collecting Officer;
Officer; (Credit)
(Credit) Subsidy
Subsidy from
from National
National Government
Government
d.
d. No journal entry. The event is recorded only in the Registries.
No journal entry. The event is recorded only in the Registries.
5.
5. According to
According the Revised
to the Revised Chart
Chart of Accounts (RCA)
of Accounts (RCA) issued
issued by
by the
the COA,
COA, the
the “Subsidy
"Subsidy from
from
National Government” account is
National Government" account is a(an)a(an)
a.
a. Asset account
Asset account
b.
b. Liability
Liability account
account
c.
c. Revenue
Revenue account
account
d.
d. Equity
Equity account
account
6.
6. Which of
not one
one of
of the
the necessary
necessary closing
closing entries
entries of
of a
a government
government entity?
entity?
a.
a. Closing
Closing of the “Cash-Treasury/Agency
of the "Cash-Treasury/Agency Deposit,
Deposit, Regular”
Regular" account
account to the “Accumulated
to the "Accumulated
Surplus/(Deficit)”
Surplus/(Deficit)" account.
account.
b.
b. Closing
Closing of the “Subsidy
of the "Subsidy from
from National
National Government”
Government" account
account to
to the
the “Revenue
"Revenue and
and
Expense Summary” account.
Expense Summary" account.
c.
c. Closing
Closing of
of income
income and
and expense
expense accounts
accounts to
to the
the “Revenue
"Revenue and
and Expense
Expense Summary”
Summary"
account.
account.
d.
d. Closing
Closing ofof the
the net
net balance
balance ofof “Revenue
"Revenue and
and Expense
Expense Summary”
Summary" account to the
account to the
“Subsidy
"Subsidy from
from National
Government" account.
account.
7. A government
7. A government entity
entity pays
pays an
an accounts
accounts payable.
payable. The
The entry to record
entry to record the
the payment will most
payment will most
likely
likely include
include a a
a.
a. debit
debit to the “Cash-Modified
to the "Cash-Modified Disbursement
Disbursement System
System (MDS),
(MDS), Regular”
Regular" account.
account.
b.
b. credit
credit toto the
the “Due
"Due to
to BIR”
BIR" account.
account.
c.
c. credit to the
credit to the “Cash-Treasury/Agency
"Cash-Treasury/Agency Deposit,
Deposit, Regular”
Regular" account.
account.
d.
d. None
None of of these.
these. The
The event
event is
is recorded
recorded only
only in the Registries
in the Registries and the Obligation
and the Obligation Request
Request
and
and Status.
Status.
8.
8. In
In accordance with the
accordance with the GAM for
for NGAs
NGAs and the Revised
and the Revised Chart
Chart of Accounts, how
of Accounts, how does
does a
a
government
government entity
entity recognize
recognize the
the uncollectibility
uncollectibility of
of accounts
accounts receivable?
receivable?
a.
a. By
By debiting
debiting the
the “Bad
"Bad Debts
Debts Expense”
Expense" account.
account.
b.
b. ByBy debiting the “Impairment
debiting the "Impairment Loss-Loans
Loss-Loans and and Receivables”
Receivables" account.
account.
c.
c. By
By debiting
debiting the
the “Allowance for Impairment-Accounts
"Allowance for Impairment-Accounts Receivable”
Receivable" account.
account.
d.
d. bband
and cc
9.
9. The
The “Subsidy
"Subsidy from
from National
Government" account
account is
is credited when recording
credited when recording a
a
a.
a. receipt of NCA
receipt of NCA
b.
b. reversion
reversion of
of unused
unused NCA
NCA
c.
c. constructive
constructive remittance
remittance of
of customs
customs duties
duties or
or taxes withheld through
taxes withheld through TRA
TRA
d.
d. a
a and
and cc
10.
10. Expenditures
Expenditures to
to acquire
acquire long-term
long-term assets
assets are
are most
most likely
likely classified
classified as
as
a.
a. Personal
Personal Services
Services (PS)
(PS)
b.
b. Maintenance
Maintenance and
and Other
Other Operating
Operating Expenses
Expenses (MOOE)
(MOOE)
c.
c. Financial
Financial Expenses
Expenses (FE)
(FE)
d.
d. Capital
Capital Outlays
Outlays (CO)
(CO)

MULTIPLE CHOICE
CHOICE
1.
1. This
This is
is used
used to
to recognize
recognize the
the constructive
remittance of
of taxes withheld to
taxes withheld to the
the BIR
BIR or
or
customs
customs duties withheld to
duties withheld to the
the BOC.
BOC.
a.
a. Tax
Tax Remittance
Remittance Advice
Advice (TRA)
(TRA)
b.
b. Notice
Notice of
of Tax Allocation (NTA)
Tax Allocation (NTA)
c.
c. Tax
Tax and
and Customs
Customs Remittance Advice (TCRA)
Remittance Advice (TCRA)
d.
d. Notice
Notice of
of Tax
Tax Remittance Advisory (NTRA)
Remittance Advisory (NTRA)
2. Which of
2. Which of the following does
not affect
affect the
the amount
amount of
of surplus
surplus or
or deficit that is
deficit that is reported
reported in
in the
the
statement of financial performance?
a.
a. receipt
receipt of
of NCA
NCA
b.
b. constructive
remittance of
of taxes withheld through
taxes withheld through TRA
TRA
c.
c. closing
closing of the “Cash-Treasury/Agency
of the "Cash-Treasury/Agency Deposit,
Deposit, Regular”
Regular" account
account
d.
d. adjustment
adjustment of of the
the “Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular”
Regular" account
account for the
for the
unused
unused Notice
Notice ofof Cash Allocation.
Cash Allocation.
e.
e. All of
All these affect
of these affect surplus
surplus or
or deficit.
deficit.
3.
3. Entity A received
Entity A received Notice
Notice of
Cash Allocation (NCA) amounting
amounting to to P625,000
P625,000 for the year.
for the year.
Unused
Unused NCANCA at
at the
the end
end of
of the
the period
period amount
amount to
to P6,000.
P6,000. Entity A remitted
Entity A taxes withheld
remitted taxes withheld to
to
the BIR amounting to P48,000 through Tax Remittance Advice (TRA). How much
the BIR amounting to P48,000 through Tax Remittance Advice (TRA). How much is the "Net is the “Net
Financial Assistance/Subsidy” to
Financial Assistance/Subsidy" to be
be reported
reported in
in Entity A’s statement
Entity A's statement of financial
of financial
performance?
performance?
a.
a. 667,000
667,000
b.
b. 619,000
619,000
c.
c. 571,000
571,000
d.
d. 0
Computation:
Computation:
Subsidy form NG
Subsidy form NG (NCA)
(NCA) 625,000
625,000
Subsidy from NG
Subsidy from NG (TRA)
(TRA) 48,000
48,000
Unused
Unused NCA
NCA (6,000)
(6,000)
667,000
667,000
4.
4. Entity A, a
government entity,
entity, had
had the
the following transactions during
following transactions during the
the period:
period:
 Received Notice of Cash Allocation (NCA) amounting
Received Notice of Cash Allocation (NCA) amounting to P750,000.to P750,000.
 Earned
Earned total
total revenue
revenue ofof P290,000
P290,000 from
from billings
billings and
and collections
collections of
of unbilled
unbilled income.
income.
 Incurred
Incurred total
total expenses
expenses of of P885,000.
P885,000.
 Remitted
Remitted total taxes withheld
total taxes withheld ofof P140,000
P140,000 to the BIR
to the BIR through
through Tax
Tax Remittance Advice
Remittance Advice
(TRA).
(TRA).
 The
The “Cash-Modified
Disbursement System
System (MDS),
(M DS), Regular”
Regular" has
has an
an unused
unused balance
balance of
of
P43,000
P43,000 at at the
the end
end of
of the
the period.
period.
How
How much
much is the surplus
is the surplus (deficit) for the
(deficit) for the period?
period?
a.
a. (595,000)
(595,000)
b.
b. 155,000
155,000
c.
c. 252,000
252,000
d.
d. 112,000
112,000
Computation:
Computation:
Revenue 290,000
290,000
Expenses
Expenses (885,000)
(885,000)
Surplus
Surplus (deficit) from operations
(deficit) from operations (595,000)
(595,000)
Subsidy
Subsidy from NG (NCA)
from NG (NCA) 750,000
750,000
Subsidy from NG
Subsidy from NG (TRA)
(TRA) 140,000
140,000
Unused
Unused NCA
NCA (43,000)
(43,000)
Net
Net Financial Assistance/Subsidy
Financial Assistance/Subsidy 847,000
847 ooo
Surplus
Surplus (Deficit) for the
(Deficit) for the period
period 252,000
252,000
5.
5. The
The trial
trial balances
balances of
of Entity A, a
government entity,
entity, show
show the following amounts:
the following amounts:
 Unadjusted
• Unadjusted Trial
Trial Balance
Balance — – P2,753,000
Adjusted Trial
 Adjusted
• Trial Balance
Balance - – P2,765,000
 Statement
• Statement of of Financial
Financial Position
Position (Debit
(Debit Column)
Column) — – P1,880,000
 Statement
• Statement of of Financial
Financial Performance
Performance (Credit) – P1,137,000
(Credit) —
How
How much
much is the surplus
is the surplus (deficit) for the
(deficit) for the period?
period?
a. 252,000
a. 252,000
b.
b. 885,000
885,000
c.
c. (252,000)
(252,000)
d.
d. (743,000)
(743,000)
Computation:
Computation:
Adjusted Trial
Adjusted Trial Balance
Balance (Dr.
(Dr. &
& Cr.)
Cr.) 2,765,000
Statement
Statement of Financial Position (Dr.)
of Financial Position (Dr.) (1,880,000)
Statement
Statement of
of Financial
Financial Performance
Performance (Dr.)
(Dr.) 885,000
885,000
Statement
Statement of
of Financial
Financial Position
Position (Cr.)
(Cr.) 1,137,000
1 137 ooo
Surplus
Surplus (Deficit) for the
(Deficit) for the period
period 252,000
252,000
6. Which of
6. Which of the following expenditures
the following expenditures is
is not
not shown
shown in
in the
the statement
statement ofof financial
financial performance?
performance?
a.
a. Personnel
Personnel Services
Services (PS)
(PS)
b.
b. Maintenance
Maintenance and and Other
Other Operating
Operating Expenses
Expenses (MOOE)
(MOOE)
c.
c. Capital
Capital Outlay
Outlay (CO)
(CO)
d.
d. Financial
Financial Expenses
Expenses (FE)
(FE)
e.
e. All of
All these expenditures
of these expenditures are
are shown
shown in the statement
in the statement of
of financial
financial performance.
performance.
7.
7. The
The entries
entries to
to record
record the
the constructive
remittance of taxes withheld
through Tax
Tax Remittance
Remittance
Advice include
Advice include all
all of
of the
the following,
following, except
except
a.
a. A debit to the
debit to the “Cash-Tax
"Cash-Tax Remittance Advice” account
Remittance Advice" account
b.
b. A credit
credit to the “Cash-Tax
to the "Cash-Tax Remittance Advice” account
Remittance Advice" account
c.
c. A
A debit to the
debit to the “Subsidy
"Subsidy fromfrom National
Government" account
account
d.
d. A debit to the
debit to the “Due
"Due toto BIR”
BIR" account
account
e.
e. All of
All these are
of these are included.
included.
8.
8. The
The receipt
receipt of
of Notice
Notice of
of Cash Allocation is
Cash Allocation is recorded
recorded in the
in the
a.
a. Books
Books of
of accounts
accounts (Journal
(Journal and
and Ledger)
Ledger)
b.
b. Registry
Registry of Allotments and
of Allotments and Notice
Notice of
of Cash Allocation (RANCA)
Cash Allocation (RANCA)
c.
c. a
a and
and bb
d.
d. None
None of
of these
these
9. Which of
not one
one of
of the
the special journals prescribed
special journals prescribed by
by the
the GAM for NGAs?
GAM for NGAs?
a.
a. Sales
Sales Journal
Journal c.
c. Check
Check Disbursements
Journal
b.
b. Cash
Cash Disbursements Journal
Disbursements Journal d.
d. Cash
Cash Receipts
Receipts Journal
Journal
10.
10. The
The 8-digit
8-digit Revised
Revised Chart
Chart of Accounts (RCA)
of Accounts (RCA) Code
Code for
for expenses
expenses starts with number
starts with number
a. 1 c. 5
b. 2 d.
d. None
None of
of these
these
CHAPTER 4
4
PROBLEM 4-1:
4-1: TRUE
TRUE OR FALSE FALSE
False
False 1.
1. All revenues
All revenues shall
shall be
be remitted
remitted toto the
the BTr
BTr and
and included
included inin the
the Special
Special Fund,
Fund,
unless
unless another
another law
lawsspecifically
ecificall requires
re uires otherwise.
otherwise.
False
False 2.
2. Payments
Pa ments to to government
overnment entities
entities in the form
in the form of
of checks
checks are
are not
not allowed.
allowed.
False
False 3.
3. Revenues
Revenues of ofaa government
overnment entity
enti arise from exchange
arise from transactions only.
exchan e transactions onl
False
False 4. According to
4. According to the
the GAM
GAM forfor NGAs,
NGAs, revenue
revenue from
from exchange transactions are
exchange transactions are
measured
measured at at the
the amount
amount of of cash
cash received.
received.
True
True 5. When cash
5. When flows are
cash flows are deferred,
deferred, thethe fair value of
fair value of the
the consideration
consideration receivable
receivable is is
its
its present value.
resent value.
True
True 6.
6. The
The constructive
through the
the TRA
TRA gives
gives rise
rise to
to the
the
recognition
reco nition of of revenue.
revenue.
True
True 7. According to
7. According to the
the GAM
GAM forfor NGAs,
NGAs, the the receipt
receipt of
of concessionary
concessionary loansloans byby
government
overnment entities
entities may
ma giveive rise to revenue
rise to revenue recognition.
reco nition.
False
False 8.
8. The
The taxable
taxable event
event for
for income
income taxtax isis the
the passage
passage of the time
of the time period
period for which the
for which the
tax
tax is
is levied.
levied.
False
False 9.
9. Taxes
Taxes areare compulsory
compulsory payments,
payments, imposed
imposed on on persons,
persons, properties
properties oror activities,
activities,
intended
intended to to provide
provide revenue
revenue toto the
the government.
government. Taxes
Taxes include
include fees,
fees, fines
fines and
and
penalties.
enalties.
True
True 10.
10. The
The main
main source
source ofof revenue
revenue forfor the
the government
overnment is is taxes.
taxes.
PROBLEM 4-2:
4-2: MULTIPLE
MULTIPLE CHOICECHOICE
1.
1. Which of
the following is a
a non-exchange transaction?
non-exchange transaction?
a.
a. Leasing
Leasing
b.
b. Collection
Collection ofof taxes
taxes
c.
c. Rendering
Rendering ofof legal
legal services
services
d.
d. Collection
Collection of
of tuition fees
tuition fees
2.
2. Entity
Entity AA enters
enters into
into aa long-term
long-term contract
contract to
to provide
provide services.
services. The
The outcome
outcome ofof the transaction
the transaction
can
can bebe estimated
estimated reliably
reliably and the progress
and the progress onon the
the contract
contract can
can be
be measured with sufficient
measured with sufficient
reliability. According to
reliability. According to PPSAS,
PPSAS, howhow should
should the
the revenue from the
revenue from the contract
contract be
be recognize?
recognize?
a.
a. On
On a a straight
straight line
line basis
basis over
over the
the contract term.
contract term.
b.
b. ByBy reference
reference to to the
the stage
stage ofof completion
completion of the contract
of the contract atat the
the reporting
reporting date.
date.
c.
c. Full
Full recognition
recognition of of contract
contract price
price upon
upon completion
completion of of the
the contract.
contract.
d.
d. Only
Only toto the
the extent
extent of of costs
costs that
that are
are expected
expected to to be
be recovered.
recovered.
3. According to
3. According the GAM
to the GAM forfor NGAs,
NGAs, interest
interest revenue
revenue is is recognized
recognized
a.
a. on
on a time proportion
a time proportion basis
basis using
using the
the effective
effective interest
interest method.
method.
b.
b. on
on aa straight
straight line
line basis.
basis.
c.
c. in
in accordance
accordance withwith the
the substance
substance of the relevant
of the relevant loan
loan agreement.
agreement.
d.
d. when the
when the entity’s
entity's right
right to
to receive
receive payment
payment is is established.
established.
4.
4. The
The taxable
taxable event
event for value added
for value added tax
tax (VAT)
(VAT) is
is the
the
a.
a. undertaking
undertaking of of a
a taxable
taxable activity.
activity.
b.
b. earning
earning of
of taxable
taxable income.
income.
c.
c. movement
movement of of dutiable
dutiable goods
goods oror services
services across the customs
across the customs boundary.
boundary.
d.
d. any
any of
of these
these
5.
5. Which of
Which of the following would
the following would result to an
result to an increase
increase or
or decrease
decrease in the revenue
in the revenue reported
reported by
by a
a
government
government entity
entity in
in its
its statement
of financial performance?
a.
a. Impairment
Impairment loss
loss on
on anan amount
amount already
already recognized
recognized asas revenue.
revenue.
b.
b. Receipt
Receipt of
of aa pledge.
pledge.
c.
c. Receipt
Receipt of
of donation
donation in the form
in the form of
of services
services in
in kind.
kind.
d.
d. The
The repayment
repayment of of aa loan
loan payable
payable is is forgiven.
forgiven.
6.
6. A type
A type of
of fund
fund held
held by
by a
a government
government entity
entity that
that is
is designated
designated for
for special
special purposes.
purposes.
a.
a. General fund
General fund
b.
b. Special
Special fund
fund
c.
c. Trust fund
Trust fund
d.
d. Fiduciary fund
Fiduciary fund
7.
7. The
The national
national government
government receives
receives a foreign grant
a foreign grant conditioned
conditioned on on the
the construction
construction of
of a
a public
public
infrastructure. According to the GAM for NGAs, when does the national
infrastructure. According to the GAM for NGAs, when does the national government government
recognize
recognize revenue
revenue from the grant
from the grant (i.e.,
(i.e., credit
credit to the Income
to the from Grants
Income from Grants and
and Donations
Donations in in
Cash’
Cash' account)?
account)?
a.
a. Upon
Upon the
the receipt
receipt of the grant.
of the grant.
b.
b. When the
When the grant
grant becomes
becomes receivable,
receivable, provided there is
provided there is reasonable
reasonable assurance
assurance that the
that the
attached
attached condition will be
condition will be satisfied.
satisfied.
c.
c. When the the condition
condition is is met.
met.
d.
d. When the
When the related
related expenses
expenses for for which
which the
the grant
grant is
is intended
intended toto compensate
compensate are
are incurred.
incurred.
8.
8. The
The receipt
receipt of which of
of which of the
the following
following may
may not
not give
give rise
rise to
to revenue
revenue by
by a
a government
government entity?
entity?
a.
a. Notice
Notice of
of Cash Allocation
Cash Allocation
b.
b. Tax
Tax Remittance Advice
Remittance Advice
c.
c. Subsidy
Subsidy from another government
from another government entity
entity
d. Inter-agency fund transfer
9.
9. A government
A government entity
entity collects
collects fees
fees for the processing
for the processing of
of certain
certain permits.
permits. The
The processing
processing of
of a
a
permit would normally
permit would normally take
take aa few
few minutes.
minutes. The
The processing
processing fee
fee is
is collected
collected upon
upon issuance
issuance of
of
the
the permit.
permit. This
This government
government entity would normally
entity would normally recognize
recognize revenue
revenue from
from permit fees
permit fees
a.
a. on
on aa straight
straight line
line basis.
basis.
b.
b. by
by reference to the stage
reference to the stage of
of completion.
completion.
c.
c. upon
upon collection
collection of the fee.
of the fee.
d.
d. when the
when the significant
significant risks
risks and
and rewards
rewards are
are transferred
transferred to
to the
the customer.
customer.
10.
10. The
The receipt
receipt of
of a
a performance
performance bond
bond or
or a
a security
security deposit
deposit is
is credited to a
credited to a
a.
a. liability account
liability account
b.
b. revenue
revenue account
account
c.
c. cash
cash account
account
d.
d. a
a and
and cc
FOR CLASSROOM DISCUSSION DISCUSSION
1.
1. Which of
not one
one of
of the
the fundamental
fundamental principles for revenue
principles for revenue under
under P.D.
P.D. No.
No.
1445?
1445?
a.
a. All revenues
All revenues shall
shall be
be remitted
remitted to
to the
the BTr
BTr and
and included
included in
in the
the General
General Fund,
Fund, unless
unless
another law specifically allows otherwise.
another law specifically allows otherwise.
b.
b. Recording
Recording of of revenue
revenue in in other types of
other types of funds
funds (e.g.,
(e.g., Special
Special Fund)
Fund) shall
shall be
be made
made only
only
when authorized by
when authorized by law. law.
c.
c. Collections
Collections of of revenue
revenue mustmust be
be properly
properly acknowledged
acknowledged through
through pre-numbered
pre-numbered Official
Official
Receipts.
Receipts.
d.
d. All
All collections
collections of of revenue
revenue mustmust be be in
in the
the form
form of
of cash.
cash. Checks
Checks are
are not
not acceptable.
acceptable.
2.
2. Imposition
Imposition and
and collection
collection of
of tax
tax revenue
revenue is
is considered
considered
a.
a. exchange
exchange transaction
transaction
b.
b. non-exchange
non-exchange transaction
transaction
c.
c. donation
donation
d.
d. any
any of
of these
these
3. According to
to the GAM for
for NGAs,
NGAs, all
of the following criteria
criteria must
must bebe met
met before
before aa
government
government entityentity recognizes
recognizes revenue
revenue from
from sale
sale of
of goods,
goods, except
except
a.
a. Significant
Significant risksrisks and
and rewards
rewards of
of ownership
ownership of of the
the goods
goods areare transferred
transferred to to the
the buyer
buyer and
and
the
the entity
entity does
does not
not retain
retain control
control over
over those
those goods.
goods.
b.
b. ItIt is
is probable
probable that
that economic
economic benefits will flow
benefits will flow to
to the
the entity.
entity.
c.
c. The
The amounts
amounts of of revenue
revenue and
and related
related costs
costs can
can bebe measured
measured reliably.
reliably.
d. The stage of completion can be measured

d. The stage of completion can be measured reliably. reliably.
4. According to
to the GAM for
for NGAs,
NGAs, whenwhen the
the outcome
outcome of
of a
a service
service contract
contract cannot
cannot be
be
estimated
estimated reliably,
reliably, revenue
revenue isis recognized
recognized
a.
a. on a straight line basis over
on a straight line basis over the the periods the services
periods the services are
are rendered.
rendered.
b.
b. by
by reference
reference toto the
the contract’s
contract's stage
stage of
of completion
completion at
at each
each reporting
reporting date.
date.
c.
c. only to the
only to the extent
extent ofof costs
costs that
that are
are expected
expected to
to be
be recovered.
recovered.
d.
d. only
only upon
upon the
the completion
completion of of the
the contract.
contract.
5.
5. Entity
Entity A sells
sells goods with a
goods with a list
list price
price of
of P100,000,
PIOO,OOO, on
on account.
account. Credit
Credit term
term is
is 20%
20% and
and 10%.
10%.
Journal
Journal entry to recognize
entry to the revenue
recognize the revenue includes
includes all
except
a.
a. A debit
A to accounts
debit to accounts receivable for P72,000.
receivable for P72,000.
b.
b. A credit
credit to
to sales
sales revenue
revenue forfor P72,000.
P72,000.
c.
c. AA debit to sales
debit to sales discounts
discounts for for P28,000.
P28,000.
d.
d. All of
All these are
of these are included
included inin the
the entry.
entry.
6.
6. According to
According the GAM
NGAs, anan exchange
exchange of of goods
goods or
or services
services of
of similar
similar nature
nature and
and
value between entities
value between entities
a.
a. gives
gives rise to revenue
rise to revenue measured
measured at the fair
at the value of
fair value of the
the goods
goods or
or services
services received,
received,
adjusted for any
adjusted for any cash
cash paid
paid or
or received
received onon the
the exchange.
exchange.
b.
b. gives
gives rise to revenue
rise to revenue measured
measured at the fair
at the value of
fair value of the
the goods
goods or
or services
services given
given up,
up,
adjusted for any
adjusted for any cash
cash paid
paid or
or received
received onon the
the exchange.
exchange.
c.
c. a
a or
or b, whichever is
b, whichever is more
more clearly
clearly determinable.
determinable.
d.
d. does
does not
not give
give rise
rise to
to revenue.
revenue.
7.
7. Gifts,
Gifts, donations
donations and
and goods
goods in-kind with condition
in-kind with condition are
are recognized
recognized
a.
a. as
as revenue
revenue immediately
immediately upon
upon the
the receipt
receipt thereof.
thereof.
b.
b. initially
initially as
as liability
liability and
and recognized
recognized asas revenue
revenue only when the
only when the condition
condition is
is satisfied.
satisfied.
c.
c. as
as revenue
revenue measured
measured at fair value
at fair value only when actually
only when actually received.
received.
d.
d. directly in equity.
directly in equity.
8.
8. Which of
Which of the following, according
the following, according to
to GAM
GAM for
for NGAs,
NGAs, may
may never
never give
give rise
rise to
to revenue for a
revenue for a
government
government entity?
entity?
a.
a. Services
Services in-kind
in-kind
b.
b. Debt
Debt forgiveness
forgiveness
c.
c. Concessionary
Concessionary loanloan
d.
d. Grant with condition
Grant with condition
9.
9. When an
When an amount
amount already
already recognized
recognized as
as revenue
revenue become
become subsequently
subsequently uncollectible,
uncollectible, it is
is
it
a. Recognized as expense.
a. Recognized as expense.
b.
b. Recognized
Recognized as as an
an adjustment to the
adjustment to the revenue
revenue originally
originally recognized.
recognized.
c.
c. Either a or b as an accounting policy choice
Either a or b as an accounting policy choice
d.
d. Not
Not recognized
recognized
10. Which of
10. Which of the following receipts
the following receipts of
of a
a government
government entity will give
entity will give rise to revenue
rise to revenue recognition?
recognition?
a.
a. Receipt
Receipt of
of excess
excess cash
cash advance
advance
b.
b. Receipt
Receipt of
of refund
refund for
for overpayment
overpayment of
of expenses
expenses
c.
c. Receipt
Receipt of
of performance
performance bond
bond
d.
d. Receipt
Receipt ofof subsidy
subsidy from
from the
the National
National Government
Government or or other
other National
National Government
Government
Agencies
Agencies
CHAPTER
CHAPTER 55
PROBLEM 5-1:
5-1: TRUE
TRUE OR FALSE FALSE
True
True 1.
1. No
No additional cash
additional cash advance
advance shall shall be
be given
given to
to any
any official
official or
or employee
employee unless
unless
the
the previous
revious cash
cash advance
advance given iven toto him
him is
is first
first liquidated.
liuidated.
True
True 2. All disbursements
2. All disbursements requirerequire prior
prior certificates
certificates toto establish
establish their validity and
their validity and legality.
legality.
A certification
A certification for fictitious obligation
for fictitious obligation is void and
is void and results
results toto criminal
criminal liability
liability be
be
the
the certifying
certi in officials.
officials.
False
False 3.
3. Entity
Entity AA acquires
acquires equipment
equipment from from a a supplier,
supplier, on on account.
account. A A lender
lender settles the
settles the
account
account of of Entity
Entity A A by
by directly
directly paying
paying thethe supplier
supplier the the proceeds
proceeds of of a
a loan
loan
payable that is
payable that is recorded
recorded in the BTr’s
in the BTr's books.
books. This
This transaction
transaction is is call
call Cash
Cash
Disbursement
Disbursement CeilingCeilin (CDC).
CDC .
False
False 4. All disbursements
4. All disbursements shall shall be
be made through Disbursement
made through Vouchers (DVs)
Disbursement Vouchers (DVs) or or
Payroll which are approved by the Head of the
Payroll which are approved by the Head of the Requisitioning Unit.Requisitioning Unit.
False
False 5.
5. Government
Government entities
entities are
are not
not allowed
allowed by by law
law toto make
make purchases
purchases using
using credit
credit
card.
card.
False
False 6.
6. The
The Non-Cash Availment Authority
Non-Cash Availment Authority (NCAA)
(NCAA) is is aa disbursement
disbursement authority
authority issued
issued
to
to government
overnment agencies with forei
a encies with foreign n service
service posts.
osts.
False
7. According to the
the GAM for for NGAs,
NGAs, the Advice to
the Advice to Debit Account (ADA)
Debit Account (ADA) modemode of of
disbursement
disbursement can can bebe used
used only
only if the
the payee
if payee maintains
maintains an an account
account in the same
in the same
bank where the
bank where the government
overnment entity enti maintains
maintains its its account.
account.
False
False 8.
8. Disbursements
Disbursements throughthrough thethe Cash
Cash Disbursement
Disbursement CeilingCeiling (CDC)
(CDC) results
results toto the
the
recognition
reco nition of of aa loan
loan payable
a able in the books
in the books of of accounts
accounts of of the
the BTr.
BTr.
True
True 9.
9. Under
Under the Advice to
the Advice to Debit Account (ADA)
Debit Account (ADA) mode
mode of of disbursement,
disbursement, payments
payments
from
from a a government
government entityentity are
are directly
directly credited
credited to to the
the bank
bank accounts
accounts of of the
the
payees through fund/bank
payees through transfers.
fund/bank transfers.
False
False 10.
10. The
The only valid modes
only valid modes of of disbursement
disbursement for for a
a government
government entity entity are
are through
through cashcash
or check.
or check.

MULTIPLE CHOICE
CHOICE
1.
1. A certification
A certification on
on the
the availability
availability of
of allotment
allotment isis required
required before
before a
a disbursement
disbursement ofof
government funds is
government funds is made. According to
made. According to the
the GAM forfor NGAs, who shall
NGAs, who shall issue this
issue this
certification?
certification?
a.
a. Budget
Budget Officer
Officer
b.
b. Chief Accountant
Chief Accountant
c.
c. Head
Head of Agency
of Agency
d.
d. Requisitioning
Requisitioning Individual
Individual
2.
2. The
The Chief Accountant shall
Chief Accountant shall charge
charge obligations
obligations incurred
incurred against
against available
available allotment
allotment to
to ensure
ensure
that
that
a.
a. the
the NCA
NCA is
is sufficient
sufficient to
to meet
meet the
the disbursement
disbursement needs.
needs.
b.
b. there
there are
are no
no unreleased
unreleased appropriations.
appropriations.
c.
c. nono overdraft
overdraft isis incurred.
incurred.
d.
d. no
no excess
excess allotment
allotment exists.
exists.
3. A certification
3. A certification on
on the
the availability
availability of
of funds
funds and
and completeness
completeness of
of supporting
supporting documents
documents is
is
required
required before
before aa disbursement
disbursement of of government funds is
government funds is made. According to
made. According to GAM
GAM for
for NGAs,
NGAs,
who shall
who shall issue this certification?
issue this certification?
a.
a. Budget
Budget Officer
Officer
b.
b. Chief
Chief Accountant
Accountant
c.
c. Head
Head of Agency
of Agency
d.
d. Requisitioning
Requisitioning Individual
Individual
4. Which of
4. Which of the following results
the following to the
results to the recognition,
recognition, in
in the
the books
books of
of accounts,
accounts, of
of expenses
expenses
classified
classified as
as Personnel
Personnel Services?
Services?
a.
a. Granting
Granting of cash advance for
of cash advance for payroll
payroll
b.
b. Liquidation
Liquidation ofof payroll fund
payroll fund
c.
c. Issuance
Issuance of of office
office supplies
supplies to
to end
end users
users
d. Set up of payable for
d. Set up of payable for payrollpayroll
5.
5. According to
According the GAM
to the GAM for
for NGAs,
NGAs, disbursements for salaries
disbursements for salaries and wages shall
and wages shall be
be supported
supported
by
by
a.
a. Disbursement Vouchers
Disbursement Vouchers
b. Payroll
b. Payroll
c.
c. Petty
Petty Cash Vouchers
Cash Vouchers
d.
d. Official
Official Receipts
Receipts
6.
6. Which of
Which of the following results
the following to the
results to the recognition
recognition of
of expense?
expense?
a.
a. Granting of cash advance for travel
Granting of cash advance for travel
b.
b. Liquidation
Liquidation of of cash
cash advance
advance forfor travel
travel
c.
c. Refund
Refund of
of excess
excess cash
cash advance
advance
d.
d. Remittance
Remittance of the refund
of the refund for
for excess
excess cash
cash advance
advance to
to the
the BTr.
BTr.
7.
7. The
The entry
entry in the books
in the books of
of a
a government
government agency with foreign
agency with foreign service
service post
post to
to record
record the
the
receipt
receipt of
of disbursement
authority called the Cash
called the Cash Disbursement
Ceiling (CDC)
(CDC) includes
includes a
a
a.
a. debit
debit to
to Cash-Modified
Disbursement System
System (MDS)
(MDS)
b. credit to Subsidy from National Government
c.
c. credit to Cash-Constructive
credit to Cash-Constructive Income
Income Remittance
Remittance
d.
d. debit
debit to
to Subsidy
Subsidy from
from National
National Government
Government
8.
8. This
This is
is used
used to
to recognized:
recognized: (1)
(1) in
in the
the books
books of of national
national government
government agencies,
agencies, the
the
constructive
remittance to
to BIR
BIR and
and BOC
BOC of of taxes
taxes and
and customs’
customs' duties withheld, and
duties withheld, and the
the
constructive
constructive receipt
receipt of
of NCA for those
NCA for those taxes
taxes and
and customs
customs duties;
duties; (2)
(2) in
in the
the books
books ofof the
the BIR
BIR
and
and BOC,
BOC, the
the constructive
constructive receipt
receipt of tax revenue
of tax revenue and
and customs
customs duties;
duties; and
and (3)
(3) in the books
in the books
of the BTr, the constructive receipt of the taxes and customs duties
of the BTr, the constructive receipt of the taxes and customs duties remitted. remitted.
a.
a. Notice
Notice of
Cash Allocation (NCA)
b.
b. Tax
Tax Remittance
Remittance Advice
Advice (TRA)
(TRA)
c.
c. Cash
Cash Disbursement Ceiling (CDC)
Disbursement Ceiling (CDC)
d.
d. Non-Cash Availment Authority
(NCAA)
9.
9. All of
All the following
of the following areare considered valid cashless
considered valid cashless disbursements,
disbursements, except
except
a.
a. purchase
purchase of of goods
goods using
using an
an electronic
electronic card
card issued
issued by
by CitiBank.
CitiBank.
b.
b. payment of payables using a Non-Cash Availment
payment of payables using a Non-Cash Availment Authority.Authority.
c.
c. remittance
to the
the BIR
BIR through
through Tax
Tax Remittance Advice.
Remittance Advice.
d.
d. online
online payment through LBP’s
payment through LBP's eMDS.
eMDS.
e.
e. payment
payment to supplier through LBC
to supplier through LBC Padala.
Padala.
10. Which of
10. Which of the following government
the following government agencies will most
agencies will most likely
likely be
be able
able to
to obtain
obtain a
a
disbursement
authority in the form
in the form of
of Cash
Cash Disbursement
Ceiling (CDC)?
(CDC)?
a.
a. BIR
BIR
b.
b. DPWH
c.
c. DFA
DFA
d.
d. NFA
NFA

MULTIPLE CHOICE
CHOICE
1.
1. Entity A disburses
Entity A disburses a
a check
check chargeable
chargeable against
against the
the Treasury Account. The
Treasury Account. journal entry
The journal entry to
to
record
record the
the disbursement
disbursement involves
involves a
a credit
credit to which of
to which the following
of the following accounts?
accounts?
a.
a. Cash-Treasury/Agency Deposit, Regular
b.
b. Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular
c.
c. Cash-in-Bank-Local
Cash-in-Bank-Local Currency,
Currency, Current Account
Current Account
d.
d. Cash-Collecting
Cash-Collecting Officers
Officers
2.
2. Entity A sends
Entity A sends an
an employee
employee to to an
an official
official travel
travel and
and gives
gives him
him cash
cash to
to cover
cover his travelling
his travelling
expenses. Which of
expenses. Which of the
the following
following is
is most
most likely
likely the
the entry
entry to
to record
record the
the cash
cash disbursement?
disbursement?
a.
a. Travelling
Travelling Expenses
Expenses xxx
xxx
Advances to Officers and Employees
Advances to Officers and Employees xxx
xxx
b.
b. Travelling
Travelling Expenses
Expenses xxx
xxx
Cash-Modified
Disbursement SystemSystem (MDS),
(MDS), Regular
Regular xxx
xxx
c.
c. Advances
Advances to to Officers
Officers and
and Employees
Employees xxx
Cash-Modified
Disbursement System System (MDS),
(MDS), Regular
Regular xxx
d.
d. Advances to Officers and Employees
xxx
Cash
Cash on
on Hand
Hand xxx
xxx
3.
3. Entity A purchases
Entity A purchases office
office supplies
supplies from
from an
an authorized
authorized merchant
merchant using
using an
an electronic
electronic card.
card.
The
The entry
entry to
to record the purchase
record the purchase isis
a.
a. Office
Office Supplies
Supplies Inventory
Inventory xxx
xxx
Accounts Payable
Accounts Payable xxx
xxx
b.
b. Accounts
Accounts Payable
Payable xxx
Cash – Modified Disbursement System (MDS),
Cash - Modified Disbursement System (MDS), Regular Regular xxx
c.
c. Office
Office Supplies
Supplies Inventory
Inventory xxx
xxx
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
xxx
d.
d. No journal entry.
No journal entry.
4.
4. Entity
Entity AA wants
wants toto make
make disbursements
disbursements online. Which of
online. Which of the following should
the following should Entity A do
Entity A do so
so
that
that it can
itcan make valid disbursements
make valid disbursements online?
online?
a.
a. Apply for a PayPal account.
Apply for a PayPal account.
b.
b. Obtain
Obtain aa debit
debit card
card or
or credit
credit card that is
card that is either Visa or
either Visa or MasterCard from any
MasterCard from any bank.
bank.
c.
c. Enrol with the
Enrol with the eMDS
eMDS of of the
the Land
Land Bank
Bank of the Philippines.
of the Philippines.
d.
d. Make
Make a facebook account.
a facebook account.
5.
5. Entity A acquires
Entity A acquires the
the equipment
equipment on
on account
account andand settles
settles the
the account through Non-Cash
account through Non-Cash
Availment Authority
Availment Authority (NCAA).
(NCAA). The
The entry
entry to
to settle
settle the
the account
account isis
a.
a. Accounts
Accounts Payable
Payable xxx
Subsidy
Subsidy form
form National
National Government
Government xxx
b.
b. Accounts Payable
xxx
Cash
Cash —– Modified
Modified Disbursement
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
xxx
c.
c. Accounts Payable
xxx
Cash-Constructive
Cash-Constructive Income
Income Remittance
Remittance xxx
xxx
d.
No journal entry.
6.
6. Entity A has
Entity A has a foreign service
a foreign service post.
post. During
During the
the period,
period, Entity A receives
Entity A receives authorization from
authorization from
the
the DBM
DBM allowing
allowing it to
it to use the collections
use the collections of
of its
its own
own foreign
foreign service
service post
post to
to defray
defray for
for the
the
necessary
necessary expenses
expenses of of the
the foreign
foreign service
service post.
post. The
The entry to record
entry to record the
the disbursement
disbursement
authority
authority is
is
a.
a. Cash
Cash inin Bank-Foreign
Bank-Foreign Currency,
Currency, Current Account
Current Account xxx
xxx
Cash-Collecting
Cash-Collecting Officer
Officer xxx
xxx
b. Cash-Constructive Income
b. Cash-Constructive Income Remittance Remittance xxx
Subsidy
Subsidy fromfrom NGNG xxx
c.
c. Accounts Payable
xxx
Cash-Constructive
Income Remittance
Remittance xxx
xxx
d.
No journal entry.
7. Which of
7. Which of the following modes
the following modes of
of disbursements
disbursements is
is most
most similar
similar to
to a
a check
check disbursement?
disbursement?
a.
a. eMDS
eMDS
b.
b. NCAA
NCAA
c.
c. ADA
d.
d. NBA
NBA
8.
8. A government
A government entity
entity makes
makes payment through Advice
payment through Advice to
to Debit Account (ADA).
Debit Account (ADA). The
The entry
entry most
most
likely to be
likely to be used
used in
in recording the payment
recording the payment is
is
a.
a. Accounts Payable
Cash
Cash –- Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
b.
b. Accounts Payable
xxx
Subsidy form National
Subsidy form National Government
Government xxx
xxx
c.
c. Accounts Payable
xxx
Cash-ADA
Cash-ADA xxx
xxx
d.
d. None.
None. The transaction is
The transaction is recorded
recorded only
only in
in the
the Registries
Registries and
and ORS.
ORS.
9.
9. A government
government entity
entity makes
makes constructive
remittance of
taxes withheld to the
the BIR
BIR through
through Tax
Tax
Remittance Advice (TRA).
Remittance Advice (TRA). The
The entry
entry used
used in
in recording
recording the
the transaction
transaction is
is
a.
a. Cash-Tax
Remittance Advice xxx
xxx
Subsidy form National
Subsidy form National Government
Government xxx
xxx
b.
b. Due
Due to
to BIR
BIR xxx
xxx
Cash-Tax
Remittance Advice xxx
xxx
c.
c. aa and
and b
b
d.
d. None. The transaction is
None. The transaction is recorded
recorded only
only in
in the
the Registries
Registries and
and ORS.
ORS.
10. Which of
10. Which of the following modes
the following modes ofof disbursements would result
disbursements would result to
to the
the recognition
recognition of
of a
a loan
loan
payable
payable in the books
in the books of the BTr?
of the BTr?
a.
a. CDC
b.
b. NCAA
c.
c. ADA
d.
d. UFC
UFC
PROBLEM 5-4:
5-4: MULTIPLE
MULTIPLE CHOICE
CHOICE
1.
1. Which of
not used
used in
in processing
processing disbursements?
disbursements?
a.
a. DVs
DVs
b.
b. Payroll
Payroll
c.
c. PCVs
PCVs
d.
d. ORs
ORs
2.
2. Which of
not a
a form
form of
of disbursement
disbursement authority?
authority?
a.
a. NCA
NCA
b.
b. TRA
TRA
c.
c. NTA
NTA
d.
d. Allotment
Allotment
3.
3. It is
Itis an
an authority
authority issued
issued by
by the
the DBM
DBM toto central,
central, regional
regional and
and provincial
provincial offices
offices and
and operating
operating
units to cover their cash requirements.
units to cover their cash requirements. It
It specifies
specifies the maximum amount of cash that can
the maximum amount of cash that can be
be
withdrawn from
withdrawn from a
a government
government servicing
servicing bank
bank in
in a
a certain
certain period.
period.
a.
a. Notice
Notice of
of Cash
Cash Allocation
Allocation (NCA)
(NCA)
b.
b. Tax Remittance Advice (TRA)
Tax Remittance Advice (TRA)
c.
c. Cash
Cash Disbursement
Ceiling (CDC)
(CDC)
d.
(NCAA)
4.
4. Entity A has
Entity A has a foreign service
a foreign service post.
post. During
During the
the period,
period, Entity A receives
Entity A receives authorization from
authorization from
the
the DBM
DBM allowing
allowing it to
to use
it the collections
use the collections of
of its
its own
own foreign
foreign service
service post
post to
to defray
defray for
for the
the
necessary
necessary expenses
expenses of of the
the foreign
foreign service
service post.
post. This
This authorization
authorization isis called
called
a.
a. Cash
Cash Disbursement
Ceiling (CDC)
(CDC)
b.
(NCAA)
c.
c. Electronic
Electronic Modified
Disbursement System
System (eMDS)
(eMDS)
d.
d. Advice to
Advice to Debit Account (ADA)
Debit Account (ADA)
5.
5. Entity A disburses
Entity A disburses a a check
check chargeable
chargeable against
against its
its checking
checking account
account maintained with
maintained with
Government
Government Servicing
Servicing Bank.
Bank. The journal entry
The journal to record
entry to the disbursement
record the disbursement involves
involves aa credit
credit
to which of
to which the following
of the following accounts?
accounts?
a.
a. Cash-Treasury/Agency
Cash-Treasury/Agency Deposit,
Deposit, Regular
Regular
b.
b. Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular
c.
c. Cash-in-Bank-Local
Cash-in-Bank-Local Currency,
Currency, Current
Current Account
Account
d.
d. Cash-Collecting
Officers
6.
6. Which of
Which of the following entries
the following would most
entries would most likely
likely constitute
constitute aa cash
cash disbursement,
disbursement, rather than
rather than
a
a check
check disbursement?
disbursement?
a.
a. Electricity
Electricity Expenses
Expenses xxx
xxx
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
xxx
To
To record payment for
record payment for electricity
electricity expenses
expenses
b.
b. Accounts Payable
xxx
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
xxx
To record payment of accounts payable
c.
c. Advances
Advances to to Officers
Officers and
and Employees
Employees xxx
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
To
To record grant of
record grant of cash advance for
cash advance for travel
travel
d.
d. None. All of
None. All of these
these are
are check
check disbursements.
disbursements.
7. Which of
7. Which of the following would
most likely
likely constitute
constitute a a disbursement
disbursement through Advice to
through Advice to Debit
Debit
Account (ADA)?
Account (ADA)?
a.
a. Electricity
Expenses xxx
xxx
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
xxx
To
To record payment for
record payment for electricity
electricity expenses
expenses
b.
b. Accounts Payable
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
To
To record payment of
record payment accounts payable
of accounts payable
c.
c. Advances to
Advances to Officers
Officers and
and Employees
Employees xxx
xxx
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
xxx
To record grant of cash advance for travel
To record grant of cash advance for travel
d.
d. None. All of
None. All of these
these are
are check
check disbursements.
disbursements.
8.
8. Which of
the following is true
true regarding
regarding disbursements
disbursements through
through electronic
electronic Modified
Modified
Disbursement
Disbursement System
System (eMDS)?
(eMDS)?
a.
a. The
The disbursement
disbursement isis not
not recorded
recorded in
in the
the books
books of
of accounts.
accounts.
b.
b. The
The disbursement
disbursement isis made through the
made through the issuance
issuance ofof MDS check.
check.
c.
c. The
The disbursement
disbursement isis made through the
made through the use
use of
of a
a credit
credit card that is
card that is swiped
swiped in
in a
a card
card swipe
swipe
machine
machine ofof an
an authorized
authorized merchant.
merchant.
d.
d. The
The disbursement
disbursement is is made
made through
through anan online transaction.
online transaction.
9.
9. Entity A purchases
Entity A purchases office
office supplies
supplies from
from an
an authorized
authorized merchant
merchant using
using an
an electronic
electronic card.
card.
The
The entry
entry to
to record the purchase
record the purchase isis
a.
a. Office Supplies Inventory
Office Supplies Inventory xxx
Accounts
Accounts Payable
Payable xxx
b.
b. Accounts Payable
xxx
Cash
Cash — – Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular xxx
xxx
c.
c. Office
Office Supplies
Supplies Inventory
Inventory xxx
xxx
Cash-Modified Disbursement System (MDS), RegularRegular xxx
xxx
d.
No journal entry.
10.
Entity A acquires the
the equipment
equipment onon account
account and
and settles
settles the
the account
account by
by debiting Accounts
debiting Accounts
Payable
Payable and
and crediting
crediting Subsidy
Subsidy from
from National
National Government.
Government. TheThe mode
mode of
of disbursement
disbursement used
used
by
by Entity A is
Entity A is most
most likely
likely a(an)
a(an)
a.
a. Credit
Credit Card
Card transaction
transaction
b.
b. Advice to
Advice to Debit Account
Debit Account
c.
c. Cash
Cash Disbursement Ceiling
d.
d. Non-Cash
Non-Cash Availment
Availment Authority
Authority
CHAPTER
CHAPTER 66
PROBLEM 6-1:
6-1: TRUE OR FALSE FALSE
False
False 1.
1. According to the
According to the GAM
GAM for for NGAs,
NGAs, allall financial
financial assets
assets areare initially
initially measured
measured at at
fair value.
fair value.
False
2. According to the
the GAM
GAM for for NGAs,
NGAs, government
government entities
entities shall
shall prepare
prepare bank
bank
reconciliations
reconciliations only
onl atat year-end
ear-end or whenever the
or whenever the need
need arises.
arises.
False
False 3.
3. Only
Only debt
debt instruments
instruments withwith remaining
remaining maturity
maturity of
of 3
3 months
months or or less
less can
can qualify
qualify
as
as cash
cash equivalents.
e uivalents.
False
False 4.
4. The
The PCFPCF of
of a
a government
government entityentity is
is replenished
replenished whenwhen disbursements
disbursements reach reach atat
least
least 90%,
90%, or
or as
as needed.
needed.
True
True 5.
5. No journal entry
No journal entry is
is prepared
prepared whenwhen a a disbursement
disbursement is is made
made out out of
of the
the petty
petty cash
cash
fund.
fund.
False
False 6.
6. AA government
government entity
entity established
established a a P30,000
P30,000 petty
petty cash fund. The
cash fund. The custodian
custodian
must
must be be bonded
bonded forfor at
at least
least P5,000.
P5,000.
False
7. According to the
the GAM
GAM for for NGAs,
NGAs, allall financial
financial assets
assets shall
shall bebe initially
initially measured
measured
at
at fair value plus
fair value lus transaction
transaction costs.
costs.
False
False 8.
8. Transaction
Transaction costs
costs onon financial
financial assets
assets classified
classified under
under thethe held to maturity
held to maturity
category
cate o are
are expensed
ex ensed outright.
outri ht.
True
True 9.
9. AA derivative
derivative derives
derives its value from
its value from the
the changes
changes in value of
in value of aa specified
specified rate,
rate,
price,
rice, event
event or
or some
some other variable.
other variable.
True
True 10.
10. Risk
Risk management
management is is the
the process
process ofof identifying
identifying the
the desired
desired level
level of
of risk,
risk,
identifying
identi in thethe actual
actual level
level of
of risk
risk and
and altering
alterin the
the latter
latter to
to equal
e ual the
the former.
former.
PROBLEM 6-2:
6-2: MULTIPLE
MULTIPLE CHOICE
CHOICE
1.
1. Which of
not considered
considered a financial asset?
a financial asset?
a.
a. Petty cash fund
Petty cash fund
b.
b. Investment
Investment inin debt
debt securities
securities
c.
c. Accounts receivable
Accounts receivable
d. Prepaid assets
d. Prepaid assets
2.
2. A cash
A cash shortage
shortage of of a
a government
government entity
entity is
is most
most likely
likely recorded
recorded as
as a
a
a.
a. debit
debit toto aa receivable
receivable account
account
b.
b. debit
debit to
to aa cash
cash shortage
shortage or
or overage
overage account
account
c.
c. credit to miscellaneous income account
credit to miscellaneous income account
d.
d. credit to a
credit to a cash
cash shortage
shortage or
or overage
overage account
account
3.
3. Dishonored
Dishonored checks
checks are
are recorded
recorded by
by a
a government
government entity
entity as
as
a.
a. Notes
Notes receivable
receivable
b.
b. Other
Other receivables
receivables
c.
Accounts receivable
d.
d. Losses
Losses
4.
4. The
The entry
entry to
to record the replenishment
record the replenishment ofof a
a petty
petty cash
cash fund
fund of
of a
a government
government entity
entity is
is
a.
a. Expense
Expense accounts
accounts xxx
Cash-Modified Disbursement System (MDS), Regular Regular xxx
b.
b. Expense
Expense accounts
accounts xxx
xxx
Petty
petty Cash
Cash xxx
xxx
c.
c. Expense accounts
Expense accounts xxx
xxx
Cash-Collecting
Officers xxx
xxx
d.
d. Expense accounts
Expense accounts xxx
xxx
Cash-Treasury/Agency
Deposit, Regular
Regular xxx
xxx
5.
5. Under
Under this
this method
method of
of bank
bank reconciliation
reconciliation statement
statement preparation,
preparation, the
the unadjusted
unadjusted book
book and
and
bank
bank balances
balances areare brought
brought to
to an
an adjusted
adjusted balance
balance that
that is
is reported
reported on
on the
the statement
statement of
of
financial
financial position.
position.
a.
a. Bank
Bank to to Book
Book Method
Method
b.
b. Book
Book to to Bank
Bank Method
Method
c.
c. Adjusted Balance Method
Adjusted Balance Method
d.
d. All of
All these
of these
6.
6. Which of
Which of the following may
the following may be
be paid
paid through
through the
the petty
petty cash fund of
cash fund of a
a government
government entity?
entity?
a.
a. Rent worth P12,000.
Rent worth P12,OOO.
b.
b. Pantry
Pantry supplies worth P15,000.
supplies worth P15,000.
c.
c. Office
Office supplies worth P20,000.
supplies worth P20,000.
d.
d. None
None of of these.
these.
7.
7. Entity
Entity AA maintains
maintains a a petty
petty cash
cash fund. At any
fund. At any given
given point
point of
of time, the cash
time, the cash on
on hand
hand and
and the
the
petty
petty cash vouchers must
cash vouchers must bebe equal
equal to
to the
the ledger
ledger balance
balance ofof the
the petty
petty cash
cash fund.
fund. If
If these
these are
are
not equal, the difference is either shortage or overage. This system of handling petty
not equal, the difference is either shortage or overage. This system of handling petty cash cash
fund
fund is
is called
called
a.
a. Impress
Impress System
System
b.
b. Fluctuating
Fluctuating Balance
Balance System
System
c.
c. Pretty
Pretty Cash
Cash System
System
d.
d. Imprest
Imprest System
System
8.
8. According to
According the GAM
to the GAM for
for NGAs,
NGAs, the
the establishment
establishment ofof a
a petty
petty cash
cash fund
fund
a.
a. requires the approval of the Head of Agency.
requires the approval of the Head of Agency.
b.
b. requires
requires the
the approval
approval of the Chief
of the Accountant.
Chief Accountant.
c.
c. requires
requires the
the approval
approval of the President
of the President of
of the
the Philippines.
Philippines.
d.
d. does
does not
not require
require any
any formal
formal approval
approval because
because petty
petty cash
cash funds
funds are
are likely
likely to
to be
be
immaterial.
immaterial.
9.
9. The
The “Loans
"Loans Receivable”
Receivable" account
account is
is most
most likely to be
likely to be used
used in
in the
the books
books of
of accounts
accounts of which
of which
the
the following
following government
government agencies?
agencies?
a.
a. COA
b.
b. NIA
NIA
c.
c. BTr
BTr
d.
d. All of
All these
of these
10. Which of
not one
one of
of the
the characteristics
characteristics of
of a
a derivative?
derivative?
a.
a. It
It requires
requires nono notional
notional amount
amount (or
(or only
only a very minimal
a very minimal notional
notional amount).
amount).
b.
b. Its value changes
Its value changes in in response
response to
to the
the change
change inin an
an underlying.
underlying.
c.
c. ItIt requires
requires no initial net investment (or only a very minimal initial
no initial net investment (or only a very minimal initial net
net investment).
investment).
d.
d. ItIt is
is settled
settled at
at a
a future
future date.
date.

MULTIPLE CHOICE
CHOICE
1.
1. According to the GAM for NGAs,
According to the GAM for NGAs, these
these refer
refer to
to incremental
incremental costs that are
costs that are directly
directly
attributable to the
attributable to the acquisition,
acquisition, issue,
issue, or
or disposal
disposal of
of a
a financial
financial instrument.
instrument.
a.
a. Costs to sell
Costs to sell
b.
b. Transaction
Transaction costs
costs
c.
c. Financial
Financial costs
costs
d.
d. Variable costs
Variable costs
2.
2. Which of
not one
one of
of the
the categories
categories of financial assets
of financial assets under
under the
the GAM for
for
NGAs?
NGAs?
a.
a. Held-to-maturity
Held-to-maturity investments
investments
b.
b. Loans
Loans and
and receivables
receivables
c.
c. Available-for-sale financial
Available-for-sale financial assets
assets
d.
d. Financial
Financial asset through other
asset through other comprehensive
comprehensive income
income
3.
3. Entity
Entity A acquires
acquires an
an investment for P1,000,000. Transaction
investment for Transaction costs
costs amount
amount toto P10,000.
PIO,OOO. At At
year-end, the
year-end, the investment
investment has
has a
a fair value of
fair value of P900,000.
P900,000. IfIf the
the investment
investment is
is classified
classified as
as
financial asset through surplus or deficit, how much is the loss from the change in fair
financial asset through surplus or deficit, how much is the loss from the change in fair value? value?
a.
a. 100,000
100,000
b.
b. 90,000
90,000
c.
c. 110,000
110,000
d.
d. 0
Use
Use the
the following
following information
information for
for the
the next
next four
four questions
questions
On
On January
January 1, 1, 20x1,
20x1, Entity A acquires
Entity A acquires 10-year,
10-year, 10%,
10%, P2,000,000 face
face amount
amount bonds
bonds for
for
P1,456,792
Pl,456,792 andand classifies
classifies them
them as
as held-to-maturity
held-to-maturity investments.
investments. Transaction
Transaction costs
costs on
on the
the
acquisition
acquisition amount
amount to to P125,919.
P125,919. The
The issuer
issuer pays
pays annual
annual interest
interest every
every December
December 31.
31. The
The
effective
effective interest
interest rate
rate is
is 14%
14%
4.
4. The
The initial
initial carrying
carrying amount
amount of the investment
of the investment on
on January
January 1,
1, 20x1
20<1 is
is
a.
a. 1,456,792
1,456,792
b. 1,330,873
c.
c. 1,582,711
1,582,711 (1,456,792 + + 125,919)
125,919)
d. 2,000,000
5.
5. The
The interest
interest income
income in
in 20x1
20x1 is
is
a.
a. 221,580 (1,582,711 x 14%)
221,580 (1,582,711 x 14%)
b.
b. 203,951
203,951
c.
c. 186,322
186,322
d.
d. 200,000
200,000
6.
6. IfIf the
the investment
investment is
is classified
classified as
as available
available for
for sale
sale financial
financial asset
asset and
and the
the fair value at
fair value year-
at year-
end
end is is P1,800,000, how
how much
much is the gain
is the gain (loss)
(loss) from
from the
the change
change in fair value?
in fair value?
a.
a. (200,000)
(200,000)
b.
b. (217,289)
(217,289)
c.
c. 195,709
195,709 (1,800,000 - – 1604,291)
1604,291)
d.
d. 238,869
238,869
Date
Date Collections
Collections Interest income
Interest income Amortization
Amortization Present
Present value
value
1/1/x1
1/1/x1 1,582,711
1,582,711
12/31/x1
12/31/x1 200,000
200,000 221,580
221,580 21,580
21,580 1,604,291
7.
7. If the investment
If the investment is
is classified
classified as
as available
available for
for sale
sale financial
financial asset,
asset, how
how much
much is the interest
is the interest
income
income in in 20x1?
20<1?
a. 221,580
a. 221,580
b.
b. 203,951
203,951
c.
c. 186,322
186,322
d.
d. 200,000
200,000
8.
8. According to
According the GAM
to the GAM for
for NGAs,
NGAs, changes
changes in fair value
in fair value of
of investments
investments classified
classified as
as available
available
for
for sale
sale financial
financial assets
assets are
are
a.
a. recognized
recognized in in surplus
surplus or
or deficit
deficit
b.
b. recognized
recognized in
in net
net assets
assets
c.
c. not
not recognized
recognized
d.
d. a
a or
or b
b
9.
Entity A acquires anan investment
investment forfor P100,000
PIOO,OOO and and incurs
incurs transaction
transaction costs
costs of
of P10,000. At
PIO,OOO. At
year-end, the
year-end, the fair value of
fair value of the
the investment
investment isis P80,000.
P80,000. Entity A recognizes
Entity A recognizes aa P30,000
P30,000 loss
loss
from
from the
the change
change in in fair value. The
fair value. The investment would most
investment would most likely
likely to
to have
have been
been classified
classified
under which of
under which of the following categories
the following categories ofof financial
financial assets?
assets?
a.
a. Available-for-sale
Available-for-sale financial
financial assets
assets
b.
b. Financial
Financial asset
asset through
through surplus
surplus or
or deficit
deficit
c.
c. Held-to-maturity
Held-to-maturity investments
investments
d.
d. Loans and receivables
Loans and receivables
10.
10. Entity
Entity AA acquires
acquires anan investment for P100,000
investment for PIOO,OOO andand incurs
incurs transaction
transaction costs
costs of
of P10,000. At
PIO,OOO. At
year-end, the
year-end, the fair value of
fair value of the
the investment
investment isis P120,000.
P120,000. However,
However, the
the investment
investment isis
appropriately
appropriately reported
reported inin the year-end statement
the year-end statement of financial position
of financial position at
at a
a carrying
carrying amount
amount of
of
P106,382.
P106,382. TheThe investment would most
investment would most likely to have
likely to have been
been classified
classified under which of
under which the
of the
following
following categories
categories ofof financial
financial assets?
assets?
a.
a. Available-for-sale financial
Available-for-sale financial assets
assets
b. Held-to-maturity investments
c.
c. Loans
Loans and
and receivables
receivables
d.
d. Cannot
Cannot bebe determined
determined due due to
to insufficient
insufficient information
information
PROBLEM 6-4:
6-4: FOR
DISCUSSION
1.
1. According to
According the GAM
to the GAM for
for NGAs,
NGAs, a
a government
government entity’s
entity's cash
cash comprises
comprises all
all of
of the
the following
following
except
except
a.
a. cash
cash on
on hand
hand
b.
b. cash
cash in
in bank
bank
c.
c. cash
cash equivalents
equivalents
d.
d. cash
cash treasury accounts
treasury accounts
2.
2. Which of
the following is excluded
excluded from
from the
the amount
amount of
of cash
cash that
that is
is reported
reported in
in the
the statement
statement
of financial position of a government entity?
of financial position of a government entity?
a.
a. unreleased
unreleased checks
checks drawn
drawn
b.
b. cancelled checks drawn
cancelled checks drawn
c.
c. undeposited
undeposited collections
collections
d.
d. post-dated
post-dated checks
checks received
received
3. An unexplained
3. An unexplained cashcash overage
overage of
of a
a government
government entity
entity is
is recorded
recorded as
as a
a
a.
a. credit to a
credit to a payable
payable account
account
b.
b. debit
debit to
to a
a cash
cash shortage
shortage overage
overage account
account
c.
c. credit
credit toto miscellaneous
miscellaneous income
income account
account
d.
d. credo
credo to a cash shortage or overage account
to a cash shortage or overage account
4. All of
4. All the following
are considered
considered internal
internal controls
controls over
over cash
cash except
except
a.
a. Requiring
Requiring a a cash
cash custodian
custodian toto be
be properly
properly bonded.
bonded. The
The amount
amount of
of bond
bond shall
shall not
not be
be less
less
than
than the
the cash
cash accountability
accountability ofof the
the custodian.
custodian.
b.
b. Preparing
Preparing a a bank
bank reconciliation
reconciliation for
for each
each bank
bank account
account maintained
maintained by
by a
a government
government
entity.
entity.
c.
c. Making
Making estimates
estimates of of recurring
recurring expenses
expenses before
before establishing
establishing an
an amount
amount for
for a
a petty
petty cash
cash
fund.
fund.
d.
d. Maintaining the
Maintaining the petty
petty cash
cash fund
fund under
under aa Fluctuating
Fluctuating Balance
Balance System wherein the
System wherein the
total
total cash
cash onon hand
hand andand petty
petty cash vouchers may
cash vouchers may oror may
may not
not be
be equal to a
equal to a fixed
fixed
amount
amount of of petty
petty cash
cash fund
fund at
at any
any given
given point
point of time.
of time.
e.
e. Requiring
Requiring at least three bidders or canvases before making
at least three bidders or canvases before making purchases.
purchases.
5.
5. The
The per
per transaction
transaction threshold for petty
threshold for petty cash
cash disbursements
disbursements of
of a
a government
government entity
entity is
is
a.
a. P5,000
P5,OOO
b.
b. P10,000
PIO,OOO
c.
c. P15,000
P15,OOO
d.
d. No
No limit;
limit; sky
sky is
is the
the limit.
limit.
6.
6. A government
government agency
agency shall
shall prepare
prepare a
a bank
bank reconciliation for each
reconciliation for each bank
bank account
account maintained.
maintained.
Bank
Bank reconciliations
reconciliations are
are prepared
prepared using the
using the
a.
a. Bank to Book
Bank to Book Method
Method
b.
b. Book to Bank
Book to Bank Method
Method
c.
c. Adjusted
Adjusted Balance
Balance Method
Method
d.
d. Any of these
Any of these
7.
7. If the adjusted
If the adjusted balance
balance of
of cash
cash is
is less
less than
than the
the unadjusted
unadjusted balance
balance per
per books
books and there are
and there are
no other reconciling items or errors, the difference is most likely caused
no other reconciling items or errors, the difference is most likely caused by by
a.
a. Credit
Credit memo
memo
b.
b. Debit
Debit memo
c.
c. Deposits
Deposits in transit
in transit
d.
d. Outstanding
Outstanding checks
checks
8.
8. According to
According the GAM
to the GAM for
for NGAs,
NGAs, receivables
receivables are
are measured
measured at at
Initial
Initial Subsequent
Subsequent
a.
a. Fair value
Fair value Amortized cost
Amortized cost
b.
b. Fair value plus
Fair value plus transaction
transaction costs
costs Amortized
Amortized cost
cost
c.
c. Fair value minus
Fair value transaction costs
minus transaction costs Amortized cost
Amortized cost
d.
d. Fair value
Fair value Fair value
Fair value
9.
9. The
The subsequent
subsequent changes
changes in the fair
in the value of
fair value of an
an investment that is
investment that is classified
classified as
as available
available for
for
sale
sale are
are recognized
recognized in in
a.
a. surplus or deficit
surplus or deficit
b.
b. net
net assets
assets oror equity
equity
c.
c. not
not recognized
recognized
d.
d. any
any of
of these
these as
as an
an accounting
accounting policy
policy choice
choice
10. According to
to the GAM for
for NGAs,
NGAs, the very purpose
the very purpose of
of derivatives
derivatives is
is
a.
a. risk
risk management
management
b.
b. speculation
speculation
c.
c. risk
risk incurrence
incurrence
d.
d. a
a or
or b
b
CHAPTER 7
7
PROBLEM 7-1:
7-1: TRUE
TRUE OR FALSE FALSE
False
False 1.
1. According to the
GAM forfor NGAs,
NGAs, inventories
inventories of of government
government entities
entities are
are
subsequently
subsequently measured
measured at at net
net realizable value or
realizable value or current
current replacement
replacement cost cost
depending
depending on whether the
on whether the inventory
inventory isis classified
classified asas held
held for
for sale
sale or
or held
held for
for
distribution.
distribution.
False
2. According to the
the GAM
GAM forfor NGAs,
NGAs, purchases
purchases of of machinery,
machinery, equipment,
equipment, furniture
furniture
and fixtures and similar items below the Ᵽ10,000 capitalization
and fixtures and similar items below the PIO,OOO capitalization threshold threshold for for
PPE
PPE areare recorded
recorded as as inventories.
inventories.
True
True 3.
3. Relief
Relief goods,
goods, office
office supplies,
supplies, equipment
equipment and and furniture
furniture and
and fixture
fixture are
are items
items that
that
may
ma appropriately
a ro riatel be be recorded
recorded as as inventories
inventories by b a a government
overnment entity.
enti
False
False 4.
4. The
The GAM for for NGAs
NGAs allows
allows government
government entities
entities to
to use
use the
the FIFO
FIFO cost
cost flow
flow
formula.
formula.
False
False 5.
5. The
The GAM
GAM forfor NGAs
NGAs allows
allows government
government entities
entities to
to use
use aa periodic
periodic inventory
inventory
system.
system.
False
False 6.
6. The
The specific
specific identification
identification cost
cost formula
formula is is not
not available
available for
for use
use by
by government
government
entities,
entities, according
accordin to to the
the GAM for for NGAs.
NGAs.
False
False 7.
7. The
The Purchase
Purchase Request
Request (PR)(PR) form
form isis prepared
prepared whenwhen endend users
users request
request forfor the
the
issuance
issuance of of items
items ofof inventory
invento that
that are
are available
available on on stock.
stock.
True
True 8.
8. If
If the
the beginning
beginning balance
balance of of inventory
inventory is is P50,
P50, the
the net
net purchases
purchases areare P100
PIOO andand
the
the cost
cost of
of goods
oods sold
sold is
is P30,
P30, the
the ending
endin inventory
invento must
must bebe P120.
P120.
Fact pattern
Fact pattern
Entity A, a
government entity,
entity, sells
sells eggs.
eggs. AtAt the
the start
start of the period,
of the period, Entity A’s inventory
Entity A's inventory consisted
consisted
of
of (1)
(1) red
red egg with a
egg with a carrying
carrying amount
amount of of P2.
P2. During the period,
During the period, Entity
Entity AA acquired
acquired one
one (1)
(1) brown
brown
egg
e for P3
for P3 and
and one
one (1)1 blue
blue egg
e for
for P4.
P4. Entity
Enti A sold
sold the
the brown
browne egg during the period.
durin the eriod.
False
False 9.
9. Under
Under thethe Specific
S ecific identification
identification cost formula, Entity
cost formula, Enti A’s cost
A's cost of
of sale
sale is
is P2.
P2.
False
False 10.
10. If
If the
the eggs
eggs are
are ordinarily
ordinarily interchangeable,
interchangeable, Entity A’s cost
Entity A's cost of
of sale
sale is
is P2.5,
P2.5,
assuming
assumin the the sale
sale occurred
occurred only
onl after
after all
all the
the purchases were made.
urchases were made.

MULTIPLE CHOICE
CHOICE
1.
1. Entity A, a
government entity,
entity, purchases
purchases inventories.
inventories. To
To record
record a
a purchase,
purchase, Entity A would
Entity A would
likely
likely debit
debit the
the (an).
(an).
a.
a. Inventory
Inventory account
account
b.
b. Purchases Account
Purchases Account
c.
c. Expense Account
Expense Account
d.
d. a or b
aorb
2.
2. Entity A, a
government hospital,
hospital, acquires
acquires medicines to be
medicines to be sold
sold in
in its
its pharmacy.
pharmacy. Entity A
Entity A
would record
would record the
the medicines
medicines acquired
acquired as
as
a.
a. Semi-Expendable
Semi-Expendable Property
Property
b.
b. Inventory
Inventory Held for Consumption
Held for Consumption
c.
c. Inventory
Inventory Held for Distribution
Held for Distribution
d.
d. Inventory
Inventory Held for Sale
Held for Sale
3.
3. Entity A, a
government entity,
entity, purchases
purchases relief
relief goods which are
goods which are to
to be
be held
held on
on standby,
standby, ready
ready
to be distributed when a calamity strikes. Entity A would most likely classify the
to be distributed when a calamity strikes. Entity A would most likely classify the goods goods
purchased
purchased as as
a.
a. Inventory
b.
b. Inventory
Inventory Held for Distribution
Held for Distribution
c.
c. Purchases
Purchases
d.
d. None
None of of these,
these, only
only aa note
note disclosure
disclosure shall
shall be
be made
made
4. According to
NGAs, this
this shall
shall be
be used for large
used for large numbers
numbers of
of items
items of
of inventory
inventory
that
that are
are ordinarily
ordinarily interchangeable.
interchangeable.
a.
a. Specific
Specific identification
identification
b.
b. FIFO
FIFO
c.
c. Weighted average
Weighted average cost
cost applied
applied in
in aa period
period inventory
inventory system
system
d.
d. Weighted average cost applied in a perpetual inventory system
Weighted average cost applied in a perpetual inventory system
e.
e. Any of
Any of these
these as
as aa matter
matter of
of accounting
accounting policy
policy choice
choice
5.
5. This
This refers to the
refers to the cost
cost an
an entity would incur
entity would incur to
to acquire
acquire an
an asset
asset on
on the
the reporting
reporting date.
date.
a.
a. Net
Net realizable value
realizable value
b.
b. Fair value
Fair value
c.
c. Current
Current replacement
replacement cost
cost
d.
d. Present value
Present value
6.
6. Which of
Which of the following inventories
the following inventories ofof a
a government
government entity would be
entity would be subsequently
measured
at
at the
the lower
lower ofof cost
cost and
and current
current replacement
replacement cost?
cost?
a.
a. Inventories
Inventories of of rice
rice that
that are
are held
held for
for sale
sale
b.
b. Medicines
Medicines being sold by a government-owned pharmacy
being sold by a government-owned pharmacy
c.
c. Books
Books to to be
be distributed
distributed to to students
students inin public
public schools
schools
d.
d. Forest products held for
Forest products held for sale sale
7.
7. Which of
Which of the following events
the following events or
or transactions would not
transactions would not lead
lead to the recognition
to the recognition of
of the
the cost
cost of
of
inventory
inventory as
as expense?
expense?
a.
a. The
The inventory
inventory is written down.
is written down.
b.
b. The
The inventory
inventory is
is distributed
distributed for
for free.
free.
c.
c. The
The inventory is exchanged for dissimilar
inventory is exchanged for dissimilar inventory.
inventory.
d.
d. The
The inventory
inventory isis consumed
consumed in in the
the manufacturing
manufacturing process.
process.
8.
8. The
The accounting
accounting division
division of
of a
a government
government entity
entity uses this record
uses this record and
and monitor the movements
monitor the movements
and
and balances
balances inventories.
inventories.
a.
a. Stock
Stock Card
Card
b.
b. Stock Ledger
Stock Ledger Card
Card
c.
c. Journal
Journal Entry
Entry
d.
d. Special Journal
Special Journal
9.
9. Which of
Which of the following statements
the following statements correctly
correctly differentiates
differentiates the
the Stock
Stock Card
Card from
from the
the Stock
Stock
Ledger Card?
Ledger Card?
a.
a. The
The Stock
Stock Ledger
Ledger Card
Card is
is maintained
maintained byby the
the Budget
Budget Division while the
Division while the Stock
Stock Card
Card is
is
maintained
maintained byby the Accounting Division.
the Accounting Division.
b.
b. The
The Stock
Stock Card
Card is
is subject
subject to
to audit
audit by the COA
by the while the
COA while the Stock
Stock Ledger
Ledger Card
Card is
is not.
not.
c.
c. The
The Stock
Stock Card
Card shows
shows quantities
quantities only while the
only while the Stock
Stock Ledger
Ledger Card
Card shows
shows monetary
monetary
balances
balances only.
only.
d.
d. The
The stock
stock Card
Card shows
shows quantities
quantities only while the
only while the Stock
Stock Ledger
Ledger Card
Card shows
shows
quantities as well as monetary amounts.
quantities as well as monetary amounts.
10.
10. This
This document
document isis prepared when end
prepared when end users
users request
request for
for the
the issuance
issuance of
of inventories
inventories that
that are
are
available
available on
on stock.
stock.
a.
a. Purchase
Purchase Requisition
Requisition Form
Form
b.
b. Custodian Inventory Slip
Custodian Inventory Slip
c.
c. Purchase
Purchase Order
Order
d.
d. Requisition
Requisition and
and Issue
Issue Slip
Slip
PROBLEM
MULTIPLE CHOICE
CHOICE
1.
1. Entity A, a
government entity,
entity, purchases
purchases inventory
inventory to
to be
be held
held for
for sale
sale in
in the
the ordinary
ordinary course
course
of
of activities. Which of
activities. Which of the following is
the following the correct
is the correct entry, to record
entry, to the purchase?
record the purchase?
a.
a. Merchandise
Merchandise Inventory
Inventory xxx
Account
Account Payable
Payable xxx
b.
b. Purchase
Purchase xxx
xxx
Accounts Payable
xxx
c.
c. a
a or
or b
b depending
depending on the accounting
on the accounting policy
policy being
being used
used
d.
d. none, a government entity cannot hold inventories
none, a government entity cannot hold inventories for for sale;
sale; only
only for
for consumption.
consumption.
2.
2. Entity A, a
government entity,
entity, distributed welfare goods
distributed welfare goods to
to the
the intended
intended recipients.
recipients. The
The entry
entry
to
to recognize
recognize the
the event
event is
is
a.
a. Cost
Cost of
of sales
sales xxx
xxx
Welfare Goods
Welfare Goods forfor Distribution
Distribution xxx
xxx
b. Welfare Goods
b. Welfare Expense
Goods Expense xxx
Welfare Goods
Welfare Goods for for Distribution
Distribution xxx
c.
c. Distribution
Distribution costs
costs xxx
xxx
Welfare Goods
Welfare Goods forfor Distribution
Distribution xxx
xxx
d.
d. None. The expense is recognized at the end of the period
None. The expense is recognized at the end of the period when when a a physical
physical count
count is
is
performed.
performed. The
The expense
expense is is closed
closed to
to the
the Income
Income Summary
Summary account.
account.
3. At year-end,
3. At year-end, Entity A, a
government entity,
entity, determines the following
determines the following information:
information:
 Carrying
• Carrying amount
amount of of goods
goods held for distribution
held for —
distribution — P100,000.
PIOO,OOO.
 Net
• Net realizable —
value — P80,000.
realizable value P80,000.
 Current
• Current replacement
replacement cost —
cost — P90,000.
P90,000.
How
How much
much of
of the
the carrying
carrying amount
amount of the inventory
of the inventory is
is recognized
recognized as
as expense?
expense?
a.
a. 10,000
10,000
b.
b. 20,000
20,000
c.
c. 90,000
90,000
d.
d. None
None of
of these
these
Use
Use the
the following
information for
for the
the next
next two
two questions:
questions:
Entity A, a
government entity,
entity, determines the following
determines the following information
information regarding
regarding the
the inventory
inventory of
of
Goods
Goods A,A, aa non-unique
non-unique item:
item:
units unit cost
cost
Bolance at January l. 20xl
Purchases:
January 6. 21.30
January 26, I 2.230 20.60
Sales:
January 7.21M
January II. 2002
4.
4. How
How much
much isis ending
ending inventory?
inventory?
a.
a. 116,382
116,382
b.
b. 117,300
117,300
c.
c. 116,495
116,495
d.
d. Any of
Any of these.
these.
5.
5. How
How much
much is the cost
is the cost of
of sale?
sale?
a.
a. 207,805
207,805
b.
b. 207,918
207,918 (56,862
(56,862 +
+ 151,056)
151,056)
c.
c. 207,000
207,000
d.
d. Any of
Any of these.
these.
Units
Units Unit
Unit Cost
Cost Total
Total Cost
Cost
Balance
Balance at
at January
January 1,
1, 2002
2002 3,000
3,000 19.55
19.55 58,650
58,650
January
January 6,
6, 2002
2002 10,200
10,200 21.5
21.5 219,300
219,300
TGAS
TGAS 13,200
13,200 21.06
21.06 277,950
277,950
January
January 7,
7, 2002
2002 (2,700)
(2,700) 21.06
21.06 (56,862)
(56,862)
January
January 26, 2002
26, 2002 2,250
2,250 20.6
20.6 46,350
46,350
TGAS
TGAS 12,750
12,750 20.98
20.98 267,438
267,438
January
January 31,
31, 2002
2002 (7,200)
(7,200) 20.98
20.98 (151,056)
(151,056)
Ending inventory
Ending inventory 5,550
5,550 116,382
116,382
PROBLEM 7-4:
7-4: FOR CLASSROOM DISCUSSION
DISCUSSION
1.
1. Entity A, a
government entity,
entity, purchases
purchases furniture
furniture and fixtures amounting
and fixtures amounting to
to P14,000.
P14,000. Entity
Entity
A would
A would most
most likely
likely record the purchase
record the purchase as
as
a.
a. Property,
Property, Plant
Plant and
and Equipment
Equipment
b.
b. Inventory
c.
c. Inventory
Inventory Held for Manufacturing
Held for Manufacturing
d.
d. Semi-Expendable Property
2.
2. Accountable forms
Accountable forms such
such as
as pre-printed
pre-printed forms
forms used
used in
in government
government transactions
transactions are
are most
most
likely to be
likely to be classified
classified by
by a
a government
government entity
entity as
as
a.
a. Inventory
b.
b. Inventory
Inventory Held for Sale
Held for Sale
c.
c. Semi-Expendable
Property
d.
d. Not
Not considered
considered inventory,
inventory, according
according to the GAM
to the for NGAs
GAM for NGAs
3.
3. Inventories
Inventories are
are initially
initially measured
measured at
at cost
cost and
and subsequently
measured at at
a.
a. The
The Lower
Lower of
of Cost
Cost and
and Net
Net realizable value for
realizable value for good
good ss held
held for
for sale
sale
b.
b. The
The Lower
Lower of
of Cost
Cost and
and Current
Current replacement
replacement cost
cost for
for goods
goods held
held for
for distribution.
distribution.
c.
c. aa and
and bb
d.
d. cost
cost
4. Which of
4. Which of the following cost
the following cost formulas
formulas is
is not
not available
available for
for use
use by
by government
government entities?
entities?
a.
a. Specific identification
Specific identification
b.
b. FIFO
FIFO
c.
c. Weighted Average
Weighted Average
d.
d. All of
All these are
of these are available
available
5.
5. The
The GAM for NGAs
GAM for NGAs requires
requires the
the use
use of which of
of which the following
of the following inventory
inventory systems?
systems?
a.
a. Perpetual inventory system
Perpetual inventory system
b.
b. Periodic
Periodic inventory
inventory system
system
c.
c. a
a or
orbb
d.
d. none
none of
of these
these
6.
6. Government
Government entities
entities record
record purchases
purchases of
of inventories
inventories
a.
a. in
in an
an inventory
inventory account
account
b.
b. in
in the
the Purchases
Purchases account
account
c.
c. a
a orb
orb
d.
d. as
as expenses
expenses
7.
7. Which of
Which of the following may
the following may be
be included
included asas cost
cost of
of inventory?
inventory?
a.
a. freight-in
freight-in under a freight collect, FOB destination sale
under a freight collect, FOB destination term
sale term
b.
b. trade
trade discounts
discounts
c.
c. cost
cost of
of insurance while the
insurance while the goods
goods areare in
in transit
transit
d.
d. advertisement
advertisement cost
cost that
that resulted to the
resulted to the resale
resale of
of inventory
inventory purchased
purchased
8.
8. Arrange the
Arrange the following
following in the sequence
in the sequence they
they are
are used
used in the requisition
in the requisition and
and receipt
receipt of
of
inventories
inventories by
by a a government
government entity
entity
I. Inspection
Inspection and Acceptance Report
and Acceptance Report (IAR)
(IAR)
II.
II. Disbursement Voucher
Disbursement Voucher (DV) (DV)
III. Purchase
Purchase Request
Request (PR)
(PR)
IV.
IV. Journal
Journal entry
entry
V.
V. Purchase
Purchase Order
Order (PO).
(PO).
VI. Stock
Stock Card
Card (SC)
(SC)
a.
a. III, V, I, VI,
Ill, V, VI, IV
l,IV and
and II
II
b.
b. III, V,
Ill, V, I, IV,
IV, VI and II
l,VI and II
c.
c. III, V,
Ill, V, I, II, VI
VI and
l, and IV
II, IV
d.
d. V, III, I, II, VI
V, Ill, VI and
l, and IV
II, IV
9.
9. This
This is
is maintained
maintained in
in the
the Property/Supply
Property/Supply Division
Division to
to record
record the
the movements
movements of
of inventories.
inventories.
a.
a. Stock
Stock Card
Card (SC)
(SC)
b.
b. Property/Supply
Property/Supply Card
Card (PSC)
(PSC)
c.
c. Supplies
Supplies Ledger
Ledger Card
Card (SLC)
(SLC)
d.
d. Magic
Magic Card
Card (MC)
(MC)
10.
10. This
This is
is used
used to
to report wasted materials,
report wasted materials, such
such as
as destroyed
destroyed spare
spare parts
parts and
and other
other spoilages.
spoilages.
a.
a. Wasted Stocks Card (WSC)
Wasted Stocks Card (WSC)
b. Waste Materials
b. Waste Materials Report
Report
c.
c. Report
Report on
on the
the Physical
Physical Count
Count of
of Inventories
Inventories
d.
d. Inventory
Inventory Custodian
Custodian Slip
Slip
CHAPTER
CHAPTER 88
PROBLEM 8-1:
8-1: TRUE
TRUE OR FALSE FALSE
False
False 1.
1. Living
Living animals and
animals and plants
lants are
are always
always accounted
accounted for for biological
biological assets.
assets.
True
True 2.
2. Biological
Biological assets
assets are
are initially
initially and
and subsequently
subsequently measuredmeasured at fair value
at fair value less
less
costs
costs to to sell.
sell.
True
True 3. Agricultural produce
3. Agricultural produce is is measured
measured at at fair value less
fair value less costs
costs toto sell
sell only
only atat the
the
point
oint of
of harvest.
harvest.
True
True 4. An essential
4. An essential element
element of of agricultural
agricultural activity
activity is is the
the management
management of the
of the
biological
biolo ical transformation
transformation of of biological
biolo ical assets.
assets.
True
True 5.
5. Entity A’s dairy
Entity A's dairy cattle
cattle gave
gave birth
birth toto a
a calf.
calf. The
The fair value less
costs to to sell
sell of
of
the
the new
new born
born calf
calf is
is P10,000.
PIO,OOO. EntityEntity A A recognizes
recognizes a a gain
gain of
of P10,000
PIO,OOO fromfrom the the
initial recognition of the
initial reco nition of the calf. calf.
True
True 6.
6. A loss
A loss can
can arise
arise from
from thethe initial
initial measurement
measurement of of a
a biological
biological asset.
asset.
False
False 7.
7. Fair value is
Fair value is quoted
uoted price
rice inin an
an active
active market
market less less transaction
transaction costs.
costs.
True
True 8.
8. Entity
Entity A A acquires
acquires a a biological
biological asset
asset forfor P100,
PIOO, equal
equal to to fair value, and
fair value, and incurs
incurs
transaction
transaction cost of PIO on the purchase. If the asset's costs to sell is P20,
cost of P10 on the purchase. If the asset’s costs to sell is P20,
Entity
Entity A A will
will recognize
recognize a a loss
loss of of P30
P30 on the initial
on the initial recognition
recognition of of the
the
purchased
urchased asset.
asset.
False
False 9.
9. Entity
Entity A A recognizes
recognizes a a gain
gain of of P100 from the
PIOO from the change
change in in FVLCS
FVLCS of of its
its biological
biological
assets
assets during
during thethe period.
period. If the change
If the change in in FVLCS
FVLCS due due toto price
price change
change is is P70,
P70,
the
the change
chan e in in FVLCS
FVLCS due due to to physical
h sical change
chan e must must be be P40.
P40.
True
True 10.
10. If there are
If there are more
more than
than oneone active
active markets
markets for for a a biological
biological asset,
asset, the
the entity
entity
shall
shall use
use the
the price
price in
in the
the market
market expected
expected to to be
be used
used whenwhen determining
determining fair fair
value.
value.
PROBLEM 8-2:
8-2: MULTIPLE
MULTIPLE CHOICE
CHOICE
1.
1. According to
According the GAM
NGAs, a
a biological
biological asset
asset is
is
a.
a. an
an animal
animal or
or plant
plant
b.
b. an
an asset
asset used
used in farming
in farming
c.
c. a living animal or plant
a living animal or plant
d.
d. a
a harvested
harvested product
product
2.
2. The
The common
common features
features of
of agricultural
agricultural activities
activities include
include all
except
a.
a. capability to change
capability to change
b.
b. management
management of of change
change
c.
c. measurement
measurement of of change
change
d. wind of
d. wind of change
change
3. Which of
the following is an
an agricultural
agricultural produce?
produce?
a.
a. carabao
carabao
b.
b. harvested
harvested palay
palay
c.
c. extra
extra rice
rice
d.
d. powdered
powdered milk
milk
4. According to
to the GAM for
for NGAs,
NGAs, biological
biological assets
assets are
are measured
measured as follows:
as follows:
Initial
Initial measurement
measurement Subsequent
Subsequent measurement
measurement
a.
a. fair value
fair value less
less cost
cost to
to sell
sell fair value less
fair value less cost
cost to
to sell
sell
b.
b. cost
cost cost
cost less
less accumulated
accumulated
depreciation
depreciation
c.
c. cost
cost cost
cost less
less accumulated
accumulated
depreciation
depreciation andand impairment
impairment
losses
losses
d.
d. fair value less
fair value less costs to sell
costs to sell cost
cost
5.
5. Which of
Which of the following are
the following are not
not considered
considered costs to sell?
costs to sell?
a.
a. commissions
commissions to to brokers
brokers
b.
b. levies
levies by
by regulatory
regulatory agencies
agencies and
and commodity
commodity exchanges
exchanges
c.
c. transfer
transfer taxes
taxes and
and duties
duties
d.
d. transport
transport costs
costs
6.
6. According to
According the GAM
to the GAM for
for NGAs,
NGAs, if there
there is
if is no
no active
active market
market for
for a
a biological
biological asset
asset
a.
a. the
the entity
entity shall
shall measure
measure the
the biological
biological asset
asset at
at cost
cost less
less accumulated
accumulated depreciation.
depreciation.
b.
b. the
the entity
entity shall
shall measure
measure the
the biological
biological asset
asset at
at cost
cost less
less accumulated
accumulated depreciation
depreciation and
and
accumulated impairment losses.
c.
c. the
the entity
entity shall
shall use
use a
a contract
contract price
price in
in determining
determining the
the fair value.
fair value.
d.
d. the
the entity
entity shall
shall estimate the market
estimate the market price
price using
using the
the guidance
guidance setset forth
forth in
in the
the GAM
for
for NGAs.
NGAs.
7. Agricultural produce
7. Agricultural produce after the point
after the point of
of harvest
harvest is
is accounted
accounted for
for as
as
a.
a. Inventory
Inventory
b.
b. PPE
PPE
c.
c. Prepaid
Prepaid assets
assets
d.
d. Investment
Investment property
property
8.
8. The
The carrying
carrying amount
amount of of a
a group
group ofof biological
biological assets
assets of
of Entity
Entity AA is
is P100,000
PIOO,OOO before
before any year-
any year-
end
end adjustment.
adjustment. If the year-end
If the year-end fair value is
fair value is P120,000 while the
P120,000 while the year-end
year-end estimate
estimate of
of costs
costs
to
to sell
sell is
is P5,000, which of
P5,000, which of the
the following
following statements
statements isis correct?
correct?
a.
a. Entity
Entity A will recognize
A will recognize a a gain
gain ofof P15,000
P15,000 inin surplus
surplus or or deficit.
deficit.
b.
b. Entity A will
recognize a a gain
gain of
of P15,000
P15,000 directly
directly in
in equity.
equity.
c.
c. Entity A will
recognize a a gain
gain of
of P10,000
PIO,OOO inin surplus
surplus or
or deficit.
deficit.
d.
d. Entity A will
recognize a a gain
gain of
of P25,000
P25,000 inin surplus
surplus or
or deficit.
deficit.
9.
9. Which of
Which of the following need
the following need not
not be
be disclosed
disclosed in
in relation
relation to
to the
the accounting
accounting for
for biological
biological
assets?
assets?
a.
a. Consumable
Consumable and and bearer
bearer biological
biological assets
assets
b.
b. Mature
Mature and
and immature
immature biological
biological assets
assets
c.
c. The
The amount
amount of of change
change in
in fair value less
costs to
to sell
sell due to physical
due to physical changes
changes and
and due to
due to
price
price changes
changes
d.
d. The
The gain or
gain or loss
loss on
on initial
initial recognition
recognition ofof agricultural
agricultural produce
produce separately
separately from
from that
that
of
of biological
biological assets
assets
10.
10. Entity A is
Entity A is determining
determining the
the measurement
measurement of of its
its biological
biological assets
assets at the end
at the end of the period.
of the period.
Entity A’s biological
Entity A's biological assets
assets consist
consist of
of trees
trees in
in a
a plantation
plantation forest.
forest. There
There is
is no
no separate
separate active
active
market for these
market for these trees.
trees. However,
However, Entity
Entity AA was
was able to gather
able to the following
gather the following information:
information:
 FVLCS
• FVLCS of of land,
land, land
land improvements
improvements andand trees
trees as
as aa package,
package, P10M.
PIOM.
 FVLCS
• FVLCS of of land,
land, P8M.
P8M.
 FVLCS
• FVLCS of of land
land improvements,
improvements, P500,000
P500,000
How
How much
much is the valuation
is the valuation of
of the
the trees
trees in
in Entity A’s year-end
Entity A's year-end statement
statement of
of financial
financial position?
position?
a. P10,000,000
b. P2,000,000
c. P1,500,000
d. P1,000,000
PROBLEM 8-3: 8-3: FOR

DISCUSSION
1.
1. Living
Living animals
animals and
and plants
plants are
are accounted
accounted for
for as
as biological
biological assets
assets
a.
a. only if they are harvested for
only they are harvested for sale.
if sale.
b.
b. only
only if they relate
if they relate to
to agricultural
agricultural activity.
activity.
c.
c. in
in all
all cases.
cases.
d.
d. all
all of
of these.
these.
2.
2. The
The essential
essential element
element of
of an
an agricultural
agricultural activity
activity is
is
a.
a. the
the management
management of of the
the biological
biological transformation
transformation of
of biological
biological assets.
assets.
b.
b. the assets are alive.
the assets are alive.
c.
c. it involves
involves harvesting
it harvesting activity.
activity.
d.
d. the
the conversion
conversion of
of raw
raw materials
materials into
into finished
finished goods.
goods.
3. Which of
the following is a
a biological
biological asset?
asset?
a.
a. Land
Land used
used inin farming
farming
b.
b. Picked
Picked fruits
fruits
c.
c. Fruit
Fruit cocktail
cocktail
d.
d. Trees
Trees inin a
a plantation
plantation forest
forest
4. Which of
4. Which of the following statements
the following statements is is correct
correct regarding
regarding the
the measurement
measurement of of assets
assets related to
related to
agricultural activities?
agricultural activities?
a.
a. Biological
Biological assets
assets are
are initially
initially and
and subsequently
measured at fair value.
at fair value.
b.
b. No
No gain
gain or
or loss
loss shall
shall be
be recognized
recognized on on the
the initial
initial recognition
recognition ofof a
a biological
biological asset.
asset.
c.
c. Agricultural produce
Agricultural produce isis initially
initially and
and subsequently
measured at at fair value less
costs to
to
sell.
sell.
d.
d. The
The gain
gain or
or loss
loss arising
arising from
from the
the initial
initial measurement
measurement of of biological
biological asset
asset or
or
agricultural
agricultural produce
produce is is recognized
recognized in in surplus
surplus or or deficit.
deficit.
5.
5. According to
According the GAM
NGAs, biological
biological assets whose fair
assets whose value cannot
fair value cannot be
be reliably
reliably
determined
determined on on initial
initial recognition
recognition are
are measured
as follows:
Initial
Initial measurement
measurement Subsequent
measurement
a.
a. fair value
fair value less
less cost
cost to
to sell
sell fair value less
fair value less cost
cost to
to sell
sell
b.
b. cost
cost cost
cost less
less accumulated
accumulated
depreciation
depreciation
c.
c. cost
cost cost
cost less
less accumulated
accumulated
depreciation
depreciation and and impairment
impairment
losses
losses
d.
d. fair value less
costs toto sell
sell cost
cost
Use
Use the
the following
information for
for the
the next
next three
three questions:
questions:
A group
A group of
of Entity A’s biological
Entity A's biological assets
assets has
has aa carrying
carrying amount
amount of
of P100,000
PIOO,OOO before year-end
before year-end
adjustments.
adjustments. Information
Information at year-end is
at year-end is as
as follows:
follows:
Active Market
Active Market #2
Quoted rice P130,ooo Quoted rice
Trans rt costs 10,000 Trans rt costs 12000
Costs to sell
2,000 Costs to sell
3,000
6.
6. IfIf Entity
Entity A expects
expects to transact in
to transact Active Market
in Active #1, how
Market #1, how much
much is the fair
is the value?
fair value?
a.
a. 130,000
130,000
b.
b. 120,000
120,000
c.
c. 118,000
118,000
d.
d. 123,000
123,000
7.
7. IfIf Entity
Entity A expects
expects to transact in
in Active #2, how
Market #2, how much
much is the carrying
is the carrying amount
amount of the
of the
biological assets in the year-end statement of financial position?
biological assets in the year-end statement of financial position?
a.
a. 135,000
135,000
b.
b. 132,000
132,000
c.
c. 120,000
120,000
d.
d. 123,000
123,000
8.
8. IfIf Entity A expects
Entity A expects to transact in
in Active #1, how
Market #1, how much
much is the gain
is the gain or
or loss
loss from
from the
the
year-end remeasurement?
year-end remeasurement?
a.
a. 18,000
18,000
b.
b. 28,000
28,000
c.
c. 32,000
32,000
d.
d. 23,000
23,000
Use
Use the
the following
information for
for the
the next
next two
two questions:
questions:
On
On January
January 1,1, 20x1,
20x1, Entity A has
Entity A has one
one 1-year
I-year old
old biological
biological asset with carrying
asset with carrying amount
amount of
of
P1,000.
PI,OOO.
The
The following
following transactions
transactions occurred
occurred during
during the
the period:
period:
a.
a. On
On July
July 1,
1, 20x1,
20x1, one
one I-year
I-year old
old biological
biological asset
asset is
is acquired
acquired for
for P1,100,
PI,IOO, equal to the
equal to the FVLCS
FVLCS
on
on this
this date.
date.
b.
b. On
On October
October 1, 1, 20x1,
20x1, one
one biological
biological asset
asset is
is born.
born. The
The FVLCS
FVLCS of of a
a newborn
newborn on
on this
this date
date is
is
P500.
P500.
The
The FVLCS
FVLCS on on December
December 31,
31, 20x1
20<1 are
are as follows:
as follows:
Age
Age FVLCS
FVLCS
new
new bornborn P600
P600
3
3 mos.
mos. old
old P800
P800
11 yr.
yr. old
old P1,200
Pl,200
1.5 yr. old
1.5 yr. old P1,500
Pl,500
2 yrs. Old
2 yrs. Old P2,000
P2,OOO
9.
9. How
How much
much is
is change
change in
in FVLCS
FVLCS due to price
due to price change?
change?
a.
a. 400
400
b.
b. 800
800
c.
c. 1,800
1,800
d.
d. 2,400
2,400
Asset
Asset Group
Group Change
Change in in FVLCS
FVLCS
From
From beg. (1
beg. yr.; 11 yr.)
(1 yr.; yr.) ₱1,200 -- ₱
((Pl,200 1,000) xx 11
PI,OOO) 200
200
Purchased
Purchased on July 1
on July 1 (1 yr.; 11 yr.)
(1 yr.; yr.) ₱1,200 -- ₱
((Pl,200 1,100) xx 11
PI,IOO) 100
100
Born on Oct. 1 (0; 0)
Born on Oct. 1 (0; 0) ₱600 -- ₱
((P600 500) xx 11
P500) 100
100
Change
Change in FVLCS due
in FVLCS due toto Price
Price Change
Change 400
400
10.
10. How
How much
much is
is change
change in
in FVLCS
FVLCS due to physical
due to physical change?
change?
a.
a. 600
600
b.
b. 800
800
c.
c. 1,600
1,600
d.
d. 1,800
1,800
Asset
Asset Group
Group Change
Change in in FVLCS
FVLCS
From
From beg.
beg. (2yrs.;
(2yrs.; 1yr.)
lyr.) ₱2,000 -- ₱
((P2,OOO 1,200) xx 11
Pl,200) 800
800
Purchased
Purchased onon July
July 11 (1.5yrs.;
(1.5yrs.; 1yr.)
lyr.) ₱1,500 -- ₱
((Pl,500 1,200) xx 11
Pl,200) 300
300
Born
Born on
on Dec.
Dec. 31
31 (3
(3 mos.;
mos.; 0 yr.)
O yr.) ₱800 -- ₱
((P800 600) xx 11
P600) 200
200
FVLCS
FVLCS ofof new
new born
born on
on Dec.
Dec. 31 ₱500 xx 1)
31 ((P500 1) 500
500
Change
Change in FVLCS due
in FVLCS due toto Physical
Physical Change
Change 1,800
1,800
CHAPTER
CHAPTER 99
PROBLEM 9-1:
9-1: TRUE
TRUE OR FALSE FALSE
False
False 1.
1. An entity shall capitalize
An entity shall capitalize as as part
part ofof the
the cost
cost ofof an
an investment
investment property
property thethe
operating
operating losses losses incurred
incurred before
before thethe investment
investment property
property achieves
achieves thethe
planned
planned level level of
of occupancy.
occupancy.
False
False 2.
2. According to
According the GAM
to the GAM for for NGAs,
NGAs, government
government entities
entities may
may choose
choose to to use
use
either
either the the cost
cost model
model or the fair
or the value model
fair value model to to subsequently
subsequently measure
measure
investment
investment properties.
ro erties.
False
NGAs, an an entity
entity shall
shall not
not depreciate
depreciate an an asset while
asset while
it isis classified
classified as
it as investment
investment property.
ro er
False
False 4.
4. Recoverable
Recoverable amount amount is is the
the lower
lower of of an
an asset’s
asset's fair value less
costs toto sell
sell
and
and valuevalue inin use.
use.
False
False 5.
5. IfIf an
an asset’s
asset's recoverable
recoverable amountamount exceeds
exceeds its its carrying
carrying amount,
amount, thethe asset
asset is is
impaired.
im aired.
False
False 6.
6. An investment
An investment property with carrying
property with carrying amount
amount of of PIO
PIO is
is determined
determined to to have
have a a
fair value less
costs toto sell
sell of
of P7
P7 and
and a value in
a value in use
use of
of P8.
P8. The
The impairment
impairment
loss
loss is is P3.
P3.
True
True 7. An investment
7. An investment property with carrying
property with carrying amount
amount of of P10
PIO is
is sold for P7.
sold for P7.
Transaction
Transaction costs costs on the sale
on the sale amounted
amounted to to P1.
Pl. The
The loss
loss on
on derecognition
derecognition is is
P4.
False
False 8.
8. An investment
An investment property that was
property that was previously
previously impaired
impaired is is determined
determined to to have
have a a
new recoverable amount of P10. Right now, the
new recoverable amount of PIO. Right now, the asset's carrying amount is asset’s carrying amount is
P7.
P7. However,
However, if no no impairment
if impairment loss loss had
had been
been recognized
recognized in in the
the prior year’
prior year'
the
the asset would have
asset would have a a carrying
carrying amount
amount of of P9
P9 by by now.
now. The
The gain
gain on
on reversal
reversal
of
of impairment,
impairment, therefore,
therefore, is is P1.
Pl.
False
False 9.
9. According to
According the GAM
NGAs, a a government
government entity entity shall,
shall, at
at each
each reporting
reporting
date, determine the recoverable amount of an
date, determine the recoverable amount of an investment property and investment property and
compare
com are it with with its
it its carrying
car in amount.
amount.
True
True 10. An entity
10. An entity need
need notnot compute
compute for for the value in
the value in use
use of of an
an asset
asset if the
ifthe entity
entity has
has
no
no reason
reason to to believe that the
believe that value in
the value in use
use exceeds
exceeds the the fair
fair value
value less
less costs
costs to to
sell.
sell.
PROBLEM
PROBLEM 9-2:
9-2: MULTIPLE
MULTIPLE CHOICE CHOICE
1.
1. Which of the following is considered
Which of the following is considered anan investment
investment property?
property?
a.
a. Owner-occupied
Owner-occupied property
property awaiting
awaiting disposal.
disposal.
b.
b. Property that is
Property that is leased
leased to to another
another entity
entity under
under a
a finance
finance lease.
lease.
c.
c. Property
Property held for use
held for use inin the
the production
production or
or supply
supply of
of goods
goods or
or services
services or
or for
for
administrative
administrative purposes.
purposes.
d.
d. A
A building
building held
held by the entity
by the entity under
under aa finance
finance lease
lease and
and leased
leased out
out under
under one
one or
or
more
more operating
operating leases
leases on on a
a commercial
commercial basis.
basis.
2.
2. Which of
Which of the following would
the following would notnot be
be reported
reported as
as investment
property?
a.
a. Property
Property owned
owned byby the
the entity
entity and
and leased
leased out
out under
under one
one or
or more
more operating
operating leases.
leases.
b.
b. Property
Property head
head byby the
the entity
entity to
to be
be leased
leased out
out under
under one
one or
or more
more operating
operating leases.
leases.
c.
c. Real
Real estate
estate held with an
held with an undetermined
undetermined future
future use.
use.
d.
d. Property
Property owned
owned by by the
the entity
entity and
and leased
leased out to another
out to another entity
entity under
under aa finance
finance
lease.
lease.
3. Which of
3. Which of the following costs
the following costs may
may properly
properly be
be included
included in
in the
the carrying
carrying amount
amount of
of an
an
investment
property?
a.
a. Start-up
Start-up costs,
costs, such
such as
as opening
opening costs.
costs.
b.
b. Operating
Operating losses
losses incurred
incurred before
before the
the investment
investment property
property achieves
achieves the
the planned
planned level
level of
of
occupancy.
occupancy.
c.
c. Abnormal amounts
Abnormal amounts of wasted materials,
of wasted materials, labor
labor or
or other
other resources
resources incurred
incurred in
in constructing
constructing
or
or developing
developing the
the property.
property.
d.
d. Accrued
Accrued taxes
taxes prior
prior to
to acquisition
acquisition date that the
date that the entity
entity assumes
assumes an an obligation
obligation toto
pay.
pay.
4.
4. Entity A, a
government entity,
entity, acquires
acquires aa building
building to
to be
be leased
leased out
out under various operating
under various operating
leases
leases on
on commercial
commercial basis.
basis. Entity A incurs
Entity A incurs the following costs
the following costs on the acquisition:
on the acquisition:
Purchase
Purchase price
price P10,000,000
Legal
Legal services
services and
and transfer taxes
transfer taxes 10,000
10,000
Refurbishments
Refurbishments before
before occupancy
occupancy 30,000
30,000
Occupancy
Occupancy permit fees
permit fees 25,000
25,000
Property taxes after
Property taxes after occupancy
occupancy 8,000
8,000
Opening
Opening costs
costs (blessing
(blessing and
and feng
feng shui)
shui) 500,000
500,000
The
The entry
entry to
to initially
initially recognize
recognize the
the investment
investment property
property in
in Entity A’s books
Entity A's books of
of account
account is
is
a. Investment Property,
a. Investment Property, Land Land 10,065,000
Cash
Cash Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular 10,065,000
b.
b. Investment
Investment Property,
Property, Land
Land 10,565,000
Cash
Cash Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular 10,565,000
c.
c. Investment
Property, Land
Land 10,010,000
Cash
Cash Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular 10,010,000
d.
d. Investment
Property, Land
Land 10,040,000
Cash
Cash Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular 10,040,000
5.
5. During the period,
During the period, Entity A, government
Entity A, government entity,
entity, decides
decides to
to use
use as
as an
an office
office one
one of
of its
its building
building
that
that has
has previously
previously been
been leased
leased out
under various operating leases
leases on
on commercial
commercial basis.
basis.
Information
Information on
on the
the investment
investment property
property is
is as
as follows:
follows:
Investment
Investment property
property —– Building
Building P1,000,000
Accumulated depreciation
Accumulated depreciation 800,000
800,000
At the
At the date
date of
of change
change in
in use,
use, the fair value
the fair value of
of the
the investment
investment property
property is
is P250,000.
P250,000. How
How
much
much is the gain
is the gain (loss)
(loss) on
on the
the transfer?
transfer?
a.
a. 50,000
50,000
b.
b. (50,000)
(50,000)
c.
c. 0
d.
d. A transfer
A transfer is
is prohibited.
prohibited.
6.
6. On
On January
January 1, 1, 20x1,
20x1, Entity A acquires
Entity A acquires a a building
building toto be
be held
held as
as investment
investment property
property for
for aa total
total
cost
cost of
of P1,500,000. The
The building
building is
is estimated
estimated to
to have
have a a 30-year
30-year useful
useful life
life and
and aa 5%
5% residual
residual
value. Entity
value. A uses
Entity A the straight-line
uses the straight-line method
method ofof depreciation.
depreciation. On
On December
December 31, 31, 20x5,
20x5, Entity
Entity
A sells the building for
A sells the building for P1,300,000. How much is gain (loss) on the
How much is gain (loss) on the sale?sale?
a.
a. 35,700
35,700
b.
b. 37,500
37,500
c.
c. 53,700
53,700
d.
d. 75,300
75,300
Use
Use the
the following
information forfor the
the next
next three
three questions:
questions:
Entity A determines
Entity A determines an an indication
indication that
that its
its investment
investment property
property might
might be
be impaired.
impaired. Entity A then
Entity A then
gathers
gathers the
the following
following information:
information:
Carrying
Carrying amount
amount ofof investment
investment property
property P1,000,000
Fair value less
Fair value less costs
costs toto sell
sell 900,000
900,000
Value in
Value in use
use 880,000
880,000
Following the impairment,

Following the impairment, Entity
Entity A revises
revises its
its estimate
estimate of
of residual value to
residual value to 5% of
of the
the recoverable
recoverable
amount
amount and the remaining
and the remaining useful
useful life
life to
to 10 years.
10 years.
7.
7. How
How much
much is the impairment
is the impairment loss?
loss?
a.
a. 120,000
120,000
b.
b. 20,000
20,000
c.
c. 100,000
100,000
d. 0
8.
8. How
How much
much is the annual
is the annual depreciation
depreciation after the impairment?
after the impairment?
a.
a. 85,500
85,500
b.
b. 90,000
90,000
c.
c. 85,000
85,000
d.
d. 95,000
95,000
9.
9. Five years after
Five years after the
the impairment,
impairment, Entity A determines
Entity A determines an
an indication
indication that
that the
the impairment
impairment may
may
no
no longer
longer exist.
exist. Entity A makes
Entity A makes the
the following
following estimates
estimates and
and computations:
computations:
Fair value less
Fair value less costs to sell
costs to sell P800,000
P800,OOO
Value in
Value in use
use P700,000
P700,OOO
The
The investment
investment property would have
property would have a
a carrying
carrying amount
amount of
of P600,000
P600,000 by
by now
now if no
no if
impairment
impairment loss
loss had
had been
been recognized
recognized in the past.
in the past.
How
How much
much is the gain
is the gain on the reversal
on the reversal of
of impairment?
impairment?
a.
a. 125,000
125,000
b.
b. 129,500
129,500
c.
c. 127,500
127,500
d.
d. 327,500
327,500
10.
During the period, oneone of the buildings
of the buildings of
of Entity A, a
government entity, was completely
entity, was completely
destroyed
destroyed byby fire.
fire. The
The building
building has
has aa historical
historical cost
cost of
of P1,000,000 and and an
an accumulated
accumulated
depreciation
depreciation ofof P400,000.
P400,000. The
The building
building is
is insured
insured for
for P700,000. Which of
P700,000. Which of the
the following
following
statements
statements isis correct?
correct?
a.
a. Entity A reports
Entity A reports a a net
net gain
gain of
of P300,000
P300,000 fromfrom the
the event
event in
in its year-end financial
its year-end financial
statements.
statements.
b.
b. Entity A reports
Entity A reports a a net
net gain
gain of
of P100,000
PIOO,OOO fromfrom the
the event
event in
in its year-end financial
its year-end financial
statements.
statements.
c.
c. Entity A recognizes
Entity A recognizes a a loss
loss of
of P600,000
P600,000 but but no
no gain.
gain.
d.
d. Entity
Entity A
A shall treat the
shall treat the loss
loss event
event and
and the
the insurance
insurance claim
claim asas separate
separate events.
events.
PROBLEM 9-3:
9-3: FOR
1.
1. Which of
the following is an
an investment
property?
a.
a. Property
Property held to provide
held to provide a a social
social service
service and which also
and which also generate
generate cash
cash inflows.
inflows.
b.
b. Property
Property held for strategic
held for strategic purposes.
purposes.
c.
c. Property
Property occupied
occupied by by employees.
employees.
d.
d. Property
Property that
that is
is being
being constructed
constructed or or developed
developed for future use
for future use as
as investment
investment
property.
property.
2.
2. Which of
not an
an investment
property?
a.
a. Land
Land held for long-term
held for long-term capital
capital appreciation
appreciation rather
rather than
than for
for short-term
short-term sale
sale in the
in the
ordinary
ordinary course
course of of operations.
operations.
b.
b. Land
Land held for a
held for a currently
currently undetermined future use.
undetermined future use.
c.
c. A building
A building owned
owned by by the
the entity
entity (or
(or held
held by
by the
the entity
entity under
under aa finance
finance lease)
lease) and
and leased
leased
out
out under
under one
one oror more
more operating
operating leases
leases onon a
a commercial
commercial basis.
basis.
d.
d. Equipment
Equipment held held to
to be
be leased
leased out
out under
under one
one oror more
more operating
operating leases
leases on
on aa
commercial
commercial basisbasis toto external
external parties.
parties.
3. According to
to the GAM for
for NGAs,
NGAs, government
government entities
entities shall
shall measure
measure an
an investment
investment property
property
as follows:
as follows:
Initial
Initial Subsequent
Subsequent
a.
a. cost
cost Cost
Cost model
model or
or Fair value Model
Fair value Model
b.
b. cost
cost Cost
Cost Model
Model
c.
c. fair value
fair value Fair value Model
Fair value Model
d.
d. fair value
fair value Cost
Cost Model
Model or
or Fair value Model
Fair value Model
4.
4. Investment
Investment property
property acquired
acquired through
through donation
donation isis initially
initially measured
measured
a.
a. equal
equal to the carrying
to the carrying amount
amount inin the
the donor’s
donor's books
books
b.
b. at
at the
the cost
cost to
to the
the donor
donor
c.
c. at
at fair value on
fair value on acquisition
acquisition date
date
d.
d. equal
equal to the costs
to the costs incurred
incurred in transferring title
in transferring title of the investment
of the investment property
property to the entity
to the entity
5.
5. An entity
An entity acquires
acquires investment
investment property
property in
in exchange
exchange for for a
a long-term
long-term noninterest-bearing
noninterest-bearing note.
note.
Assuming all
Assuming all of the following
are determinable with sufficient
determinable with sufficient reliability
reliability but
but differ
differ in
in amounts,
amounts,
which of
which of them
them isis most
most likely
likely to
to be
be used
used in
in the
the initial
initial measurement
measurement of the investment
of the investment
property?
property?
a.
a. cash
cash price
price equivalent
equivalent of of the
the investment
investment property
property
b.
b. cash
cash price
price equivalent
equivalent of the note
of the note payable
payable
c.
c. present value of
present value of future
future cash
cash flows
flows on
on the
the note
note payable
payable discounted
discounted at at the
the current
current market
market
rate
rate
d.
d. face
face amount
amount of of note which is
note which is equal to the
equal to the installment
installment price
price
6.
Entity A acquires an
an investment
investment property
property for
for P1,000,000 cash. Additional costs
cash. Additional costs incurred
incurred are
are
as follows:
as follows:
 Repairs
• Repairs and
and remodeling
remodeling before
before occupancy,
occupancy, P50,000.
P50,000.
 Legal
• Legal costs
costs of transferring title
of transferring to the
title to the property,
property, P20,000.
P20,000.
 Repairs
• Repairs after
after occupancy,
occupancy, P15,000.
P15,000.
The
The investment
investment property
property is
is estimated
estimated to to have
have aa remaining
remaining useful
useful life
life of
of 10 years and
10 years and aa
residual value equal
residual value equal to
to 5%
5% of
of initial
initial cost.
cost. Entity A uses
Entity A the straight
uses the straight line
line method
method of
of
depreciation.
depreciation. How much is the carrying amount of the investment property after one
How much is the carrying amount of the investment property after year?
one year?
a.
a. 914,850
914,850
b. 968,350
b. 968,350
c.
c. 923,100
923,100
d.
d. 872,100
872,100
7.
7. According to
According the GAM
NGAs, transfers
transfers to
to or
or from
from investment
investment property
property shall
shall be
be made
made only
only
when there
when there is
is a
a
a.
a. change
change in
in management’s
management's intention
intention
b.
b. change
change inin use
use
c.
c. change
change in
in business
business model
model
d.
d. change in classification
change in classification
8.
During the period, Entity
Entity AA decides
decides to to lease
lease out
under various operating leases
leases on
on
commercial
commercial basis
basis one
one of
of its
its buildings
buildings that
that has
has previously
previously been
been used
used as
as office
office building.
building.
Information
Information on
on the
the building
building isis as
as follows:
follows:
Historical
Historical cost
cost P1,000,000
800,000
At the
At the date
date of
of change
change in
in use,
use, the fair value
the fair value of
of the
the building
building is
is P250,000. Which of
P250,000. Which the
of the
following
following isis the
the correct
correct reclassification
reclassification entry?
entry?
a. Investment Property, Buildings
a. Investment Property, Buildings 200,000
200,000
Accumulated
Accumulated Depreciation
Depreciation – - Buildings
Buildings 800,000
800,000
Buildings
Buildings 1,000,000
b.
b. Investment
Property, Buildings
Buildings 250,000
250,000
Accumulated Depreciation — – Buildings
Buildings 800,000
800,000
Buildings
Buildings 1,000,000
Gain
Gain on
on reclassification
reclassification 50,000
50,000
c.
c. Investment Property, Buildings
Investment Property, Buildings 250,000
250,000
Accumulated Depreciation — – Buildings
Buildings 800,000
800,000
Buildings
Buildings 1,000,000
Revaluation
Revaluation Surplus
Surplus 50,000
50,000
d.
d. a
a or
or c,
c, depending
depending onon the
the entity’s
entity's accounting
accounting policy
policy
Use
Use the
the following
information for
for the
the next
next two
two questions:
questions:
On
On January 1, 20x1, Entity A acquires a building to
January 1, 20x1, Entity A acquires a building to be
be held
held as
as investment
investment property
property for
for a
a total
total
cost
cost of
of P1,500,000. TheThe building
building is
is estimated
estimated to
to have
have a a 30-year
30-year useful
useful life
life and
and aa 5%
5% residual
residual
value. Entity
value. A uses
Entity A the straight-line
uses the straight-line method
method ofof depreciation.
depreciation.
On
On December
December 31,
31, 20x5, Entity A determines
Entity A determines that the building
that the building is
is impaired
impaired and
and makes
makes the
the
following estimates:
following estimates:
Fair value less
P900,OOO
Value in
Value in use
use P1,000,000
Following the impairment,

Following the impairment, Entity
Entity A revises
revises its
its estimate
estimate of
of residual value to
residual value to 5%
5% of
of the
the recoverable
recoverable
amount.
amount.
9.
9. How
How much
is the impairment loss
loss on
on December
December 31,
31, 20x5?
20x5?
a.
a. 226,500
226,500
b.
b. 326,500
326,500
c.
c. 257,500
257,500
d.
d. 262,500
262,500
10.
10. On
On December
December 31,31, 2x10,
2x10, Entity A determines
Entity A determines an an indication
indication that the impairment
that the impairment loss
loss
recognized
recognized in
in the
the prior
prior period
period may
may no
no longer
longer exist.
exist. Entity A makes
Entity A the following
makes the following estimates
estimates
and
and computations:
computations:
Fair value less
costs to sell P1,100,000
Value in
Value in use
use P1,050,000
How
How much
much is the gain
is the gain on the reversal
on the reversal of
of impairment?
impairment?
a.
a. 215,000
215,000
b.
b. 290,000
290,000
c.
c. 75,000
75,000
d.
d. 218,000
218,000
CHAPTER
CHAPTER 10
10
PROBLEM 10-1:
10-1: TRUE
TRUE OR FALSE FALSE
True
True 1.
1. The
The capitalization threshold
capitalization threshold for for items
items of of PPE
PPE by by government
government entities
entities if P15,000,
if P15,000,
which is
which is equal
e ual to the petty
to the et cash
cash disbursement
disbursement limit. limit.
True
True 2.
2. Individual
Individual items
items of of PPE with values
PPE with values below
below the the capitalization
capitalization threshold
threshold but work
but work
together
together as as aa group
group areare recognized
recognized as as PPE
PPE if thethe total
if total cost
cost ofof the
the group
group meets
meets
the
the capitalization
ca italization threshold.
threshold.
False
False 3.
3. Items
Items below
below thethe capitalization
threshold of of PPE
PPE areare recognized
recognized as as Semi-
Semi-
Expandable
Ex andable Property
Pro er — –a a separate
se arate class class of of PPE.
PPE.
False
4. According to the
the GAM
GAM for for NGAs,
NGAs, tradetrade discounts
discounts are are excluded
excluded from from the
the initial
initial
measurement
measurement of of items
items of of PPE
PPE but but not
not cash
cash discounts.
discounts.
True
True 5.
5. The
The provision
provision for for decommissioning
decommissioning and and restoration
restoration costs
costs of of an
an item
item ofof PPE
PPE is is
subsequently
measured at at amortized
amortized cost. cost.
False
6. According to the
the GAM
GAM for for NGAs,
NGAs, government
government entities entities may
may choose
choose either the
either the
cost
cost model
model or the revaluation
or the revaluation model
model to to subsequently
subsequently measuremeasure their their PPE.
PPE.
True
True 7.
7. Government
Government entities
entities record
record depreciation
de reciation on on a a monthly
monthl basis.
basis.
False
False 8. An item
8. An item ofof PPE
PPE withwith historical
historical cost
cost of of P10,
PIO, accumulated
depreciation of of P5
P5 and
and
accumulated
accumulated impairment
im airment losseslosses of of P1
Pl isis sold
sold for
for P7.
P7. The
The gain ain on
on the
the sale
sale is is P2.
P2.
True
True 9.
9. Heritage
Heritage assets
assets areare measured
measured at at cost.
cost. However,
However, they they are
are not
not subsequently
subsequently
depreciated,
de reciated, but but subject
sub•ect to to impairment.
im airment.
True
True 10.
10. Infrastructure
Infrastructure assets
assets areare accounted
accounted for for in
in the
the same
same manner
manner as as the
the other
other items
items
of
of PPE.
PPE. However,
However, infrastructure
infrastructure assets
assets are are generally
generally assigned
assigned a a residual value
residual value
of
of zero.
zero.
True
True 11.
11. Reforestation
Reforestation projectsro•ects are
are classified
classified as as land
land improvements.
im rovements.
False
False 12.
12. Entity A's equipment has a carrying amount of P10
Entity A’s equipment has a carrying amount of PIO before
before replacement
replacement of of an
an
old
old part.
part. The
The oldold part
part has
has a a carrying
carrying amount
amount of of P2.
P2. The
The cost
cost of
of the
the replacement
replacement
part
art is
is P5.
P5. The
The loss
loss on
on replacement
re lacement is is P3.
P3.
True
True 13.
13. Entity
Entity A A acquires
acquires an an equipment
equipment in in exchange
exchange for for another
another equipment
equipment ownedowned by by
Entity
Entity B.B. The
The carrying
carrying amount
amount of of Entity A’s equipment
Entity A's equipment is is P10 while its
PIO while fair value
its fair value
is
is P9.
P9. Entity
Entity B’s
B's equipment
equipment has has a a fair value of
fair value of only
only P7.
P7. However,
However, Entity
Entity B B pays
pays
Entity
Entity A A P2
P2 for
for the
the difference.
difference. If the exchange
If the exchange has has commercial
commercial substance,
substance, EntityEntity
will recognize
A will reco nize a a loss
loss of
of P1
Pl onon the
the exchange.
exchan e.
True
True 14.
14. Entity
Entity A A acquires
acquires an an item
item ofof PPE
PPE fromfrom an an inter-agency
inter-agency transfer.
transfer. Entity
Entity AA will
will not
not
recognize
reco nize any an gain ain or
or loss from this
loss from this transaction.
transaction.
False
False 15.
15. Government
Government entities
entities normally
normally assign
assign items items of of PPE
PPE a a residual value of
residual value of 15%
15% of of
cost.
cost.
MULTIPLE CHOICE
CHOICE
1.
Entity A acquires an an equipment
equipment for
for P1M.
PIM. The
The equipment
equipment is is acquired
acquired notnot for
for active
active use
use in
in the
the
production
production of of goods
goods butbut rather
rather as
as aa standby
standby equipment
equipment that will only
that will only bebe used
used if the
if the main
main
equipment
equipment needs
needs to to be
be repaired.
repaired. Does this equipment
Does this equipment qualify
qualify for
for recognition
recognition asas property,
property,
plant
plant and
and equipment?
equipment?
a.
a. Yes,
Yes, all
all of
of the
the recognition
recognition criteria
criteria for
for aa PPE
PPE areare met.
met.
b.
b. No. the equipment
No. the equipment does
does not
not satisfy
satisfy all the recognition
all the recognition criteria for a
criteria for a PPE.
PPE.
c.
c. No.
No. Although, the equipment satisfies some of the recognition criteria for
Although, the equipment satisfies some of the recognition criteria for a
a PPE,
PPE, it does
it does
not
not satisfy
satisfy all.
all. The
The equipment
equipment shall
shall be
be classified
classified asas “Other Assets.”
"Other Assets."
d.
d. Yes
Yes and
and no.no. During the periods
During the the equipment
periods the equipment is is idle,
idle, it shall
it shall be
be classified
classified as
as “Other
"Other
Assets.” During
Assets." During the
the periods
periods the
the equipment
equipment is is in
in active
active use,
use, it shall
it shall be
be classified
classified as
as “PPE.”
"PPE."
2.
2. For
For government
government entities,
entities, the
the capitalization
threshold for
for PPE
PPE is
is
a.
a. P15,000
P15,000 or or more
more
b.
b. more than P15,000
more than P15,000
c.
c. not
not less than P25,000
less than P25,000
d.
d. at
at least
least P5,000
P5,000
3. According to
to the GAM for
for NGAs,
NGAs, cash
cash discounts
discounts not
not taken
taken on
on purchases
purchases of
of items
items of
of PPE
PPE
are
are
a.
a. included
included in the cost
in the cost of
of PPE
PPE
b.
b. recognized
recognized as as “Other
"Other Losses”
Losses"
c.
c. ignored
ignored
d.
d. debited to the
debited to the “Purchase
"Purchase Discount
Discount Lost”
Lost" account
account
4. According to
NGAs, estimates
estimates of
of decommissioning
decommissioning and and restoration
restoration costs
costs of
of an
an
item of PPE are (choose the incorrect
item of PPE are (choose the incorrect statement)statement)
a.
a. included
included in the initial
in the initial cost
cost of
of the
the item
item of
of PPE
PPE at the present
at the value of
present value of the
the estimates.
estimates.
b.
b. credited to the
credited to the “other
"other provisions”
provisions" account
account at
at their
their present value.
present value.
c.
c. included
included in in the
the initial
initial cost
cost of
of an
an item
item of
of PPE
PPE butbut not
not subject
subject to
to subsequent
subsequent
depreciation,
depreciation, although
although subject
subject toto amortization
amortization using the effective
using the effective interest
interest method.
method.
d.
d. are recognized as provisions, at present value, and subsequently measured
are recognized as provisions, at present value, and subsequently measured similar to similar to a
a
financial
financial liability.
liability.
5.
5. Which of
Which of the following costs
the following costs is
is not
not added
added to the cost
to the cost of
of an
an intern
intern of
of PPE?
PPE?
a.
a. Costs
Costs of of site
site preparation
preparation
b.
b. Initial
Initial delivery
delivery and
and handling
handling costs
costs
c.
c. Net
Net disposal proceeds of samples generated
disposal proceeds of samples generated during
during testing
testing
d.
d. Employee
Employee benefits
benefits arising
arising directly
directly from
from the
the acquisition
acquisition of
of PPE
PPE
6.
Entity A acquires 55 motor vehicles for
motor vehicles for a
a package
package price
price of
of P10M.
PIOM. In In conjunction with the
conjunction with the
purchase,
purchase, thethe supplier
supplier provides
provides Entity Aa
Entity A a promotional
promotional item
item ofof 1
1 motor vehicle which
motor vehicle which isis not
not of
of
the
the same
same type
type as
as those
those acquired.
acquired. The
The fair value of
fair value of the
the motor vehicle is
motor vehicle is P2M. Which of
P2M. Which of the
the
following
statements is is correct?
correct?
a.
a. For
For individual
individual costing
costing purposes,
purposes, thethe cost
cost of
of each
each of
of the
the 55 motor vehicles is
motor vehicles is
P1,600,000.
b.
b. For
For individual
individual costing
costing purposes,
purposes, the
the cost
cost of
of each
each motor vehicle acquired
motor vehicle acquired is
is P1,666,667.
Pl,666,667.
c.
c. The promotional item is recognized as gain equal to fair
The promotional item is recognized as gain equal to fair value. value.
d.
d. a
a and
and cc
7.
7. Entity
Entity A A acquires
building through
through self-construction
self-construction (construction
(construction by
by administration).
administration). The
The
initial
initial cost
cost of
of the
the building will most
building will most likely
likely be
be based
based on which of
on which of the
the following?
following?
a.
a. The
The contract
contract price.
price.
b.
b. The
The costs
costs of
of direct
direct materials,
materials, direct
direct labor
labor and
and construction
construction overhead,
overhead, excluding
excluding
wastages.
wastages.
c.
c. a
a or
or b
b
d.
d. Fair value at
Fair value at the
the acquisition
acquisition date.
date.
8.
Entity A acquires a a building
building through
through self-construction
self-construction (construction
(construction byby administration).
administration). The
The
construction
construction costs
costs incurred
incurred are
are
a.
a. initially
initially recorded
recorded in in the
the Registries
Registries and
and recorded
recorded in
in the
the books
books ofof accounts
accounts only
only upon
upon
completion
completion of the construction.
of the construction.
b.
b. initially
initially recorded
recorded in the “Construction
in the "Construction in in Progress”
Progress" account.
account.
c.
c. recorded in the “Buildings” account in the period they
recorded in the "Buildings" account in the period they arise. arise.
d.
d. initially
initially recorded
recorded asas “Receivables”
"Receivables" during
during the
the construction
construction period.
period.
9.
9. Entity A, a
government entity,
entity, acquires
acquires an an equipment
equipment for
for P1M
PIM on August 6,
on August 6, 20x1. The
The
equipment’s
equipment's estimated
estimated useful
useful life
life is
is 5 year. How
5 year. How much
much is
is the
the carrying
carrying amount
amount of the
of the
equipment
equipment onon December
December 31,
31, 20x1?
a.
a. 920,833
920,833
b.
b. 936,667
936,667
c.
c. 916,667
916,667
d.
d. 979,167
979,167
Computation:
Computation:
(1M x 95%(a) xx 5
(1M x (b)
/60 (c)) =
5 (b)/60 = 79,167
79,167 accumulated
depreciation
(1M – 79,167)
(1M - 79,167) = = 920,833
920,833
(a)
(100%
(100% less
(a) less 5%5% standard
standard residual value)
residual value)
(b)
(August
(August to
(b) to December
December 20x1)
20<1)
(c)
(5 yrs. x 12)
(5 yrs. x 12)
(c)
10. Which of
10. Which of the following assets
assets would most likely
likely not
not be
be assigned
assigned a
a residual value by
residual value by a
a
government
government entity?
entity?
a.
a. A major part of
A major part of an
an equipment
equipment
b.
b. A building held
Abuilding held as
as investment
investment property
property
c.
c. A major
A major tool
tool
d.
d. Infrastructure
Infrastructure asset
asset
11. Which of
the following assets is
is generally
generally not
not subject
subject to
to depreciation?
depreciation?
a.
a. Heritage
Heritage assets
assets
b.
b. Infrastructure
assets
c.
c. Roads
Roads
d.
d. a
a and
and b b
12. Which of
the following is considered
considered a
a heritage
heritage asset?
asset?
a.
a. road
road networks
networks
b. museum
b. museum
c.
c. bridges
bridges
d.
d. forest
forest
13. Which of
the following assets of
of a
a government
government entity
entity is
is not
not subject
subject to
to impairment?
impairment?
a.
a. Heritage
Heritage assets
assets
b.
b. Reforestation
Reforestation projects
projects
c.
c. Idle
Idle land
land
d.
d. None of
None these
of these
14. A government
14. A government entity
entity derecognizes
derecognizes an
an item
item of
of PPE
PPE that
that is
is
a.
a. idle
idle
b.
b. fully
fully depreciated
depreciated
c.
c. unserviceable
unserviceable
d.
d. all
all of
of these
these
15.
15. The
The national
national government
government receives
receives aa P10M
PIOM grant
grant from
from a a foreign
foreign government
government condition
condition on the
on the
construction
construction of
of a
a highway. According to
highway. According the GAM
to the for NGAs,
GAM for when shall
NGAs, when shall the
the national
national
government
government recognize
recognize revenue from the
revenue from the grant?
grant?
a.
a. when the grant is received
when the grant is received
b.
b. when the
when the grant
grant becomes
becomes receivable
receivable
c.
c. when the
when the grant
grant becomes
becomes receivable
receivable and there is
and there is reasonable
reasonable assurance
assurance that the attached
that the attached
condition will be
condition will be satisfied
satisfied
d. when the
d. when the condition
condition is is satisfied
satisfied
PROBLEM 10-3:
10-3: MULTIPLE
MULTIPLE CHOICECHOICE
1.
Entity A acquires a a train
train on
on January
January 1,
1, 20x1.
20x1. Information
Information onon costs
costs are
are as
as follows:
follows:
Purchase price
Purchase price 9,000,000
Import
Import duties
duties 200,000
200,000
Cash
Cash discount
discount notnot taken
taken 100,000
100,000
Freight costs
Freight costs 800,000
800,000
Testing
Testing costs
costs 300,000
300,000
Repairs
Repairs after
after the
the train
train is
is brought
brought to
to its
its operational
operational state
state 600,000
600,000
Estimated
Estimated costs
costs of
of dismantling
dismantling the train at
the train at the
the end
end of
of its
its
20-year
20-year useful
useful 120,000
120,000
The
The current
current market
market rate
rate of
of interest
interest on
on acquisition
acquisition date
date 12%.
12%. The
The entry to recognize
entry to the train
recognize the train in
in
the
the books
books of
of accounts
accounts is?
is?
a.
a. Trains
Trains 10,212,440
Other
Other Losses
Losses 100,000
100,000
Cash-Modified Disbursement System (MDS), Regular Regular 10,300,000
Other
Other Provisions
Provisions 12,440
12,440
b.
b. Trains
Trains 10,312,440
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular 10,300,000
Other
Other Provisions
Provisions 12,440
12,440
c.
c. Trains
Trains 10,200,000
Other
Other Losses
Losses 100,000
100,000
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular 10,300,000
d.
d. Trains
Trains 10,300,000
Cash-Modified
Disbursement System
System (MDS),
(MDS), Regular
Regular 10,300,000
2.
2. During the period
During the period Entity A starts
Entity A starts the
the construction
construction of
of a
a building
building by
by administration.
administration. Entity A
Entity A
acquires
acquires construction
construction materials
materials for Ᵽ10M. the
for PIOM. the entry to record
entry to the transaction
record the transaction is
is
a.
a. Construction
Construction Materials
Materials Inventory
Inventory 10,000,000
Account
Account Payable
Payable 10,000,000
b.
b. Construction in Progress-Buildings And Other Structures
Construction in Progress-Buildings And Other Structures 10,000,000
Account Payable
Account Payable 10,000,000
c.
c. Construction
Construction in
in Progress-Buildings
Progress-Buildings AndAnd Other
Other Structures
Structures 10,000,000
Construction Materials Inventory
Construction Materials Inventory 10,000,000
d.
d. None
None of
of these.
these.
3.
3. Entity
Entity AA exchanged
exchanged an an equipment with Entity
equipment with Entity B.
B. Entity A however,
Entity A however, did
did not
not recognize
recognize any
any gain
gain
or loss on the exchange. Which of the following is a valid reason for
or loss on the exchange. Which of the following is a valid reason for this? this?
a.
a. No
No cash was involved
cash was involved in
in the
the exchange.
exchange.
b.
b. The
The fair values of
fair values the equipment
of the equipment exchanged were equal
exchanged were equal
c.
c. The exchanged lacks commercial
The exchanged lacks commercial substance. substance.
d.
d. All of
All these
of these
4.
4. Entity
Entity A receives
receives a a donation
donation of of land with fair
land with value of
fair value Ᵽ1M.The donor
of PIM.The donor stipulated
stipulated that the land
that the land
shall
shall only
only be
be used
used asas aa portion
portion of of a
a proposed
proposed highway.
highway. If in
If in case
case the
the project
project is
is discontinued,
discontinued,
Entity A shall
Entity A shall return
return the
the land
land toto the
the donor. At the
donor. At the date
date of
of receipt
receipt of
of the
the donation, the
donation, the
construction
construction ofof the
the highway
highway is is not yet started.
not yet When should
started. When should Entity A recognize
Entity A recognize the
the land
land in
in its
its
books
books of
of accounts?
accounts?
a.
a. Upon
Upon receipt
receipt of the donation.
of the donation.
b.
b. When the
When the construction
construction ofof the
the highway
highway is is started.
started.
c.
c. When the construction of the highway is
When the construction of the highway is completed. completed.
d.
d. When the
When the land
land is
is used
used in the construction
in the construction of the highway.
of the highway.
5.
5. During the year
During the year Entity A, an
Entity A, an NGA,
NGA, incurred
incurred interest of Ᵽ
interest of 200,000 on
P200,000 on a
a loan
loan taken to
taken to
specifically
specifically finance
finance the
the construction
construction of
of a
a building.
building. The
The proceeds
proceeds ofof a
a loan were temporarily
loan were temporarily
invested
invested and
and earned
earned interest
interest income
income of Ᵽ20,000. Which
of P20,000. Which of
of the
the following
following entries
entries best
best reflects
reflects
the
the recognition
recognition of the interest
of the interest in
in the
the books
books of
of accounts
accounts ofof Entity A?
Entity A?
a.
a. Interest expense
Interest expense 200,000
200,000
Interest
Interest Payable
Payable 200,000
200,000
b.
b. Interest
Interest expense
expense 180,000
180,000
Interest Payable
Interest Payable 180,000
180,000
c.
c. Construction
Construction in in Progress-Buildings
Progress-Buildings
and
and Other
Other Structures
Structures 180,000
180,000
Interest Payable
180,000
d.
d. Buildings
Buildings and
and Other
Other Structures
Structures 180,000
180,000
Interest
Interest Payable
Payable 180,000
180,000
PROBLEM 10-4: 10-4: FOR

1.
1. Which of
not one
one ofof the
the characteristics
characteristics of
of property,
property, plant
plant and
and equipment?
equipment?
a.
a. ItIt is
is aa tangible
tangible asset.
asset.
b.
b. ItIt is
is held
held for
for use
use in
in the
the production
production oror supply
supply of
of goods,
goods, services
services or
or program
program outputs, for
outputs, for
rental
rental to to others,
others, or
or for
for administrative
purposes.
c.
c. It
It is expected to be used for more than one
is expected to be used for more than one reporting
reporting period.
period.
d.
d. It
It is is intended
intended for for resale
resale inin the
the ordinary
ordinary course
course ofof operations.
operations.
2.
2. Which of
Which of the following does
not result to the
result to the recognition
recognition of
of PPE?
PPE?
a.
a. A single
A single purchase
purchase ofof equipment
equipment costing
costing P15,000.
P15,000.
b.
b. Purchases
Purchases of of equipment that work
equipment that work together
together as
as aa group,
group, individually
individually costing
costing P1,000
PI,OOO to
to
P5,000
P5,000 but with a
but with a sum
sum total
total cost
cost of
of more
more than
than P15,000.
P15,000.
c.
c. Bulk
Bulk acquisitions
acquisitions of
of small
small items
items of
of PPE with aggregate
PPE with aggregate cost
cost of
of more than P15,000.
more than P15,000.
d. Acquisition of building for P10M intended to be leased out
d. Acquisition of building for PIOM intended to be leased out under various under various
operating
operating leases
leases on
on commercial
commercial basis.
basis.
3.
Entity A acquires anan equipment
equipment on on account with the
account with following terms:
the following terms: P500,000
P500,000 list
list price,
price,
20%,
20%, 10%,
10%, 2/10,
2/10, n/30.
n/30. Entity A incurs
incurs the following additional
additional costs:
costs:
Non-refundable purchase
Non-refundable purchase taxes taxes
(not yet included
(not yet included inin the
the list
list price
price above)
above) 10,000
10,000
Installation
Installation costs
costs 100,000
100,000
Estimated
Estimated costs
costs of
of dismantling
dismantling the
the equipment
equipment atat
the
the end
end of
of its
its 10-year
10-year useful
useful 20,000
20,000
The
The current
current market
market rate
rate of
of interest
interest on
on acquisition
acquisition date
date is
is 10%.
10%.
How
How much
much is the initial
is the initial cost
cost of the equipment?
of the equipment?
a.
a. 468,713
468,713
b.
b. 470,511
470,511 (500,000
(500,000 x x 80% xx 90% xx 98%)
98%) +
+ 10,000
10,000 +
+ 100,000
100,000 +
+ (20,000 x PV
(20,000 x PV of
of 1
1
@10%, n=10)
n=10)
c.
c. 472,341
472,341
d.
d. 489,313
489,313
4.
Entity A acquires 5 5 motor vehicles for
motor vehicles for a
a package
package price
price of
of P10M.
PIOM. In In construction with the
construction with the
purchase,
purchase, thethe supplier
supplier provides
provides Entity A a promotional
Entity Aa promotional item
item ofof 1
1 motor vehicle which
motor vehicle which is is the
the
same
same as those acquired.
as those acquired. The fair value
The fair value the
the motor vehicle is
motor vehicle is P2M. Which of
P2M. Which the following
of the following
statements
statements is is correct?
correct?
a.
a. For
For individual
individual costing
costing purposes,
purposes, thethe cost
cost of
of each
motor vehicle acquired is
is P2,000,000.
b.
b. For
For individual
individual costing
costing purposes,
purposes, the the cost
cost of
of each
motor vehicle acquired is is
P1,666,667.
c.
c. The
The promotional
promotional item
item is
is recognized
recognized as as gain
gain equal to fair
equal to fair value.
value.
d.
d. a
a and
and cc
5.
5. Entity
Entity AA acquires
building by
by awarding
awarding a a construction
construction contract
contract toto a
a contractor.
contractor. The
The initial
initial
cost
cost of the building
of the will most
building will most likely
likely be
be based
based on which of
on which the following?
of the following?
a.
a. The
The contract
contract price.
price.
b.
b. The
The costs
costs of
of direct
direct materials,
materials, direct
direct labor
labor and
and construction
construction overhead,
overhead, excluding
excluding
wastages.
wastages.
c.
c. a
a or
or b
b
d.
d. Fair value at
Fair value at the
the acquisition
acquisition date.
date.
Use
Use the
the following
information for
for the
the next
next two
two questions:
questions:
Entity A exchange
Entity A exchange equipment with Entity
equipment with Entity B.
B. Pertinent
Pertinent data
data are
are shown
shown below:
below:
Entity A
Entity A Entity B
Entity B
Carrying
Carrying amount
amount 85,000
85,000 130,000
130,000
Fair value
Fair value 95,000
95,000 115,000
115,000
Cash
Cash paid
paid by
by Entity A to
Entity A to Entity
Entity B
B 15,000
15,000
6.
6. IfIf the
the exchange
exchange has
has commercial
substance, how
how much
much is the initial
is the initial measurement
measurement of
of the
the
equipment received by Entity
equipment received by Entity A? A?
a.
a. 95,000
95,000
b.
b. 110,000
110,000 (95,000
(95,000 +
+ 15,000)
15,000)
c.
c. 115,000
115,000
d.
d. 85,000
85,000
7.
7. IfIf the
the exchange
exchange hashas commercial
substance, how
how much
much is the gain
is the gain (loss)
(loss) recognized
recognized by
by
Entity
Entity A A in
in the
the exchange?
exchange?
a.
a. 10,000 (95,000
10,000 (95,000 - – 85,000)
85,000)
b.
b. (10,000)
(10,000)
c.
c. (15,000)
(15,000)
d.
d. 15,000
15,000
8.
8. Entity A incurs
Entity A incurs costs
costs in
in repairing
repairing an
an item
item of
of PPE.
PPE. It is
is not
It not clear whether the
clear whether the repair
repair is
is a
a minor
minor
or
or major
major repair.
repair. Entity A shall
Entity A shall
a.
a. recognize
recognize thethe repair
repair costs
costs as
as expense
expense
b.
b. capitalize the repair costs
capitalize the repair costs
c.
c. a
a or b
orb
d.
d. none
none ofof these
these
9.
9. Entity A, a
government entity,
entity, acquires
acquires anan equipment
equipment for
for P1M
PIM on August 26,
on August 26, 20x1.
20x1. The
The
equipment’s
equipment's estimated useful life is 5 years. How much is the accumulated depreciation of
estimated useful life is 5 years. How much is the accumulated depreciation of
the
the equipment
equipment onon December
December 31,31, 20x1?
20<1?
a.
a. 66,666
66,666
b.
b. 63,333
63,333
c.
c. 83,333
83,333
d.
d. 79,167
79,167
Computation:
Computation:
(a)
(1M x 95%
(1M X 950/0(a) X x44 (b)/60 (c)) =
(b)/60 = 63,333
63,333
(a)
(100%
(100% less
(a) less 5%5% standard
standard residual value)
residual value)
(b)
(September
(b)(September to to December
December 20x1)
20<1)
(c)
(5 yrs. x
(5 yrs. x 12)'
(c) 12)’
Use
Use the
the following
information for
for the
the next
next three
three questions:
questions:
At year-end,
At year-end, Entity
Entity AA determines
determines an an indication
indication that
that an
an equipment with carrying
equipment with carrying amount
amount ofof
P400,000 is impaired. This equipment was acquired 5 year earlier and was originally
P400,000 is impaired. This equipment was acquired 5 year earlier and was originally estimated estimated
to
to have
have aa useful
useful life
life of
of 10 years and
10 years and aa 5%
5% residual value. Entity
residual value. A determines
determines the following
information:
information:
Fair value less
Fair value less cost to sell
cost to sell P350,000
P350,OOO
Replacement
Replacement costscosts P700,000
P700,OOO
10.
10. How
How much
is the impairment loss
loss assuming
assuming Entity A compute
Entity A for the
compute for value in
the value in use
use using
using the
the
Depreciable
Depreciable Replacement
Replacement Cost Approach?
Cost Approach?
a.
a. 32,667
32,667
b.
b. 32,500
32,500
c.
c. 50,000
50,000
d.
d. 37,500
37,500
Computation:
Computation:
Replacement
Replacement cost
cost 700,000
700,000
Accumulated depreciation -- (700K
(700K xx 95%
95% xx 5/10)
5/10) (332,500)
(332,500)
Depreciated
Depreciated Replacement
Replacement Cost
Cost —– Value
Value in
in use
use 367,500
367,500
Recoverable
Recoverable service
service amount
amount (VIU
(VIU -- higher)
higher) 367,500
367,500
Carrying
Carrying amount
amount (400,000)
(400,000)
Impairment
Impairment loss
loss (32,500)
(32,500)
11. Assume the

11. Assume the indication
indication of
of impairment
impairment is
is physical
physical damage
damage toto the
the equipment.
equipment. Entity A
Entity A
estimates that it would
estimates that it would cost
cost P10,000
PIO,OOO to
to restore
restore the
the equipment’s
equipment's service
service potential to the
potential to the level
level
before
before the
the physical
physical change.
change. How
How much
much isis the
the impairment
impairment loss
loss under the Restoration
under the Restoration Cost
Cost
Approach?
Approach?
a.
a. 42,667
42,667
b.
b. 42,500
42,500
c.
c. 50,000
50,000
d.
d. 47,500
47 ,500
Computation:
Computation:
Depreciated
Depreciated replacement
replacement cost
cost (see
(see solution above)
solution above) 367,500
367,500
Less:
Less: Restoration
Restoration cost
cost (10,000)
(10,000)
Value
Value in
in use
use 357,500
357,500
Recoverable
Recoverable service
service amount
amount (VIU
(VIU -- higher)
higher) 357,500
357,500
Carrying
Carrying amount
amount (400,000)
(400,000)
Impairment
Impairment loss
loss (42,500)
(42,500)
12. Assume the
12. Assume the indication
indication of
of impairment
impairment is
is a
a significant
significant decline
decline in the expected
in the expected output
output of
of the
the
equipment, which Entity
equipment, which Entity A estimates
estimates to
to be
be 10%.
10%. How
How much
much isis the
the impairment
impairment loss
loss under the
under the
Service Units Approach?
Service Units Approach?
a.
a. 62,667
62,667
b.
b. 62,500
62,500
c.
c. 50,000
50,000
d.
d. 69,250
69,250
Computation:
Computation:
Depreciated
Depreciated replacement
replacement cost
cost (see
(see solution above)
solution above) 367,500
367,500
Multiply
Multiply by:
by: 90%
Value
Value in
in use
use 330,750
330, 750
Recoverable
Recoverable service
service amount
amount (FVLCS
(FVLCS -- higher)
higher) 350,000
350,000
Carrying
Carrying amount
amount (400,000)
(400,000)
Impairment
Impairment loss
loss (50,000)
(50,000)
13. Which of
13. Which of the following statements
the following statements is is correct?
correct?
a.
a. Heritage
Heritage assets
assets are
are initially
initially measured
measured at at cost
cost and
and subsequently
measured at
at cost
cost less
less
accumulated
depreciation andand accumulated
accumulated impairment
impairment losses.
losses.
b.
b. Infrastructure
assets are
are accounted for similar
accounted for to the
similar to the other
other items
items of
of PPE.
PPE. However,
However, they
they
are
are generally
generally assigned
assigned a a 10%
10% residual value.
residual value.
c.
c. Reforestation
Reforestation project are not considered PPE.
project are not considered PPE.
d.
d. Fully
Fully depreciated
depreciated PPEPPE areare derecognized.
derecognized.
14. Which of
the following is derecognized?
derecognized?
a.
a. Idle
Idle PPE
PPE
b.
b. Fully
Fully depreciated
depreciated PPE
PPE
c.
c. Unserviceable
Unserviceable PPE PPE
d.
d. Partially
Partially damaged
damaged PPEPPE
15.
15. How
How do
do government
government entities
entities account for borrowing
account for borrowing costs?
costs?
a.
a. Capitalized
Capitalized if the
ifthe borrowing
borrowing costs
costs relate
relate to the acquisition
to the acquisition or
or construction
construction of
of a
a qualifying
qualifying
asset.
asset.
b.
b. Expensed
Expensed eveneven if the
if the borrowing
borrowing costs
costs relate to the
relate to the acquisition
acquisition or
or construction
construction of
of a
a
qualifying
qualifying asset.
asset.
c.
c. Choice
Choice (a)
(a) for the national
for the national government;
government; choice
choice (b)
(b) for
for national
national government
government agencies.
agencies.
d.
d. Choice
Choice (a)(a) for the national
for the national government
government agencies;
agencies; choice
choice (b) for the
(b) for the national
national
government.
government.
CHAPTER 11
11
PROBLEM 11-1:
11-1: TRUE
TRUE OR FALSE FALSE
False
False 1.
1. If
If it is not clear whether an
is not clear whether
it an expenditure
expenditure is is aa research
research or or a
a development
development cost, cost,
it is
is treated
treated as
it as development
develo ment cost. cost.
True
True 2.
2. The
The development
development cost cost of
of an
an internally
internally generate
generate intangible
intangible asset
asset maymay bebe
capitalized
ca italized if certain
certain conditions
if conditions are are met.
met.
False
False 3.
3. A government
overnment entity
enti does
does notnot amortize
amortize intangible
intan ible assets.
assets.
False
False 4.
4. Government
Government entities
entities amortize
amortize all all of
of their
their intangible
intangible assets
assets over
over a a period
period of
of 22
to
to 10
10 years,
ears, unless
unless a a more
more appropriate
a ro riate estimate
estimate of of useful
useful life
life is
is available.
available.
True
True 5.
5. For
For subsequent
subsequent measurement,
measurement, government
government entities
entities classify
classify intangible
intangible assets
assets
into
into those with finite
those with finite and
and indefinite
indefinite useful
useful lives,
lives, similar
similar to
to business
business entities.
entities.
False
False 6.
6. Government
Government entities
entities normally
normally assign their intangible
assign their intangible assets
assets a a residual value
residual value
of
of 5% of of cost.
cost.
True
True 7.
7. Subsequent
Subsequent expenditures
expenditures on on recognized
recognized intangible
intangible assets
assets are are generally
generally
expensed
expensed unlessunless it is
is clear
clear that
it the expenditures
that the expenditures meet meet thethe recognition
recognition criteria
criteria
for
for intangible
intan ible assets.
assets.
False
False 8.
8. A government
A government entity
entity acquires
acquires an an intangible
intangible asset with indefinite
asset with indefinite useful
useful life
life for
for
P100. Assuming the
PIOO. Assuming the entity
entity uses
uses the
the maximum
maximum amortization
amortization period for
period for
intangible
intangible assets
assets under the GAM
under the GAM forfor NGAs,
NGAs, the the appropriate
appropriate annual
annual
amortization
amortization expense
ex ense on on the
the intangible
intan ible asset
asset is is P10.
PIO.
False
False 9.
9. The
The amortization
amortization of of an
an intangible
intangible asset
asset isis credited
credited directly
directly toto the
the intangible
intangible
asset
asset account,
account, according
accordin to the GAM for
to the for NGAs.
NGAs.
False
False 10. An entity
10. An entity determines
determines an an indication
indication of of impairment
impairment for the intangible
for the intangible asset with
asset with
carrying
carrying amount
amount of of P100.
PIOO. TheThe entity
entity calculates
calculates a fair value
a fair value less
less costs to sell
costs to sell
of
of P90
P90 andand a value in
a value in use
use ofof P105.
P105. TheThe impairment
impairment loss loss is
is P5.
P5.
PROBLEM 11-2:
11-2: MULTIPLE
MULTIPLE CHOICE
CHOICE
1.
1. In which of
In which the following
of the following instances
instances isis an
an asset
asset not
not considered
considered to to be
be identifiable?
identifiable?
a.
a. The
The asset
asset can
can be
be sold
sold separately
separately regardless
regardless of whether the
of whether the entity
entity intends
intends to
to do
do so.
so.
b.
b. The
The asset
asset arises
arises from
from aa contractual
contractual right.
right.
c.
c. The
The asset
asset can
can be
be leased
leased out
out separately
separately on on its
its own
own oror licensed
licensed to
to be
be used
used separately
separately by
by
other entities in exchange for cash payments.
other entities in exchange for cash payments.
d.
d. The
The asset
asset cancan only
only be
be transferred
transferred if the entity
if the entity isis liquidated.
liquidated.
2.
2. Which of
the following is most
most likely
likely to
to be
be recognized
recognized as
as intangible
intangible asset
asset by
by a
a government
government
entity?
entity?
a.
a. Internally
Internally generated
generated brand
brand
b.
b. Subsequent
Subsequent expenditure
expenditure onon aa copyright
copyright
c.
c. Development
Development costs incurred in internally
costs incurred in internally generating
generating a
a patent
patent
d.
d. Publishing
Publishing title
title acquired
acquired as
as a a donation
donation
3.
3. Subsequent
Subsequent expenditures
expenditures on on recognized
recognized intangible
intangible assets
assets are
are
a.
a. generally
generally capitalized
capitalized and
and amortized
amortized over the remaining
over the remaining useful
useful life
life or
or the
the extended
extended useful
useful
life.
life.
b.
b. generally
generally expensed,
expensed, unless
unless they
they meet
meet the
the definition
definition ofof an
an intangible
intangible asset
asset and
and the
the
asset
asset recognition
recognition criteria.
criteria.
c.
c. generally
generally capitalized
capitalized if they
they meet
if meet the
the conditions
conditions of technical feasibility,
of technical feasibility, probable
probable future
future
economic
economic benefits,
benefits, and
and reliable
reliable measurement.
measurement.
d.
d. not
not accounted for.
accounted for.
4. According to
to the GAM for
for NGAs,
NGAs, government
government entities
entities shall
shall use this measurement
use this measurement model
model in
in
subsequently measuring intangible assets.

subsequently measuring intangible assets.
a.
a. Cost
Cost model
model
b.
b. Revaluation
Revaluation model
model
c.
c. Fair value model
Fair value model
d.
d. a
a or
orbb
5.
5. Intangible
Intangible assets
assets held
held by
by government
government entities
entities are
are measured
measured as
as follows:
follows:
Initial
Initial Subsequent
Subsequent
a.
a. cost
cost cost
cost less
less accumulated
accumulated amortization
amortization and
and impairment
impairment losses
losses
b.
b. cost
cost fair value
fair value less
less accumulated
accumulated amortization
amortization and
and impairment
impairment losses
losses
c.
c. cost
cost fair value
fair value through
through surplus
surplus or
or deficit
deficit
d.
d. a
a or
or b
b
6.
6. The
The default
default amortization
amortization method for intangible
method for intangible assets with finite
assets with finite useful
useful life
life is
is
a. straight line method

a. straight line method
b.
b. sum-of-the-years
sum-of-the-years digits
digits
c.
c. double
double declining
declining
d.
d. none
none of
of these
these
7. which of
7. which of the
the following
statements is is incorrect
incorrect regarding the accounting
regarding the accounting forfor impairment
impairment of of
intangible
intangible assets
assets under
under thethe GAM
GAM forfor NGAs?
NGAs?
a.
a. An entity
An entity is
is required
required to test for
to test for impairment
impairment an an intangible
intangible asset with indefinite
asset with indefinite useful
useful life
life or
or
an
an intangible
intangible asset
asset not yet available
not yet available for
for use
use at
at least
least annually
annually or whenever there
or whenever there is
is an
an
indication
indication ofof impairment.
impairment.
b.
b. An entity
An entity shall
shall test
test for
for impairment
impairment an an intangible
intangible asset with definite
asset with definite useful
useful life
life only when
only when
an
an indication
indication of of impairment
impairment exists.
exists.
c.
c. The
The accounting
accounting for for impairment
impairment of of intangible
intangible assets,
assets, and
and reversal
reversal thereof,
thereof, is the same
is the same as as
those
those of
of investment
investment property
property andand PPE.
PPE.
d.
d. Intangible
Intangible assets
assets are are subject
subject to to amortization
amortization using the straight
using the straight line
line method
method overover a a
period
period ofof 22 to
to 10 years but
10 years but are
are not
not subject to impairment.
subject to impairment.
Use
Use the
the following
information for
for the
the next
next three
three questions:
questions:
On
On December
December 1, 1, 20x1,
20<1, Entity A acquired
Entity A acquired a a computed
computed software
software for
for P1,000,000 and and incurred
incurred the
the
following costs:
following costs:
 Non-refundable
Non-refundable purchase taxes of
purchase taxes of P30,000,
P30,000, not
not included
included inin the
the purchase
purchase price
price above.
above.
 Professional fees incurred in the installation of the software,
Professional fees incurred in the installation of the software, PIOO,OOO. P100,000.
 Modifications
Modifications to the software
to the software before
before it was
it was brought
brought toto the
the condition
condition intended
intended byby
management
management for for use,
use, P60,000.
P60,000.
 Costs
Costs ofof testing
testing the
the software,
software, P10,000.
PIO,OOO.
 Training
Training costs
costs of
of staff who will
staff who will be
be using
using the
the software,
software, P200,000.
P200,000.
 Costs
Costs of updating the software after was available for use
of updating the software afteritit was available for use inin the
the condition
condition originally
originally
intended
intended by by management,
management, P5,000.
P5,000.
Administrative and
 Administrative and other
other general
general overhead
overhead costs
costs incurred
incurred onon the
the acquisition
acquisition and
and
installation
installation of
of the
the software,
software, P15,000.
P15,000.
The
The software’s
software's useful
useful life
life is
is 5 years.
5 years.
8.
8. The
The entry
entry to
to initially
initially recognize
recognize the
the software
software is
is
a.
a. Computer Software
Computer Software 1,200,000
Cash-Modified
Disbursement
System
System (MDS), Regular
(MDS), Regular 1,200,000
b.
b. Computer
Computer Software
Software 1,140,000
Cash-Modified
Disbursement
System
c.
c. Computer
Computer Software
Software 1,400,000
Cash-Modified
Disbursement
System
System (MDS),
(MDS), Regular
Regular 1,400,000
d.
d. Computer Software
Computer Software 1,190,000
Cash-Modified
Disbursement
System
9.
9. Entry
Entry to
to recognize the amortization
recognize the amortization expense
expense for
for the
the current year is
current year is
a.
a. Amortization-Intangible Assets
Amortization-Intangible Assets 240,000
240,000
Computer
Computer Software
Software 240,000
240,000
b.
b. Amortization-intangible Assets
Amortization-intangible Assets 240,000
240,000
Accumulated Amortization-Computer
Accumulated Amortization-Computer Software
Software 240,000
240,000
c.
c. Amortization-Intangible
Amortization-Intangible Assets
Assets 20,000
20,000
Accumulated
Accumulated Amortization-Computer
Amortization-Computer Software
Software 20,000
20,000
d.
d. Amortization-Intangible Assets
Amortization-Intangible Assets 20,000
20,000
Computer
Computer Software
Software 20,000
20,000
10.
10. On
On December
December 31,
31, 20x2, Entity A assesses
Entity A assesses an
an indication
indication impairment
impairment and
and makes
makes the
the following
following
estimates:
estimates:
Fair value less
P700,OOO
Value in
Value in use
use P800,000
P800,OOO
The
The entry
entry to
to recognize the event
recognize the event is
is
a.
a. Impairment
Impairment Loss-Intangible Assets
Loss-Intangible Assets 140,000
140,000
Accumulated
Accumulated Impairment
Impairment Losses-Computer
Losses-Computer Software
Software 140,000
140,000
b.
b. Impairment Loss-Intangible Assets
Impairment Loss-Intangible Assets 140,000
140,000
Computer
Computer Software
Software 140,000
140,000
c.
c. None, the intangible asset is not impaired.
None, the intangible asset is not impaired.
d.
d. None,
None, intangible
intangible assets
assets held
held by
by government
government entities
entities are
are not
not subject
subject to
to impairment.
impairment.
PROBLEM
PROBLEM 11-3:
11-3: FOR
FOR CLASSROOM DISCUSSIONDISCUSSION
1.
1. Which of
not one
one of
of the
the essential
essential an
an intangible
intangible asset?
asset?
a.
a. Separability
Separability
b.
b. Arising from
Arising from binding
binding arrangement
arrangement
c.
c. Control
Control
d.
d. Held
Held for
for use
use in the production
in the production or or supply
supply of
of goods
goods
2.
2. An intangible
An intangible asset
asset is
is identifiable
identifiable if itif it
a.
a. is
is separable
separable
b.
b. arises
arises from
from binding
binding arrangements
arrangements
c.
c. is
is a
a non-monetary
non-monetary asset without physical
asset without physical substance.
substance.
d.
d. aa orb
orb
3. Which of
the following is an
an indicator
indicator of
of control?
control?
a.
a. the
the ability
ability of
of an
an entity
entity to
to benefit
benefit from
from an
an asset.
asset.
b.
b. the
the ability of an entity to deny or regulate the
ability of an entity to deny or regulate the access
access ofof others
others to
to the
the benefit
benefit of
of an
an asset.
asset.
c.
c. an
an entity
entity can,
can, depending
depending on the nature
on the nature of
of the
the asset,
asset, exchange
exchange it, use
it, use it to
it to provide
provide goods
goods
or
or services,
services, exact
exact aa price for others’
price for others' use
use of
of it, use
it, use it to
it to settle
settle liabilities,
liabilities, hold
hold it, or
it, or perhaps
perhaps
even
even distribute
distribute it to
to owners.
it owners.
d.
d. all
all of
of these.
these.
4. Which of
the following is most
most likely
likely not
not an
an intangible
intangible asset?
asset?
a. Computer
a. Computer
b.
b. Trademark
Trademark
c.
c. Acquired import
Acquired import quota
quota
d.
d. Customer
Customer list
list
5.
5. A purchased
A purchased intangible
intangible asset
asset is
is initially
initially measured
measured at
at
a.
a. cost
cost
b.
b. fair value
fair value
c.
c. the
the sum
sum ofof research
research and
and development
development costs
costs
d.
d. the total of development costs
the total of development costs
6.
6. The
The development
development costs
costs of
of an
an internally
internally generated
generated intangible
intangible asset
asset can
can be
be capitalized
capitalized ifif
certain
certain conditions
conditions areare met. Which of
met. Which the following
of the following is
is not
not one
one of those conditions?
of those conditions?
a.
a. Technical
Technical feasibility
feasibility of
of completing
completing the
the intangible
intangible asset.
asset.
b.
b. Intention
Intention to
to complete
complete thethe intangible
intangible asset.
asset.
c.
c. Ability to
Ability to measure
measure reliably
reliably the
the expenditure
expenditure attributable to the
attributable to the intangible
intangible asset
asset during
during its
its
development.
development.
d.
d. Existence
Existence of of similar
similar assets
assets inin the
the market
market oror economic
economic environment where the
environment where the
entity
entity operates.
operates.
7.
7. Internally
Internally generated
generated brands,
brands, mastheads,
mastheads, publishing
publishing titles,
titles, lists
lists of
of users
users of
of a
a service,
service, and
and
items
items similar
similar inin substance
substance areare not
not recognized
recognized as as intangible
intangible assets
assets because
because
a.
a. it is
itis illegal
illegal to
to recognize
recognize these
these items
items as
as assets,
assets, according
according to to international
international intellectual
intellectual
property
property lawslaws and
and other
other business
business laws.
laws.
b.
b. it is
itis often
often difficult to measure
difficult to measure separately
separately the
the costs
costs ofof these
these items.
items.
c.
c. these
these cannot
cannot be be distinguished
distinguished from
from the
the cost
cost of
of developing
developing the the entity’s
entity's operations
operations
as
as a whole.
a whole.
d.
d. the
the entity
entity normally
normally cannot
cannot demonstrate
demonstrate itsits ability
ability to
to use
use these, when completed
these, when completed during
during
their
their development
development phase.phase.
8.
8. Government
Government entities
entities normally
normally assign their intangible
assign their intangible assets
assets a
a residual value of
residual value of
a.
a. 5%
5% of
of cost
cost
b.
b. 10%
10% of
of cost
cost
c.
c. 25%
25% of
of cost
cost
d.
d. zero
zero
9.
9. Which of
Which of the following intangible
the following intangible assets
assets isis not
not amortized?
amortized?
a.
a. Intangible
Intangible asset with infinite
asset with infinite useful
useful life
life
b.
b. Intangible
Intangible asset with finite
asset with finite useful
useful life
life
c.
c. All intangible
All intangible assets
assets held
held byby a
a government
government entity
entity
d.
d. Intangible
Intangible asset
asset not
not yet
yet available
available for
for use
use
10. An entity
10. An entity shall
shall test
test for
for impairment
impairment anan intangible
intangible asset with finite
asset with finite useful
useful life
life
a.
a. only when an
only when an indication
indication of
of impairment
impairment exists.
exists.
b.
b. at
at least
least annually
annually or whenever there
or whenever there is
is an
an indication
indication of
of impairment.
impairment.
c.
c. at
at each
each reporting
reporting date,
date, including
including interim
interim periods,
periods, if the
the entity
if entity prepares
prepares interim
interim financial
financial
statements.
statements.
d.
d. Never,
Never, because
because intangible
intangible assets
assets held
held by
by a
a government
government entity
entity is
is not
not subject to
subject to
impairment;
impairment; only
only amortization.
amortization.
GOVERNMENT
ACCOUNTING
ACCOUNTING FOR
NON-PROFIT ORGANIZATIONS
GOVERNM
FOR NATIONAL GOVERNME
PHILIPPINE FINANCIAL • SOFRSs)
ZEUS VERNON B. MILLAN

GOVERNMENT
ACCOUNTING
Accounting for
Non-Profit Organizations
BASED ON
GOVERNMENT ACCOUNTING MANUAL FOR NATIONAL
GOVERNMENT AGENCIES (GAM for NGAs)
and
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs)
NC PAR
2008
Nation's Foremost CPA Review Inc. (NCPAR)

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ii
ALL RIGHTS RESERVED

2018
No part of this work covered by the

copyright hereon may be reproduced or
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ISBN 978-621-8029-15-6
Any copy of this book not bearing the

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as proceeding from an illegal source.
Published by:
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iii
Dear Reader,
This book has, two parts. The first part is Government
Accounting and the second part is Accounting for Non-profit
Organizations.
As with all the books that I have written and co-written so
far, this book is also a labor of love and it is dedicated to you, my
dear reader.
When I was a student like you, I disliked government
accounting and accounting for non-profit organizations simply
because I found these topics too difficult to understand. My aim in
writing this book is to present concepts in a manner that would
make sense to you. I hope that, this way, you will find it easier to
appreciate these topics.
One day, if you have the opportunity to become a
government accountant, you would already have the basic
knowledge necessary for you to start building a meaningful
career. Being a government accountant is one of the noble
professions in the practice of accountancy. You will not only be

serving your personal aspirations but also the aspiration of many
Filipinos — and that is, to have a great nation! As a public servant,
you will have the privilege of directly serving our beloved
country. Remember, theories become truly useful only when
applied in order to achieve something that is meaningful.
If lateryou have queries, comments, or suggestions on
on,
how I can improve my work, I would be glad if you inform me.
Here are my contact details: zeusvernonmillan@gmail.com and
(0917) 870 6962.
Good luck in your learning and best wishes in your
journey through life.. ....thank you for making me a part of it.O
Sincerely,
Zeus vernnt B. Millan

iv
Dedicatt.one
For my wife — Eureka, my son — Devin Joshua and daughter
Athena. My deepest gratitude goes to my parents — Agapito, Jr.
and Dr. Remedios, and my teachers in elementary, high school

all
and college for inculcating in me the importance of education.

Special thanks to all the people at Bandolln enterprise (Publuhé.+te
ad PÆ+1tt+%).
My sincere thanks also go to my dear friend Mr. Rodel
Villanueva (aGOCC Audit Manager) for sharing his valuable time
in answering my queries during the writing of this book as well as
his experiences in the field of government accounting.
- zeus vervvovt B. Millan
A bouttheAutho-r
The author is a 6th Placer in the October 2006 CPA board
examinations. He is a co-founder of, and a CPA reviewer at,
Nation's Foremost CPA Review Inc. (NCPAR), a teacher, and an

entrepreneur.
TABLE OF CONTENTS
CHAPTER 1
OVERVIEW OF GOVERNMENT ACCOUNTING
RESPONSIBILITY, ACCOUNTABILITY AND LIABILITY OVER GOVERNMENT FUNDS AND

PROPERTY
ACCOUNTING RESPONSIBILITY
THE GAM FOR NGAs
BASIC ACCOUNTING AND BUDGET REPORTING PRINCIPLES
QUALITATIVE CHARACTERISTICS OF FINANCIAL REPORTING

COMPONENTS OF GENERAL PURPOSE FINANCIAL STATEMENTS 12
ELEMENTS OF THE FINANCIAL STATEMENTS 12
CHAPTER 1 SUMMARY' 16
CHAPTER 2
THE BUDGET PROCESS 24
THE NATIONAL BUDGET

THE BUDGET CYCLE
25
Budget Preparation
29
Budget Legislation
The Approved Budget 30
32
Budget Execution
37
42
Responsibility Accounting
CHAPTER 2 SUMMARY'
43
CHAPTER 3
THE GOVERNMENT ACCOUNTING PROCESS 52
52
BOOKS OF ACCOUNTS AND REGISTRIES
53
BUDGET REGISTRIES
54
Object of Expenditures
55
KEEPING OF THE GENERAL ACCOUNTS
55
BASIC RECORDINGS
55
Appropriation
55
Allotment
57
Incurrence of Obligation
57
Obligation Request and Status (ORS)
Disbursement Authority — Notice of Cash Allocation (NCA) 60
vi
Disbursements 63
Remittance of Amounts Withheld 66
Tax Remittance Advice (TRA) 66
Billings, Collections & Remittances 68
Reversion of Unused Notice of Cash Allocation (NCA) 69
THE REVISED CHART OF ACCOUNTS 71
THE GOVERNMENT ACCOUNTING CYCLE 75
CHAPTER 3 SUMMARY• 99
CHAPTER 4
REVENUES AND OTHER RECEIPTS 116
FUNDAMENTAL PRINCIPLES FOR REVENUE 116

Types of funds 117
SOURCES OF REVENUE 119
Exchange Transactions 120
Non-exchange Transactions 123
Bequests 126
Grant with Condition 126
Pledges 127
Concessionary Loans 128
OTHER RECEIPTS 128
CHAPTER 5
DISBURSEMENTS 139
FUNDAMENTAL PRINCIPLES FOR DISBURSEMENT OF PUBLIC FUNDS 139

AUTHORITY TO DISBURSE/PAY 140
BASIC REQUIREMENTS & CERTIFICATIONS FOR DISBURSEMENTS 141
MODES OF DISBURSEMENTS 142
Disbursements through Check 142
Disbursements through Cash 143
Disbursements through Advice to Debit Account (ADA) 145
Disbursements through electronic Modified Disbursement System. 146
Disbursements through Cashless Purchase Card (CPC) System 146
Disbursements through Non-Cash Availment Authority (NCAA) 148
ACCOUNTING FOR DISALLOWANCES 149
ACCOUNTING FOR OVERPAYMENTS 150
vii
CHAPTER 6
FINANCIAL ASSETS 162
CASH AND CASH EQUIVALENTS 164

Petty Cash Fund 165
Accounting for Cash Shortage/Overage of Disbursing Officer 168
Dishonored Checks 169
Bank Reconciliation 170
RECEIVABLES 171
INVESTMENTS 172
Categories of Financial Assets 172
Impairment of Financial Assets 176
Derecognition of Financial Assets 177
DERIVATIVES 178
CHAPTER 7
INVENTORIES 189
MEASUREMENT 190
COST FORMULAS 191
RECEIPT AND DISPOSITION OF INVENTORIES 193
CHAPTER 8
AGRICULTURE 205
RECOGNITION 207
MEASUREMENT 207
DETERMINATION OF FAIR VALUE 208
DISCLOSURES 210
CHAPTER 9
INVESTMENT PROPERTY 220
INITIAL MEASUREMENT 221

223
SUBSEQUENT MEASUREMENT
TRANSFERS To OR FROM INVESTMENT PROPERTY 223
225
DERECOGNITION
225
IMPAIRMENT
227
CASH GENERATING UNIT
227
REVERSAL OF IMPAIRMENT
CHAPTER 9 SUMMARY- 231
O{APTER 10
PROPERTY, PLANT AND EQUIPMENT 241
RECOGNmON 241
Subsequent Expenditures on recognized PPE 252
SUBSEQUENT MEASUREMENT 255
IMPAIRMENT 258
Computation of Value in Use 259
HERITAGE ASSETS 264
INFRASTRUCTURE ASSETS 265
REFORESTATION PROJECTS 266
DERECOGNmON 267
IDLE, FULLY DEPRECIATED, UNSERVICEABLE AND LOST PPE 268
RECEIPT AND DISPOSITION OF PPE 271
BORROWING COSTS 272
CHAPTER 11
INTANGIBLE ASSETS 290
RECOGNITION 291
SUBSEQUENT MEASUREMENT 294
IMPAIRMENT 295
DERECOGNITION 295
CHAPTER 12
LIABILITIES 305
FINANCIAL LIABILITIES 306

Initial Measurement 306
Subsequent Measurement 307
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS 309
Measurement 310
ix
CHAPTER 13
LEASES
320
FINANCE LEASE
320
LEASE OF LAND AND BUILDING
321
Accounting for Finance lease by Lessees 322
Accounting for Finance lease by Lessors 323
OPERATING LEASE
326
CHAPTER 14
FINANCIAL STATEMENTS 337
GENERAL PRINCIPLES 339

STATEMENT OF FINANCIAL POSITION 341
STATEMENT OF FINANCIAL PERFORMANCE 345
STATEMENT OF CHANGES IN NET ASSETS/EQUITY 347
STATEMENT OF CASH FLOWS 348
STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNTS 352
NOTES TO FINANCIAL STATEMENTS 355
Events After the Reporting Date 358
Changes in Accounting Policies 359
Changes in Accounting Estimates 360
Errors 360
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS 361
INTERIM FINANCIAL STATEMENTS 363
OTHER REPORTS 363
DEADLINES ON SUBMISSION OF REPORTS 364
CHAPTER 15
MISCELLANEOUS TOPICS 376
SERVICE CONCESSION ARRANGEMENTS BY GRANTOR 376

Recognition and Measurement of Asset 378
Recognition and Measurement of Liability
379
380
Financial Liability Model
380
Grant of Right to the Operator Model
381
Dividing the Arrangement
382
INTERESTS IN JOINT VENTURE
382
Jointly ControJled Operations
384
Jointly Controlled Assets
385
Jointly Controlled Entities
x
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 387

Initial Measurement 387
Subsequent Measurement 388
Exchange Differences 388
Translation of Financial Statements 389
CHAPTER 16
NON-PROFIT ORGANIZATIONS 400
CURRENT TREND IN PRACTICE 401

CHARACTERISTICS OF A NON-PROFIT ORGANIZATION 403
PFRS PRINCIPLES APPLICABLE TO NPOs 403
ACCOUNTING FOR NON-PROFIT ORGANIZATIONS 405
Fund theory vs. Fund accounting 405
Contributions 406
Recognition and measurement
Cash and other Non-cash assets 407
Unconditional promises 408
Conditional promises 409
Services 410
Works of art and similar items 411
Deferral method of recognizing contributions 418
FINANCIAL STATEMENTS 420
Statement of financial position 420
Statement of activities 420
Statement of cash flows 422
ACCOUNTING PROCEDURES PECULIAR TO SPECIFIC TYPES OF N POs 423
Health Care Organizations 423
Private, non-profit, Colleges and Universities 429
Voluntary Health and Welfare Organizations 430
Other non-profit organizations 431
ACCOUNTING FOR OTHER ASSETS HELD BY NPOs 431
CHAPTER 17
ILLUSTRATIVE FINANCIAL STATEMENTS OF NPOS 457
ILLUSTRATIVE FINANCIAL STATEMENTS - BASED ON U.S. GAAP 457

ILLUSTRATIVE FINANCIAL STATEMENTS — BASED ON IFRSs 462
ILLUSTRATIVE FINANCIAL STATEMENTS BASED ON IFRSs, SOME U.S. GAAP PRINCIPLES
ARE INCORPORATED 473
Overview of Government Accounting
Chapter 1
Learning Objectives
1. Differentiate government accounång from the accounting for
business entities.
2. State the government entities charged with accounting
responsibility.
3. Describe briefly the GAM for NGAs.
4. State the basic principles used in government accounting.
5. State the recognition criteria for assets.
Introduction
"Government accounting encompasses the processes of
analyzing, recording, classifying, summarizing and
communicating all transactions involving the receipt and
disposition of government funds and property, and interpreting
the results thereof." (State Audit Code of the Philippines, P.D. No. 1445, Sec.
The objectives ofgovernment accounting are:

a) To produce information concerning past operations and
present conditions;
b) To provide a basis for guidance for future operations;
c) To provide for control of the acts of public bodies and officers
in the receipt, disposition and utilizaåon of funds and

and
property;
d) To report on the financial position and the results of
operations of government agencies for the information of all
persons concerned.
(P.D. No. 1445, sec. 110)
2 qapter 1
Like the accounting for business entities, government

accounting is also a process of producing information that is useful
in making economic decisions. Government accounting, however

places greater emphasis on the following:
a. Sources and utilization of government funds; and
b. Responsibility, accountability and liability of entities entrusted
with government funds and properties.
The sources of government funds include receipts from taxes

and other fees, borrowings,' and grants from other
govemments and intemational bodies.
The utilization of government funds includes expenditures on

programs, projects, unanticipated losses from calamities and
the like.
Responsibility. Accountability and Liability over Government

Funds and Property
Responsibility over Government Funds and Property

1. Government resources shall be utilized efficiently and
effectively in accordance with the law. The head ofa government
agency is directly responsible in implementing this policy and
is primarily responsible for government resources entrusted to
his agency. Those who are entrusted with the possession of

government resources are directly responsible to the head Of
the agency.
2. All those who are exercising authority over a government

agency shall share fiscal responsibility.
(State Audit Code of the Philippines, P.D. No. 1445)
Accountability over Government Funds and Property

1. A government officer entrusted with the possession Of
government resources is responsible for the safekeeping

3
therefor in accordance with the law. Every accountable officer

shall be properly bonded. (P.D. No. 1445 and E.o. No. 292)
2. The transfer of government funds from one officer to another

shall, except as allowed by law, be made only after the
authorization of the COA. The transfer shall be properly
documented in an invoice and receipt. (P.D. No. 1445)
Liability over Government Funds and Property

1. The unlawful use of government resources shall be the
personal liability of the employee found to be directly
responsible therefor.
2. Every accountable officer shall be liable for all losses resulting
from the unlawful use or negligence in the safekeeping of

govequnent resources.
3. No accountable officer shall be relieved from liability merely

because he has acted under the direction of a superior officer
in unlawfully utilizing the government resources entrusted to
him, unless before that act, he has notified the superior officer,
in writing, that the utilization is illegal. The superior officer
shall be primarily liable while the accountable officer who fails
to serve the required notice shall be secondarily liable.
4. An accountable officer shall immediately notify the COA for
any loss of government funds from unforeseen events (force

majeure) within 30 days. Failure to do so will not relieve the
officer of liability.
(P.D. No. 1445)
Main concept:
Government resources must be utilized efficiently and effectively in
accordance with the law. Government officials are responsible in
implementing this policy, are accountable for the govemment

resources in their custody, and are liable for any loss.
4 Chapter 1
The Unsung gferoes
The number of Filipinos going abroad to seek employment is
increasing every year. In 2012, it was estimated that about 10.4 million
Filipinos worked abroad.l Almost all Filipinos know at least one other
Filipino — a family member. a relative, or a friend, who is working
abroad. We refer to our overseas workers as unsung heroes. How so?
This is mainly because overseas workers remittances greatly
increase the spending in our country, and the more money is spent,
the more taxes the government collects. A portion of the money we
spend on almost everything (food, clothing, bills. entertainment,
medicine, rentals, etc.) represents payment for tax. Taxes are the main
source of government funds used in developing our country.
Working abroad entails great sacrifices, not only for the

overseas worker but also for family members left at home. We need
efficient and effective utilization of our government resources so that
someday our countrymen can have better options of finding a

livelihood in our country.
Accounting, as a tool for planning and control,.contributes to

the achievement of this goal by providing information that is useful in
planning the sources and uses of government funds and comparing
actual results with expected results to promote the efficient and
effective utilization ofgovernment funds.
1 CNN
Accounting responsibility
The following offices are charged with government accounting
responsibility:
a. Commission on Audit (COA)
b. Department of Budget and Management (DBM)
d. Government agencies
Commission on Audit (COA)

The Commission on Audit (COA):
a. Has the exclusive authority to promulgate accounting and
auditing rules and regulations.
Overview of Government Accounting 5
b. Keeps the general accounts of the government, supporting

vouchers, and other documents.
c. Submits financial reports to the President and Congress.
Department of Budget and Management (DBM)

The Department of Budget and Management (DBM) is responsible
for the formulation and implementation of the national budget with the
goal of attaining the nation's socio-economic objectives.

The Bureau of Treasury (BTr) functions under the Department of
Finance and is the cash custodian of the government. The BTr is
authorized to:
a. Receive and keep national funds and manage and control the
disburséments thereof; and
b. Maintain accounts of financial transactions of all national
government offices, agencies and instrumentalities.
Government Agencies
Government agency refers to any department, bureau or office of
the national government, or any of its branches and
instrumentalities, or any political subdivision, as well as any
government owned or controlled corporation (GOCC), including
its subsidiaries, or other self-governing board or commission of
the government. (P.D. No. 1445)
The government agencies are responsible in directly

implementing the projects of, and performing the functions
delegated by, the government.
Each agency (entity) shall maintain accounting books and
budget registries which are reconciled with the cash records of the
BTr and the budget records of the COA and DBM.
Government agencies are required by law to have accounting
units/divisions/departments.
A Even a barangay (the smallest administrative division in the Philippines) is required

to have an accounting unit, e.g., the barangays "bookkeeper."
6 Chapter 1
Financial Reporting System of the National Government
Each entity reconciles
accounting bmks with
cash records ofBTr.

Each entity's
accounting bmks are
subject to audit by
Govemment Agencies
COA. Commission on Audit
(Entities)
Ead Each entity reconciles

entity maintains (COA)
accounting books and budget registries with
budget registries. budget records ofCOA.
Each entity submits
financial reports to
COAfor consolidation.
Each entity reconciles Consolidatesfinancial
budget registries with reports ofgovernment

budget records ofDBM. agencies and submits it to-
the President and
Congress.
Depanment of Budget
and
Management (DBM)
Entity — refers to a government agency, department or

operating/field unit.
Financial Reporting — is the process of preparation, presentation

and submission of general purpose financial statements and
other reports. The objective of financial reporting is to provide
information about the entity that is useful to users for
accountability purposes and decision-making.

The CAM for NGAs

An "old" governmeht accounting system had been used for about
five decades before it was replaced by the New Govemment
Accounting System (NGAS) in 2002. However, on January 1, 2016,
the NGAS was replaced by the Government Accounting Manual
for National Government Agencies (GAM for NGAs).
The GAM for NGAs was promulgated primarily to

harmonize the government accounting standards with
international accounting standards, particularly the Intemational
Public Sector Accounting Standards (IPSAS). The IPSÅSs are
based on the International Financial Reporting Standards (IFRS).
The Philippine Government has adopted the IPSAS

through the Philippine Public Sector Accounting Standards
(PPSAS). The provisions of the PPSAS are incorporated in the
GAMfor NGAs.
Since the PPSAS are based on the IPSAS, which are in turn
based on the IFRSs/PFRSs, most of the concepts that we will be
learning in this book would be very familiar to you JO.
Legal basis
The GAM for NGAs is promulgated by the Commission on Audit
(COA) based on the authority conferred to it by the Philippine
Constitution:
Relevant provision of/aw:

"The Commission (on Audit) shall have exclusive authority,
subject to the limitations in this Article, to define the scope of its
audit and examination, establish the techniques and methods

required therefor, and promulgate accounting and auditing rules
and regulations. including those for the prevention and
disallowance of irregular. unnecessary, excessive, extravagant,
or unconscionable expenditures, or uses of government funds
and properties." (Art. IX-D, sec. 2(2). Philippine Constitution)
8 Chapter 1
Coverage
The GAM for NGAs provides the basic concepts to be used in:
a. Preparing general purpose financial statements in accordance

with the Philippine Public Sector Accounting Standards
(PPSAS) and other financial reports as may be required by
laws, rules and regulations; and
b. Reporting of budget, revenue and expenditure in accordance with
laws, rules and regulations.
Objective
The GAM for NGAs aims to update the following:
a. Standards, policies, guidelines and procedures in accounting
forgovernment funds and property;
b. Coding structure and accounts; and
c. Accounting books, registries, records, forms, reports and
(GAM for NGAs; Chapter 1, sec. 3)
Basic Accounting and Budget reporting Principles

The financial records and reports of government entities shall
comply with the following:
1. Philippine Public Sector Accounting Standards (PPSAS) and

relevant laws, rules and regulations;
2. Accrual basis of accounting;

Under the accrual basis of accounting, transactions are
recognized when they occur (and not only when cash is
received or paid). Therefore, transactions are recognized in the

periods to which they relate.
3. Budget basis for presentation of budget information in the

financial statements;
4. Revised Chart of Accounts prescribed by COA;

5. Double entry bookkeeping;
6. Financial statements based on accounting and budgetary records;

and
7. Fund cluster accounting.

The books of accounts are maintained by fund cluster
(i.e., according to the types of Ktnds being accounted for) as
follows:
Code Fund clusters

01 Regular Agency Fund
02 Foreign Assisted Projects Fund
03 Special Account-Locally Funded/Domestic Grants Fund
04 Special Account-Foreign Assisted/Foreign Grants Fund
05 Internally GeneratedFunds
06 Business Related Funds
Trust Recei ts
For example, separate accounting books (Journals and

Ledgers) and budget registries shall be maintained for Regular
Agency Fund. Another separate accounting books and budget
registries shall be maintained for Foreign Assisted Projects Funds,
and so on.
Qualitative Characteristics of Financial Reporting

Information reported shall meet the qualitative characteristics.
Qualitative characteristics are the attributes that make information
useful to users.
a. Understandability — information is understandable when

users can reasonably be expected to comprehend its meaning.
Accordingly, users are assumed to have
i. reasonable knowledge of the entity's activities; and
ii. willingness to study the information.
10 Chapter I
Information about complex matters is not excluded

simply because it may be too difficult for certain users to
understand.
b. Relevance — Information is relevant if it can assist users in
evaluating past, present or future events or in confirming or

correcting past evaluations. In order to be relevant,
information must also be timely.
c. Materiality — Materiality affects the relevance of information.

Information is material if its omission or misstatement could
influence the decisions of users. Materiality depends on the
nature or size of the item or error, judged in the particular
circumstances of its omission or misstatement.
d. Timeliness — Information loses its relevance if there is undue

delay in its reporting. The complexity of an entity's operations
is not a sufficient reason for failing to report on a timely basis.
e. Reliability — reliable information is free from material error

and bias, and can be depended on by users to represent
faithfully that which it purports to represent or could

reasonably be expected to represent.
Trade-offs between Relevance and Reliability

To provide timely information, it may be necessary to report
before all aspects of a transaction are known, thus impairing
reliability. Conversely, if reporting is delayed until all aspects
areknown, the information may be highly reliable but of little
use to users who need to make decision in the interim. TO
achieve a balance between relevance and reliability, the
overriding consideration is how users' needs are best satisfied.
f.
Faithful representation For information to represent
faithfully transactions and other events, it should be presented
in accordance with the substance of the transactions and other
events, and not merely their legal form.
11
g. Substance overform — The substance of transactions or other

events is not always consistent with their legal form. If
information is to represent faithfully the transactions and

other events that it purports to represent, it is necessary that
they be accounted for and presented in accordance with their
substance and economic reality, and not merely their legal
form.
h. Neutrality — Information is neutral if it is free from bias.
Information shall not be selected or presented in a manner

that is designed to influence the user's decision in order to
achieve a predetermined outcome.
i. Prudence — is the exercise of a degree of caution when making

estimates under conditions of uncertainty, such that assets or
revenue are not overstated and liabilities or expenses are not
understated. However, prudence does not allow the creation
of hidden reserves or excessive provisions, the deliberate
understatement of assets or revenue, or the deliberate
overstatement of liabilities or expenses, because the finanäal
statements would not be neutral and, therefore, not reliable.
j. Completeness — Information should be complete within the

bounds of materiality and cost.
k. Comparability Information is comparable when users are

able to identify similarities and differences between that
information and information in other reports. Comparability
applies to the comparison of financial statements of different
entities and comparison of the financial statements of the same
entity over different periods. Comparability requires that users
must be informed of the entity's policies, changes to those
policies, and the effects of those changes and that financial
statements show corresponding information for preceding
periods.
(PPSAS I/GAM for NGAs, Chapter 19, Sec. 6)
Chapter 1
12
Components of General Purpose Financial Statements

General Purpose Financial Statements are those intended to meet the
needs of users who are not in a position to demand reports
tailored to meet their particular information needs. (PPSAS 1.3)
The complete set of general purpose financial statements

consists of:
a. Statement of Financial Position;
b. Statement of Financial Performance;
c. Statement of Changes in Net Assets/Equity;
d. Statement of Cash Flows;
e. Statement of Comparison of Budget and Actual Amounts; and
f. Notes to the Financial Statements, comprising a summary of
significant accounting policies and other explanatory notes.
Notice that the financial statements listed above are

similar to those of a business entity. However, the financial
statement unique to a government entity is the "Statement of

Comparison of Budget and Actual Amounts" (letter 'e'). We will
elaborate on this later.
Elements of the financial statements
ASSETS
Assets — are resources controlled by an entity as a result of past
events, and from which future economic benefits or service
potential are expected to flow to the entity.
The key features of an asset are:

a. The benefits must be controlled by the entity;
b. The benefits must have arisen from a past event; and
c. Future economic benefits or service potential must be expected
to flow to the entity.
Control means the ability to benefit from an asset or prevent

others from benefitting from that asset.
Possession or ownership normally evidenæs control.

However, this is not always true. For example, under a finance
lease, the lessor retains legal ownership over the leased asæt
but control is transferred to the lessee.
Benefit means the ability to use, exchange, lease, sell, or use the
asset to settle liabilities, or distribute it to owners.
Indicators of future economic benefits:

a. distinguishable from the source of the benefit i.e. the
particular physical resource or legal right;
b. does not imply that assets necessarily generate cash flows, the
benefits can also be in the form of 'service potential';
c. in determining whether a resource or right needs to be
accounted for as an asset, the potential to contribute to the
objectives of the entity should be the prime consideration;
d. capacity to contribute to activities/objectives/programs; and
e. the fact that an asset cannot be sold does not preclude it from
providing future economic benefits.
Past event — A transaction or event giving rise to control of

future economic benefits must have occurred. A mere intention
to acquire assets in the future does not result to the
recognition of assets in the present.
Recognition of an Asset
An asset is recognized when:
a. it is probable that the future economic benefits will flow to the
entity; and
b. the asset has a cost or value (e.g., fair value) that can be
measured reliably.
Probable inflow of future economic benefits:

a. The chance of benefits arising is more likely rather than less
likely (e.g. greater than 50%).
b. Benefits can be expected on the basis of available evidence or
logic.
14 Chapter 1
Reliable measurement:
a. Valuation method is free from material error or bias.
b. Faithful representation of the asset's benefits.
c. Reliable information will, without bias or undue error,
faithfully represent those transactions and events.
LIABILITIES
Liabilities — are present obligations of the entity arising from past
events, the settlement of which is.expected to result in an outflow
from the entity of resources embodying economic benefits or
service potential.
EQUITY
Net assets/equity — is the residual interest in the assets of the entity
after deducting all its liabilities.
REVENUE
Revenue — is the gross inflow of economic benefits or service
potential during the reporting period when those inflows result in
an increase in net assets/equity, other than increases relating to
contributions from owners.
Contributions from owners are future economic benefits that
have been contributed to the entity by external parties which

do not result to liabilities of the entity and for which the
contributor obtains interest in the net assets of the entity (i.e.,
right to dividends and right to net assets in cases Of

liquidation).
Revenue funds — comprise all funds derived from the income of any
agency of the government and available for appropriation or
expenditure in accordance with law. (Section 3, P.D. No. 1445)
EXPENSES
Expenses — are decreases in economic benefits or service potential
during the reporting period in the form of outflows or
consumption of assets or incurrence of liabilities that result in
decreases in net assets/equity, other than those relating to

distributions to owners.
> Distributions to owners — are future economic benefits

distributed by the entity to its owners, either as a return on
investment or as a return of investment.
16 Chapter 1
Chapter 1 Summary:
Aside from providing information that is useful in making

economic decisions, government accounting also aims to
demonstrate the accountability of the entity for the resources

entrusted to it.
The following are charged with government accounting

responsibility: COA, DBM, BTr and other government
agencies.
The GAM for NGAs provides the principles and procedures to
be applied in the financial reporting of government entities. It
was promulgated by the COA primarily to harmonize the
government accountiråg standards with international
standards.
Basic principles: Compliance with PPSAS and other relevant
laws, Accrual basis, Budget basis, Revised chart of accounts,
Double entry, Financial statements based on accounting and
budgetary records, and Fund cluster accounting.
Qualitative characteristics: Understandability, Relevance,
Materiality, Timeliness, Reliability, Faithful representation,
Substance over form, Neutrality, Prudence, Completeness,
and Comparability.
An item is recognized as asset if all of the following criteria
are met:
1. the item meets the definition of an asset;
2. probable inflow of future economic benefits; and
3. reliable measurement of cost or other value (e.g., fair
value).
PROBLEMS:
PROBLEM 1-1: TRUE OR FALSE

1. Compared to the accounting for business entities, govemment
accounting places greater emphasis on the sources and
utilization of government funds and the managemen€s
stewardship over govemment resources.
2. Taxes are the main source of funds of the•govemment.
3. Other sources of funds of the government include fees,
borrowings, and grants from other governments and

international bodies.
4. Currently, the financial reporting of government entities is

based on NGAS.
5. The principles used in the financial reporting of government

entities are very unique that only a very few of these
principles are similar to those that are applied to business
entities.
6. The prinäples in the GAM for NGAs are similar to the

principles in the PFRSs.
7. The GAM for NGAs is promulgated by the Philippine Congress

under the authority conferred to it under the Philippine
Constitution.
8. A unique financial reporting requirement of government

entities is the use of fund cluster accounting. Under fund
cluster accounting, separate books and reports are prepared
for each type of fund held by a govemment entity.
9. The GAM for NGAs is promulgated primarily to harmonize

government accounting standards with the U.S. GAAP.
18 Chapter 1
10. An item is recognized as an asset if it meets both the "probable

future economic benefits" and "reliable meaSUrement„
criteria, regardless of whether the item is a resource controlled
arising from past events.
PROBLEM 1-2: MULTIPLE CHOICE

1. Which of the following is a unique requirement of government.
accounting that is not required in the accounting for business
entities?
a. The use of double-entry recording system.

b. The use of single-entry recording system.
c. The use of accrual basis of accounting.
d. The presentation of budget information in the financial
statements.
2. What is the legal basis of the COA in promulgating the GAM

for NGAs?
a. P.D. No. 1445, State Audit Code of the Philippines
b. The Philippine Constitution
c. R.A. 9298, The Philippine Accountancy Act of 2004
d. Philippine Public Sector Accounting Standards (PPSAS)
3. Which of the following is tasked in keeping the general

accounts of the government, supporting vouchers, and other
documents?
a. COA c. NGAs
b. DBM d. Congress
4. The Bureau of Treasury (BTR) is responsible for
a. promulgating accounting and auditing rules and

regulations.
b. the formulation and implementation of the national
budget with the goal of attaining the nation's socio--
economic objectives.
c. receiving and keeping national funds and managing and

controlling the disbursements thereof.
d. directly implementing the projects of the government.
5. According to the GAM for NGAs, the basis of accounting to be

applied by government entities is the
a. Cash basis
c. Modified accrual basis
b. Accrual basis
d. Any of these as a policy choice
6. Govemment resources must be utilized efficiently and

effectively in accordance with the law. According to P.D. No.
1445, who is directly responsible in implementing this policy?
a. All employees who are entrusted with the possession of
b. The head of the government agency.
c. The COA.
d. All elected officials.
7. The transfer of government funds from one officer to another

requires the prior authorization of the
a. Commission on Audit
b. Head of the Agency
c. The President of the Republic of the Philippines
d. Bureau of Treasury
8. Mr. A, a government employee entrusted with the custody of

government funds, was instructed by Mr. B (a politician) to
release funds for the acquisition of a car as a birthday gift for

Mr. B's daughter who will be having her 18th birthday next
week. To relieve Mr. A from any liability, what should Mr. A
a. Mr. A shall not release the fund but rather notify Mr. B, in
writing, that his instruction is illegal.
b. Mr. A shall release the fund and then notify Mr. B, in
writing, that his instruction is illegal.
c. Mr. A shall release the fund but retains 20% commission.
20
Chapter I
d, Mc. A shall release the fund but requires Mr. B to Promise
in writing, that the car shall be returned to the government
after his daughter's birthday.
9. Mr. C, a government employee entrusted with the custody of
government funds, has lost the government funds entrusted to

him in a force majeure. What should Mr. C do to relieve him
from liability?
a. Mr. C should immediately notify the Head of Agency after
30 days,
b. Mr. C should immediately notify the COA within 30 days.
c. Mr. C should immediately notify the Bureau of Treasury
within 30 days.
d. Mr. C should keep the event a secret and wait for next
funds to arrive.
10. These refer to the attributes that make information useful to

users.
a. Usefulness characteristics
b. Quantitative characteristics
c. Qualitative characteristics
d. Fundamental principles
11. Information loses 'this qualitative characteristic if it is not

reported on a timely basis.
a. Relevance c. Neutrality
b. Reliability d. Materiality
12. Which of the following qualitative characteristics does an

entity most likely would need to make some trade-offs?
a. Faithful representation and Substance over form
b. Materiality and Relevance
c. Relevance and Reliability
d. Understandability and Comparability
Overvietv of Government Accounting
21
13. An entity recognizes an estimated loss from the decline in

value of a property. Which of the following is most likely the
qualitative characteristic being applied by the entity?

a. Reliability c. Faithful representation
b. Substance over form d. Prudence
14. Which of the following is not one of the fund clusters of a
government entity?
a. Regular Agency Fund
b. Foreign Assisted Projects Fund
c. Special Account-Locally Funded/Domestic Grants Fund
d. Business Related Funds
e. Petty Cash Fund
15. To achieve a proper balance between relevance and reliability,
the overriding consideration is

a. how users' needs are best satisfied.
b. relevance is always more important than reliability.
c. reliability is always more important than relevance.
d. greater weight shall be given to relevance compared to
reliability.
PROBLEM 1-3: FOR CLASSROOM DISCUSSION

1. How does government accounting differ from the accounting
for business entities?
a. Government accounting places more emphasis on profit-
making.
b. Government accounting is very complex that only highly
intellectual individuals can understand it.
c. Government accounting places greater emphasis on

sources and utilization of funds in accordance with the
law and management's stewardship over government

resources entrusted to the entity.
22
Chapter 1
d. Government accounång is specialized in nature that the

principles applicable to business entities are never
applicable to government entities.
2. Which of the following is not a source qf revenue for the

government?
a. Taxes
b. Fees collected by government agencies
c. Grants and donations from other governments
d. Contract price on government contracts awarded to
private companies.
3. Entity A (a government agency) is entrusted with government

resources. According to P.D. 1445, who is directly responsible
for the efficient and effective utilization of these resources?
a. The govemment employees who have custody over the
resources.
b. Ihe Head of Entity A.

c. The COA staff stationed in Entity A.
d. The Foot of Entity A.
4. Which of the following is not charged with government

accounting responsibility under the GAM for NGAs?
a. COA c. NGAs
b. DBM d. House of Representatives
5. The Department of Budget and Management (DBM) is
responsible for
a.
promulgating accounting and auditing rules and
regulations.
b. the formulation and implementation of the national
budget with the goal of attaining the nation's socio-
economic objectives.
c. receiving and keeping national funds and managing and
controlling the disbursements thereof.
d. directly implementing the projects of the government.
6. Which of the following is not one of the objectives of the GAM

for NGAs?
a. to harmonize government accounting standards with

international standards.
b. to update the coding structure and accdunts

c. to update accounting books, registries, records, forms,
reports and financial statements.
d. to update govemment accounting standards to be
consistent with the provisions of U.S. GAAP.
7. All of the following are requirements peculiar to a

government entity. Which is not?
a. Presenting budget information in the financial statements.
b. Fund cluster accounting.
c. Incorporating budgetary controls in the financial reporting

system.
d. Accrual basis of accounting.
8. Which of the following qualitative characteristics is improved

when information is reported on a timely basis?
a. Relevance c. Understandability
b. Reliability d. a and b
9. The best estimate for a loss is P 100,000. However, the entity

deliberately overstated the loss to P200,000. Which of the
following qualitative characteristics is violated?
a. Prudence c. a and b
b. Reliability d. Nothing is violated
10. Which of the following financial statements is peculiar to a

government entity?
a. Balance Sheet
b. Statement of Cash Flows
c. Statement of Comparison of Budget and Actual Amounts
d. Statement of Changes in Equity
24
Chapter 2
Chapter 2
The Budget Process
Learning Objectives
1. Enumerate the steps in the budget process.
2. Describe briefly the principles of responsibility accounting.
The National Budget

Government accounting is primarily budgetary accounting.
Government accounting does not only aim to provide information
on past events and transactions but also budget information in
accordance with PPSAS 24.
The Philippine Constitution and other laws require
government funds to be utilized in accordance with a national
budget that is duly approved by legislation. Government

accounting, therefore, is concerned with providing information
useful in assessing the conformance of utilizations of government
funds with the approved budget.
The national budget (government budget) is the government's
estimate of the sources and uses of government funds within a
fiscal year. This forms the basis for expenditures and is the
governmenes key instrument for promoting its socio-economic
objectives.
The formulation and eventual utilization of the national
budget are summarized in the budget cycle.
The Budget Cycle

The budget cycle has four phases, namely:
1. Budget Preparation
2. Budget Legislation
3. Budget Execution
4. Budget Accountability
The Budget Process 25
Budget Preparation
The budget preparation in the Philippines uses a "bottom-up"
approach. Under "bottom-up" budgeting, several parties
partidpate in the budget preparation, starting from the lowest to the
highest levels of the government. Government agencies are a so

tasked to increase the participation of citizen-stakeholders in the
budget preparation. The opposite of "bottom-up" budgeting is
"top-down" budgeting - wherein the budget preparation starts
from the agency heads.

In 2011, the Philippine Govemment attempted to a start a
new tradition by shifting from the old "incremental" system of

budgeting to the "zero-based budgeting" approach. (The Philippine
Public Transparency Reporting Project, January 11, 2011)
Incremental bud etin vs. Zero-based bud etin

The current year's budget is The current year's budget is
formulated based on the formulated without regard
previous year's budget, to the previous year's
which is just adjusted for budget. Government
any variances experienced agencies are required to
in the past. Presumably, the justify their current year's
proposed programs and proposed programs and

expenditures in the expenditures, irrespective
previous year are of whether these are new or
automatically approved in carried over from the
the current year. previous year.
Uses a "roll-over" approach. Uses a "back-to-zero" or
Prone to abuse. "clean slate" approach.
Promotes efficient and
effective utilization of
funds.
1. Budget call — The budget preparation starts when the
Department of Budget and Management (DBM) issues a

Budget Call to all government agencies. The budget call
26
Chapter 2
contains, among other things, the next fiscal year's targets, the
agency's budget ceiling, and other guidelines in the
completion and submission of agency budget proposals.
Relevant terms:
Balanced budget — prepared in such a way that estimated
revenues exceed estimated expenditures. If actual
revenues exceed actual expenditures, the govemment earns

a surplus. If expenditures exceed revenues, the
government incurs a deficit.

Annual budget — covers a period of one year and forms the
basis for the annual appropriation.
Special budget — provides for items not adequately

covered or not included in the general appropriations act.
Line item budget focuses on specific expenditures such
as salaries and wages, travel expenses, freight, supplies,

materialsand equipment.
Performance budget — a plan of activities to be undertaken,
including their related costs, with the emphasis on
meeting targets and desired results. The main focus is on
the work to be done or services to be rendered.
Obligations budget — focuses on expenditures incurred in
the current year which are to be paid either in the same
year or in the following year.
2. Budget hearings — Budget hearings are conducted after the
agencies submit their budget proposals. Each agency defends

its budget proposal before the DBM. The DBM deliberates on
the budget proposals, makes recommendations, and
consolidates the deliberated proposals into the National
Expenditure Program (NEP) and Budget of Expenditures and

Sources of Financing (BESF). The DBM then submits the
proposed budget to the President.
3. Presentation to the Office of the President — The President

and Cabinet members review the proposed budget. After the
President approves the proposed budget, the DBM finalizes
the budget documents to be submitted to the Congress. At this
point, the proposed budget is referred to as the "President's,
Budget. "
The "President's Budget" contains the following

documents which are intended to assist the Congress in their
review and deliberation of the proposed national budget:
a. President's Budget Message — this contains the Presided s
explanation of the country's fiscal policy and budget
priorities.
b. National Expenditure Program (NEP) — this contains the
details of all the government entities' proposed

expenditures in the coming year.
c. Budget of Expenditures and Sources of Financing (BESF) — this
contains the estimated expenditures accompanied by
estimates of expected sources of financing.
d. Other documents aimed to provide further explanation of
selected items in the NEP (e.g., details of key programs
and projects and staffing summary).

The President shall submit the proposed budget to the
Congress within 30 days from the opening of every regular
session. (Art. VII. Sec 22, Philippine Constitution)
28 Chapter 2
Illustration: Excerptsfrom President's Budget Message
Exce t 1:
fiscal Year 2017
Message of
President Rodrigo Roa Duterte
to the Seventeenth Congress of the Phlllpplnes
on the National Budget for Fiscal Year 2017
August 15, 2016
Ladies and Gentlemen of the

17th Congress of the Philippines:
I have the honor to submit to you, through the President of the

Senate and the Speaker of the House of Representatives, the
Proposed National Budget for Fiscal Year (FY) 2017.
Excerpt 2:
Fiscal Year 2017
BUDGET PHILOSOPHY
Ladies and gentlemen, my commitment to implement real

change lies at the core of the P3.35 trillion proposed Budget for
FY 2017.
This is my Administration's first Budget. It is a Budget that gives

flesh and bone to the promise by which I won as President: to
fight for social justice. It was designed to realize change in the

here and now.
This Budget is for the people and by the people.
In the last one and a half months since we assumed office, we

designed this Budget around the following principles:
A/Vs/
Budget Legislation
Government åmds shall only be spent in pursuance of an
appropriation made by law. Therefore, due process must be
undertaken to legalize the proposed budget.
4. House Deliberations — Upon receipt of the President's Budget,

the House of Representatives conducts hearings to scrutinize
the various agencies' respective proposed programs and
expenditures. Thereafter, the House of Representatives
prepares the General Appropriations Bill (GAB).
5. Senate Deliberations — The ±nate conducts its own

deliberations on the GAB. These normally start after the
Senate receives the GAB from the House of Representatives.
However, for expediency, hearings in the Senate start even as
Representatives deliberations are ongoing.
6. Bicameral Deliberations — After deliberations in both houses

are finished, a committee called the Bicameral Conference
Committee is formed to harmonize any conflicts between the
Representatives and Senate versions of the GAB.
The harmonized GAB ('Bicam' version) is submitted
back to both Houses for ratification. After ratification, the final
GAB is submitted to the President for enactment.
7. President's enactment — The President enacts the budget,

which is now known as the General Appropriations Act (GAA).
Before enactment though, the President may exercise his veto
power as conferred to him under the Philippine Constitution.

When the proposed budget is not enacted before the fiscal
year starts, the last year's GAA is automatically reenacted.

The last year's GAA shall be used in the current year until a
new general appropriations bill is passed by the Congress.
(Art. VI, Sec. 25(7). Philippine Constitution)
30 Chapter 2
The Approved Budget

Approved Budget
— is the expenditure authority derived from
appropriation laws, government ordinances, and Other decisions
related to the anticipated revenue or receipts for the budgetary
period. The approved budget consists of the following:
VACS Code
01
New General Appropriations
02
Continuing Appropriations
03
Supplemental Appropriations
04
Automatic Appropriations
05
Unprogrammed Funds
Retained Income/Funds
06
07
Revolving Funds
Trust Receipts
08
*The unified Accounts Code Structure (IIACS) refers to the standard coding
system used in financial reporting of the National Government.
Appropriation — is the authorization made by a legislative body

to allocate funds for purposes specified by the legislative or
similar authority.
1. New General Appropriations — are annual authorizations for
incurring obligations during a specified budget year, as listed

in the
2. Continuing Appropriations — are the authorizations to support

obligations for a specific purpose or project, such as multi-year
construction projects which require the incurrence Of
obligations even beyond the budget year.
3. Supplemental Appropriations — are additional appropriations

authorized by law to augment the original appropriations
which proved to be insufficient for their intended purpose due
to economic, political or social conditions supported by a
Certification of Availability of Funds from the BTr.
4. Automatic Appropriations — are the authorizations programmed

annually or for some other period prescribed by law which do
not require periodic action by Congress.
5. Unprogrammed Funds — are standby appropriations authorized

by Congress in the annual GAA which may be availed only
when any of the following instances occur:
a. revenue collections exceed the original revenue targets in
the Budget of Expenditures and Sources of Financing
(BESF) submitted by the President to the Congress;
b. new revenues are collected or realized from sources not
originally considered in the BESF; or
c. newly-approved loans • for foreign-assisted projects are
secured or when conditions are triggered for other sources
of funds such as perfected loan agreements for foreign

assisted projects.
(source: http://www.dbm.gov.ph/?page_id=7366)
6. Retained Income/Funds — collections which are authorized by

law to be used directly by agencies concerned for their
operation or specific purposes.
(http://www.dbm.gov.ph/wp-content/uploads/BESF/BESF2016/GLOSSARY.pdt)
7. Revolving Funds receipts derived from business-type

activities of departments/agencies which are authorized by
law to be constituted as such and deposited in an authorized
government depository bank. These funds shall be self-
liquidating and all obligations and expenditures incurred by

virtue of said business-type activity shall be charged against
said fund.
(http://www.dbm.gov.ph/wp-content/uploads/BESF/BESF2016/GLOSSARY.pdf)
8. Trust Receipts — by any government agency acting as

receipts
trustee, agent or administrator for the fulfilment of some
obligations or conditions.
(Adapted from the definition of "Trust Fund" in http://www.dbm.gov.ph/wp-
content/uploads/BESF/BESF2016/GLOSSARY.pdf)
32 Chapter 2
Relevant provisions of law:

A special appropriations bill shall specify the purpose for
which it is intended, and shall be supported by funds
actually available as certified by the National Treasurer, or to
be raised by a corresponding revenue proposal therein.

(Art. VI.' Sec. 25(4), Philippine Constitution)
No law be passed authorizing any transfer

shall of
appropriations; however, the President, the President of the
Senate, the Speaker of the House of Representatives, the

Chief Justice of the Supreme Court, and the heads of
Constitutional Commissions may, by law, be authorized to
augment any item in the general appropriations law for their
respective offices from savings in other items of their
respective appropriations. (Art. VI. Sec. 25(5), Philippine
Constitution)
Budget Execution
This is the phase where government funds are spent.
8. Release guidelines and BEDs — The DBM issues guidelines on

the release and utilization of funds while the various agencies
submit their Budget Execution Documents (BEDs). A BED
summarizes an agency's fiscal year plans and performance
targets. It includes the following:
a. Physical and financial plan,

b. Monthly cash program,
c. Estimate of monthly income, and
d. List of obligations that are not yet due and demandable.
The following are the major recipients of the budget:

1. National Government Agencies (NGAs) — include all agencies
within the executive, legislative and judicial branches Of
government, e.g., commissions, departments, Land Bank
of the Philippines, Social Security System, etc.
2. Local Government units (LGlIs) — include (a) autonomous

regions, (b) provinces and cities independent from a
province, .(c) component cities (dties which are part of a
province) and municipalities, and (d) barangays.
3. Government Owned and Controlled Corporations (GOCCs) —

corporations that are owned or controlled, directly or
indirectly, by the government and vested with functions
relating to public needs.
The members of the Congress (Senators and Congressmen) and the Judiciary
Branch are also recipients of a portion of the budget.
1. The portion received by members of the Congress is referred to as the
Priority Development Assistance Fund (PDAF) a.k.a. "Pork Barrel." This is

intended to fund priority development programs of the government.
2. 'The portion received by members of the Judiciary is referred to as the
Judiciary Development Fund (JDF). At least 80% of the fund is intended
for the cost of living allowances of the members and personnel of the
Judiciary. the remainder, 'not exceeding 20%. is for the acquisition and
maintenance of office equipment and facilities. (PD NO. 1949)
In 2014, Aquino Administration introduced the Disbursement

the
Acceleration Program (DAP) which aims to speed-up public spending. The
DAP is not a fund but a mechanism of releasing funds, particularly from
savings and unprogrammed funds.
Savings are available portions or balances of items under the General
Appropriations Act (GAA) which result from: a) the completion or final
discontinuance or abandonment of a program. activity. or b)
unpaid compensation for vacant or unfilled positions and leaves of
absence without pay; or c) the implementation of efficiency measures that
enable agencies to deliver services at lower cost. Such savings may then be
used to augment funds for programs, activities, or projects which are
included in the CAA (i.e. nonexistent budget items cannot be funded).
Unprogrammed funds (see previous definition).
Both the PDAF and the DAP received various criticisms from the public in
2013 and 2014, following the Janet Lim-Napoles alleged pork scam. The PDAF
and DAP was later on thought to have been abolished by the Supreme Court.
However. "The 2015 budget is still filled with pork barrel funds despite the
Supreme Court decision declaring the Disbursement Acceleration Program
(DAP) and the Priority Development Assistance Fund (PDAF) as
unconstitutional, according to a budget watchdog." (Source: The Philippine Star,
December 21, 2014)
34 Chapter 2
9. Allotment — The DBM formulates the Allotment Release
Program (ARP) to set the limit for allotment releases during the
upcoming year. This is used as a control device to ensure that
releases conform to the national budget. Alongside, is a Cash
Release Program (CRP), which sets the disbursement limits for
the year, for each quarter and for each month.
Allotment — is an authorization issued by the DBM to
government agencies to incur obligations for specified

amounts contained in a legislative appropriation in the
form of budget release documents. It is also referred to as
It is illegal for a government entity to incur
obligations without having first received the "Allotment."
Moreover, the type and amount of obligations to be
incurred must conform to those that are specified in the
"Allotment. "
— is an act of
Obligation a duly authorized official which
binds the government to the immediate or eventual
payment of a sum of money. Obligation maybe referred to
as a commitment that encompasses possible future
liabilities based on current contractual agreement.
The following are the documents used in releasing
allotments to government agencies:
1. General Appropriations Act Release Document (GAARD) —

serves as the obligational authority for the comprehensive
release of budgetary items appropriated in the GAA,
categorized as For Comprehensive Release.
2. Special Allotment Release Order (SARO) — covers budgetary

items under For Later Release (negative list) in the entity's
submitted Budget Execution Documents (BEDs), subject to
compliance of required documents/clearances. Releases Of

allotments för Special Purpose Funds (e.g., Calamity Fundi.
Contingent Fund, E-Government Fund, Feasibility Studies
35
The Budget Process
Fund, International Commitments Fund, Miscellaneous

Personnel Benefits Fund and Pension and Gratuity Fund)
are also covered by SAROs.
3. General Allotment Release Order (GARO) is a
comprehensive authority issued to all national

government agencies, in general, to incur obligations not
exceeding an authorized amount during a specified period
for the purpose indicated therein. It covers automatically
appropriated expenditures common to most, if not all,
agencies without need of special clearance or approval

from competent authority, i.e. Retirement and Life
Insurance Premium.
10. Incurrence of Obligations government agencies incur

obligations which will be paid by the government, e.g.,
entering into contracts, hiring of personnel, purchase of
supplies, etc.
11. Disbursement Authority — the DBM issues disbursement

authority to the government agencies. This is the point where
government agencies obtain access to the government funds.
The following are the documents used in releasing

disbursement authority to government agencies:
1. Notice of Cash Allocation (NCA) authority issued by the

DBM to central, regional and provincial offices and
operating units to cover their cash requirements.
The NCA specifies the maximum amount of cash
that can be withdrawn from a government servicing bank
in a certain period. The NCA is based on the agency's
submitted Monthly Cash Program.
36 Chapter 2
2. Notice of Transfer of Allocation — authority issued by an

agency's Central Office to its regional and operating units
to cover the latter's cash requirements.
3. Non-Cash Availment Authority — authority issued by the

DBM to agencies to cover the liquidation of their actual
obligations incurred against available allotrnents for
availment of proceeds from loans/grants through

supplier's credit/constructive cash.
4. Cash Disbursement Ceiling — authority issued by the DBM to

agencies with foreign operations (e.g., Department of
Foreign Affairs 'DFA') allowing them to use the income
collected by their Foreign Service Posts to cover their
operating requirements.
Disbursements are most commonly made through

checks that are chargeable against the account of the Treasurer
of the Philippines (i.e., Treasury Single Account). Checks issued
under this scheme are called "Modified Disbursement System
(MDS) Checks. "
Other modes of disbursements include payments
through cash, commercial check, bank transfer/bank debit, or
credit card. We will elaborate on these later in Chapter 5.
Remember the ollowin
1. Appropriation authorization by a legislative body to

allocate funds fors ecified u oses.
2. Allotment authorization to agencies to incur
obligations (i.e., obligational
authori
3. Obligation amount contracted by an authorized
officer for which the government is
held liable.
4. Disbursement actual amount paid out of the

bud eted amount.
37
Tke Budget Process
This phase occurs concurrently with the Budget Execution phase.
As the budge( is being executed, it is regularly monitored to
determine the conformance of actual results with planned targets.
12. Budget Accountability Reports — government agencies are

required to submit the following accountability reports:
a. Monthly Report of Disbursements — shows the disbursements

of the entity during the month, classified according to the
type of disbursement authority. This report is submitted to
the COA and DBM within 30 days after the end of each
month.
b. Quarterly Physical Report of Operation — shows the agency's

physical accomplishments in a given quarter vis-å-vis its
physical targets.
c. Statement of Appropriations, Allotments, Obligations,

Disbursements and Balances shows the agency's
authorized appropriations, allotments received,
obligations incurred, disbursements made and the
balances of unreleased appropriations, unobligated
allotments, and unpaid obligations.
d. Summary of Appropriations, Allotments, Obligations,

Disbursements and Balances by Object of Expenditures —
similar to 'c' above but provides details of expenditures
(e.g., salaries and wages, traveling expenses, etc.).
e. List of Allotments and Sub-Allotments — shows the allotments

received by the agency from the DBM and the sub-
allotments issued by the agency's Central Office or
Regional Office to lower operating units.
38
Chapter 2
f.
Statement of Approved Budget, Utiliza!ions, Disbursements
and Balances — this report is prepared by agencies that have
authority to use their revenue. It shows the bUdgeted
revenue, the utilizations and disbursements thereof, and
the unutilized amount.
g. Summary of Approved Budget, Utilizations, Disbursements and

Balances by Object of Expenditures — similar to 'f' above but
provides details of expenditures.
h.
Quarterly Report of Revenue and Other Receipts— shows the
actual revenues and other receipts remitted to the BTr and
deposited in authorized government depository banks in a
given quarter.
Reports 'b' to 'h' above are prepared on a quarterly basis and

are submitted to the COA and DBM within 30 days after the
end of each quarter.
i. Aging of Due and Demandable Obligations — shows the

names of creditors, the amounts owed to them, and the
number of days these obligations are outstanding. This
report is submitted to the COA and DBM within 30 days
after the end of the year.
A Consolidated Statement of Allotments, Obligations, and Balances

per Summary of Appropriations (based on reports 'c' and 'd'
above) shall be submitted on or before February 14 of the

following year.
13. Performance reviews — The DBM and COA perform periodic

reviews of the agencies' performance and budget
accountability and report to the President.
14. Audit — the COA audits the agencies.

The budget reports, together with other budget records,

provide information in preparing the Statement of
Comparison of Budget and Actual Amounts, which is one of
the components of a complete set of financial statements of a
government entity. We will discuss this statement later.
Story: The Budget Cycle
b. Budget Preparation
Papa and Mama are leaving for a I-month trip so they asked you and
your little sister to make an estimate of the money you will need while
they are gone (Budget Call). You started your estimate by asking first
Little Sister of her needs ( Same time last year.

'bottom-up' budgeting).
Papa and Mama also went for a I-month trip and they had you made
a similar estimate. However, instead of giving them that old estimate,
you decided to make a new one in order to better reflect current
circumstances ( 'zero-based' budgeting).
You defended your estimate with Mama (Budget hearings).
Mama
submitted the estimate to Papa for approval
(Presentation to the Office of the President).
II. Budget Legislation

Papa consulted Lolo (a retired Lawyer) to review your estimate
(House Deliberations).
After reviewing the estimate, Lolo gave the estimate to Lola (a
retired CPA) for further study (Senate Deliberations).
Lolo and Lola had some disagreements. so they asked
Umpong, your dog, to harmonize the conflicts (Bicameral
Deliberations). After harmonizing the conflicts, Umpong submitted the
"Bicam" version of the estimate back to both Lolo and Lola for
ratification.
Lolo and Lola submitted the ratified estimate to Papa for

enactment (President's enactment). Your approved budget for the
month is PIOO (Appropriation).
Ill. Budget Execution

Papa left the money to Uncle. Uncle gave you guidelines on how the
money will be released to you. based on your estimates of the timing
of disbursements (Release guidelines and BEDS).
40 Chapter 2
Uncle told you that you can now incur obligations up to a

maximum of P80 (Allotment).
You then went to Aling Masing•s Store to purchase groceries,
good for month. worth P50. on credit (Incurrence of Obligations).
1
Uncle gave you P25 cash to cover your cash disbursement

needs for the 1st week (Disbursement Authority — Notice of Cash
Allocation). You gave Little Sister her share of p5 (Notice of Transfer
ofAllocation).
Your disbursements in the 1st week were as follows:

You: P5 installment payment to A/ing Masing and P12 on persona/
needs
- Little Sister: P5 on persona/ needs
Total disbursements in 1st week P22
IV. Budget Accountability

Your budget accountability reports after the 1st week will show the
following information (Budget Accountability Reports):
Appropriation: PIOO
Allotment received: 280
Unreleased appropriation: (PIOO - 980) = P20
Obligations incurred: (P50 to Aling Masing + P12 on your
personal needs + 95 on Little Sister's personal needs) = P67
Unobligated allotment: (P80 allotment - P67) = P13
Disbursements: P22
Unpaid Obligations: (P67 obligations incurred P22
disbursements) = P45 (payable to Aling Masing)
Unused NCA = (P25 NCA - P22 disbursements) = P3
Uncle periodically updates Papa and Mama regarding your

budget execution through call and text (Performance Review).
Papa and Mama will audit you when they return (Audit).
- The End -
Notice that appropriation, allotments and disbursement

authorities are systems of budgetary controls. Instead of releasing
the allocated funds of PIOO to you all at once, it is released on a
piecemeal basis, based on your estimate of the timing of needs
(Budget Execution Documents 'BEDs'). This is to prevent the
incurrence of overdraft (i.e., obligations exceeding the
appropriated funds).
The Budget Process
41
BUDGET PREPARATION
4. House
Deliberations
1. Bud et 2. Budget 3. Presentation to the
CalF Hearings Office of the President
5. Senate
Deliberations
14. Audit
THE
13. Performance
Reviews BUDGET 6. Bicarneral
Deliberations
z CYCLE
z
12. Budget
Accountability
Reports 7.President's
Enactn-tent
REPORT
11. Disbursement 10. Incurrence of 9.

Authority Obligations
Allotrnent 8. Release
Guidelines & BEDs
o
iPo•o.
BUDGET EXECUTION
42 Chapter 2
Responsibility Accounting
To better evaluate the budget accountability of an entity,
government accounting adheres to the concept of responsibility
accounting.
Responsibility accounting is a system of providing cost and
revenue information over which a manager has direct control of.
This enables the evaluation of a managed s performance based

only on matters that are directly under his control. Therefore,
budget deviations can be readily attributed to the managers
Responsibility accounting requires the identification of
responsibility centers and the distinction between controllable and
non-controllable costs.
Responsibility center — is a part, segment, unit or function of a
government agency, headed by a manager, who is accountable
for a specified set of activities.
> Controllable costs —a cost is considered controllable at a given
level of managerial responsibility if the manager has the
power to incur it within a given period of time.

Non-controllable costs — are costs incurred indirectly and
allocated to a responsibility level.
Except for some which derive most of their income from

collection of taxes and fees, government agencies are basically cost
centers whose primary purpose is to render service to the public at
the lowest possible cost.

Each of the managers of an agency that is a cost center is
evaluated based on his ability to meet budgeted goals for
controllable costs. All costs are controllable by top management

because of the high extent of its authority. Fewer costs are
controllable in lower management levels because of the decreased
scope of authority.
Each government agency is assigned a responsibility
center code as follows:
Responsibility Center Code Structure Example: Commission on Audit
(oøe)
for —Jor
Chapter 2 Summary:
The Budget Cycle: (1) Budget Preparation, (2) Budget

Legislation , (3) Budget Execution, (4) Budget Accountability
Under "bottom-up" budgeting, several parties participate in the
budget preparation, starting from the lowest to the highest levels
of the government.
• Under "zero-based" budgeting, the current year's budget is
formulated without regard to the previous year's budget.

Government agencies are required to justify their current
year's proposed programs and expenditures, irrespective of

whether these are new or carried over from the previous year.
• Appropriation — is the authorization made by a legislative body
to allocate funds for purposes specified by the legislative or
similar authority.
Allotment
— is an authorization issued by the DBM to
government agencies to incur obligations for specified

amounts contained in a legislative appropriation in the form
of budget release documents. It is also referred to as
• Obligation— is an act of a duly authorized which binds
official
the government to the immediate or eventual payment of a
sum of money.
• Under responsibility accounting, a managed s performance is
evaluated onl in terms of the costs that he controls.

44 Chapter 2
PROBLEMS:

1. The budget preparation in the Philippines uses a "bottom-up"
approach. Under this approach, the budget preparation starts
from the highest levels of the government down to the lowest
levels.
2. An entity prepares budget by simply rolling-over the

its
budget in the previous year and adjusting each line item by

10% increment to reflect inflation. This process is described as
zero-based budgeting.
3. After the budget from the DBM, the proposed budget

call of
various agencies are submitted immediately to the Office of
the President for review.
4. An entity can incur obligations after receiving notice of its
appropriation but before receiving the allotment.
5. Budget deliberations in the Congress start in the House of

Senate.
6. A government entity must first receive an allotment before it
can incur obligations.
7. A government entity can make disbursements even before it
receives a disbursement authority.
8. Appropriation is also called obligational authority.
9. The Notice of Cash Allocation (NCA) is an authority issued by

the DBM to central, regional and provincial offices and
operating units to cover their cash requirements.
10. Responsibility enhances

accounting greatlybudget
accountability because managers are evaluated only in terms
of the costs or other variables that they contrpl, and therefore,
budget deviations can be readily attributed to the managers


1. Which of the following does not properly describe the budget
process used in the Philippines?
a. Bottom-up budgeting
b. Top-down budgeting
c. Zero-based budgeting
d. Non-incremental budgeting
2. Arrange the following steps according to the sequence that

they appear in the budget cycle.
I. Allotment
II. Bicameral deliberations
Ill. Budget accountability reports
IV. GAA
President's enactment of the
V. Budget hearings with the DBM
a. V, IV, 11, 1 and 111

c. 11, v, 11, 1 and 111
b. V, 11, IV, 1 and 111 d. V, 1, 11, lv and 111
3. Arrange the following steps according to the sequence that

they appear in the budget cycle.
I. Allotment
n. Disbursement authority
Ill. Disbursement
IV. Appropriation
V. Incurrence of obligation
46 Chapter 2
a. IV, 1, 11, V and 111 c. IV,I, V, 11 and 111
b; IV,I, V, 111 and 11 d. IV, V, 1, 11 and 111
4. This type of budget is pr#ared in such a way that estimated

revenues exceed estimated expenditures.
a. Balanced budget c. Obligations budget
b. Excess budget d. Budget meal
5. This summarizes an agency's fiscal year plans and

performance targets. It shows the agency's physical and
financial plan, monthly cash program, estimate of monthly
income, and list of obligations that are not yet due and
demandable.
a. Budget Execution Documents (BEDs)
b. Special Allotment Release Order
c. Statement of Approved Budget, Utilizations,
Disbursements and Balances
d. Aging of Due and Demandable Obligations
6. It is an authorization issued by the DBM to NGAs to incur

obligations. It is also referred to as Obligational Authority.
a. Appropriation c. Budget call
b. Allotment d. Budget hearings
7. It refers to theamount contracted by a duly authorized

administrative officer for which the government is held liable.
a. Appropriation c. Obligation
b. Allotment d. Disbursement
8. Which of the following best describes the Notice of Cash

Allocation (NCA)?
a. It is a form of legislative authorization in the allocation Of
funds for specified purposes.
b. It is a form of authorization to a government agency to
incur obligations on govemment.

of the
c. It is a form of authorization to a government agency to
make disbursements out of government funds.

47
The Budget Process
d. It is a notice received from the Congress that cash is
allocated for the payment of planned expenditures.
9. Disbursements by government enåties are most commonly

made through
a. MDS Checks c. PettyCash Fund
b. Cash d. Credit Card
10. Responsibility accounting requires all of the following except

a. separate books of accounts to segregate controllable and
b. identification of responsibility centers
c. distinction between controllable and non-controllable
costs
d. coding structure for responsibility centers

Fact pattern:
A legislation approves the allocation of PIOOB funds to support
the operations of Entity A (a government agency) in the current
year. At the start of first quarter, Entity A receives authorization to
incur obligations for a maximum amount of P45B in that quarter.
Entity SA extends half of that authorization to its lower operating
units. During the quarter, Entity A receives monthly authorization

to disburse funds not to exceed P15B per month. Entity A extends
half of those monthly authorizations to its lower operating units.
At the end of the quarter, total obligations incurred amounted to
P40B while totar disbursements amounted to P35B.
1. The allocation of the PIOOB funds to Entity A is referred to as

a. Allotment c. Obligation
b. Appropriation d. Sub-allotment
2. The allocation of the PIOOB funds to Endty A is authorized by

a. Department of Budget and Management (DBM)
48
Chapter 2
b. Commission on Audit (COA)

d. Congress
3. The P45B authorization is referred to as

4.
The P45B authorization is received by Entity A from
a. DBM c. BTr
b. COA d. Congress
5. The half of the P45B authorization extended by Entity A

(Central Office) to its lower operating units is referred to as
6. Which of the following best describes the P15B monthly

authorizations?
a. Allotment
b. Obligation authority (e.g. Notice of Cash Allocation 'NCA')
c. Disbursement authority (e.g., Notice of Cash Allocation
'NCA')
d. Disbursement authority (e.g., Notice of Transfer of Allocation
'NTA')
7. The P15B monthly authorizations are received by Entity A

from
a. DBM c. BTr
b. COA d. Congress
8. The half of the P15B monthly authorizations extended by

Entity A (Central Office) to its lower operating units is
referred to as
a. Cash Disbursement Ceiling
c. Notice of Cash Allocation (NCA)
49
The Budget Process
d. Notice of Transfer of Allocation (NTA)
9. In Entity A's first quarter Statement of Appropriations,

Allotments, Obligations, Disbursements and Balances, how much
is shown as "unreleased appropriations?"
a. 965B b. P60B c. P55B d. P45B

is shown as "unobligated allotments?"
a. P6B b. P5B c. PIOB d. P15B

is shown as "unpaid obligations?"
a. P6B b. P5B c. PIOB d. P15B

1. All disbursements of government entities must be in
conformance with the law and the
a. National budget c.PPSASs
b. COA audit findings d. PFRSs
2. An entity prepares its budget for. the upcoming year from

scratch. It scrutinizes each item in the budget irrespective of
whether the item was included in the previous budget. This
process is called
a. zero budgeting c. scratch budgeting
b. incremental budgeting d. zero-based budgeting
3. Under approach to budgeting, several parties participate

this
in the budget preparation — from the lowest levels of
government to the highest levels, and sometimes even citizen-
stakeholders participate in the budget preparation.

50
Chapter 2
a. bottoms-up budgeting c. top-down budgeting

b. zero-based budgeting d. bottom-up budgeting
4. What is the correct sequence of the following steps in the

budget process?
I.
Budget Legislation
II.
Ill.
Budget Preparation
Budget Execution
a. 11, 111, 1 and IV c. 111, 1, 11 and IV

b. 111, 1, lv and 11 d. 111, IV, 1 and 11
5. After deliberations in both houses in the Congress are
finished, a committee is formed to harmonize any conflicts
between the Representatives and Senate versions of the

General Appropriations Bill. This committee is called the
a. Adjudication Conference Committee
b. Bicaramel Conference Committee
c. Referee Conference Committee
d. Bicameral Conference Committee
6. It is the authorization made by a legislative body to allocate

funds for purposes specified by the legislative or similar
authority.
a. Appropriation c. Obligation
b. Allotment d. Disbursement
7. These are the authorizations programmed annually or for
some other period prescribed by law, by virtue of outstanding

legislation which does not require periodic action by
Congress.
a. Automatic Appropriations
b. New General Appropriations
c. Continuing Appropriatiods •
d. Supplemental Appropriations
8. Entity A, a government entity, wants to make disbursements.

Arrange the following events in the correct sequence before
Entity A can make valid disbursements.
I. Allotment
II. Disbursement Authority
Ill. Appropriation
IV. Incurrence of obligation
a. 11, 111, 1, and IV c. 111, 1, 11, and IV

b. 111, 1, IV, and 11 d. 111, IV, 1, and 11
9. This is necessary before government entities can enter into

contracts that bind the government for the eventual
disbursement of government funds
a. Disbursement authority c. Allotment
b. Notice of cash allocation d. Incurrence of obligation
10. Under responsibility accounting, a manager's performance is

evaluated
a. based on all resources under his custody
b. only in terms of the costs, or other variables, that he
controls.
c. on the basis of both controllable and non-controllable

costs.
d. only at year-end.
The Government Accounting Process 52
Chapter 3
The Government Accounting Process
Learning Objectives
1. Record the basic transactions of a government entity.
2. Prepare a worksheet.
Introduction
The govemment accounting process comprises the activities of
analyzing, recording, summarizing

classifying, and
communicating transactions involving the receipt and disposition
of government funds and property, and interpreting the result}
thereof. This process is similar to that of a business entity, except

that it incorporates budgetary controls, such as recording in the
budget registries and preparing periodic budget accountability
reports.
Books of Accounts and Registries

The books of accounts and registries of government entities
consist of:
1. Journals
a. General Journal
b. Cash Receipts Journal
c. Cash Disbursements Journal
d. Check Disbursements Journal
2. Ledgers
a. General Ledgers
b. Subsidiary Ledgers
53
3. Registries
a. Registries of Revenue and Other Receipts (RROR)
b. Registry Of Appropriations and Allotments (RAPAL)
c. Registries of Allotments, Obligations and Disbursements
(RAOD)
d. Registries of Budget, Utilization and Disbursements
(RBUD)
Technically, only the Journals and Ledgers are considered

accounting records. These are similar to the accounting records of a
business entity. The Registries are budget records. These are used to
monitor the budget. You may think of the registries like
"logbooks" or something, rather than accounting books with debit
and credit columns. The accounting unit of the agency maintains
the Journals and Ledgers while the budget division of the agency
maintains the Registries.
Recall that separate accounting records and budget
registries are maintained for each fund cluster (i.e., Regular Agency
Fund, Foreign Assisted Projects Fund, etc. — see Chapter 1).
Budget Registries
1. Registries of Revenue and Other Receipts (RROR) — used to
monitor the budgeted amounts, actual collections and

remittances of revenue and other receipts.
2. Registry of Appropriations and Allotments (RAPAL) — used to

monitor appropriations and allotments. This is to ensure that
allotments will not exceed appropriations.
3. Registries of Allotménts, Obligations and Disbursements (RAOD) —

used to monitor the allotments received, obligations incurred
against the corresponding allotment, and the actual
disbursements made. This is to ensure that obligations
incurred will not exceed allotments while actual
disbursements will not exceed the obligations incurred.
54 Chapter 3
Separate RAOD shall be maintained for each object of
expenditure.
The classifications of expenditures by object are as follows:
a. Personnel Services (PS) — pertain to all types of employee

benefits, e.g., salaries, bonuses, allowances, cash gifts, etc.
b. Maintenance and Other Operating Expenses (MOOE)

pertain to various operating expenses other than employee
benefits and financial expenses, e.g., travel, utilities, supplies,
etc•
c. Financial Expenses (FE) — pertain to finance costs, e.g., interest
expense, bank charges, etc. Financial expenses also include
losses on foreign exchange transactions.
d. Capital Outlays (CO) — pertain to capitalizable expenditures,

expenditures on the construction of public
infrastructures, acquisition costs of equipment, etc.
Accordingly, the following separate RAODs shall be

maintained: (a) RAOD-PS; (b) RAOD-MOOE; (c) RAOD-FE;
and (d) RAOD-CO.
4. Registries of Budget, Utilization and Disbursements (RBUD) -

used to record the approved special budget and the
corresponding utilizations and disbursements charged to
retained income. Separate RBUDs are also maintained for each

object of expenditure, i.e., (a) RBUD-PS; (b) RBUD-MOOE; (c)
RBUD-FE; and (d) RBUD-CO.

Keeping of the General Accounts

The COA shall keep the general accounts of the Governm@nt and
preserve the vouchers and other supporting documents:
Basic Recordings
Appropriation
Entity A (a government agency) receives its GAA consisting of the
following:
Personnel Services (PS) 100,000

Maintenance and Other Operating Expenses (MOOE) 60,000
Capital Outlays (CO) 200,000

Total appropriation for the current year 20x1 360,000
The receipt of the appropriation is posted (recorded) in the

Registry of Appropriations and Allotments (RAPAL) as follows:
REGISTRY OF ALLOTMENTS
Fud Fud
Unretgd
PS MOOE CO PS
1/1h1
Allotment
Entity A receives its allotment from the DBM consisting of the
following:
Personnel Services (PS) 90,000

Maintenance and Other Operating Expenses (MOOE) 40,000
Capital Outlays (CO) 170,000

Total allotment 300,000
56 Chapter 3
The receipt of the allotment is posted (recorded) in the

Registry of Appropriations and Allotments (RAPAL) and Registries of
Allotments, Obligations and Disbursements (RAOD) as follows:
RAPAL
REGISTRY
Fed
Rd Ahab Vurtktsd
PS "E FE PS PS MOOE FECO

1/1h1 GM I n an
nooo
RAODs
REGISTRY OF ALLOTMENTS, OBLIGATIONS AND DISBURSEMENTS

PERSONNEL SERVICES
For the year 2011
Na—et
Fud CHster :
Un •ld 0b •do•s
Date Ret ADot—eats Obk•dons Disbursements Due and Not Yet
ADotments
Due and
1/2,'x1 000

MAINTENANCE AND OTHER OPERATING EXPENSES
For the year 2011
E•üy Nane:
Fud Cluster
D•teReZ ObWioas Dbbeneee•ts Not Yet

Due and
me and
REGISTRY or ALLOTMENTS, OBLIGATIONS AND DISBURSEMENTS

CAPITAL OUTLAYS
For the year 20x1
Endty
Fud Closter :
Not
Date Ret Allot—eats Dbb.ne•eab Due and Due
Demandable
1/2/x1 170000
Incurrence of Obligation
Obligation Request and Status (ORS)

Obligations shall be incurred through the issuance of Obligation
The Requesting Office shall prepare this
Request and Status (ORS).
document, supported by valid claim documents like disbursement
vouchers, payrolls, purchase/job orders, itinerary of travel, etc.
The Head of the Requesting Office shall certify the
necessity and legality of the obligation and the validity of the
supporting documents. The Head of the Budget Division shall
L€ertify the availability of the allotment.
Entity A enters into the following contracts:

a. Personnel Services — Employment contracts (Job Order)
amounting to P70,000.
b. Maintenance and Other Operating Services Purchase
contract for office supplies worth P25,000.
c. Capital Outlays — Purchase contract for office equipment
worth P160,OOO.
The ORS is prepared as follows:

Chapter 3
58
1/3/31.
OBLIGATION REQUEST AND STATUS Ftmd • Regulz
Enti A
Bi omce
St Litde Towa
VAS
code
Cata PzttcuLzs
Job Orde contracts)

for emce appbe
Aeniüüoa Offce Purdue Er quip—t

TOW
CetiØed: obbged
for
Dd uoda my wpavia«;
vü, Fopa iD&cated
Stp*are Sipanre
Printed Nne Gül T. Pid
Nne Boy G.
Poitioa : OMce
1/1/x3
1/1å3
c STATUS OF OLIGATION
Anount
Payable Paytl*at Not Yet

ORSfJEVfOeck/ Obitgioo
Pzticuizs No.
(a)
o 70.000
Job Ode 10.000
o 25,000
1/3,'xl Oßce gppbs 2S000
o 14000
lfYx1 Omee
To simplify the illustration, only one ORS is presented for
the three contracts. Separate ORSs should be prepared for each of
them.
The "obligations" are recorded in the Registries of
Allotments, Obligations and Disbursements (RAOD) as follows:
REGISTRY or ALLOTMENTS, OBLIGATIONS AND DISBURSEMENTS

PERSONNEL SERVICES
For the year 2011
E•dty Na—e: Eut*ty 4

Chster
Not Yet
Due and Due Od
1/38±1 20 ooo 000

59

MAINTENANCE AND OTHER OPERATING EXPENSES
For the year 20x1
E•dty Entity A
Fud Chster Benbr
:
Not Yet
and
Due ud
1/2*J 40 ooo
0 25 ooo
1/38±1
2 ooo 15000

CAPITAL OUTLAYS
For tbe year 2011
Entity E.tttv
Fud Cluster : Regular A.eocy
Ua 0b tins
Not Yet
Date Ret ADotmeab ObUg•dons Disbuneee•ts Due and
Allot—eats Due and
Demandable
1/2h1 110000
160 ooo 10000 o 160000
1/3.61
Notice of Obligation Request and Status Adjustment (NORSA)

If the obligations recorded in the RAOD and ORS above need to
be adjusted, the subsequent adjustment shall be made through the
use of the Notice of Obligation Request and Status Adjustment
(NORSA). The adjustment shall be effected through a positive
entry (addition) or a negative entry (reduction), as appropriate.
Up to this point, nothing is recorded yet in the accounting books.

The recordings above are made on the budget registries. Journal
entries shall be made only after:
a. the employees have rendered services;
b. the office supplies are delivered and received; and
c. the office equipment is delivered and received.
Chapter 3
60
Only after these events occur that the enüty's financial

statement elements are affected, and thus, an accountable event
has occurred that needs to be recognized.

In the meantime, the "obligations" recorded in the
registries (but not yet in the accounting books) are referred to as
"Not Yet Due and Demandable. "

Notice that government entities and business entities use
the term "obligaåon" or the phrase "incurrence of obligation"
differently.
Government enti Business enti

Obligation — is an act of a duly Obligation is another term for
authorized official which liability.
binds the government to the

immediate or eventual
payment of a sum of money.
Obligation maybe referred to
as a commitment that
encompasses possible future

liabilities based on current
contractual agreement.
Disbursement Authority — Notice of Cash Allocation (NCA)

Entity A receives Notice of Cash Allocation (NCA) from the DBM
amounting to P200,000, net of tax.
This time a journal entry shall be made in the accounting

books because the financial statement elements of the entity are
now affected, i.e., increase in cash and increase in revenue. The
entry is as follows:
Date Cash-Modified Disbursement System

(MDS), Regular 200,000
-Subsidy from National Government 200,000
To reco nize recei to NCA om DBM
The Government Accoupting Process 61
The registries used to monitor the NCA are the following:

a. Registry of Allotments and Notice of Cash Allocation (RANCA) —
used to determine the amount of allotments not covered by
NCA and to monitor the available balance of NCA.
b. Registry and Notice of Transfer of Allocation
of Allotment
(RANTA) — used to determine the amount of allotments not
covered by Notice of Transfer o/ Allocation (NTA) and to monitor
the available balance of NTA.
The NCA is posted (recorded) in the RANCA as follows:
REGISTRY OF ALLOTbÆNTS AND NOTICE OF CASH ALLOCATION

For priod Janu"Y *Ox!
Nan :
Fund : _R.lar Fud
NuÖg :
Notice of Caå Allocatbn
Date Rd Received
NCA
(a)
1/4å1 300000 ooo 200 ooo
1. JOURNALS
a. General Journal — used to record transactions not recorded in
the Special Journals.
Special Journals:
b. Cash Receipts Journal — used to record the Report of Collection
and Deposit and Cash Receipts Register of collecång officers.
Report of Collection and Deposit (RCD) — prepared by a

and deposits
collecting officer to report his/her collections
to an Authorized Govemment Depository Bank (AGDB).
62 Chapter 3
Cash Receipts Register (CRReg) — used by field offices
without a complete set of books to record their cash

collections and deposits in the books of their mother unit
(central/regional/division office).
c. Cash Disbursements Journal — used to record the cash
disbursements of the Disbursing Officer.
d. Check Disbursements Journal — used to record the check

disbursements of the Disbursing Officer.
11. LEDGERS
a. General Ledger — summarizes all transactions recorded in the
journals. Accounts in the general ledger are arranged

according to their sequence in the Revised Chart of Accounts.
b. Subsidiary Ledgers — show details of each control account in the
general ledger.
"The NCA specifies the maximum amount of withdrawal

that an entity can make from a government bank for the period
indicated. The Collecting Officer shall not issue an official receipt
(OR) for the receipt of NCA." (GAM for NGAs, Chapter 5, Sec. 38) Since
the receipt of the NCA does not constitute a collection that is
recordable in the Cash Receipts Journal, it is recorded in the

General Journal as follows:
GENERAL JOURNAL
Mon
Fud : R.ur Fud

Panim,un VACS
0b code aedit
1/4åI i 10104040 ooo
s from 40301010 200 ooo
rorxo o tk.DBU
The journal entry for the NC-4 is posted to the general

ledger as follows:
GENERAL LEDGER
Nee:
TEE: ßDSV VAß Object Cede:
1/4±1 ÆVNo. 1 200 ooo 200 ooo
GENERAL LEDGER
Fed :
VAS code
1/4åI otNCA DBM JEVNo. i 200
Disbursements
Employees have rendered services and are now entitled to
compensation.
Journal entries shall be made because the financial
statement elements of the entity are affected, i.e., increase in
expenses and increase in liability/decrease in cash. The recordings
are as follows:
a. Set up of payable to officers and employees upon approval of

payroll.
Salariesand Wages 35,000
Personal Economic Relief Allowance (PERA) 5,000
Gross Compensation 40,000
Withholding Tax (10,000)
GSIS (2,000)
Pag-1BIG (2,000)
PhilHea1th (1,000)
Total Deductions (15,000)
Net 25,000
64 Chapter 3
Date 35,000
Salariesand Wages, Regular
Due to BIR 10,000
Due to GSIS 2,000
Due to Pag-1BIG 2,000

Due to PhilHealth 1,000
Due to Officers and Employees 25,000

To recognize payable to officers and
em 10 eesu ona rovalo a roll
b. Posting of payable to the Section C of ORS
OBLIGATION REQUEST AND STATUS 1/Yx1

Enti A Find auge. P..æguiz
B.
Bl omee
St L.itde Town
BCO?AP VAÄ
Hinn Job (E*'•— eoüxu) 70.000
A&nüüioo for omæ 2$000
omce order for omce
160."
Tool 255000
Certß•d: .oFiüoa re Cettß•d: Aflo= obliged

my tor pxpw u
vali4 Dd
Ne•. Boy G. Anæ

Girl T. Pid
Poaön
1/1,'x3 misim
c.
STATVS OF OLIGATION
Not Ya
1/3/81 Job (c) a-b

JEVNo.2 70.000
1/3'*1
25.000
If3ÄI
t6QOOO
c. Grant of Cash Advance for payroll.
Date Advances for Payroll 25,000

Cash-Modified Disbursement 25,000
To recognize grant of cash advance
or a roll
The entries above are posted to the appropriate ledgers.
d. Posting of disbursement to the payment column of Section of C

of the ORS and disbursements column of the RAOD
The Section C of the ORS will show the following

information:
OBLIGATION REQUEST AND STATUS Dae: 1/3/11

FIDd
Enti A •
STATUS OF OLIGATIO.N
Rderace
ORS JEV Obligation Pay*le

Pnalzs ADA'TUNo.
(a) (b) (c
Job JEVNo.2&3 70.000 25.000 15,000
lf3/x1 applies 25.000 o 25,000
equipot 14000 o l@.ooo
The recording in the RAOD-PS is as follows:

PERSONNEL SERVICES
For the year 2011
Entity Name:
Fud Chster : B«ular Fund
Not Yet
Dote Ret Due and
Due and
1/2/xJ 90 ooo
1/3,'x1 70 ooo 20 000 30 ooo
Chapter 3
66
At this point, the payment and disbursement columns in

the ORS and RAOD-PS, respectivley, show only the P25,000
payment. This amount will be updated after the entity remits the
other P15,000 amount withheld to the other government agencies

(i.e., BIR, GSIS, Pag-IBIG, and PhilHealth). In the meantime, the
P15,000 withheld are treated as "Due and Demandable." We will
discuss the remittances momentarily.
e. Li uidation of Pa 011 Fund

25,000
Date Due to Officers and Employees
25,000
Advances for Payroll
To recognize liquidation of Payroll Fund
Remittance of Amounts Withheld

Entity A remits the P15,000 withheld to the other government
agencies. The breakdown is re-provided below:
Withholding Tax 10,000
GSIS 2,000
Pag-1BIG 2,000
PhilHealth 1,000
Total Deductions 15,000
Remittance of Withholding Tax

The Tax Remittance Advice (TRA) is used to recognize:
a. In the books of government agencies, the constructive remittance I
t
of taxes withheld to the Bureau of Internal Revenue (BIR) or
customs duties withheld to the Bureau of Customs (BOC), and
the constructive receipt of NCA for those taxes and customs
duties;
b.
BOC, the constructive receipt of
In the books of the BIR and tax
revenue and customs duties; and
c.
In the books of the BTr, the constructive receipt of the taxes and
customs duties remitted.
The Government Accounting Process, 67
The remittance of the tax withheld is recorded as follows:
Books o_fEntity A
Date Cash-Tax Remittance Advice 10,000

Subsidy from National Government 10,000
To recognize the constructive receipt of
NCA or TRA
Date Due to BIR 10,000
Cash-Tax Remittance Advice 10,000
To recognize the constructive remittance
o taxes withheld to the BIR throu h TRA
Notice that there is actually no physical transfer of cash to

the BIR (i.e., debit and credit to 'Cash-TRA'), thus the term
"constructive." The TRA is another form of disbursement
authority, thus it is recorded similarly to the receipt of the regular
NCA (i.e., credit to 'Subsidy from Natiohal Government'). This
means that Entity A has the authority to use the amount withheld
in its operations. Amounts used from the TRA will be reported in
Entity A's Monthly Report of Disbursements.
The TRA is recorded by the other government agencies as

follows:
Bookso BIR Books 0 BTr

Cash-TRA 10,000 Subsidy to NGAs....10,OOO
Income Tax 10,000 Cash-TRA 10,000
To recognize constructive To recognize constructive
receipt of taxes remitted by National receipt of remittance of taxes by NGAs
Government Agencies (NGAs) through through TRA
TRA
The use of the account "Cash-Tax Remittance Advice" is as if

Entity A remits the cash to the BIR and BTr, which the latter then
remits back to Entity A, without the cash being physically
transferred. The use of TRA is necessary in order for the BIR to
Chapter 3
68
record the taxes as its income and for the BTr to record the
withholding agency's disbursement authority as subsidy.
Remittance to GSIS, Pag-1BIG & PhilHealth

2,000
Date Due to GSIS
1,000
Due to PhilHea1th
5,000
To recognize remittance to GSIS,
Pa -IBIG and PhilHealth
The Obligation Request and Status (ORS) and the RAOD-PS

are updated for the payments above.
Billings, Collections & Remittances

a. Entity A bills revenue of PIOO,OOO for rent income.
Date Accounts receivable 100,000

Rent/Lease income 100,000
To recognize billing of income
b. Entity A collects PIOO,OOO from the billed revenue and remits

the collection to the BTr.
Date Cash — Collecting Officers

100,000
Accounts Receivable
100,000
To recognize collection of billed income
Date Cash-Treasury/Agency Deposit, Regular 100,000

Cash — Collecting Officers
100,000
To recognize remittance of income to BTr
P.D. No. 1445 requires that all collections must be remitted

to the National Treasury, unless another law specifically allows
otherwise.
The billing of revenue is recorded in the General Journal

while the collection and remittance are recorded in the Cash
Receipts Journal as follows:
CASH RECEIPTS JOURNAL

Month Januar
E.Öty
Outer t
0001 910 Mr.KobL.«tor 1
Reversion of Unused Notice of Cash Allocation (NCA)

Government entities are required to revert any unused NCA at the
end of the accounting period.

The unused NCA is computed as follows:
Cash-Modified Disbursement System (MDS), Regular

Receipt of NCA 200,000
25,000 Advances for payroll

Remittances to GSIS,
5,000
Pag-1BIG, & PhilHea1th
170,000 end
Date Subsidy from National Government 170,000

To reco nize reversion o unused NCA
Notice that the entry above is the exact opposite of the

entry to record the receipt of the NCA.
70 Chapter 3
Summa o Basic Recordin s:
Recordin in:
Transaction Registries & Journal & Ledger

Other Records
a. A ro riation RAPAL None
b. Allotment RAPAL and None
appropriate
RAODs
c. Incurrence of ORS and None
Obligations appropriate
RAODs
d. NCA RANCA Cash-MDS, Regular xx
Subsidy from NG xx
e. Disbursements updating of Expense/Asset

Payable xx
ORS and
appropriate Payable
RAODs Cash-MDS, Regular xx
f. Tax Remittance updating of Cash-TRA
Advice ORS and Subsidy from NG xx
(TRA is used for

appropriate Due to BIR
remittance of taxes
RAODs Cash-TRA
withheld)
.6
g. Billings, RROR, Accounts receivable xx

Collections, & Cash -CO
RCD/CRReg
Remittances (not illustrated)
Cash-CO
Accounts receivable
Deposit, Regular xx
Cash-CO xx
h. Reversion of RANCA Subsidy from NG xx

Unused NCA Cash-MDS, Regular
xx
The Revised Chart of Accounts

A chart of accounts is a list of all the accounts used by an entity.
Government entities shall use the account titles and account codes
in the Revised Chart of Accounts (RCA) issued by the COA.
The RCA includes numerous accounts. Only a few of these
accounts are shown below as presenting the complete list would
more than double the number of pages in this book.O
Each account in the RCA is assigned an 8-digit code as
follows:
0 00 00 00 0
Account Group
Major Account Group
Sub-Major Account Group
General Ledger Accounts
General Ledger Contra-Accounts
Code Account Groups

1 Assets
2 Liabilities
3 Equity
4 Income
5 Expenses
Example:
Group: Asset
Major Acmunt Group: Cash and Cash Equivalents
Sub-Major AcØunt Group: Cash on Hand
General Ledger Acmunt: Cash-Collecting Officen
r Gneral Ledger Not a
CashCoUecüng Officers 1 01 01 01 0
title) (RCA Code)
Chapter 3
72
LIST OF ACCOUNTS
RCA UACs
Account Title
Code Object
Code
ASSETS
Cash and Cash Equivalents
Cash on Hand
10101010 1010101000
Cash-Collectin Officers
10101020 1010102000
Pe Cash
Cash in Bank-Local Curren
10102020 1010202005
Cash in Bank-Local Currency, Current
Account-Banco de Oro (BDO)
Treasu /A enc Cash Accounts
10104010 1010401000
Re lar
10104040 1010404000
Cash-Modified Disbursement System
(MDS), lar
10104070 1010407000
Cash E uivalents
Treasu Bills 10105010 1010501000
Investments
Financial Assets at Fair Value
Throu h Su De •cit
lus or
Financial Assets Held for Tradin 10201010 1020101000
Receivables
Loans and Receivable Accounts
Accounts Receivable 10301010 1030101000
Allowance for Impairment-Accounts 10301011 1030101100

Receivable
Inventories
Invento Held or Sale
Merchandise Invento 10401010 1040101000
Invento Held or Consum tion
Office Su lies Invento 10404010 1040401000
Pro ert , Plant and E ui ment

In astructure Assets
Road Networks 10603010 1060301000

Accumulated Depreciation-Road 10603011 1060301100
Networks
Accumulated Impairment Losses-Road 10603012 1060301200

Networks
Other Assets
Advances
Advances for Pa roll 19901020 1990102000
Pr a ments
Pre aid Rent 19902020 1990202000
LIABILITIES
Financial Liabilities
Pa ables
Accounts Pa able 20101010 2010101000
Inter-A en Pa ables
Due to BIR 20201010 2020101000
NET ASSETS/EQUITY
Government E uit
Accumulated Sur lus/(Deficit 30101010 3010101000
REVENUE
Tax Revenue
Income Tax 40101010 4010101000
Income Tax-Individual 40101010 4010101001
Immi ation Tax 40101040 4010104000
Service and Business Income

Service Income
Chapter 3
74
40201010 4020101000
Permit Fees
40201020 4020102000
Re •stration Fees
40201990 4020199099
Other Service Income
Business Income
40202010 4020201001
Tuition Fees
40202100 4020210000
Power Su I S stem Fees
40202120 4020212000
Landin and Parkin Fees
Assistance and Subsid

40301010 4030101000
Subsid from National Government
Gains
Gain on Sale of Property, Plant and 40501040 4050104000
E ui ment
Other Non-O eratin Income

Reversal o Im airment Loss
Reversal of Im airment Loss 40602010 4060201000
EXPENSES
Personnel Services
Salaries and Wa es
Salaries and Wa es-Re lar 50101010 5010101000
Other Com ensation
Personal Economic Relief Allowance 50102010 5010201000

(PERA)
Direct Costs
Cost of Sales
50402010 5040201000
Non-Cash Ex enses
D reciation
Depreciation-Buildings and Other

50501040 5050104000
Structures
The Government Accdunting Process
75
The Government Accounting Cycle

In this section, we will have an overview of the accounüng cycle
of a government entity. Here is a list of the things that we will be
learning:
I. Appropriation
2. Allotment
3. Incurrence of Obligation
4. Disbursement Authority - NCA
5. Disbursements
6. Billings, Collections & Remittances
7. Unadjusted trial balance
8. Adjusting entries
9. Closing entries
10. Preparation of financial statements
The trial balance of Entity A (a government entity) at the
beginning of the period is shown below:
Debit Credit
Accounts
Cash - Collecting Officers 5,000
Accounts Receivable 45,000

500,000
Buildings
Accumulated Depreciation - Buildings 150,000
Equipment
Office
150,000
Accumulated Depreciation - Equipment 60,000

20,000
Accounts Payable
Accumulated Surplus (Deficit) 470,000
Totals 700,000 700,000
Notes:
The P20,000 accounts payable pertains to office supplies purchased
in the priok year that were already delivered but not yet paid.
An additional purchase of office supplies worth P5,000 is not yet
recorded in the accounting books because they are not yet delivered.
This prior year "obligation" is described in the registries as "Not yet
due and demandable obligation."

Chapter 3
76
1. Appropriation
Entity A receives its GAA amounting to
The appropriation is posted (recorded) in the Registry of
Appropriations and Allotments (RAPAL).
2. Allotment
Entity A receives its allotment amounting to P960,000 from the
DBM.
The allotment is posted (recorded) in the Registry of
Appropriations and Allotments (RAPAL) and Registries of
Allotments, Obligations and Disbursements (RAOD).
3. Incurrence of Obligation
Entity A incurs obligations amounting to P700,000.
The obligations are recorded in the Obligation Request and

Status (ORS) documents and Registries of Allotments,
Obligations and Disbursements (RAOD).
4. Disbursement Authority - NCA

Entity A receives the following Notice of Cash Allocations
(NCA), net of tax:
a. For current year's appropriation

600,000
b.
For prior year's accounts payable and not yet due
and demandable obligations
25,000
The journal entries are as follows:
Date
(4.a) 600,000
(MDS), Regular
600,000
Subsidy from National Government
To recognize receipt ofNCAfrom the
DBM
Date Cash-Modified Disbursement System 25,000

(4.b) (MDS), Regular 25,000
To recognize receipt ofNCAfrom the
DBM
The NCA is posted (recorded) in the Registry of Allotments

and Notice ofCash Allocation (R/NCA).
5. Disbursements
I. Personnel Services (PS)
a. Set up of payable to officers and employees upon approval

of payroll.
Salariesand Wages 200,000

Withholding Tax (20,000)

GSIS (9,000)
Pag-1BIG (2,000)
PhilHealth (1,000)
Total Deductions (32,000)
Net 218,000
Date 200,000
Salariesand Wages, Regular
(5.1.a)
Due to BIR 20,000
Due to GSIS 9,000
Due to PhilHealth 1,000
Due to Officers and Employees 218,000
To recognize payable to officers and

em I ees u ona rovalo a roll
78 Chapter 3
b. The payable is recorded in the ORS.
c. Grant of Cash Advance for payroll.
Date 218,000
Advences for Payroll
(5.1.c)

To recognize grant of cash advance
r a roll
d. The disbursement is recorded in the ORS and RAOD.
e. Liquidation of Payroll Fund
Date Due to Officers and Employees 218,000

(5.1.e)
Advances for Payroll 218,000
To recognize liquidation of Payroll Fund
II. Maintenance and Other Operating Expenses (MOOE)
Purchase of office supplies:
a. Receipt of delivery of purchased office supplies from prior

year's obligation (see note above on 'Not yet due and
demandable obligation')
Date Office Supplies Inventory 5,000

(5.11M) Accounts Payable 5,000
To recognize delivery ofoffice supplies
The payable is recorded in the ORS.
b. Receipt of delivery of purchased office supplies worth

P70,000 from current year's obligation.
Date Office Supplies Inventory 70,000

(5.11.b)
Accounts Payable 70,000
To recognize delivery of office supplies
The payable is recorded in the ORS.
Payment of accounts payable:
Entity A pays the following accounts payable:
c. From prior year's accounts payable (see trial balance above):
Accounts payable 20,000

Less: Withholding taxes* (2,000)
Net 18,000
* For simplification, the withholding taxes in this illustration do not

necessarily reflect the provisions of relevant tax laws.
Date Accounts Payable 20,000

(5.11.c)
Due to BIR 2,000
Cash — Modified Disbursement
System (MDS), Regular 18,000
To recognize payment of accounts
able
d. From prior year's obligation (see note above on 'Not yet due
and demandable obligation' and previous entry to record the
related accounts payable):

Less: Withholding taxes (1,000)
Net 4,000
80 Chapter 3
Date 5,000
Accounts Payable
(5.11.d)
Due to BIR 1,000

able
Common Fund System

To maximize the available NCAs of the agency, the Common Fund System
policy shall be adopted whereby cash allocation balances of agencies under
the Regular MDS Account may be used to cover payment of current year's
accounts payable, i.e., goods and services which have been delivered and
accepted during the year charged against appropriations of prior year/s, after
satisfying their regular operating requirements as reflected in their Monthly

Cash Program. (GAM for NGAs, Chapter 6, Sec. 3)
e. From current year's accounts payable.

Net
57,000
Date
Accounts Payable
(5.11.e) 60,000
Due to BIR
3,000
57,000
able
Operating expenses:
f. Entity A pays for the following expenses:

Water
1,000
Electricity
5,000
Telephone
2,000
Janitorial 10,000
Security 12,000
Total 30,000
Net 28,000
Date Water Expenses 1,000

(5.11.])
Electricity Expenses 5,000
Telephone Expenses 2,000
Janitorial Expenses 10,000
Security Expenses 12,000

Due BIR
to 2,000
To recognize issuance ofMDS checks as
ment or ex enses
Cash advances for travel:
g. Entity A grants a cash advance of P2,000 for the traveling

expenses of an officer:
Date Advances to Officers and Employees 2,000

(5.11.g) Cash — Modified Disbursement
2,000
To recognize grant of cash advance for
travel
All the disbursements above (payments of accounts

payable, operating expenses, and cash advance) are
recorded in the ORS and RAOD.
h. Liquidation of cash advance:
Date Traveling Expenses - Foreign 1,800

(5.11.h) 1,800
Advances to Officers and Employees
To recognize liquidation of cash advance
or travel
86 Chapter 3

(6.d.2)
Cash — Collecting Officers 340,000
To recognize remittance of income to
the BTr
"Unbilled revenue/income" refers to fees from regulatory functions and

collections of revenue with no direct exchange of services or goods.
e. Entity A collects. unbilled tax revenue

. through direct
deposit in Authorized Agent Banks:
Immigration Tax 100,000
Total 100,000

(6.e)
To recognize collection and remittance of
income to BTr through Authorized Government
Depository Banks (AGDB)/ Government Servicing
Banks (GSB)
The collection is automatically remitted to the National

Treasury because it is made through the latter's bank account.
7. Unadjusted trial balance

An unadjusted trial balance is a list of the accounts in the
General Ledger together with their balances. Its purpose is to
test the equality of total debits and total credits in the

accounts.
Before we can prepare the unadjusted trial balance
we need to post first the journals entries above in the General
Ledger.
GENERAL LEDGER
ASSETS
06m CaM Cai•Mod6edDisbøad
5,mo
200 2m 200 (0) 2900

ea.il)
100,000 90000 (02) (02)

(5Ld)
45000
340,000
57m
28.000
100,000
5Z,2N
28000
11000
Accougts ies boatoty

Cash -Tax Rmtittggct
beg. 45,000 5,mo
(5Nz1) 48,000
(6.b.1) (5Zb) 70,000 63,000 (5.n.J)
(5Na.2)
45,000 (6.c.1)
Bgildin Acwm. - Bugs.
150,000 beg. 150,000

500,000
500," —d. ad. 150," (5.m.a) 300m
450"
Advances Pa 11 Aåuxctsto oyees
60,0 beg. (51c) 218,000 (Sag) 2.000

218,000 (5.1.e) 1,800 (5.n.h)
200 (5.n.i.1)
Chapter 3
84
GSIS 9,000
2,000
Pag-1BIG
mlHea1th 1,000
Total •
12,000
9,000
Date Due to GSIS
(5.1V.b) 2,000
Due to Pag-1BIG
1,000
Due to PhilHealth
12,000
To recognize remittance to GSIS,
Pa -IBIG and PhilHealth
c. The disbursements above are recorded in the ORS and
MOD.
6. Billings, Collections & Remittances

a. Entity A bills the following revenue/income:
Power supply system fees 100,000

Landing and parking fees 80,000
Total 180,000
Date Accounts receivable 180,000

(6.a)
Power Supply System Fees 100,000
Landing and Parking Fees 80,000

To recognize billing of income
b. Entity A collects PIOO,OOO accounts receivable from the
billing above and remits of the collection.
Date Cash — Collecting Officers 100,000

(6.b.1) Accounts receivable 100,000
To recognize collection of current year's
billed income

(6.b.2) Cash — Collecting Officers 90,000
To recognize remittance of income to the
BTr
* As a general rule, all revenues of an entity must be remitted to the BTr (Sec.
65(1), P.D. No. 1445). However, there are cases where other laws permit an
entity to retain some of its revenues for specific uses — thus, the unremitted
collection of PIO,OOO above (100K collection less 90K remittance).
c. Entity A collects P45,000 accounts receivable from prior
year's billing and remits total collection.

(6.c.1)
Accounts receivable 45,000
To recognize collection of prior year's
billed income
(6.c.2)
Cash — Collecting Officers 45,000
To recognize remittance of income to the
BTr
d. Entity A collects unbilled service income of P370,000 and

remits P340,000 of the total collection:
Permit fees 200,000
Registration fees 160,000

Other service income 10,000
Total collection 370,000

(6,d.1)
Permit fees 200,000
Registration fees 160,000
Other service income 10,000
To recognize collection of unbilled

service income
82 Chapter 3
i. Receipt and deposit of refund of excess cash advance:.
Date
Cash — Collecting Officers 200
(5.11.i.1)
Advances to Officers and Employees 200
To recognize refund ofexcess cash

advance r travel
Date
Cash — Treasury/Agency Deposit,
(5.11.i.2) 200
Regular
Cash — Collecting Officers 200
To recognize remittance of the refund

o excess cash advance or travel
An adjustment for the excess cash advance is made on the

ORS and MOD.
Issuance ofofice supplies to end users

j. Entity A issues office supplies worth P63,000 to end users.
Date Office Supplies Expense 63,000

(5.11.)) 63,000
Office Supplies Inventory
To record the issuance of office supplies
to end users
111. Capital Outlays (CO)
Purchase of office equipment

a. Receipt of delivery of purchased office equipment worth
Date Office Equipment 300,000

(5.111.a)
To recognize delivery of office
e ui ment
b. Payment of accounts payable.

Net 280,000
Date Accounts Payable 300,000

Date
Due to BIR 20,000
(5.111.b)
able
Remittances of amounts withheld
a. Entity A remits the taxes withheld through TRA.

Date Cash-Tax Remittance Advice 48,000
(5.1V.a.1)
To recognize the constructive receipt of
NCA or TRA
Date Due to BIR 48,000
(5.1V.a.2)
Cash-Tax Remittance Advice 48,000
To recognize the constructive remittance
o taxes withheld to the BIR throu h TRA
Due to BIR
20,000 (5.1.a)
2,000 (5.11.c)
1,000 (5.11.d)
3,000 (5.11.e)
2,000 (5.11.f)
20,000 (5.111.b)
48,000
Entity A remits the following to the GSIS, Pag-IBIG and

PhilHea1th.
88 Chapter 3
LIABILITIES
Empl ces
A«oets to
20.000
(51.) (51.)
20,000
2.000
(5.n.c)
5.000 218,000
1.000 (5J.d)
on.c) 20.n 70.000 (5.n.b)
3,000 (sae)
(5.Ld) 5,000 30000 2.0m (5.n.0
4000 48,000 20,000
(51V.a.2) (5.m.b)
(5.Lb) 300,000
to GSIS to Pg
2,000 (51.) 1.0@ (5.1..)
9,000 (51.)
9,mo (5.rv» 2.000 (5W.b)
(5.rv.b)
EQUITY
470,000 beg.
470"
INCOME
tin Tax Pennit Fees Reöstratioø Fees
100,000 (6.e) 200,000 (6.d.1) 160,000
100" 200" 160,000
Otåer Savice Eco* Power stem Fees Landiß & ParEß Fees frm NG
10,000 (6d.1) 100,000 80,000
(6d.1) Ø0,ooo (0)
100,000 80,om 25,000 (43)
48,000 (5fl.1)
673,"
EXPENSES
%IgHes agd Wa s, R lar PERA Travellin s -Foreir
200.000 50.000
(5.n.h)
200,"
ies Water
Electria•
(5.n.j) 63,mo (5.1Lf) 1,000
(5.mo
63,"
5,0Ø
Tel one •nitoHal ses

(5n.f) zooo (5XLf) 10,000
(5n.f) 12,000
UNADJUSTED TRIAL BALANCE

Accounts RCA Code Debit Credit
Cash - Collecting Officers 10101010 45,000
Cash-Treasury/Agency Dep., Reg. 10104010 575,200
Cash-MDS, Regular 10104040 6,000
Cash-Tax Remittance Advice 10104070
Accounts Receivable 10301010 80,000
Office Supplies Inventory 10404010 12,000
Buildings 10604010 500,000
Accum. Depreciation - Buildings 10604011 150,000
Equipment
Office 10605020 450,000
Accum. Depreciation — Equipt. 10605021 60,000
Advances for Payroll 19901020
Advances to Officers & Employees 19901040
Accounts Payable 20101010 10,000

Due to Officers and Employees 20101010
Due to BIR 20201010
Due to GSIS 20201020
Due to Pag-1BIG 20201030
Due to PhilHealth 20201040
Accumulated Surplus (Deficit) 30101010 470,000

Immigration Tax 40101040 100,000
Permit Fees 40201010 200,000
Registration Fees 40201020 160,000
Other Service Income 40201990 10,000
Power Supply System Fees 40202100 100,000
Landing and Parking Fees 40202120 80,000
Subsidy from NG 40301010 673,000
Salaries and Wages, Regular 50101010 200,000
PERA 50102010 50,000
Traveling Expenses - Foreign 50201020 1,800
Office Supplies Expense 50203010 63,000
Water Expenses 50204010 1,000
Electricity Expenses 50204020 5,000
Telephone Expenses 50205020 2,000
Janitorial Expenses 50212020 10,000
Security Expenses 50212030 12,000
Totals
fi
The Government-Accounting Process 95
10. Preparation of financial statements

The Statement of Financial Position and Statement of Financial
Performance are shown below. We will prepare the other
components of a complete set •of financial statements later in
Chapter 14.
ENTITY A
STATEMENT OF FINANCIAL POSITION
(REGULAR AGENCY FUND)
AS AT DECEMBER 31, 20X1
ASSETS Notes
Current Assets
Cash and Cash Equivalents 45,000
Receivables 78,000
Inventories 12,000
Total Current Assets 135,000
Noncurrent Assets
Property, Plant and Equipment 1 660,000
Total Noncurrent Assets 660,000
TOTAL ASSETS 795,000
Current Liabilities
Financial Liabilities 10,000
Total Current Liabilities 10,000
TOTAL LIABILITIES 10,000
TOTAL ASSETS less TOTAL LIABILITIES 785,000
NET ASSETS/EQUITY
Accumulated Surplus/(Deficit) 785,000
TOTAL NET ASSETS/EQUITY 785,000
9. Closing entries
The following are the necessary closing entries:
a. Closing of the "Cash-Treasury/Agency Deposit, Regular"
account to the "Accumulated Surplus/(Deficit)" account.
b. Closing of the "Subsidy from National Government" aCCOUnt
to the "Revenue and Expense Summary" account.
c. Closing of income and expense accounts to the "Revenue
and Expense Summary" account and closing of the net
balance of "Revenue and Expense Summary" account to the
"Accumulated Surplus/(Deficit)" account.
Only closing entries (a) and (b) are unique to a
government entity.
Date
Accumulated Surplus/(Deficit) 575,200
Cash-Treasury/Agency Deposit, 575,200
Regular
To recognize closing of cash deposit
account
Date
Revenue and Expense Summary 667,000
To reco nizeclosin o subsid account
Date
Immigration Tax
(9.c.1) 100,000
Permit Fees
200,000
Registration Fees
160,000
Other Service Income
10,000
Power Supply System Fees
100,000
Landing and Parking Fees
80,000
Salaries and Wages, Regular
PERA 200,000
50,000
Traveling Expenses - Foreign
1,800
Office Supplies Expense
63,000
Water Expenses
1,000
5,000
Telephone Expenses
2,000
Janitorial Expenses
10,000
Security Expenses
De reciation-Bld s.
12,000
50,000
The Gotrrnment Accounting Prtx•e« 93
tkprcoation-Mac. & Equipt. 30,0

Lass LIR
Revenue and EVB•nse Summary
TO and
acvountg
Rc•.Tnuc and Expcnv• Summary

Accumulated Surplu€(tkficit)
recogm;.c and
('Otnplefed ts shown tx•lo•.•.•

90
Chapter 3
The accounts are arranged according to their sequence in
the Revised Chart ofAccounts (RCA). (GAM for NGAs, Chapter 19, sec. 48)
8. Adjusting entries
1. Reversion of unused Notice of Cash Allocation (NCA).
2. Depreciation expenses:
i. Buildings — P50,000
ii. Equipment — P30,000
3. Allowance for impairment on accounts receivable of
P2,OOO.
The adjusting entries are as follows:
Date Subsidy from National Government 6,000

6,000
To reco nize reversion o unused NCA
Date Depreciation-Buildings & Other Structures 50,000
(8.b.1)
Accumulated Depreciation — Bldgs. 50,000
To reco nized reciation o buildin s
Date Depreciation-Machinery and Equipment 30,000

(8.b.2) Accumulated Depreciation — O.E. 30,000
To recognize depreciation of office

e ui ment
Date Impairment Loss — Loans and Receivables 2,000
Allowance for Impairment — A/R 2,000
To recognize loss allowance on accounts

receivable
The adjusted trial balance is shown below:

8
96 Chapter 3
ENTITY A
STATEMENT OF FINANCIAL PERFORMANCE
(REGULAR AGENCY FUND)
FOR THE YEAR ENDED DECEMBER 31, 20X1
REVENUE Notes
Tax revenue 2 100,000
Service and Business Income 3 550,000

TOTAL REVENUE 650,000
Less: CURRENT OPERATING EXPENSES

Personnel Services 4 250,000
Maintenance and Other Operating Expenses 5 94,800
Non-cash Expenses 6 82,000
TOTAL CURRENT OPERATING
426,800
SURPLUS/ (DEFICIT) FROM

CURRENT OPERATIONS 223,200
Net Financial Assistance/Subsidy 667,000
SURPLUS/ (DEFICIT) FOR THE PERIOD 890,200

The Goærnment Accounting Process 97
ENTITY A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 20X1
Note 1: Property, Plant and Equipment

This account consists of the following:
Buildings 500,000
Office Equipment 450,000
Total Cost
950,000
Accumulated Depreciation - Buildings 200,000

Accumulated Depreciation - Equipment 90,000
Total Accumulated Depreciation 290,000
Property, Plant and Equipment, net 660,000
Note 2: Tax Revenue


Tax Revenue 100,000
Note 3: Service and Business Income

Permit Fees 200,000

Registration Fees 160,000
Other Service Income 10,000
Power Supply System Fees 100,000
Landing and Parking Fees 80,000
Service and Business Income 550,000
98 Chapter 3
Note 4: Personnel Services

200,000
Salaries and Wages, Regular
PERA 50,000
Personnel Services 250,000
Note 5: Maintenance and Other Operating Expenses

Traveling Expenses - Foreign 1,800
Office Supplies Expense 63,000
Water Expenses 1,000
Electricity Expenses 5,000
Telephone Expenses 2,000
Janitorial Expenses 10,000
Security Expenses 12,000
Maintenance and Other Operating Expenses 94,800
Note 6: Non-cash Expenses

Depreciation-Buildings & Other Structures 50,000

Depreciation-Machinery and Equipment 30,000
Impairment Loss — Loans and Receivables 2,000
Non-cash Expenses 82,000
The Goternment Accounting Process 99
Chapter 3 Summary:
A government entity's books of accounts and registries consist

of
a. Journals,
b. Ledgers, and
c. Registries.
The classifications of expenditures by object are:

a. Personnel Services (PS),
b. Maintenance and Other Operating Expenses (MOOE),
c. Financial Expenses (FE), and
d. Capital Outlays (CO).
Appropriations, allotments, and incurrence of obligations are
recorded only in the registries. Recording in the books of
accounts starts from the receipt of disbursement authority.
Appropriations are recorded in the Registry of Appropriations
and Allotments (RAPAL).
Allotments are recorded in the RAPAL and Registries of
Allotments, Obligations and Disbursements (RAOD).
Obligations incurred are recorded in the RAOD and Obligation
Request and Status (ORS).

Disbursement authority (e.g., Notice of Cash Allocation) is
recorded in the books of accounts.

100 Chapter 3
PROBLEMS

1.
Technically, only the Journals and Ledgers are eonsidered
accounting records; the Registries are budget records.
2.
Separate accounting records and budget registries are
maintained for each fund cluster.
3. Government entities and business entities use the term

"obligation" or the phrase "incurrence of obligation" similarly.
4. The various registries maintained by government entities

primarily serve as intemal control for controlling and
monitoring the conformance of actual results with the
approved budget.
5. A check disbursement is normally recorded as a credit to the

"Cash-Modified Disbursement System (MDS), Regular '
account.
6. Both the ORS and RAOD are updated each time an obligation
is incurred, a payable is recorded for the obligation incurred,
and disbursements are made to settle the recorded payables.
7. At the end of each year, an adjustment is made to revert any

unused NCA of a government entity.
8. The GAM for NGAs requires the Collecting Officer to issue an

official receipt to acknowledge the receipt of the Notice Of
Cash Allocation.
9. The entry to record the reversion of unused NCA at the end Of

the period is the exact opposite of the entry used to record the
receipt of NCA.
10. The remittance of amounts withheld to the other government

agencies, such as the BIR, BOC, GSIS, PhilHealth, and Pag-
IBIG, is done through the TRA.

1. The various registries maintained by government entities are
considered, technically, as
a. Books of accounts c. General Ledgers
b. Budget records d. Log books
2. Which of the following is recorded in the Obligation Request

and Status (ORS)?
a. Receipt of notice of appropriation
b. Receipt of allotment from the DBM
c. Receipt of Notice of Cash Allocation from the DBM
d. Entering into employment contracts with employees
3. This type of expenditure pertains to all types of employee

benefits.
a. Personnel Services (PS)

d. Capital Outlays (CO)
4. Entity A, a government entity, made disbursements for the

travelling expenses of its personnel. These expenditures are
most likely classified as
5. Which of the following is charged with the responsibility of

keeping the general accounts, and related documents, of the
Government?
102 Chapter 3
a. COA c. NGAs
b. BTr d. DBM
6. A journal entry with a credit to the "Cash-Modified
Disbursement System (MDS), Regular" account will most
likely be recorded in the
a. General Journal c.Cash Disbursements Journal
b. Special Journal d. Check Disbursements Joumal
7. Which of the following accounts is debited when a
government entity remits its collections to the National
Treasury?
a. Cash-Tax Remittance Advice
b. Cash-Modified Disbursement System (MDS), Regular
d. Cash — Collecting Officers
8. Which of the following accounts is credited when a

government entity remits taxes withheld to the BIR?
9. Which of the following accounts is credited when a

government entity remits contributions to the GSIS,
PhilHea1th and Pag-1BIG?
10. Obligations recorded in the registries but not yet in the

accounting books are referred to as
a. Not Yet Due and Demandable
b. Contingent liabilities
c. Erroneous recording
d. Unpaid obligations
103

1. The receipt of an allotment is recorded by@ government entity
in the
a. RAOD c. RAPAL
b. ORS d. a and c
2. The incurrence of an obligation for future delivery or

performance by the obligee is recorded by a government
entity in the
a. RAOD c. RAPAL
b. ORS d. a and b
3. The receipt of an appropriation is recorded by a government

entity in the
a. RAOD c. RAPAL
b. ORS d. a and b
4. The entry to record the receipt of Notice of Cash Allocation

(NCA) by a government entity is:
a. (Debit) Cash-Modified Disbursement System (MDS),
Regular; (Credit) Accumulated Surplus (Deficit)
b. (Debit) Cash-Modified Disbursement System (MDS),
Regular; (Credit) Subsidy from National Government
(Debit) Cash-Collecting Officer; (Credit) Subsidy from
National Government
d. No journal entry. The event is recorded only in the
Registries.
5. According to the Revised Chart of Accounts (RCA) issued by

the COA, the "Subsidy from National Government" account is
a(an)
a. Asset account c. Revenue account
b. Liability account d. Equity account
6. Which of the following is not one of the necessary closing

entries of a government entity?
104 Chapter 3
a. Closing of the "Cash-Treasury/Agency Deposit, Regular

account to the "Accumulated Surplus/(Deficit)" account.
b. Closing of the "Subsidy from National Government"
account to the "Revenue and Expense Summary/' account.
c. Closing of income and expense accounts to the "Revenue
and Expense Summary" account.

d. Closing of the net balance of "Revenue and Expense
Summary" account to the "Subsidy from National
Government" account.
7. A government entity pays an accounts payable. The entry to
record the payment will most likely include a

a. debit to the "Cash-Modified Disbursement System (MDS),
Regular" account.
b. credit to the "Due to BIR" account.
c. credit to the "Cash-Treasury/Agency Deposit, Regular"
account.
d. None of these. The event is recorded only in the Registries
and the Obligation Request and Status.
8. In accordance with the GAM for NGAs and the Revised Chart
of Accounts, how does a government entity recognize the
uncollectability of accounts receivable?
a. By debiting the "Bad Debts Expense" account.

b. By debiting the "Impairment Loss-Loans and Receivables"
account.
c. By debiting the "Allowance for Impairment-Accounts

Receivable" account.
d. b and c
9. The "Subsidy from National Government" account is credited

when recording a
a. receipt of NCA
b. reversion of unused NCA
c. constructive remittance of customs duties or taxes
withheld through TRA
105
d. a and c
10. Expenditures to acquire long-term assets are most likely
classified as


I. This is used to recognize the constructive remittance of taxes
withheld to the BIR or customs duties withheld to the BOC.
a. Tax Remittance Advice (TRA)
b. Notice of Tax Allocation (NTA)
c. Tax and Customs Remittance Advice (TCRA)
d. Notice of Tax Remittance Advisory (NTRA)
2. Which of the following does not affect the amount of surplus

or deficit that is reported in the statement of financial
performance?
a. receipt of NCA
b. constructive remittance of taxes withheld through TRA
c. closing of the "Cash-Treasury/Agency Deposit, Regular"
account
d. adjustment of the "Cash-Modified Disbursement System
(MDS), Regular" account for the unused Notice of Cash
Allocation.
e. All of these affect surplus or deficit.
3. Entity A received Notice of Cash Allocation (NCA) amounting

to P625,000 for the year. Unused NCA at the end of the period
amounted to P6,000. Entity A remitted taxes withheld to the

BIR amounting to P48,000 through Tax Remittance Advice
(TRA). How much is the "Net Financial Assistance/Subsidy"
to be reported in Entity A's statement of financial
performance?
106
Chapter 3
a. 667,000 c. 571,000
b. 619,000
4.
Entity A, a government entity, had the following transactions
during the period:

Received Notice of Cash Allocation (NCA) amounting to
P750,ooo.
Earned total revenue of P290,000 from billings and
collections of unbilled income.
Incurred total expenses of P885,000.

Remitted total taxes withheld of P140,000 to the BIR
through Tax Remittance Advice (TRA).
The "Cash-Modified Disbursement System (MDS),
Regular" has an unused balance of P43,000 at the end of
the period.
How much is the surplus (deficit) for the period?

a. (595,000) c. 252,000
b. 155,000 d. 112,000
5. The trial balances of Entity A, a government entity, show the

following amounts:
Unadjusted Trial Balance - P2,753,000
• Adjusted Trial Balance - P2,765,000
• Statement of Financial Position (Debit Column) - Pl,880,000

• Statement of Financial Performance (Credit) - Pl,137,000
How much is the surplus (deficit) for the period?

a. 252,000 c. (252,000)
b. 885,000 d. (743,000)
6.
Which of the following expenditures is not shown in the
statement of financial performance

c. Capital Outlays (CO)
107
d. Financial Expenses (FE)

e. All of these expenditures are shown in the statement of
7. The entries to record the constructive remittance of taxes

withheld through Tax Remittance Advice include all of the
following except
a. A
debit to the "Cash-Tax Remittance Advice" account
b. A credit to the "Cash-Tax Remittance Advice" account
c. A debit to the "Subsidy from National Government"
account
d. A debit to the "Due to BIR" account
e. All of these are included.
8. The receipt of Notice of Cash Allocation is recorded in the

a. Books of accounts (Journal and Ledger)
b. Registry of Allotments and Notice of Cash Allocation
(RANCA)
c. a and b
d. None of these
9. Which of the following is not one of the special journals

prescribed by the GAM for NGAs?
a. Sales Journal
b. Cash Disbursements Journal
c. Check Disbursements Journal
d. Cash Receipts Journal
10. The 8-digit Revised Chart of Accounts (RCA) Code for

expenses starts with number
d. None of these
108
PROBLEM 3-5: BASIC RECORDING DRILLS

Instruction: Record the following transacüons or events. If
joumal entry is needed, state the registry or other document

where the transaction or event is recorded. If a journal entry is
needed, just provide the joumal entry.
a. Receipt of notice of appropriation amounting to

b. Receipt of allotment from the DBM amounting to B80,000
c. Incurrence of obligations amounting to P880,000.
d. Receipt of Notice of Cash Allocation amounting to P850,000
e. Accrual of P500,000 salaries upon approval of payroll. The
breakdown is as follows:
Salaries and Wages 450,000


GSIS 25,000
Pag-1BIG 20,000
PhilHealth 12,000
Total Salary Deductions 182,000
f. Granting of cash advance for the payroll.

g. Liquidation of the cash advance for payroll.
h.
Receipt of delivery of purchased office supplies worth
i.
Payment of P180,000 accounts payable. Taxes withheld
amount to P 10,000.
j. Remittance of all taxes withheld to the BIR.
k.
Remittance of other amounts withheld to the Other
govemment agencies concerned.
l.
Billing of revenue for Power Supply System Fees amounting to
P200,ooo.
m.
Collection of P200,000 from billed revenue and remittance Of
the total collection to the National Treasury.
n.
Reversion of unused NCA.
How much is reported as unreleased appropriation in the
entity's Budget Accountability Report?

How much is reported as unobligated allotment in the entity's
Budget Accountability Report?
q.
How much is reported • as Not yet Due and Demandable
Obligations in the entity's Budget Accountability Report?
PROBLEM 3-6: BASIC RECORDING DRILLS

Instruction: Provide the journal entry to record each of the
independent transactions or events below. no journal entry is
If
needed, state the registry or other document where the transaction

or event is recorded.
1. Receipt of NCA.
2. Remittance to the BIR of PIOO,OOO taxes withheld.
3. Receipt of PI,OOO,OOO Allotment
4. Receipt of Pl,200,000 Appropriation
5. Entering into a purchase contract for future delivery. The
contract price is P500,000.
6. Entering into employment contracts worth P200,000.
7. Billing of P250,000 revenue for Affiliation Fees, subsequent
collection of P200,000 therefrom, and full remittance of the
collection to the BTr.
8. Reversion of P50,000 unused NCA.
9. Receipt of office equipment purchased on account for
PIOO,OOO.
10. Payment of accounts payable from purchase of office supplies
worth P60,000. Tax withheld amount to P3,000.
110
PROBLEM 3-7: WORKSHEET PREPARATION

Entity A a newly formed government agency. Entity
is
transactions and events during the calendar year 20x1 are
follows:
a. Received appropriation of P500,000.

b. Received allotment of P450,000.
c. Incurred obligations amounting to
d. Received Notice of Cash Allcxation of P430,000.
e. Accrued P80,000 salaries through granång, and liquidation, of
cash advance. The breakdown of the salaries is as follows:
Salariesand Wages 70,mo

Withholding Tax
GSIS 4,000
Pag-1BIG 1,000
PhilHea1th 2,000
Total Salary Deductions 25,000
f. Received delivery of purchased office equipment worth

P200,000. The equipment has an estimated useful life of 5
years and a 5% residual value. Entity A recognizes monthly
depreciation every end of the month using the straight line
method. The equipment is acquired on January 1, 20x1.

g. Paid the accounts payable from the purchase of equipment in
(f) above. Taxes withheld amount to P12,000.
h.
Received delivery of purchased office supplies worth
PIOO,OOO. The office supplies were purchased through check
Taxes withheld amount to P5,000.
i.
Issued office supplies worth BO,OOO to end users.
j. Granted P20,000 cash advance to an employee for travelling
expenses on an official local travel. The employee liquidated

P17,000 and remitted the excess cash advance.
The Goternment Accounting Process 111
k. Collected unbilled service income for Permit Fees of P40,000

and remitted P30,000 of the total collection.
l. Paid water and electricity expenses amounting to P5,000 and

PIO,OOO, respectively. Taxes withheld amount to P2,000.
m. Remitted the taxes withheld to the BIR.
n. Remitted contributions to GSIS, PhilHealth and Pag-IBIG.
Requirements:
a. Record the transactions and events above. Ifno journal entry
is needed, state the registry or other document where the
transaction or event is recorded.
b. Post the transactions in the ledger. Use T-accounts.

c. Prepare the unadjusted trial balance.
d. Prepare the adjustments, if any.
e. Prepare a complete worksheet showing columns for post-
closing trial balance.
f. Prepare the closing entries.
PROBLEM 3-8: WORKSHEET PREPARATION

The trial balance of Entity A (a government entity) at the
beginning of the period is shown below:
Accounts Debit Credit

Cash - Collecting Officers 30,000
Accounts Receivable 80,000
Buildings 800,000
Accumulated Depreciation — Buildings 650,000
Office Equipment 340,000
Accumulated Depreciation — Equipment 180,000
Due to BIR 20,000
Due to GSIS 4,000
Due to PhilHea1th 1,000
Accumulated Surplus (Deficit) 333,000
Totals
112 Qapter 3
Notes:
The accounts payable pertains to office supplies purchased that were

already delivered but not yet paid.
"Not yet due and demandable obligation" for undelivered office
equipment amount to P20,000.
Transactions and events during the calendar year 20x1:

a. Receipt of GAA amounting to
b. Receipt of allotment amounting to
c. Entity A enters into the following contracts:
Employment contracts - P420,000.
Purchase of office equipment - P300,000.
Purchase of office supplies - P150,000.
Contacts for various MOOEs - P230,000.
d. Receipt of Notice of Cash Allocation amounting to
e. Acaual of P400,000 salaries upon approval of payroll,
including granting of cash advance and liquidation thereof.
The breakdown of salaries is as follows:
Salaries and Wages 380,000


GSIS
30,000
Pag-1BIG 20,000
PhilHea1th
10,000
Total Salary Deductions
150,000
f. Receipt of delivery of purchased office equipment worth

P320,000, on account (including not yet due and demandable
obligation from previous year).
g. Payment of P320,000 accounts payable. Taxes withheld
amount to P20,000.
h. Receipt of delivery of purchased office supplies worth
P150,000, on account.
i. Payment of P120,000 accounts payable. Taxes withheld

amount to PIO,O.
j,
Payment for the following expenses:
Water 20,000
Electricity 60,000
Telephone 40,000
Janitorial 80,000
Security 100,000
Total 300,000
Net 280,000
k. Issued office supplies worth P130,000 to end users.

I. Billed revenue for Waterworks System Fees amounting to
240,000.
m. Collected P200,000 from billed revenue and remitted total
collection.
n. Collected P50,000 unbilled tax revenue for Tax on Delivery Vans

and Trucks through direct deposit in Authorized Agent Banks.
o. Remitted all taxes withheld, including those from prior year,
to the BIR.
p. Remitted all contributions due to GSIS, PhilHealth, and Pag-

IBIG, including those from prior year.
Adjusting entries:
1.
Depreciation expenses:
i. Buildings — P30,000
ii. Equipment — P20,000
2. Allowance for impairment on accounts receivable of P5,000s
114 Chapter 3
Requirements:
1. Record the transactions and events above. no journal entry
If
is needed, state the registry or other document where the

transaction or event is recorded.
2. Post the transactions in the ledger (use T-account analyses).
3. Prepare the unadjusted trial balance.
4. Prepare the adjusting entries.
5. Complete the worksheet showing columns for post-closing
trial balance.
6. Prepare the closing entries.
7. Prepare the statement of financial position with cross-
references to the notes.

8. Prepare the statement of financial performance with cross
references to the notes.
9. Prepare the notes to the financial statements showing
breakdowns for the following line items:
i. Receivables
ii. Property, plant and equipment
iii. Personnel services
iv. Maintenance and other operating expenses
v. Non-cash expenses
115
Instruction: Record the following transactions or events:
a. Receipt of notice of appropriation amounting to P400M.
b. Receipt of allotment from the DBM amounting to P380M.

c. Incurrence of obligations amounting to P350M.
d. Receipt of Notice of Cash Allocation amounting to P325M.
e. Accrual of P300M salaries upon approval of payroll. The

breakdown is as follows:
Salariesand Wages 280M

Personal Economic Relief Allowance (PERA) 20M
Gross Compensation 300M
Withholding Tax (75M)
GSIS (15M)
Pag-1BIG (15M)
PhilHea1th (8M)
Total Deductions (113M)
Net 187M
f. Granting of cash advance for the payroll.
g.
Liquidation of the cash advance for payroll.
h. Remittance of taxes withheld to the BIR.
i. Remittance of other amounts withheld to the other
government agencies concerned.

j.
Billing of revenue for Rent/Lease Income amounting to P700M.
k. Collection of P550M from billed revenue and rémittance of the
total collection to the National Treasury.
l. Reversion of unused NCA.
116 Chapter 4
Chapter 4
Revenues and Other Receipts
Learning Objectives
1. State the sources of revenue of agovernment entity.
2. State the recognition and measurement of revenue.
Introduction
Revenue — is the gross inflow of economic benefits or service
potential during the reporting period when those inflows result in
an increase in equity, other than increases relating to contributions
from owners.
Revenue includes only those that are received or
receivable by the entity in its own account. Receipts refer to actual

cash collections from all sources during a period.
Fundamental Principles for Revenue

a. All revenues of an entity shall be remitted to the National
Treasury and included in the General Fund of the National
Government, unless another law specifically allows otherwise.
b. Allmoneys and property received by a public officer, acting in

any capacity or upon any occasion, shall be accounted for as
govemment funds and govemment property, unless another
law specifically states otherwise.
c. Amounts received in trust and from business-type activitie Of
the government may be separately recorded and disbursed in

accordance with relevant rules.
Revenues and Other Receipts 117
d. Receipts shall be recorded as revenue of Special, Fiduciary or

Trust Funds, or Funds other than the General Fund only when
authorized by law.
e. A collecting officer shall immediately issue an official receipt
(OR) upon collecting a payment of any nature.
f. Where mechanical devices (e.g. electronic official receipt) are

used to acknowledge cash receipts, the COA may approve,
upon request, the exemption from the use of accountable
forms.
g. Temporary receipts shall never be used to acknowledge the

receipt of public funds.
h. Pre-numbered official receipts (ORs) shall be issued in strict
numerical sequence. Duplicate copies shall be the exact copies

of the original.
i. A collecting officer shall accept payments to the government,

in the form checks, upon proper endorsement and
identification of the payee or endorsee. The collecting officer
shall not use government funds to encash private checks.
j. Receipts of government funds shall be acknowledged in

accordance with the law — indicating the date of receipt, from
whom and on what account the fund was received.
(P.D. No. 1445 & Chapter 2, sec. 4 ofGAMfor NGAs)
Types of funds
• General fund — a fund which is available for any purpose other
than those which other funds have been designated to.
• Special fund — a fund designated for special purposes.

• Trust fund (Fiduciary fund), — fund held by a government
agency or public officer acting as trustee, agent, or
administrator for the fulfillment of a condition.
118 Chapter 4
• Revenue fund — comprises all funds derived from the income

of any government agency and available for appropriation or
expenditure in accordance with the law.
• Depository fund — fund held in an authorized depository bank
over which the recipient agency retains control for the lawful
purposes for which the fund was received.
• Special Account in the General Fund (SAGF) — established to
facilitate the funding of priority activities of the government.

The SAGF is sourced from specific fees, grants and donations,
and other sources identified under the law. The following are
relevant legal provisions regarding the SAGF:
a. All income and collections for Special and Fiduciary Funds
shall be remitted to the Treasury and treated as SAGF.
b. The SAGF shall be considered as being automatically
appropriated for purposes authorized by law, except
when the General Appropriations Act (GAA) provides
otherwise.
c. SAGF shall be released to government agencies subject to
the approval of the President.

Special Purpose Funds (SPFs) — are "funds that the President
allocates for special programs and projects. Unlike for other
funds, SPFs are not under the accountability of any particular

government agency/office or unit." (2012 Annual Financial Report ofthe
Republic of the Philippines)

All money collected on any tax levied for a special purpose
shallbe treated as a special fund and paid out for such
purpose only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if any'
shall be transferred to the general funds of the Government'

(Art. VI, Sec. 29(3). Philippine Constitution)
119
Sources of Revenue
Revenues may arise from exchange and non-exchange transactions.
a. Exchgnge transactions (Reciprocal transfers) are transactions

in which one entity receives assets or services, or has liabilities
extinguished, and directly gives approximately equal value to

another entity in exchange. (PPSAS 9.11)
Examples: sale of goods and rendering of services.
b. Non-gxchange transactions (Non-reciprocal transfers) x— are

transactions in which an entity either receives value from
another entity without directly giving approximately equal

value in exchange, or gives value to another entity without
directly receiving approximately equal value in exchange.
(PPSAS 9.11)
Examples: tax revenue, fines and penalties and donations.
When the consideration transferred does not approximate

the fair value of the resources received, the entity determines
whether the transaction includes a combination of exchange and
non-exchange transactions. Each component shall be recognized
separately. (PPSAS 23.10)
If it is not immediately clear whether a transaction is an

exchange or non-exchange transaction, the substance of the
transaction shall be examined to determine its type. For example,
the sale of goods is normally an exchange transaction. However, if
the transaction price is subsidized, the transaction falls within the

definition of a non-exchange transaction.
The receipt of trade discounts, quantity discounts, or other

reductions in price does not necessarily mean that the transaction
is a non-exchange transaction. (PPSAS 23.11)

120 Chaper 4
Exchange Transactions
Revenues from exchange transactions arise from the following:
i. Sale of Goods or Provisions of Services to third parties or other
Examples:
a. Service Income— Permit Fees, Registration Fees, Franchising
Fees, Licensing Fees, Legal Fees, Passport and Visa Fees,
Processing Fees, and the like.
b. Business Income School Fees, Examination Fees,
Rent/Lease Income, Communication Network Fee, Income

from Hostels/Dormitories, Sales Revenue, Hospital Fees,
Share in the Profit of Joint Venture, and the like.
ii. Use by other entity of assets yielding interest, royalties and

dividends or similar distributions.
Examples:
a. Interest income charges for the use of cash or cash
equivalents, or amounts due to the entity;
b. Royalties -- fees paid for the use of the entity's assets such
as trademarks, patents, software, and copyrights; and

c. Dividends — share of the National Government from the
earnings of its capital/equity investments in Government-

Owned or Controlled Corporations (GOCCs) and other
entities.
Recognition of Revenue from Exchange Transactions
Sale of Goods:
Revenue from the sale of goods shall be recognized when all Of the
following conditions are satisfied:
i. Significant risks and rewards of ownership of the goods

are transferred to the buyer;
Retvnues and Other Receipts 121
ii. The entity does not retain continuing managerial

involvement or effective control over the goods sold;
iii. It is probable that economic benefits will flow to the entity;
Revenue can be measured reliably; and
v. Costs relating to the transaction can be measured reliably.
Rendering of Services:
Revenue from the supply of services is recognized on a straight
line basis over the period the services are rendered.
However, revenue is recognized by reference to the stage of
completion (e.g., percentage of completion method) if the outcome
of the transaction can be estimated reliably, such as when all of the
following conditions are satisfied:
i. The stage of completion of the transaction at the reporting
date can be measured reliably;
ii. It is probable that economic benefits will flow to the entity;
iii. Revenue can be measured reliably; and
iv. Costs relating to the transaction can be measured reliably.
For practical purposes, when services are performed by an

indeterminate number of acts over a specified time frame, revenue
is recognized on a straight line basis over the specified time frame
unless there is evidence that some other method better represents
the stage of completion. (PPSAS 9.24)

When the outcome of the transaction involving the
rendering of services cannot be estimated reliably, revenue is
recognized only to the extent of the expenses recognized that are

recoverable. (PPSAS 9.25)
Interest, Royalties & Dividends

a. Interest is recognized on a time proportion basis that takes into
account the effective yield on the asset;
b. Royalties are recognized as they are earned in accordance with
the substance of the relevant agreement; and
c. Dividends are recognized when the entity's right to receive
payment is established.
122 Chapter 4
A govemment entity normally recognizes revenue from

service income when the services are rendered, except when this is
not practicable, in which case, revenue is recognized when fees are
collected. Similarly, revenue from business income (except sale of
goods) is recognized when fees are billed, or if not practicable, when

fees are collected. (GAM for NGAs, Chapter 5, sec. 7)
Measurement of Revenue from Exchange Transactions

Revenue from exchange transactions are measured at the fair value
of the consideration received or receivable. Any trade discounts
and volume rebates shall be taken into account.
Fair value — is the amount for which an asset could be

exchanged, or a liability settled, between knowledgeable,
willing parties in an arm's length transaction
Example:
Entity A sells goods with a list price of PIO,OOO, on account, with
the following credit term 10%, 10%, and 5%. Revenue is
recognized as follows:
Date Accounts Receivable 7,695

Sales Revenue (10,000 x 90% x 90% x 95%) 7,695
To reco ize sale o oods on account
When cash flows are deferred, the fair value of the
consideration may be less than its nominal amount. In this case,
the fair value of the consideration receivable is determined by

discounting all future cash flows using an imputed rate of interest.
The difference between the fair value and the nominal amount Of
the consideration is recognized as interest revenue.
When the consideration is received in advance, it is initially

recognized as a liability and subsequently recognized as revenue
only when the revenue recognition criteria are met.
Revenues and Other Receipts 123
Exchanges of Goods or Services
Exchanges of goods or services with:

a. Similar nature and value do not give rise to revenue.
b. Dissimilar nature and value give rise to revenue measured
using the following order of priority:
i. Fair value of the goods or services received, adjusted by
the amount of any cash transferred.
ii. Fair value of the goods or services given up, adjusted by
the amount of any cash transferred.
Non-exchange Transactions
Revenue from non-exchange transactions are derived mostly from
taxes, fines and penalties, gifts, donations and goods in-kind.
These are received without directly providing something of equal
value in return.
• — are compulsory payments intended to provide revenue

Taxes
to the government. Taxes do not include fines and penalties.
Fines and penalties — are monetary sanctions received as a

consequence of breach of laws.
Gifts, Donations and Goods/Services In-kind — are voluntary
transfers of assets and services that one entity makes to
another, normally free from stipulations.
Recognition of Revenue from Non-exchange Transactions

Revenue from non-exchange transactions are recognized on a cash
basis until a reliable measurement model is developed.
Accordingly, the asset and revenue or liability arising from a non-
exchange transaction are recognized when collected or when these
are measurable and legally collectible. (GAM for NGAs, Chapter 5, Sec. 12)
124 Gapter 4
Tax revenue
Tax revenue is recognized at a gross amount and not reduced
for expenses paid through the tax system.

Expenses paid through the tax system are those expenses
which should be paid irrespective of whether the taxpayer
pays taxes, or uses a particular mechanism to pay taxes.
Tax revenue shall not be grossed up for the amount of tax
expenditures.
Tax expenditures are preferential provisions of the tax
law that provide certain taxpayers with concessions that are . o
not available to others. Tax expenditures are foregone

revenue, not expenses.
T eo tax Taxable event

a. Income tax Earnin of taxable income
b. Value added tax Undertaking of a taxable
activi
c. Goods and services tax Purchase or sale of taxable
oods or services
d. Customs duty Movement of dutiable
goods or services across the

customs bounda
e. Death duty Death of the owner of the
taxable ro e
f. Property tax Passage of the time period

for which the tax is levied
Transfers
Transfers are inflows of future economic benefits or service
• potential from non-exchange transactions, other than taxes

(PPSAS 23)
Transfers include fines, gifts, donations and goods and

services in-kind, debt forgiveness, bequests, and grants. All Of
these transactions transfer resources without approximate

equal value in exchange and are not taxes but some are with
conditions.
Retenues and Other Receipts
125
Fines and penalties

Fines and penalties are recognized as income in the year they are
collected. (GAM for NGAs, Chapter 2, sec. 33)
However, fines are recognized as revenue when the

receivable meets the recognition criteria for asset and are
measured at the best estimate of inflow of resources to the entity.
(GAM for NGAs, Chapter 5, sec. 24)
An entity
collecting fines in the capacity of an agent shall
not treat those fines as revenue.
Gifts, Donations and Goods In-kind
Gifts, donations and goods in-kind are recognized as revenue

when it is probable that future economic benefits or service
potential will flow to the entity. Those that are received without
condidons are recognized immediately as revenue. Those with
conditions are initially recognized as liability and recognized as
revenue only when the conditions are satisfied.
Services In-kind
Services In-kind are not recognized as revenue due to the

uncertainties affecting the entity's ability to control those services
and measure them at fair value. Examples of services in-kind
include technical assistance from foreign bodies, community
services rendered by persons convicted of offenses, volunteer
services, and the like. Services in-kind received may be disclosed
in the notes.
Measurement
Assets, and revenue arising from a non-exchange
liabilities
transaction are measured as follows:

a. Assets — at the acquisition-date fair value.
b. Liabilities — at present value, when the effect of time value of
money is material.
c. Revenue — at the amount of increase in net assets. If the non-
exchange transaction is initially recognized as a liability, the

126 Chapter 4
subsequent reduction in that liability (e.g., because the
condiåon is satisfied) is recognized as revenue.
Debt Forgiveness
When a lender cancels the debt of a government entity, the debtor
recognizes revenue equal to the carrying amount of the debt
forgiven.
However, when a controlling entity cancels the debt of a
wholly owned controlled entity, the cancelled debt is treated as
contribution from owners and not revenue.
Bequests
Bequests are transfers made according to the provisions of a
deceased person's will. A bequest that satisfies the recognition

criteria for asset is recognized as revenue, measured at the fair
value of the resources received or receivable.
Grant with Condition

An asset received under a grant with condition is initially
recognized as liability and recognized as revenue only when the
condition is satisfied.
Illustration:
The national government (NG) received a foreign grant of PIOM
conditioned on the construction of a flood control system which
must be completed within the next 2 years, otherwise the grant
must be returned to the grantor. The Department of Public Works
and Highways (DPWH) is the implementing entity.
The journal entries are as follows:

127
a. Receipt of grant
Books 0 theNG-BTr Books 0 DPWH

Cash in Bank-Local Currency, Cash — Modified Disbursement
Bangko Sentral ng Pilipinas 10M System (MDS), Regular 10M
Other Deferred Credits 10M Subsid from NG 10M
b. Disbursements for materials and labor amounting to PIOM
Books 0 the NG-BTr Books 0 DPWH

Subsidy from NG 10M Construction in Progress-
Cash in Bank-Local Currency, InfrastructÜre Assets 10M
Bangko Sentral ng Pilipinas 10M Cash — Modified Disbursement
To recognize replenishment of System (MDS), Regular 10M
MDS checks issued for payment of the
materials and labor for the construction of
a ood control s stem
c. Completion of the project
Books 0 the NG-BTr Books 0 DPWH

Other Deferred Credits 10M Flood Control Systems 10M
Income from Grants and Construction in Progress-
Donations in Cash 10M Infrastructure Assets 10M
Pledges
Pledges are unenforceable undertakings to transfer assets to the
recipient entity.
Pledges are not recognized as revenue because they do not
meet the recognition criteria for asset, i.e., at present, the entity has
not yet obtained control over the item pledged.
If' the pledged item is subsequently transferred to the
recipient entity, it is recognized as a gift or donation. Pledges may
warrant disclosure as contingent assets.
128 Chapter 4
Concessionary Loans
•Concessionary loans — are loans received by an entity at below
market terms.
The whether the difference between the
entity considers
transaction price (loan proceeds) and the fair value of the loan on
initial recognition is a non-exchange transaction. If it is so, the
difference is recognized as revenue, except if a present obligation

exists, in which case the difference is recognized as a liability and
recognized as revenue only when the obligation is satisfied.
Impairment Losses and Allowance for Impairment Losses

When an amount already recognized as revenue becomes
uncollectible, it is recognized as expense (impairment loss) rather
than as an adjustment to the revenue originally recognized.

Entities shall evaluate the collectability of accounts
receivable on an ongoing basis based on historical bad debts,
customer/recipient credit-worthiness, current economic trends

and changes in payment activity. An allowance is provided for
known and estimated bad debts. (GAM for NGAs, Chapter 5, Sec. 9)
Other Receipts
Other receipts include, but not limited to, the following:
a. Receipt of subsidy from the National Government (i.e.,
disbursement authority), such as receipt of:
i. Notice of Cash Allocation (NCA) (a)
ii. Tax Remittance Advice (a)
iii. Non-Cash Availment Authority (b)

iv. Cash Disbursement Ceiling (b)
(a) See joumal entries in Chapter 3.
(b) See journal entries in Chapter 5.
b. Receipt of subsidy or assistance from other government agencies'

including LGlIs and GOCCs. The Collecting Officer shall issue
Revenuß and Other Receipts 129
an official receipt (OR) upon receipt of any of these

subsidies/assistance. The journal entries are as follows:
Date Cash-Collecting Officers 100,000

Subsidy from Other NGAs 60,000
Assistance from LGUs 30,000
Assistance from GOCCs 10,000
To recognize receipt of subsidy/assistance
om other overnment a encies
Date
Cash-Treasury/Agency Deposit, Trust 100,000
Cash-Collecting Officers 100,000
To recognize remittance of collections to
the BTr
c. Receipt of excess cash advance granted to officers and employees

(e.g., receipt of excess cash advance for travel). (See sample journal
entries in Chapter 3)
d. Receipt of refund of overpayment of expenses.
Date Cash-Collecting Officers 10,ooo
Appropriate expense account 10,000

To recognize collection of refund of
ov a mento ex enses
Date 10,000
(Regular, Special Account or Trust)
the BTr
e. Receipt of performance bond or security deposit. A performance

bond is a security deposit required from a contractor or
supplier to guaranty the full and faithful performance of a
contract. It may be in the form of cash or certified check. The
journal entries are as follows:
130 Chapter 4
Date 100,000
100,000
Guaranty/Security Deposits Payable
To recognize collection ofperformance
bond/securit d osits
Date 100,000
Cash-Treasury/Agency Deposit, Trust
100,000
To recognize remittance ofcollections to
the BTr
f: Collections made on behalfofanother entity.

The collecting entity records the collecüon as a credit to the "Due
to NGAs" account. Upon receipt of remittance, the recipient entity
records the collection as a credit to the "Trust Liabilities" account.
g. • Intra-agency and Inter-agencyfund transfers.
Intra-a en Fund Transfer (transfers within same a en ):
Date 100,000
Due to (Central Office, Regional Office,
Operating Units or Other Funds) 100,000
To recognize receipt of intra-entityfund

trans er
Date 100,000
Cash-Treasury/Agency Deposit, Trust
the BTr
Inter-agency Fund Transfer (transfers between different
a encies):
Due to (NGAs, LGUs or GOCCs) 100,000
To recognize receipt of inter-entityfund •
trans er
Date
Cash-Treasury/Agency Deposit, Trust 100,000
the BTr
131
Chapter 4 Summary:
All revenues shall be remitted to the BTr and included in the

General Fund, unless another law specifically allows
otherwise. Recording in other types of funds (e.g., Special
Fund) shall be made only when authorized by law.
Receipts shall be acknowledged through pre-
properly
numbered ORs. Receipts can be in the form of checks.
Revenues of a government entity may arise from exchange and
non-exchange transactions. Exchange transactions involve
giving and receiving resources while non-exchange
transactions involve either giving or receiving but not both.
Revenue from exchange transactions are measured at the fair
value of the consideration received or receivable.
Nature o recei t Reco nition

Sale of Goods Revenue is recognized
when significant risks and
rewards are transferred;
control is not retained;
inflow of economic benefits
is probable; and revenue
and related costs can be
measured reliabl
Rendering of Services Revenue is recognized on a

straight line basis.
However, revenue is
recognized by reference to
the stage of completion if this
can be measured reliably.
When the outcome cannot
be estimated reliably,
revenue recognized only

is
to the extent of recoverable
costs.
Interest
Recognized on a time
proportion basis using
effective interest method.
132 Chapter 4
Recognized based on the

Royalties
substance of the a eement.
Recognized when right to
Dividends
receive payment is
established.
If similar, no revenue is
Exchanges ofgoods or services
recognized.
If dissimilar, revenue is
recognized at the (1) FV of

asset received or (2) FV of
asset given up. Any cash
paid or received is adjusted
to the FV.
Gifts, Donations and Goods If without condition,

In-kind recognized immediately.
If with condition, initially
recognized as liability until
condition is satisfied.
Services In-kind Not reco ized as revenue.

Carrying amount of debt
Debt Forgiveness
forgiven is recognized as
revenue.
Bequests Recognized as revenue

measured at fair value, if
asset recognition criteria are

met.
Grant with Condition Initially recognized as
liability until condition is
satisfied.
Pled es Not reco •zed.
Concessionary Loans Difference between fair
value and transaction price

is recognized as revenue, if
non-exchan e transaction.
+ Subsidy from NG and other Recognized as revenue
NGAs from assistance and
subsid
133
Receipts from excess cash Not recognized as revenue.

advance, overpayment of
expenses, performance bonds
and security deposits,
collections on behalf of other

entities, and inter or intra-
a en nd trans ers.
PROBLEMS

1. All revenues shall be remitted to the BTr and included in the
Special Fund, unless another law specifically requires
otherwise.
2. Payments to government entities in the form of checks are not

allowed.
3. Revenues of a government entity arise from exchange

transactions only.
4. According to the GAM

NGAs, revenue from exchange
for
transactions are measured at the amount of cash received.
5. When cash flows are deferred, the fair value of the

consideration receivable is its present value.
6. The constructive remittance of taxes withheld through the
TRA gives rise to the recognition of revenue.
7. According to the GAM for NGAs, the receipt of concessionary

loans by government entities may give rise to revenue
recognition.
Chapter 4
134
8. The taxable event for income tax is the passage of the time
period for which the tax is levied.
9. Taxes are compulsory payments, imposed on persons

properties or activities, intended to provide revenue to the
government. Taxes include fees, fines and penalties.
10. The main source of revenue for the government is taxes.
PROBLEM 4-2: MULTIPLE CHOICE - THEORY

1. Which of the following is a non-exchange transaction?
a. Leasing cu Rendering of legal services
d. Collection of tuition fees
b. Collection of taxes
2. Entity A enters into a long-term contract to provide services.

The outcome of the transaction can be estimated reliably and
the progress on the contract can be measured with sufficient
reliability. According to the PPSAS, how should Entity A

recognize revenue from the contract?
a. On a straight line basis over the contract term.
b. By reference to the stage of completion of the contract at
the reporting date.
c. Full recognition of contract price upon completion of the

contract.
d. Only to the extent of costs that are expected to be

recovered.
3. According to the GAM for NGAs, interest revenue is
recognized
a. on a time proportion basis using the effective interest
method.
b. on a straight line basis.
c. in accordance with the substance of the relevant loan

agreement.
d. when the entity's right to receive payment is established'

135
4, The taxable event for Value added tax (VAT) is the

a. undertaking of a taxable activity.
b. earning of taxable income.
c. movement of dutiable goods or services across the

customs boundary.
d. any of these
5. Which of the following would result to an increasé or decrease

in revenue reported by a govemment entity in
the its
a. Impairment loss on an amount already recognized as

revenue.
b. Receipt of a pledge.
c. Receipt of donation in the form of services in kind.
d. The repayment of a loan payable is forgiven.
6. It is a type of fund held by a government entity that is
designated for special purposes.

a. General fund c. Trust fund
b. Special fund d. Fiduciary fund
7. The national government receives a foreign grant conditioned

on the construction of a public infrastructure. According to the
GAM for NGAs, when does the national government
recognize revenue from the grant (i.e., credit to the 'Income
from Grants and Donations in Cash' account)?
a. Upon receipt of the grant.
b. When the grant becomes receivable, provided there is
reasonable assurance that the attached condition will be

satisfied.
c. When the condition is met.

d. When the related expenses for which the grant is intended
to compensate are incurred.
8. The receipt of which of the following may not give rise to
revenue by a government entity?

136 Chapter 4
a. Notice of Cash Allocation

b. Tax Remittance Advice
C. Subsidy from another government entity
9. A government entity collects fees for the processing Of certain

permits.The processing of a permit would normally take a
few minutes. The processing fee is collected upon issuance of
the permit. This government entity would normally recognize
revenue from permit fees

a. on a straight line basis.
b. by reference to the stage of conåpletion.
c. upon collection of the fee.
d. when the significant risks and rewards are transferred to
the customer.
10. The receipt of a performance bond or a security deposit is
credited to a
ae liability account c. cash account
b. revenue account d. a and c

1. Which of the following is not one of the fundamental
principles for revenue under P.D. No. 1445?
a. All revenues shall be remitted to the BTr and included in
the General Fund, unless another law specifically allows

otherwise.
b. Recording of revenue in other types of funds (e.g., Special
Fund) shall be made only when authorized by law.

c. Collections of revenue shall be properly acknowledged
through pre-numbered Official Receipts.
d. All collections of revenue must be in the form of cash'

Checks are not acceptable.
2. Imposition and collection of tax revenue is considered a(an)

a. exchange transaction c. donation
137
b. non-exchange transaction d. any of these
3. According to the GAM for NGAs, all of the following criteria

must be met before a govemment entity recognizes revenue
from the sale of goods, except
a. Significant risks and rewards of ownership of the goods
are transferred to the buyer and the entity does not retain
control over those goods.
b. It is probable that ecpnomic benefits will flow to the entity.

c. The amounts of revenue and related costs can be
measured reliably.
d. The stage of completion can be measured reliably.
4. According to the GAM for NGAs, when the outcome of a

service contract' cannot be Étimated reliably, revenue is
recognized
a. on a straight line basis over the periods the services are
rendered.
b. by reference to the contract's stage of completion at each
reporting date.
c. only to the extent of costs that are expected to be
recovered.
d. only upon the completion of the contract.
5. Entity A sells goods with a list price of PIOO,OOO, on account.

The credit term is 20% and 10%. The journal entry to recognize
the revenue includes all of the following except?
a. A debit to accounts receivable for P72,W0.
b. A credit to sales revenue for P72,000.
c. A debit to sales discount for P28,000.
d. All of these are included in the entry.
6. According to the GAM for NGAs, an exchange of goods or

services of similar nature and value between entities
a. gives rise to revenue measured at the fair value of the
goods or services received, adjusted for any cash paid or

received on the exchange.
138 Chapter 4
b. gives rise to revenue measured at the fair value of the
goods or services given up, adjusted for any cash paid or
received on the exchange.

c. a or b, whichever is more clearly determinable.
d. does not give rise to revenue.
7. Gifts; donations and goods in-kind with condition are
recognized
a. as revenue immediately upon the receipt thereof.
b. initially as liability and recognized as revenue only when
the condition is satisfied.
c. as revenue measured at fair value only when actually
received.
d. directly in equity.
8. According to the GAM for NGAs, which of the following may

never give rise to revenue for a government entity?
a. Services in-kind c. Concessionary loan
b. Debt forgiveness d. Grant with condition
9. When an amount already recognized as revenue becomes

subsequently uncollectible, it is
a. recognized as expense.
b. recognized as an adjustment to the revenue originally
recognized.
c. either a or b as an accounting policy choice
d. not recognized
10. Which of the following receipts of a government entity will

give rise to revenue recognition?
a. Receipt of excess cash advance
b. Receipt of refund for overpayment of expenses
c.f Receipt of performance bond
d. Receipt of subsidy from the National Government or Other
National Government Agencies.
Disbursements 139
Chapter 5
Disbursements
Learning ()bjectives
1. State the main concepts in the disbursement of government
funds.
2. Account for the different modes of disbursements.
Introduction
Disbursements constitute all payments in cash, in whatever manner

(i.e., through cash, check, or other means). Disbursements shall be
supported by Disbursement Vouchers (including Petty Cash
Vouchers) or Payroll.
Fundamental Principles for Disbursement of Public Funds

All government resources shall be used only in accordance
with the law and only for public purposes.
b. Trust funds shall be used only for their specific purpose.
c.
Fiscal responsibility shall be strictly shared by all those
exercising authority over a government agency.
d.
The use of government resources shall be approved by proper
officials.
Claims against government funds shall be supported with

complete documentation.
f.
All laws and regulations applicable to financial transactions
shall be faithfully adhered to, including generally accepted

principles and practices of accounting, management and fiscal
administratison, provided that they do not contravene existing

laws and regulations.
(P.D. No. 1445)
140
Chapter 5
Expenditures funded by borrowings are included in the
expenditure program of the entity. The loan proceeds shall not be

used without the corresponding release of funds through a Special
Budget. (GAM for NGAs, Chapter 2, sec. 35)
Authority to Disburse/Pay
An entity can make disbursements only after it has received a
disbursement authority, based on the following:

a.
Notice of Cash Allocation (NCA)
b.
Notice of Transfer of Allocation (NTA)
c.
(Itoits 'a' to 'c' above are discussed in Chapters 2 and 3)
d. N on-Cash Availment Authority (NCAA) — see discussion later
e.
Cash Disbursement Ceiling (CDC) — authority issued by the
DBM to agencies with foreign operations (i.e., Department of

Foreign Affairs 'DFA' and Department of Labor and
•
Employment 'DOLE') allowing them to use the income

collected by their Foreign Service Posts (FSPs) to cover their
operating requirements.
The entries related to CDC are as follows:

Books 0 DFA or DOLE Bookso BTr
Cash-Collecting Officer 10()
Passport and Visa Fees 100

To recognize collection of revenue of
FSPs
Cash in Bank-Foreign
Currency, Current Account 100
Cash-Collecting Officer 100
To recognize deposit of collections to
authorized servicin bank o the FSPs
Subsidy to NGAs 80
Remittance 80
Subsidy from NG 80
Remittance 80
To recognize receipt of CDC front
DBM To recognize constructive receipt Of
remitted collections by FSPs and

disbursement charged to the issued CDCs to
FSPs
Disbursetnents 141
Rents-Building and Structures 80

Cash in Bank-Foreign
Currency, Current Account 80

To recognize payment of expenses
charged to CDC
Basic Requirements & Certifications for Disbursements

The following are required when disbursing funds:
a. The Budget Officer (or Head of Budget Unit) shall certify the
availability of allotment;
b. The Chief Accountant (or Head of Accounting Unit) shall

charge obligations against available allotment;
The foregoing are to ensure that no overdraft shall be

incurred. An overdraft is incurred if obligations exceed the
allotment. The incurrence of overdraft is prohibited.
c. The Chief Accountant (or Head of the Accounting Unit) shall
certify the availability of funds/cash and the completeness of the

supporting documents before the Head of Agency (or his
authorized representative) can enter into any contract
involving the expenditure of public funds;
All disbursements require the certification of the Chief
Accountant Head of Accounting Unit). Certifications

(or
must be based on valid and properly authorized claims.
Any certification for fictitious obligation is void. The
certifying official shall be dismissed from service and shall
be held criminally liable. Others who are involved in the

fictitious transaction are also liable. (GAM for NGAs, Chapter 2,
Sec. 37)
Chapter 5
142
d. The requesting and approving officials shall ensure that the
disbursements are legal and conform to applicable rules and
regulations;
e. The Head of the Requesting Unit shall certify the necessity and
legality of disbursertents. Payments shall be made through

Disbursement Vouchers (DVs) or Payroll and supported by the
original copies of supporting documents; and
f. The Head of Agency (or his authorized representative) shall
approve all DVS or Payrolls.

(GAM for NGAs, Chapter 2, Sec. 36)
Modes of Disbursements
The different modes of disbursements are as follows:
a. Check
b. Cash
c. Cashless payments:
i. Advice to Debit Account (ADA)
ii. Electronic Modified Disbursement System (eMDS)
iii. Cashless Purchase Card System (Credit Card)
iv. Non-Cash Availment Authority (NCAA)
v. Tax Remittance Advice (TRA)
(GAM for NGAs, Chapter 2, Sec. 29 and Chapter 6, Sec. 7)
Disbursements through Check

Checks are used whenever payments cannot conveniently, or are
not authorized to, be made through cash or ADA. The following

are the two types of checks issued by government entities:
a. Modified Disbursement System Checks — checks chargeable
against the account of the Treasurer of the PhilippineS
maintained with different Modified Disbursement System-
Government Servicing Banks (MDS-GSBs).
b. Commercial Checks — checks chargeable against the Agency
Checking Account with GSBs. These are covered by
Disbursements
143
income/receipts authorized to be deposited with Authorized

Government Depository Banks (AGDBs).
All checks drawn, whether released or unreleased to

payees, including cancelled checks, are recorded chronologically
the Checks/ADA Disbursement Record maintained by the
Cash/Treasury Unit.
Illustration:
Entity A
disburses PIO,OOO for electricity expense. The entries are
as follows:
MDS Check Commercial Check

ElectricityExpense 10K Expense
Electricity 10K
Cash-Modified Disbursement Cash in Bank-Local
S stem lar 10K Curren , Current Account 10K
Disbursements through Cash

Cash disbursements constitute payments through cash advances,
including payments out of the petty cash fund. Cash advances are
governed by the following rules:
Cash advances shall be made only for a legally authorized

specific purpose (i.e., payments for personnel services, petty
expenses, and for field operating requirements).
b. Cash advances, other than advances for travel, shall be given

only to duly .appointed Disbursing Officers who must be
properly bonded. The amount of cash advance. shall not
exceed the maximum cash accountability under the bond.
Only designated Disbursing Officers are allowed to perform

disbursing functions and only permanently appointed officials
shall be designated as disbursing officers.
Chapter 5
144
d. A cash advance must be liquidated as soon as the purpose for
which it was given has been served.
Cash advances for payroll shall be liquidated within 5 days

end of the pay period. Unclaimed salaries shall be
after the
refunded and issued official receipt to close the account.
Cash advances for travel shall be liquidated as follows:

i.
Local travel — within 30 days upon return to the
personnel's workstation.
ii.
Foreign travel -J within 60 days upon return to the
Philippines. No official or employee is allowed to go
on an official foreign travel if he is due to retire within
1 year after the foreign travel.
e. No additional cash advance shall be given to any official or
employee unless the previous cash advance given to him is
first liquid ated.
f. Transfer of cash advance from one officer to another is
prohibited.
g. A cash advance shall not be used to encash checks or to
liquidate a previous cash advance.
Illustration:
Entity A
disburses PIO,OOO for certain expenses through cash
advance. The entries are as follows
Date
Advances for/to... (Appropriate Account)
10,000
To record the rant o cash advances
Date
Expenses (Appropriate Account)
10,000
Advances for/to. .. (Appropriate Account)
10,000
To record the li uidation o cash advances
[Disbursements 145
Disbursements through Advice to Debit Account (ADA)

The ADA, or more specifically the List of Duc and Dctnandable
Accounts Payable - Advice to Debit Account (LDDAP-ADA), is an
accountable form used as an authorization issued by a
government agency to the MDS-GSB instructing the bank to debit
a specified amount from its available NCA to pay the
creditors/payees listed in the LDDAP-ADA.
The ADA works like a check, except that one ADA can be
drawn pay various payees, as long as they all maintain
to
accounts in the same bank where the ADA is drawn. Separate
ADAs shall be prepared for payees using other MDS-GSBs. ADA
payments are directly credited to the payees' accounts.
Simply stated, an ADA is an authorization for a fund
transfer (between accounts in same bank) or a bank transfer
(between accounts with different banks) from the issuing agency's
NCA bank account to the bank accounts of specified payees.
The following expenditures shall not be paid through
ADA:
a. Payment of Terminal Leave and Retirement Gratuity benefits;
b. Remittance of GSIS, PhilHealth, and Pag-IBIG contributions;
c. Payments to utility companies (e.g., electricity, water,
telephone, internet, petroleum, and the like).
d. Other payables which cannot be conveniently nor practicably
paid using the ADA.
Illustration:
Entity A pays PIOO,OOO accounts payable through ADA.
Date Accounts payable 100,000

To recognize payment of payables to
su liers/contractors throu h ADA

146 Gapter 5
Disbursements through electronic Modified DiSbUrsement

System
The eMDS is like the ADA except that disbursements are made
directly from the accounts of the BTr that are maintained with the
Land Bank of the Philippines (LBP). Agencies subscribed under

LBP's eMDS can make online disbursements for selected
transactions.
Disbursements through Cashless Purchase Card (CPC) System

Disbursements under the CPC System are made through the use
of an electronic card (i.e., credit card). The authorized credit card
company is the Citibank. Guidelines in the use of CPC System are
as follows:
a. CPC purchases shall be only for specific eligible items and

only with specific merchants.
Merchants — refer to the sellers or suppliers authorized by
Citibank.
b. Only authorized individuals shall be allowed to use the CPC,

subject to monthly credit limits. Changes in credit limits or
cardholders require the prior approval of the Steering

Committee.
c. Agency officials who approved the CPC are jointly

accountable with the cardholders.
d. The CPC System shall comply to, and shall not in any way
change, the existing disbursement policies and procedures
prescribed under the law.
e. The amount covered by the CPC shall form part of the cash
advance levels of the participating agencies. The CPC shall not
be used to justify the increase in cash advance levels Of
participating agencies.
Disbursements 147
f.
The CPC shall initially be used for purchases of small value,
non-common use items which are not available with the

Procurement Service.
g. Unauthorized items purchased using the CPC shall be the

personal liability of the cardholder; without prejudice to the
revocation of the cardholder's privileges and other penalties
that the participating agencies may impose.
h. Participating agencies shall immediately inform the Citibank
of any discrepancy regarding items which they dispute as

having been procured using the CPC.
i.
Participating agencies shall ensure the timely payment of CPC
billings. In case of delays, late payment charges shall be the
personal liability of the employee directly responsible for the
delay. The NCA shall never be used to pay late payment
charges.
j. The cardholder shall submit all receipts from use of the CPC
to the accounting unit. These shall be used in inspecting actual
goods purchased and in paying credit card billings.
k. The accounting unit shall check if the procured items are those
allowed by law to be purchased using the CPC and compare
the charge slips with the amounts in the billing statement.
l. In case the CPC is lost or stolen, the cardholder shall
immediately notify the Program Administrator and the

Citibank.The Program Administrator shall determine whether
the cardholder was negligent and whether the cardholder's
privileges shall be reinstated or permanently suspended. The
cardholder shall be liable for any CPC charges during the
period the card was lost or stolen.
148 Chapter 5
Illustration:
Entity A purchases office supplies worth PIO,OOO through CPC.
Date 10,000
To recognize delivery of office supplies

based on the chargcslip and Inspection and
Acc tance Re rt (JAR)

Date 10,000
Accounts Payable
Cash -- Modified Disbursement
10,000
To recognize settlement of CPC billing
statement
* Withholding taxes are ignored to simplify the illustration.
Disbursements through Non-Cash Availment Authority (NCAA)

Non-Cash Availntent Authority (NCAA) is the authority issued by
the DBM to agencies to cover the liquidation of their actual
obligations incurred against available allotments for availment of
proceeds from loans/grants through supplier's credit/constructive

cash.
Disbursements through NCAA (also called 'Direct Payment
Method' or 'Direct Payment Scheme of Loan Availment') are made

through the Journal Entry Voucher (JEV) issued by the BTr to the
agency to record payment of goods and services made directly by

the lending institution to the supplier or contractor. The JEV is
recorded in the General Journal.
Illustration:
Entity A acquires communication equipment for PIM, on account'
and subsequently settles the account through direct payment
scheme.
Disbursements 149
Bookso Enti A Books 0 BTr

Communication Equipment 1M
Accounts Payable 1M
To recognize receipt of PPE
procured through the direct payment
scheme
Accounts Payable 1M Subsidy to NGAs 1M
Subsidy from National Gov't. 1M Loans Payable — Foreign 1M
To recognize receipt of NCAA and To recognize the replenishments
payment of payable made to AGSB negotiated MDS-checks
and a ents on account of the NGA
Notice that no cash is involved in the acquisition of the

equipment, settlement of the accounts payable, ånd recognition of
the loans payable. The lending institution directly pays the
supplier.
Disbursements through Tax Remittance Advice (TRA)

TRA is used for the constructive remittance of taxes or customs
duties withheld to the BIR or BOC, respectively. (See discussion in
Chapter 3)
Accounting for Disallowances

Disallowances refer to expenditures made by an agency that are
subsequently invalidated or disallowed by the COA because they
are found to be irregular, unnecessary, excessive, extravagant or
unconscionable. Disallowances are recorded in the books of
accounts only when they become final and executory.
Illustration:
Entity A
acquired office supplies for PIOO,OOO. It was found out
that the correct amount should have been P90,000.
100,000
Amount paid ('Entry made')
90,000
'Should be'
10,000
Overstatement
150 Chapter 5
The disallowance ertains to:
Prior eriod
Current ear
Receivables-Disallowances/ Receivables-Disallowances/
10K
Charges 10K Charges
Office Supplies Expense 10K Accumulated Surplus/
(Deficit) 10K
To recognize the overpayment of
To recognize the overpayment of
purchased office supplies
urchasedo Ice su lies in rior ear
Cash-Collecting Officers 10K

Receivables-Disallowances/ Receivables-Disallowances/
10K Charges 10K
Charges
To recognize the settlement of To recognize the settlement of
disallowance disallowance
Cash-Treasury/Agency Cash-Treasury/Agency
10K Deposit; Regular
10K
Deposit, Regular
Cash-Collecting Officers 10K Cash-Collecting Officers 10K
To recognize the deposit of To recognize the deposit of

collection collection
Notice that the accounting for disallowances by a
government entity is similar to the accounting for current and
prior period errors by a business entity.
Accounting for Overpayments

"Sometimes overpayments or even double payment Of
expenditures do happen in agencies. These could be avoided with

the institution of proper controls but some could not be avoided
because of built-in procedures. One example is the payment Of
payrolls. Payrolls are prepared in advance and some agencies pay

their employees through the banking system. All these are done
before reports of attendance are submitted, making it impossible
to know the exact amount to be paid in case there are absenceS
without pay during the pay periods. In case of overpayments
refunds shall be demanded of the employees concerned." (GAM for
NGAs, Chapter 6, Sec. 48)
Correcting entries for overpayments are similar to the
accounting for disallowances.
151
Disbursements
Chapter 5 Summary:
Disbursement authorities:
a. Notice of Cash Allocation (NCA);

b. Notice of Transfer of Allocation (NTA);
c. Tax Remittance Advice (TRA);
d. Non-Cash Availment Authority (NCAA); and
e. Cash Disbursement Ceiling (CDC)
All disbursements require the following certifications:
a. Availability of allotment — Budget Officer
b. and completeness of supporting documents
Availability offunds
— Chief Accountant
c. Necessity and legality of disbursements — Head of the
Requesting Unit
All disbursements shall be made through Disbursement
Vouchers (DVs) or Payroll which are approved by the Head of
Agency.
• Modes of Disbursements:
a. Check;
b. Cash;
c. Cashless payments:
i. Advice to Debit Account (ADA),
ii. Electronic Modified Disbursement System (eMDS),
iii. Cashless Purchase Card System (Credit Card),
iv. Non-Cash Availment Authority (NCAA), and
v. Tax Remittance Advice (TRA
152
Chapter 5
PROBLEMS

1.
No additional cash advance shall be given to any official or
employee unless the previous cash advance given to him is
first liquidated.
2.
All disbursements require prior certifications to establish their
validityand legality. A certification for fictitious obligation is
void and results to criminal liability by the certifying officials.
3. Entity A acquires equipment from a supplier, on account. A

lender settles the account of Entity A by directly paying the
supplier the proceeds of a loan payable that is recorded in the
BTr's books. This transaction is called Cash Disbursement
Ceiling (CDC).
4. All disbursements shall be made through Disbursement

Vouchers (DVs) or Payroll which are approved by the Head of
the Requisitioning Unit.
5. Government entities are not allowed by law to make

purchases using credit card.
6. The Non-Cash Availment Authority (NCAA) is a
disbursement authority issued to government agencies with

foreign service posts.
7. According to the GAM for NGAs, the Advice to Debit

Account (ADA) mode of disbursement can be used only if the
payee maintains an account in the same bank where the
government entity maintains its account.
8. Disbursements through the Cash Disbursement Ceiling (CDC)

results to the recognition of a loan payable in the books Of
accounts of the BTr.
Disbursements 153
9. Under the Advice to Debit Account (ADA) mode of
disbursement, payments from a government entity are

directly credited to the bank accounts of the payees through
fund/bank transfers.
10. The only valid modes of disbursement for a government entity

are through cash or check.

1. A certification on the availability of allotment is required
before a disbursement of government funds is made.
According to the GAM for NGAs, who shall issue this
certification?
a. Budget Officer c. Head of Agency

b. Chief Accountant d. Requisitioning Individual
2. The Chief Accountant shall charge obligations incurred

against available allotment to ensure that
a. the NCA is sufficient to meet the disbursement needs.
b. there are no unreleased appropriations.
c. no overdraft is incurred.
d. no excess allotment exists.
A certification on the availability of funds and completeness of

supporting documents is required before a disbursement of
government funds is made. According to the GAM for NGAs,
who shall issue this certification?
a. Budget Officer c. Head of Agency
b. Chief Accountant d. Requisitioning Individual
2$4. Which of the followmg results to the recognition, in the books

of accounts, of expenses classified as Personnel Services?
a. Granting of cash advance for payroll
b. Liquidation of payroll fund
c. Issuance of office supplies to end users
154 Chapter 5
d. Set up of payable for payroll
5. According to the GAM for NGAs, disbursements for salaries
and wages be supported by

shall
a. Disbursement Vouchers c. Petty Cash Vouchers
d. Official Receipts
b. Payroll
6. Which of the following results to the recognition of expense?

a. Granting of cash advance for travel
b. Liquidation of cash advance for travel
c. Refund of excess cash advance
d. Remittance of the refund for excess cash advance to the
BTr
7. The entry in the books of a government agency with foreign

service post to record the receipt of disbursement authority
called the Cash Disbursement Ceiling (CDC) includes a
a. debit to Cash-Modified Disbursement System (MDS)
c. credit to Cash-Constructive Income Remittance
d. debit to Subsidy from National Government
8. This is used to recognize: (1) in the books of national

government agencies, the constructive remittance to BIR and
BOC of taxes and customs' duties withheld, and the
constructive receipt of NCA for those taxes and customs

duties; (2) in the books of the BIR and BOC, the constructive
receipt of tax revenue and customs duties; and (3) in the books
of the BTr, the constructive receipt of the taxes and customs
duties remitted.
a. Notice of Cash Allocation (NCA)
c. Cash Disbursement Ceiling (CDC)
d. Non-Cash Availment Authority (NCAA)
9. All of the following are considered valid cashless
disbursements, except
Disbursements 155
a. purchase of goods using an electronic card issued by

CitiBank.
b. payment of payables using a Non-Cash Availment

Authority.
c. remittance of taxes withheld to the BIR through Tax
Remittance Advice.
d. online payment through LBP's eMDS.
e. payment to a supplier through LBC padala.
10.
Which of the following government agencies will most likely
be able to obtain a.disbursement authority in the form of Cash
Disbursement Ceiling (CDC)?
a. BIR c. DFA
b. DPWH d. NFA

1.
Entity A disburses a check chargeable against the Treasury
Account. The journal entry to record the disbursement
involves a credit to which of the following accounts?

c. Cash in Bank-Local Currency, Current Account
d. Cash-Collecting Officers
Entity A sends an employee to an official travel and gives him

cash to cover his travelling expenses. Which of the following is
most likely the entry to record the cash disbursement?

Traveling Expenses xxx
b.
Traveling Expenses
System (MDS), Regular xxx
Gapter 5
156
d. Advances to Officers and Employees

Cash on Hand
3. Entity A
purchases office supplies from an authorized
merchant using an electronic card. The entry to record the
settlement of the transaction is

xxx
a. Office Supplies Inventory
xxx
Accounts Payable
xxx
b. Accounts Payable
Cash Modified Disbursement
xxx
xxx
c. Office Supplies Inventory
Cash Modified Disbursement
xxx
4. Entity A wants to make disbursements online. Which of the
following should Entity A do so that it can make valid
disbursements online?
a. Apply for a PayPal account.
b. Obtain a debit card or credit card that is either Visa or
MasterCard from any bank.

c. Enrol with the eMDS of the Land Bank of the Philippines.
d. Make a facebook account.
5. Entity A acquires an equipment on account and settles the
account through Non-Cash Availment Authority (NCAA)•

The entry to settle the account is
a. Accounts Payable
b. Accounts Payable xxx

xxx
c. Accounts Payable xxx
Remittance xxx
Disbursetnents 157
6. Entity A has a foreign service post. During the period, Entity

A receives authorization from the DBM allowing it to use the
collections of its foreign service post to pay for the necessary
operating expenses of the foreign service post. The entry to
record the disbursement authority is
a. Cash in Bank-Foreign Currency, Current
Account xxx
Cash-Collecting Officer xxx
b. Cash-Constructive Income Remittance xxx
Subsidy from NG xxx
c. Accounts Payable xxx
Remittance xxx
7. Which of the following modes of disbursements is most

similar to a check disbursement?
a. eMDS c. ADA
b. NCAA d. NBA
8. A government entity makes payment through Advice to Debit

Account (ADA). The entry most likely to be used in recording
the payment is
Accounts payable xxx
b. Accounts payable xxx
Subsidy from National Government xxx
c. Accounts payable xxx
Cash-ADA
d. None. The transaction is recorded only in the Registries and
ORS.
9. A government entity makes constructive remittance of taxes

withheld to the BIR through Tax Remittance Advice (TRA).
The entry used in ding the transaction is
a. Cash-Tax Rer • Advice xxx

158 Chapter 5
xxx
xxx
b. Due to BIR
xxx
c. a and b
d. None. The transaction is recorded only in the Registries and
ORS.
10. Which of the following modes of disbursements would result
to the recognition of a loan payable in books of the BTr?

a. CDC c. ADA
b. NCAA d. UFC

1. Which of the following is not used in processing
disbursements?
a. DVs c. pcvs
d. ORs
b. Payroll
2. Which of the following is not a form of disbursement
authority?
a. NCA c. NTA
b. TRA d. Allotment
3. It isan authority issued by the DBM to central, regional and

provincial offices and operating units to cover their cash
requirements. It specifies the maximum amount of cash that
can be withdrawn from a government servicing bank in a
certain period.
a. Notice of Cash Allocation (NCA)
c. Cash Disbursement Ceiling (CDC)
d. Non-Cash Availment Authority (NCAA)
4. Entity A has a foreign service post. During the period, Entity

A receives authorization from the DBM allowing it to use the
collections of its foreign service post to defray for the
159
Disbursements
necessary operating expenses of the foreign service post. This

authorization is called
a. Cash Disbursement Ceiling (CDC)

b. Non-Cash Availment Authority (NCAA)
c. Electronic Modified Disbursement System (eMDS)
d. Advice to Debit Account (ADA)
5. Entity A disburses a check chargeable against its checking

account maintained with Government Servicing Bank. The
journal entry to record the disbursement involves a credit to
which of the following accounts?
c. Cash in Bank-Local Currency, Current Account
d. Cash-Collecting Officers
6. Which of the following entries would most likely constitute a

cash disbursement, rather than a check disbursement?
a. Expenses
Electricity
xxx
To record payment for electricity
expenses
c. Advances to Officers and Employees xxx
To record grant ofcash advance for
travel
d. None. All of these are check disbursements.
Which of the following would most likely constitute a

disbursement through Advice to Debit Account (ADA)?
Chapter 5
160
xxx
a. Electricity Expenses
xxx
To record payment for electricity
expenses xxx
b. Accounts Payable
xxx
To record payment ofaccounts payable
xxx
c. Advances to Officers and Employees
xxx
To record grant of cash advance for
travel
d. None. All of these are check disbursements.
8. Which of the following is true regarding disbursements

through electronic Modified Disbursement System (eMDS)?
a. The disbursement is not recorded in the books of accounts.
b. The disbursement is made through the issuance of MDS
check.
c. The disbursement is made through the use of a credit card
that is swiped in a card swipe machine of an authorized
merchant.
d. The disbursement is made through an online transaction.
9. Entity A purchases office supplies from an authorized

merchant using an electronic card. The entry to record the
purchase is
a. Office Supplies Inventory xxx


c. Office Supplies Inventory xxx
System (MDS); Regular xxx
Disbursements 161
10. Entity A acquires an equipment on account and settles the
account by dpbiting Accounts Payable and crediting Subsidy

from National Government. The mode of disbursement used
by Entity A is most likely a(an)
a. Credit Card transaction
b. Advice to Debit Account
c. Cash Disbursement Ceiling
162 pter 6
Chapter 6
Financial Assets
Learning Objectives
1. Define a financial asset and give examples.
2. Account for cash and cash equivalents.
3. Account for receivables.
4. Account for investmelts.
Introduction
Financial instrument — is any contract that gives rise to both a
financial asset of one entity and a financial liability or equity
instrument of another entity. (PPSAS 28.9)
Financial asset — is any asset that is:

a. cash;
b. An equity instrument of another entity;
c. A contractual right to receive cash or another financial asset
from another entity;
d. A contractual right to exchange financial instruments with

another entity under conditions that are potentially favorable;
or
e. A contract that will or may be settled in the entity's own
equity instruments.
Financial liability — is any liability that is:

a. A contractual obligation to deliver cash or anOther financial
asset to another entity;
b. A contractual obligation to exchange financial assets or
financial liabilities with another entity under conditions that
are potentially unfavorable to the entity; or

c. A contract that will or may be settled in the entity's own
equity instruments.
Financial Assets 163
Equity instrument — is any contract that evidences a residual

interest in the assets of an entity after deducting all of its liabilities.
The issuer of a financial instrument shall classify the

instrument, or its component parts, on initial recognition as a
financial asset, a financial liability or an equity instrument in
accordance with the substance of the contractual arrangement and
the definitions of a financial asset, a financial liability and an
equity instrument. (GAM for NGAs, Chapter 7, Sec. 23)
Example:
Bank deposit is a financial instrument. It is a contract that gives
rise to both a financial asset (i.e., Cash in bank) on the part of the
depositorand a financial liability (i.e., Deposit liability) on the
part of the bank. The depositor has a contractual right to
withdraw his cash while the bank has a contractual obligation to
deliver cash when the depositor withdraws.
Cash is the most basic financial instrument because it is
the medium of exchange and the basis of measurement of all
financial statement elements.
Initial Recognition
A financial asset is recognized when an entity becomes a party to
the contractual provisions of the instrument. (PPSAS 29.16)
Initial Measurement
Financial assets are initially measured at fair value plus
transaction costs, except for financial assets at fair value through
surplus or deficit whose transaction costs are expensed.
Transaction costs are incremental costs that are directly
attributable to the acquisition, issue, or disposal of a financial
instrument. An incremental cost is one that would not have been
incurred if the entity had not acquired, issued or disposed the
financial instrument. Transaction costs include: (a) fees and
COmmissions paid to agents, advisers, brokers and dealers; (b)
164 Chapter 6
levies by regulatory agencies and securities exchanges; and (c)
transfer taxes and duties.
Our succeeding discussions on financial assets are subdivided into

the following:
a. Cash and cash equivalents
b. Receivables
c. Investments
d. Derivatives
Cash and Cash Equivalents
Cash — comprises cash on hand, cash in bank and cash treasury

accounts.
Adjustments for Unreleased Commercial Checks

Unreleased checks are checks drawn but not yet given to the
payees as of the end of the period. Unreleased checks are reverted

back to cash as follows:
Date Cash in Bank, Local Currency-Current xx

Accounts Payable (or other liability account) xx
Unreleased checks are not physically cancelled. At the
start of the following year, the adjusting entry above is reversed to
recognize the availability of the checks for release. This procedure

does not apply to the "Cash-Modified Disbursement System
(MDS)" account because there is no actual cash with the
Government Servicing Bank. Recall that any unused NCA is
reverted back to the National Govémment, and therefore, the
balance of the "Cash-Modified Disbursement System (MDS)"

account is zeroed-out at the end of each period.
Financiål Assets
165
Accounting for Cancelled Checks
checks are cancelled when they become stale, voided or spoiled.

A check is considered stale if it has been outstanding for over 6
months from its date. Replacement checks may be issued •for
cancelled checks that were already released to payees, upon
submission of the cancelled checks to the Accounting Unit.
Cancelled checks are reverted back to cash as follows:
The cancelled check ertains to:

Current ear Prior eriod
Accumulated Surplus/
System (MDS), Regular (Deficit) xx
Accounts payable
Accounts payable
To recognize the cancellation of To recognize the cancellation of
stale/voided/spoiled MDS checks stale/voided/spoiled MDS checks in prior
For prior period MDS checks, the "Accumulated

Surplus/(Deficit)" account is debited. This is because, again, the
"Cash-Modified Disbursement System (MDS)" account is zeroed-
out at the end of each period.
For cancelled commercial checks, the "Cash in Bank-Local
Currency, Current" account is debited for both current year and
prior period.
If a replacement check is issued, the replacement check is
recorded in the regular manner, i.e., debit to accounts payable and
credit to cash.
Petty Cash Fund

Petty Cash Fund (PCF) refers to the amount granted to duly
designated Petty Cash Fund Custodian for payment of authorized
petty or miscellaneous expenses which cannot be conveniently
paid through checks or ADA. (GAM for NGAs, Chapter 6, sec. 2)
166 Chapter 6
Guidelines:
a. The Head of Agency shall approve the amount of PCF to be
established, which shall be sufficient to defray recurring petty
expenses for 1 month.

b. The PCF Custodian shall be properly bonded(a) whenever the
established amount of PCF exceeds P5,000.

means an insurance shall be taken on the custodian. In the event
that the custodian misuses the funds, the entity can claim from the insurance
company, and the insurance company in turn will go after the custodian.
c. The PCF shall be maintained using the Imprest System. At all
times, total cash on hand and unreplenished expenses shall be
equal to the PCF ledger balance.

d. The PCF shall be kept separately from other advances or
collections and shall not be used to pay for regular expenses,

such as rentals, electricity, water, and the like.
e. PCF payments shall not exceed P15,000 for each transaction,
except when otherwise authorized by law or by the COA.
Splitting of transactions to avoid exceeding the ceiling is
prohibited.
f. A canvass from at least 3 suppliers is required for purchases
amounting to PI,OOO and above, except for purchases made
while on official travel.
g. PCF disbursements shall be supported by properly
accomplished and approved Petty Cash Vouchers, invoices,
ORs, or other evidence of disbursements.
h. Replenishment shall be made as soon as disbursements reach
at least 75% or as needed.
i. At the end of the year, the PCF Custodian shall submit all
unreplenished Petty Cash Vouchers to the Accounting Unit for

recording in the books of accounts.
j. The unused balance of the PCF shall not be closed at year-end'
It shall be closed only upon the termination, separation

retirement or dismissal of the PCF Custodian, who in turn
shall refund any balance to close his/her cash accountability•
Illustration:
After careful estimates of recurring monthly petty expenses, the

Head of Entity A approves the establishment of a P50,000 petty
cash fund.
Date Petty Cash 50,000

To record the establishment o PCF
Just like the accounting by business

no journalentities,
entries are made as disbursements are made out of the PCF.
Journal entries will be made when the PCF is (a) replenished or (b)
adjusted at the end of the period for unreplenished expenses.
A cash count of the PCF reveals the following:
Coins and Currencies 12,500

Vouchers:
Office Supplies Expenses 10,000

Fuel, Oil and Lubricants 15,000
Postage and Courier Expenses 8,000
Other Maintenance and Operating Expenses 4,500 37,500
Total per count 50,000
Accountability 50,000
Shortage (Overage)
Case 1: The PCF is replenished.
Date Office Supplies Expenses 10,000

Fuel, Oil and Lubricants 15,000
Postage and Courier Expenses 8,000
Other Maintenance and Operating Expenses 4,500
To record ther lenishmento the PCF
Chapter 6
168
Case 2: The PCF is not replenished.
10,000
Date Office Supplies Expenses
15,000
Fuel, Oil and Lubricants
8,000
Postage and Courier Expenses
Other Maintenance and Operating Expenses 4,500
37,500
Petty Cash
To adjust theiPCFfor unreplenished
disbursements
Case 3: The PCF Custodian retires and the PCF is closed.
Date Cash-Collecting Officer 12,500

12,500
Petty Cash
To record the return of unused PCF upon
retirement o the Pet Cash Custodian
Accounting for Cash Shortage/Overage of Disbursing Officer

The disbursing officer is liable for any cash shortage while any cash
overage that he cannot satisfactorily explain to the auditor is
forfeited in favor of the government.
Relevant provision of law:

"The failure of a public officer to have duly forthcoming any
public funds or property with which he is chargeable, upon
demand by any duly authorized, officer, shall be prima facie
evidence that he has put such missing funds or property to
personal use." (Revised Pena/ Code. Art. 217)
+ Cash shorta e
Date Due from Officers and Employees xx
Advances for/to..(Appropriate account) xx
To reco nize cash shorta eo disbursin o tcer
Date Cash — Collecting Officers xx
Due from Officers and Employees xx
To recognize restitution of cash shortage
Assets 169
Deposit, Regular
Cash -- Collecting Officvrs
To the tontttancc of restituted cag.h
shopta •c to the BTr
+ Cash overa c
Pate Cash Collecting Officers XX
Miscellaneous Income
To recognize forfciturc of cash overage of the
disbursin o cer
Patc
Cash-Treasury/Agency Deposit, Regular xx
Cash Collecting Officers xx
To recognize the rctnittancc offorfettcd cash
overa e to the BTr
Dishonored Checks
A dishonored check is a check that is not accepted when presented
for payment, e.g., a check returned by the bank because of lack of
sufficient funds - 'bounced' check.
The drawer of the dishonored check is liable for the
amount of the check and all penalties resulting from the dishonor,
without prejudice to his criminal liability for a 'bounced' check.
Guidelines:
a. When a check is dishonored, the Collecting Officer shall:
i. issue a Notice of Dishonored Checks to the drawer and any
endorser; and
ii. cancel the related OR.
If the Collecting Officer fails to issue the notice, the
dishonored check becomes his personal liability. The drawer
and any endorser not given the notice will be relieved from
any liability.
A check refused by the drawee bank when presented within
90 days from its date is a prima facie evidence that the drawer
has knowledge about the insufficiency of his funds, unless the
drawer pays the check in full or makes arrangement with the
Chapter 6
170
drawee bank for the full payment of the check within 5
banking days after receiving the notice of the dishonor.
d. A dishonored check shall be settled by payment in cash or
certified check. The dishonored check shall not be returned to
the payor unless he returns first the previous OR therefor.
Journal entries
Dishonored checks are recorded to the "Other receivables"
account as follows:
Collections remitted to BTr
Prior ear
Current ear
Other receivables xx Other receivables
Accumulated Surplus/(Deficit) xx
xx To recognize the cancellation of
Deposit, Regular
To recognize tlr cancellation of prior year's deposited collections due to
current year's deposited collections due dishonored checks

to dishonored checks
Collections remitted to Authorized Government Depository

Bank
Current ear Prior ear

Other receivables Other receivables
Cash in Bank-Local Cash in Bank-Local
Currenc , Current Account xx Curren , Current Account xx
Bank Reconciliation
A bank reconciliation statement is a report that is prepared for the
purpose of bringing the balances of cash (a) per records and (b)
per bank statement into agreement.
A bank statement is a report issued by a bank which shows

the credits and debits to the depositor's account during a period'
as well as the account's cumulative balance.
Guidelines:
a. Bank reconciliations shall be prepared as internal control to
ensure the correctness of cash records and as deterrent to
fraud.
The Chief Accountant or designated staff shall prepare

separate bank reconciliations for each bank account
maintained by the entity within 10 days from receipt of the
monthly bank statement.
c. The Adjusted Balance Method shall be used. Under this
method, the unadjusted book and bank balances are brought to

an adjusted balance that is reported on the Statement of
Financial Position.
d. Bank reconciliations shall be prepared in 4 copies to be
submitted within 20 days from receipt of bank statement to
the following: COA Auditor, Head of Agency, Accounting
Division, and Bank, if necessary.
e. A Journal Entry Voucher (JEV) shall be prepared to record any
reconciling items.
Cash Equivalents
Cash Equivalents — are short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value. (PPSAS 2.8)
Only debt instruments acquired within 3 months before
their scheduled maturity date can qualify as cash equivalents.
Receivables
Receivables represent claims for cash or other assets from other
entities. Examples:
a. Accounts receivable — refers to amounts due from customers
arising from regular trade and business transactions.
b. Notes receivable represents claims, usually with interest, for
which a formal instrument of credit is issued as evidence of
debt, such as promissory notes.

172 Chapter 6
cs Loans receivable used in the BTr-NG books to recognize loans
extended by the National Government Government

to
Financial Institutions 'GFIs' or GOCCs, covered by loan
agreements.
d. Other receivables, such as, interest receivable, due from
employees/officers/ other NGAs, lease receivables, dividends
receivable, and the like.

(GAM for NGAs, vol. 3)
Receivables are initially measured at fair value plus

transaction costs and subsequently measured at amortized cost.
Investments
Categories of Financial Assets

For purposes of subsequent measurement, financial assets are
classified as follows:
a. Financial asset at fair value through surplus or deficit — is one that

is either:
a. Held-for-trading, or
b. Designated as at fair value through surplus or deficit on
initial recognition. Any financial asset can be classified in
this category if its fair value can be reliably measured.
b. Held-to-maturity investments — are non-derivative financial
assets with fixed or determinable payments and fixed
maturity that an entity has the positive intention and ability to
hold until maturity.
c. Loans and receivables — are non-derivative financial assets with

fixed or determinable payments and are not quoted in an
active market.
d. Available-for-sale financial assets — are non-derivative financial

assets that are designated as available for sale or are not
classifiable under the other categories
Summary of Measurements:
Type of Initial Subsequent

Examples Measurement
Financial Asset Measurement
Financial Investments Fair value Fair value;
asset at fair in quoted changes in fair
value stocks or value are
through bonds. recognized in

surplus or surplus/dcficit
deficit
b. Held-to- Investments Fair value plus Amortized cost

in bonds and transaction (using the
maturity
effective interest
other debt costs
method)
securities to
be held until
maturity
c. Loans and Accounts, Fair value plus Amortized cost

receivables Notes, Loans transaction (using the
costs effective interest

receivable
method)
d. Available- Investments Fair value plus Fair value;
for-sale in stocks or transaction changes in fair

bonds not costs value are
financial
assets classified recognized in

under (a) to equity
(c above.
Investments in unquoted equity instruments whose fair
value cannot be reliably measured are measured at cost.

174 Chapter 6
Illustration measurement
1: Initial
Entity A acquires an investment for PIOO,OOO. Transaction costs
amount to PIO,OOO.
Case 1: The investment is classified as Financial Asset Held for
Trading.
Date Financial Assets Held for Trading

100,000
Other Financial Charges 10,000
Cash in Bank-Local Currency, Bangko

110,000
Sentraln Pilipinas
Case 2: The investment is classified as Held-to-maturity

investments.
Date Investments in Treasury Bills-Local 110,000

Sentral ng Pilipinas 110,000
Case 3: The investment is classified as Available-for-sale assets.
Date Investments in Stocks (or Bonds) 110,000

Sentral ng Pilipinas 110,000
Illustration 2: Subsequent measurement

Assume the investment in Illustration 1 is investment in stocks
The fair value at the end of the period is P120,000.
Case 1: The investment is classified as Financial Asset Held for
Trading.
Date Financial Assets Held for Trading 20,000

Gain from Changes in Fair Value of
Financial Instruments (120K- 100K) 20,000
Financial Assets
175
Case 2: The investment is classified as Available-for-sale

financial assets.
Pate Investments in Stocks

10,0
Unrealized Gain/(Loss) from Changes in
Fair Value of Financial Assets (120K - 110K)
10,0
Interest income from debt instruments, other than those

which are classified as financial asset at fair value through surplus
or defidt, is recognized using the effective interest method.
Therefore, if the investment in the illustration above in is
in the form of bonds and is classified as available-for-sale financial
assets, the unrealized gain (loss) would have been computed as the
difference between the fair value at year-end and the carrying
amount adjusted for the amortization of bond discount or
premium.
Onlv debt securities can be classified as held-to-maturity
investments. Thus, this categorv is omitted in Illustration 2 above.

Held-to-maturity investments are subsequently measured at
amortized cost, and therefore, changes in fair value are ignored.
Illustration 3: Held-to-maturity investments
On January l, 20xl, Entity A acquires 5-year, 5%, face
amount bonds for P957,876 and classifies them as held-to-maturity
investntents. The issuer pays annual interest every December 31.
The effective interest rate is 6%.
1/1/x1 Investment in Bonds 957,876

957,876
Sentral ng Pilipinas
To reco nize investment in bonds
176 Chapter 6
Amortization Table:
Interest Interest
Date received income Amortization Present value
1/1/x1 957,876
12/31/x1 50,000 57,473 7,473 965,349
12/31/x2 50,000 57,921 7,921 973,270
12/31/0 50,000 58,396 8,396 981,666
12/31/x4 50,000 58,900 8,900 990,566
12/31/x5 50,000 59,434 9,434 1,000,000
12/31/x1 Cash in Bank-Local Currency, Bangko

Sentralng Pilipinas 50,000
Investment in Bonds 7,473
Interest income 57,473
To reco nize interest income
Subsequent journal entries follow the same pattern.
Variation: Available-for-sale financial assets

Assume the bonds are classified as available-for-sale financial assets
and the fair value at year-end The unrealized gain

is PI,OIO,OOO.
that is recognized in net assets would have been P44,651

(PI,OIO,OOO fair value — P965,349 carrying amount adjusted for
discount amortization). The same amount of interest income
would be recognized.
Impairment of Financial Assets

An entity shall assess at the end of each reporting period whether
there is any objective evidence that a financial asset or group Of
financial assets is impaired. If any such evidence exists, the entity
shall measure the amount of loss as the difference between the
carrying amount of the asset and the present value of estimated
future cash flows discounted at the financial asset's original
effective interest rate. The carrying amount of the asset shall be
reduced either directly or through the use of an allowanCe

account. The amount of the loss shall be recognized in surplus or
deficit.
In case of Accounts Receivable, the Allowance for

Impairment shall be provided in an amount based on collectability
of receivable balances and evaluation of such factors as aging of
accounts, collection experiences of the agency, expected loss

experiences and identified doubtful accounts. (GAM for NGAs, Chapter
7, sec. 10)
Derecognition of Financial Assets

Derecognition is the process of removing a previously recognized
asset, liability or equity from the statement of financial position.
A financial asset is derecognized when:

a. The contractual rights to the cash flows from the financial
asset expire or are waived; or
b. The financial asset is transferred and the transfer qualifies for

derecognition, such as when the risks and rewards of
ownership and control of the financial asset are relinquished.
The derecognition of financial assets is subject to the

provisions of the State Audit Code of the Philippines (P.D. No.
1445) on the writing off of receivables and other policies issued by
the COA. (GAM for NGAs, Chapter 7, sec. 10)
Illustration: Impairment and Derecognition

Entity A, a government hospital, receives promissory notes from
several patients amounting to PI,OOO,OOO.
Date Notes Receivable

Hospital Fees
To reco nize recei to romisso notes
At year-end, it was estimated that P300,000 notes are
impaired.
178 Chapter 6
Date Impairment Loss-Loans and Receivables 300,000
Allowance for Impairment-Notes

Receivable 300,000
To reco nize i' airmento notes receivable
A subsequent audit reveals that PIOO,OOO of the impaired

notes cannot be collected anymore. The COA authorizes the
derecognition (write-off) of these notes.
Date Allowance for Impairment-Notes Receivable 100,000

Notes Receivable 100,000
To recognize the derecognition of notes
receivable
Derivatives
A derivative is a financial instrument or other contract that derives
itsvalue from the changes in value of some other underlying asset
or other instrument.
Characteristics of a derivative
a. Its value changes in response to the change in an underlying;

b. It requires no initial net investment (or only a very minimal
initial net investment); and
c. It is settled at a future date.
An "underlying" is a specified price, rate, or other variable
(e.g., interest rate, security or commodity price, foreign exchange

rate, index of prices or rates, etc.), including a scheduled event
(e.g., a payment under contract) that may or may not occur.
Purpose of a derivative
The very purpose of derivatives is risk management. Risk
management is the process of identifying the desired level of risk'
identifying the actual level of risk and altering the latter to equal
the former. (GAM for NGAs, Chapter 7, sec. 19)
Financial Assets
179
Hedging
Hedging is a method of offsetting a potential financial loss or the
structuring of a transaction to reduce risk involving financial
instruments.
Hedge accounting recognizes the offsetting effects on

surplus or deficit of changes in the fair values of the hedging
instrument and the hedged item.
Hedging Relationships
a.
Fair value hedge — a hedge of the exposure to changes in fair
value of a recognized asset or liability or an unrecognized firm

commitment, or an identified portion of such an asset, liability
or firm commitment, that is attributable to a particular risk
and could affect surplus or deficit.
b. Cash flow hedge — a hedge of the exposure to variability in
cash flows that (i) is attributable to a particular risk associated
with a recognized asset or liability (such as all or some future
interest payments on variable rate debt) or a highly probable
forecast transaction and (ii) could affect surplus or deficit.
c. Hedge ofa net investment in a foreign operation.
Components of a Hedging Relationship

a. Hedging Instrument — a designated derivative or a designated
non-derivative financial asset or non-derivative financial
liability whose fair value or cash flows are expected to offset
changes in the fair value or cash flows of designated hedged
item.
b. Hedged Item — an asset, liability, firm commitment, highly
probable forecast transaction or net investment in a foreign
operation that (a) exposes that entity to risk of changes in fair
value or future cash flows and (b) is designated as being
hedged.
Chapter 6
180
Chapter 6 Summary:
Financial asset is any asset that is: cash or right to receive cash
or other financial asset, an equity instrument of another entity,
or contractual right to exchange financial instruments under

potentially favorable condition. Examples: cash and cash
equivalents, receivables, investments in debt and equity
and derivative assets.

securities,
The Petty Cash Fund of a government entity is:
maintained using the imprest system.
sufficient to defray recurring petty expenses for 1 month.
used for disbursements not exceeding P15,000 per
transaction.
replenished as soon as disbursements reach at least 75%
or as needed.
A government entity prepares monthly bank reconciliations
using the adjusted balance method.
Only debt instruments acquired 3 months or less before their
scheduled maturity date can qualify as cash equivalents.

Receivables are measured at fair
initially value plus
transaction costs and subsequently measured at amortized
cost.
For subsequent measurement purposes, a government entity
classifies its financial assets into the following categories: (a)
Financial asset at fair value through surplus or deficit; (b)
Held-to-maturity investments; (c) Loans and receivables; and

(d) Available-for-sale financial assets.
PROBLEMS

1. According to the GAM for NGAs, all financial assets are
initially measured at fair value.
2. According to the GAM for NGAs, government entities shall
prepare bank reconciliations only at year-end or whenever the

need arises.
3. Only debt instruments with remaining maturity of 3 months

or less can qualify as cash equivalents.
4. The PCF of a government entity is replenished when

disbursements reach at least 90%, or as needed.
5. No journal entry is prepared when a disbursement is made

out of the petty cash fund.
6. A government entity established a P30,000 petty cash fund.

The custodian must be bonded for at least P5,000.
7. According to the GAM for NGAs, all finanäal assets shall be

initially measured at fair value plus transaction costs.
8. Transaction costs on financial assets classified under the held
to maturity category are expensed outright.
9. A derivative derives its value from the changes in value of a

specified rate, price, event or some other variable.
10. Risk management is the process of identifying the desired

level of risk, identifying the actual level of risk and altering the
latter to equal the former.

182 Chapter 6

1. Which of the following is not considered a financial asset?
a. Petty cash fund

b. Investment in debt securities
d. Prepaid assets
2. A cash shortage of a government entity is most likely recorded

as a
a. debit to a receivable account
b. debit to a cash shortage or overage account
d. credit to a cash shortage or overage account
3. Dishonored checks are recorded by a government entity as

a. Notes receivable c. Accounts receivable
b. Other receivables d. Losses
4. The entry to record the replenishment of a petty cash fund of a

government entity is
a. Expense accounts xxx
(MDS), Regular
b. Expense accounts xxx
Petty Cash xxx
c. Expense accounts xxx

Cash-Collecting Officers xxx
d. Expense accounts xxx

5. Under this method of bank reconciliation statement
preparation, the unadjusted book and bank balances are
brought to an adjusted balance that is reported on the
statement of financial position.

a. Bank to Book Method
c. Adjusted Balance Method
b. Book to Bank Method d. All Of these
6. Which of the following may be paid through the petty cash

fund of a government entity?
a. Rent worth P12,000.
b. Pantry supplies worth P15,000.
c. Office supplies worth P20,000.
d. None of these.
7. Entity A maintains a petty cash fund. At any given point of

time, the cash on hand and the petty cash vouchers must be
equal to the ledger balance of the petty cash fund. If these are
not equal, the difference is either shortage or overage. This
system of handling petty cash fund is called
a. Impress System c. Pretty Cash System
b. Fluctuating Balance System d. Imprest System
8. According to the GAM for NGAs, the establishment of a petty

cash fund
a. requires the approval of the Head of Agency.
b. requires the approval of the Chief Accountant.
c. requires the approval of the President of the Philippines.
d. does not require any formal approval because petty cash
funds are likely to be immaterial.
9. The "Loans Receivable" account is most likely to be used in

the books of accounts of which of the following government
agencies?
a. COA c. BTr
b. NIA d. All of these
10. Which of the following is not one of the characteristics of a

derivative?
a. It requires no notional amount (or only a very minimal
notional amount).
b. Its value changes in response to the change in an
underlying.
184 Chapter 6
c. It requires no initial net investment (or only a very
minimal initial net investment).

d. It is settled at a future date.

1. According to the GAM for NGAs, these refer to incremental
costs that are directly attributable to the acquisition, issue, or
disposal of a financial instrument.

a. Costs to sell c. Financial costs
b. Transaction costs d. Variable costs
2. Which of the following is not one of the categories of financial

assets under the GAM for NGAs?
a. Held-to-maturity investments
b. Loans and receivables
c. Available-for-sale financial assets
d. Financial asset through other comprehensive income
3. Entity A acquires an investment for 91,000,000. Transaction

costs amount to 910,000. At year-end, the investment has a fair
value of P900,000. If the investment is classified as financial

asset through surplus or deficit, how much is the loss from the
change in fair value?
a. 100,000 c. 110,000
b. 90,000
use the following information for the next four questions
On January 1, 20x1, Entity A acquires 10-year, 10%, 92,000,000 face

amount bonds for Pl,456,792 and classifies them as held-to-
maturity investments. Transaction costs on the acquisition amount

to P125,919. The issuer pays annual interest every December 31•
The effective interest rate is 14%.
4. The initial carrying amount of the investment on January 1,
20x1 is
Financial Assets
185
a. 1,456,792 c. 1,582,711
5.
The interest income in 20x1 is
a. 221,580 c. 186,322
b. 203,951 d. 200,000
6. If the investment is classified as available for sale financial

asset and the fair value at year-end is how much is
the gain (loss) from the change in fair value?
a. (200,000) c. 195,709
b. (217,289) d. 238,869
7. If the investment is classified as available for sale financial

asset, how much is the interest income in 20x1?
a. 221,580 c. 186,322
b. 203,951 d. 200,000
8. According to the GAM for NGAs, changes in fair value of

investments classified as available for sale financial assets are
a. recognized in surplus or deficit
b. recognized in net assets

c. not recognized
d. a orb
9. Entity A acquires an investment for PIOO,OOO and incurs

transaction costs of PIO,OOO. At year-end, the fair value of the
investment is P80,000. Entity A recognizes a P30,000 loss from
the change in fair value. The investment would most likely to
have been classified under which of the following categories
of financial assets?
a. Available-for-sale financial assets
b. Financial asset through surplus or deficit

c. Held-to-maturity investments
d. Loans and receivables
186 Chapter 6
10. Entity A acquires an invesment for PIOO,OOO and incurs
transaction costs of PIO,OOO. At year-end, the fair value of the
investment is P120,000. However, the investment is
appropriately reported in the year-end statement of financial

position at a carrying amount of P106,382. The investment
would most likely to have been classified under which of the
following categories of financial assets?
a. Available-for-sale financial assets
c. Loans and receivables
d. Cannot be determined due to insufficient information

1. According to the GAM for NGAs, a government entity's cash
comprises all of the following except
a. cash on hand c. cash equivalents
b. cash in bank d. cash treasury accounts
2. Which of the following is excluded from the amount of cash

that is reported in the statement of financial position of a
government entity?
a. unreleased checks drawn c. undeposited collections
b. cancelled checks drawn d. post-dated checks received
3. An unexplained cash overage of a government entity is
recorded as a
a. credit to a payable account
b. debit to a cash shortage or overage account

d. credit to a cash shortage or overage account
4. All of the following are considered internal controls over cash
except
a. Requiring a cash custodian to be properly bonded. The
amount of bond shall not be less than the cash
accountability of the custodian
Financial Assets
187
b.
preparing a bank reconciliation for each bank account
maintained by a government entity,
c.
Making estimates of recurring expenses before
establishing an amount for a petty cash fund.
d.
Maintaining the petty cash fund under a Fluctuating
Balance System wherein the total cash on hand and petty
cash vouchers may or may not be equal to a fixed amount
of petty cash fund at any given point of time.
e.
Requiring at least three bidders or canvasses before
making purchases.
5. The per transaction threshold for petty cash disbursements of
a government entity is
a. P5,OOO c. P15,OOO
b. PIO,OOO d. No limit; sky is the limit.
6. A government agency shall prepare a bank reconciliation for

each bank account maintained. Bank reconciliations are
prepared using the
a. Bank to Book Method c. Adjusted Balance Method
b. Book to Bank Method d. Any of these
7. If the adjusted balance of cash is less than the unadjusted

balance per books and there are no other reconciling items or
errors, the difference is most likely caused by
a. Credit memo c. Deposits in transit
b. Debit memo d. Outstanding checks
8.
According to the GAM for NGAs, receivables are measured at
Initial Subsequent
Amortized cost
a. Fair value
Fair value plus transaction costs Amortized cost
c.
Fair value minus transaction costs Amortized cost
Fair value
d. Fair value
188 Chapter 6
9. The subsequent changes in the fair value of an investment that

is classified as available for sale are recognized in
a. surplus or deficit
b. net assets or equity
c. not recognized
d. any of these as an accounting policy choice
10. According to the GAM for NGAs, the very purpose of
derivatives is
a. risk management c. risk incurrence
b. speculation d. a or b
Inventories
189
Chapter 7
Inventories
Learning Objectives
1. Account for inventories by a government entity.
2. Describe the procedures in the 'receipt and disposition of

inventories by a government entity.
Introduction
Inventories are assets:
a. Held for sale or distribution in the ordinary course of
operations (Finished goods);

b. In the process of production for sale or distribution (Work in
process); or
c. In the form of materials or supplies to be consumed in the
production process or distributed in the rendering of services
(Raw materials and supplies).
More specifically, the inventories of a government entity

consists of the following:
a. Inventory Held for Sale (e.g., medicines for sale in government
pharmacies)
b. Inventory Held for Distribution (e.g., rice and other welfare
goods held for distribution)
c. Inventory Held for Manufacturing (e.g., raw materials, work-
in-process)
d. Inventory Held for Consumption (e.g., office supplies
inventory)
e. Semi-Expendable Property — consists of machinery,
equipment, furniture and fixtures and similar items that are
not capitalized as PPE because their costs are below the
P15,000 capitalization threshold for PPE.
190
Chapter 7
Measurement
Inventories are initially measured at cost and SUbseClUently
Goods held or sale Goods held or distribution

Lower of Cost and Net Lower of Cost and Current
realizable value re lacement cost
Cost comprises the following:

a. Purchase cost, excluding trade discounts, rebates, and other
similar deductions in purchase price.

b. Direct costs incurred in bringing the asset to its intended
location and condition (e.g., freight costs, conversion costs -

such as costs of labor and production overhead for
manufactured items).
Cost excludes the following:

a. Abnormal amounts of wasted materials, labor, and production
overhead;
b. and
Selling costs;
c. Administrative overheads
Exceptions:
a. Inventories received from non-exchange transactions (e.g.,
donations) are initially measured at acquisition-date fair value.
b. Agricultural produce are initially measured at fair value less
costs to sell at the point of harvest.
For these items, their initial measurements are deemed

their costs forpurposes of subsequent measurement at the lower Of
cost or NRV/Current replacement cost.
Net Realizable Value (NRV) is estimated selling price less

estimated costs of completion and estimated selling/disposal costs•
Current replacement cost the cost the entity

is would incur to
acquire the asset on the reporting date.

191
Inventories
Cost Formulas
cost of goods sold and cost of inventories on hand are determined
using the following cost formulas:
a. specific identification — this shall be used for items that are

not ordinarily interchangeable (i.e., unique) and those that are
segregated for specific projects.
Under this formula, specific costs are attributed to
identified items of inventory. Accordingly, cost of sales

represents the actual costs of the specific items sold while
ending inventory represents the actual costs of the specific
items on hand.
b. Weighted average cost — this shall be used for large numbers

of items of inventory that are ordinarily interchangeable. This
shall be applied under a perpetual inventory system.

Under this formula, a new weighted average unit cost
is computed after every purchase. The computed average
costs are used in determining the cost of goods sold and
inventory on hand. Accordingly, cost of sales and ending

inventory are stated at average costs, rather than at the actual
costs of the inventories sold or on hand. This method is
commonly referred to ip traditional accounting by business

entities as the "moving average" cost formula.
Government entities shall use the perpetual inventory

system. Under this system, purchases, sales, and other
transactions affecting inventory are recorded in the "inventory"
and "cost of sales" accounts, as appropriate. Moreover, stock cards
and stock ledgers are maintained. These enable the retrieval of
information on costs and quantities of inventories. sold and on
hand at any given point of However, purchases of supplies
time.
and materials out of the petty cash fund for immediate use or on
emergency cases are charged directly as expense..
The FIFO cost formula and the periodic inventory system
are not used by government entities.
192 Chapter 7
Recognition as an Expense
The carrying amount of an inventory is recognized as expense in
the period it is sold, distributed, exchanged, or consumed. The

write-down of inventbry to its NRV or Current replacement cost,
as appropriate, is also tveognized as expense.
Illustration:
Entity A acquires inventory for on account.
Invento Ileld 'r Sale Invento Ileld or Distribution
Merchandise Inventory Welfare Goods for Distribution 1K

Payable Accounts Pa able
Inventor Held or Afanu •acturin Invento Held or Consunt tion
Raw Materials Inventory 1K Office Supplies Inventory 1K

Accounts Payable 1K Accounts Pa able 1K
Senti-Ex 'andable Pro 'erh
Setni-Expendable Machinery -1K
Accounts Pavable 1K
Entity A recognizes the cost of inventory of P800 as expense.
Invento Held or Sale Invento Held or Distribution

Cost of sales 800 Welfare Goods Expense 800
Merchandise Inventory 800 Welfare Goods for
Distribution
Invento Held or Manu acturin Inventort Held or Consum tion
(see separate entries

Office Supplies Expense 800
Office Su lies Inventor 800
Senti-Ex andable Pro er
Semi-Expendable Machinery
and Equipment Expenses 800
Semi-Expendable Machinery 800
To recognize the issuance of semi-
e ndable machine to end-users
Inventones
193
Invento Held or Manu acturin

Work-Process-lnventory 2K
Cost of Sales 2K
Raw Materials Inventory 800
Direct Labor Finished Goods Inventory 2K
900
To recognize cost of sales of
Manufacturing Overhead 300 finished goods
To recognize transfer of raw
tnaterials, direct labor and tnanufacturing
ozvrhead to yroduction 'rocess
Finished Goods Inventory 2K

Work-Process-lnventory 2K
To recognize transfer of completed
units to nished oods
Inventories costing P200 are found to have a net realizable value of

p150 and current replacement cost ofP180.
Invento Held or Sale Invento Held or Distribution

Impairment Loss-Inventories 50 Impairment Loss-Inventories 20
Merchandise Inventory 50 Welfare Goods for
Distribution 20
Receipt and Disposition of Inventories
Receipt
1, End users prepare the Purchase Request (PR) form to request

for the purchase of items not available on stock. The PR is the
basis in preparing the Purchase Order.
'End users' refer to the individuals who will actually be
using the items. For example, the end users of office supplies
are those who are working in the office; the end users for
cleaning materials are the janitors. As an internal control, only
the appropriate end users are allowed to make purchase
requests for the items they need. It would be inappropriate for
an office clerk to make a purchase request for cleaning
materials.
194
Chapter 7
2. The authorized official prepares the Purchase Order (PO). The

PO is a document issued to the supplier when making a
purcha'se. It indicates the specifications, quantities, and agreed
prices of the items being purchased. The PO serves as the
contract between the entity and the supplier.
Recall that a canvass from at least 3 suppliers is
required for purchases amounting to PI,OOO and above.
3. When the purchased items are delivered, the Property/Supply

Division signs the "received" portion of the Delivery Receipt
(DR) and prepares the Inspection and Acceptance Report
(IAR). The IAR will be used by the Property Inspector in
inspecting and accepting the delivered items.

The Property/Supply Division forwards the DR, IAR
and PO to the Property Inspector.
4. The Property Inspector inspects the conformance of the

delivered items with the specifications in both the PO and DR
and indicates the result of the inspection (i.e., acceptance or
rejection) in the IAR. Rejected deliveries will be returned to
the supplier.
The Property Inspector forwards the copies of DR, IAR

and PO to both the Property/ Supply Division and Accounting
Division for recording.
5. The Property/Supply Division, through the Stock Card

Keeper, records the accepted deliveries in the Stock Card (SC).
The SC shows the quantities of all receipts and issuances Of
inventory, as well as the available balance at any given point

of time.
6. The Accounting Division records the accepted deliveries in the

books of accounts and in the Supplies Ledger Card (SLC). The
SLC shows both the quantities and monetary amounts Of all
receipts and issuances of inventory, as well as the available

balance at any given point of time.
Inventories 195
As an internal control, the SC (maintained by the

property/Supply Division) and SLC (maintained by the
Accounting Division) are periodically reconciled.
7. The Property/Supply Division prepares the Disbursement

voucher (DV) then forwards it, together with supporting
documents, to the Accounting Division for processing of
payment.
Disposition
8. End users prepare the Requisition and Issue Slip (RIS) to
request for the issuance of items available on stock. The Head
of the requesting individual shall approve the RIS. The
approved RIS is then forwarded to the Property/Supply
Division.
9. The Property/Supply Division prepares the Report of Supplies

and Materials Issued (RSMI). The RSMI will be used by the
Stock Card Keeper in updating the SC and the Accounting
Division in journalizing the items issued.
10. The Accounting Division records the items issued in the books
of accounts and updates the SLC.
11. The following are other documents used in the disposition of
inventories:
a. Waste Materials Report — prepared by the Property or
Supply Custodian to report wasted materials, such as
destroyed spare parts and other spoilages.
b. Report on the Physical Count of Inventories — used in
reporting the results of physical counts. It shows the
balance of inventory, as well as any shortages or overages.
c.
Report of Accountability for Accountable Forms — used to
report the movement and status of accountable forms in
the possession of an officer.
196 Chapter 7
d. Inventory Custodian Slip — prepared when issuing semi-

expendable property.
Chapter 7 Summary:
The inventories of government entities include the following:

Inventory Held for Sale, Inventory Held for Distribution (e.g.,
welfare goods held for distribution), Inventory Held for
Manufacturing, Inventory Held for Consumption (e.g., office
supplies), and Semi-Expendable Property (PPE-like items

below the P15,000 capitalization threshold for PPE).
Goods held for sale are subsequently measured at the Lower of
Cost and NRV while goods held for distribution are subsequently
measured at the Lower of Cost and Current replacement cost.
• The FIFO cost formula and the Periodic inventory system are
not used b overnment entities.

Inventories 197
PROBLEMS

1. According to the GAM for NGAs, inventories of government
entities are subsequently measured at net realizable value or
current replacement cost depending on whether the inventory
is classified as held for sale or held for distribution.
2. According to the GAM for NGAs, purchases of machinery,

equipment, fumiture and fixtures and similar items below the
PIO,OOO capitalization threshold for PPE are recorded as
inventories.
3. Relief goods, office supplies, equipment and furniture and

fixture are items that may appropriately be recorded as
inventories by a govei•nment entity.
4. The GAM for NGAs allows government entities to use the

FIFO cost flow formula.
5. The GAM for NGAs allows government entities to use a
periodic inventory system.
6.
The specific identification cost formula is not available for use
by government entities, according to the GAM for NGAs.
7. The Purchase Request (PR) form is prepared when end users

request for the issuance of items of inventory that are available
on stock.
If the beginning balance of inventory is P50, the net purchases

are P 100 and the cost of goods sold is P30, the ending
inventory must be P120.

j.
198 Chapter 7
Fact pattern
Entity A, a government entity, sells eggs. At the start of the
period, Entity A's inventory consisted of one (1) red egg with a
carrying amount of P2. During the period, Entity A acquired one

(1) brown egg for P3 and one (1) blue egg for P4. Entity A sold the
brown egg during the period.
9. Under the Specific identification cost formula, Entity A's cost

of sale is P2.
10. If the eggs are ordinarily interchangeable, Entity A's cost of
sale is P2.5, assuming the sale occurred only after all the
purchases were made.

1. Entity A, a government entity, purchases inventories. To
record a purchase, Entity A would most likely debit the (an)
a. Inventory account c. Expense account
b. Purchases account d. a orb
2. Entity A, a government hospital, acquires medicines to be sold

in its pharmacy. Entity A would record the medicines
acquired as
a. Semi-Expendable Property
b. Inventory Held for Consumption
c. Inventory Held for Distribution
d. Inventory Held for Sale
3. Entity A, a government entity, purchases relief goods which

are to be held on standby, ready to be distributed when a
calamity strikes. Entity A would most likely classify the goods

purchased as
a. Inventory Held for Consumption
b. Inventory Held for Distribution
c. Purchases
d. None of these, only a note disclosure shall be made
Inventories
199
4.
According to the GAM for NGAs, this shall be used for large
numbers of items of. inventory that are ordinarily
interchangeable.
b. FIFO
c. Weighted average cost applied in a periodic inventory

system
d. Weighted average cost applied in a perpetual inventory

system
e. Any of these as a matter of accounting policy choice
5. This refers to the cost an entity would incur to acquire an asset

on the reporting date.
a. Net realizable value c. Current replacement cost
b. Fair value d. Present value
6. Which of the following inventories of a government entity

would be subsequently measured at the lower of cost and
current replacement cost?
a. Inventories of rice that are held for sale
b. Medicines being sold by a government-owned pharmacy

c. Books to be distributed to students in public schools
d. Forest products held for sale
7. Which of the following events or transactions would not lead

to the recognition of the cost of inventory as expense?
a. The inventory is written down.

b. The inventory is distributed for free.
c. The inventory is exchanged for dissimilar inventory.
d. The inventory is consumed in the manufacturing process.
The accounting division of a government entity uses this -to

record and monitor the movements and balances of
inventories.
c. Journal Entry
a. Stock Card
d. Special Journal
b. Stock Ledger Card
200 Chapter 7
9. Which of the following statements correctly differentiates the

Stock Card from the Stock Ledger Card?
a. The Stock Ledger Card is maintained by the Budget
Division while the Stock Card is maintained by the
Accounting Division.
b. The Stock Card is subject to audit by the COA while the
Stock Ledger Card is not.
c. The Stock Card shows quantities only while the Stock

Ledger Card shows monetary balances only.
d. The Stock Card shows quantities only while the. Stock
Ledger Card shows quantities as well as monetary
amounts.
10. This document is prepared when end users request for the
issuance of inventories that are available on stock.
a. Purchase Requisition Form
b. Custodian Inventory Slip
c. Purchase Order
d. Requisition and Issue Slip

1. Entity A, a government entity, purchases inventory to be held
for sale in the ordinary course of activities. Which of the
following is the correct entry to record the purchäse?
a. Merchandise Inventory xxx
b. Purchases xxx
c. a or b depending on the accounting policy being used
d. none, a government entity cannot hold inventories for
sale; only for consumption.

202 Chapter 7
4. How much is ending inventory?

a. 116,382 c. 117,300
b. 116,495 d. Any of these.
5. How much is the cost of sale?

a. 207,805 c. 207,000
b. 207,918 d. Any of these.

1. Entity A,government entity, purchases furniture and
a
fixtures amounting to P14,000. Entity A would most likely
record the purchase as

a. Property, Plant and Equipment
b. Inventory Held for Consumption
c. Inventory Held for Manufacturing
d. Semi-Expendable Property
2. Accountable forms such as pre-printed forms used in
government transactions are most likely to be classified by a
government entity as
a. Inventory Held for Consumption
b. Inventory Held for Sale
c. Semi-Expendable Property
d. Not considered inventory, according to the GAM for
NGAs
3. Inventories are initially measured at cost and subsequently

measured at
a. the Lower of Cost and Net realizable value for goods held
for sale
b. the Lower of Cost and Current replacement cost for goods
held for distribution.

c. a and b
d. cost
Inventories
203
Which of the following cost formulas is not available for use

by government entities?
b. FIFO c. Weighted Average
d. All of these are available
5.
The GAM for NGAs requires the use of which of the following
inventory systems?
a. Perpetual inventory System c. a or b

b. Periodic inventory system
d. none of these
6.
Government entities record purchases of inventories
a. in an inventory account
c. a or b
b. in the Purchases account
d. as expenses
7.
Which of the following may be included as cost of inventory?
a. freight-in under a freight collect, FOB destination sale
term
b. trade discounts
c. cost of insurance while the goods are in transit

d. advertisement cost that resulted to the resale of inventory
purchased
8. Arrange the following in the sequence they are used in the

requisition and receipt of inventories by a government entity
I. Inspection and Acceptance Report (IAR)
II. Disbursement Voucher (DV)
Ill. Purchase Request (PR)
Journal entry
V. Purchase Order (PO).
VI. Stock Card (SC)
c. 111, V, 1, 11, VI and IV

a. 111, V, 1, VI, IV and 11
d. V, 111, 1, 11, VI and IV
b. 111, V, 1, IV, VI and 11
204 Chapter 7
9. This is maintained in the Property/Supply Division to record

the movements of inventories.
a. Stock Card (SC)
b. Property/Supply Card (PSC)
c. Supplies Ledger Card (SLC)
d. Magic card (MC)
10. This is used to report wasted materials, such as destroved

spare parts and other spoilages.
a. Wasted Stocks Card (WSC)
b. Waste Materials Report
c. Report on the Physical Count of Inventories
d. Inventory Custodian Slip
Agriculture 205
Chapter 8
Agriculture
Learning Objectives
1. Differentiate between the following: biological assets,
agricultural produce and inventory.
2. State the initial and subsequent measurements of biological
assets and agricultural produce.
Introduction
Agriculture means farming or the process of producing crops and

raising livestock. In this chapter, we will learn the accounting
principles used for assets, liabilities, income and expenses

resulting from agricultural activities.
Agricultural Activity — is the management by an entity of the
biological transformation and harvest of biological assets for sale,

including exchange or non-exchange transactions, or for
conversion into agricultural produce, or into additional biological
assets.
Examples of agricultural activities include: raising

livestock, forestry, annual or perennial cropping, cultivating
orchards and plantations, floriculture, and aquaculture (including
fish farming).
The following are the common features of .agricultural

activities:
a. Capability to change — living animals and plants are capable of
biological transformation;
b. Management of change — management facilitates biblogical
transformation by enhancing, or at least stabilizing, conditions
necessary for the process to take place. Such management
distinguishes agricultural activity from other activities. For
206 Chapter 8
example, harvesting from unmanaged sources (such as ocean

fishing and deforestation) is not agricultural activity; and
c. Measurement of change — the change in quality or quantity
brought about by biological transformation or harvest is
measured and monitored as a routine management function.
Biological Transformation — comprises the following processes that
cause qualitative or quantitative changes in a biological asset:
I. Asset changes through:

a. Growth — is an increase in quantity or improvement in
quality of an animal or plant.

b. Procreation — is the creation of additional living animals or
plants.
c. Degeneration — is a decrease in the quantity or
deterioration in quality of an animal or plant.

II. Production of agricultural produce.
Biological Asset — is a living animal or plant
Agricultural Produce — is the harvested product of the entity's

biological assets. "Harvest" is the detachment of produce from a
biological asset or the cessation of a biological asset's life
processes.
Examples:
Products that are the

Biological assets Agricultural produce result of processing
a er harvest
Trees in a Felled trees
Logs, Lumber
lantation forest
Plants Harvested palay Rice

Harvested cane
Sugar
Corn
Corn Flour, Corn Starch
Cotton
Thread, Clothing
Agriculture
207
Dairy cattle Milk

Cheese
Sheep wool
Yarn, Carpet
pigs Carcass
Bushes Leaf
Sausages, Cured hams
Tea, Cured tobacco
Vines Grapes
Wine
Fruit trees
Picked fruit
Processed fruit
Recognition
A biological asset or agricultural produce is recognized when it
meets the asset recognition criteria, including the reliable

measurement of its fair value or cost.
Measurement
Biological assets are initially and subsequently measured at fair
value less costs to sell. The gain or loss arising from initial
measurement and subsequent changes in fair value less costs to

sell are recognized in surplus or deficit.
Biological assets whose fair value cannot be reliably
determined on initial recognition are initially measured at cost
and subsequently measured at cost less accumulated depreciation and

Agricultural produce is initially measured at fair value less costs to

sell at the point of harvest. This will be the deemed cost when
subsequently measuring the agricultural produce using the
measurement basis for inventories or other basis.
The gain arising from the initial measurement is
recognized in surplus or deficit.
Costs to Sell — are the incremental costs directly attributable to

the disposal of an asset, excluding finance costs and income
taxes.
Chapter 8
208
Determination of Fair value

a. Fair value is determined as follows:
xx
Quoted price in an active market
Less: Transport costs (xx)
Fair value
XX
Active Market — is a market in which all the following
conditions exist:
a. the items traded in the market are hömogeneous;
b. willing buyers and sellers can normally be found at
any time; and

c. prices are available to the public.
If there are more than one active markets, the entity shall use
the price in the market expected to be used.
If there is no active market, the entity shall estimate the
market price based on one of the following:

i. The most recent market transaction price, provided that there is
no significant change in economic circumstances between
the date of that transaction and the reporting date;
ii. Market prices for similar assets with adjustment to reflect
differences;
iii. Sector benchmarks, such as the value of an orchard expressed
per export tray, bushel, or hectare, and the value of cattle
expressed per kilogram of meat; and

iv. Present value of expected net cash flows from the asset
discounted at a current market-determined rate, in
circumstances where market-determined prices or values

are not available for a biological asset in its present
condition.
Estimates of cash flows exclude finance costs, taxes
and costs of reestablishing biological assets after harvest
(e.g., the cost of replanting trees in a plantation forest after
harvest).
Agriculture 209
contract prices are irrelevant when determining fair value.
Transport costs refer to all costs necessary in getting the asset

to the market for the sale.
b. The determination of fair value may be facilitated by grouping

biological assets or agricultural produce according to
significant attributes, e.g., by age or quality.
c. Cost may sometimes approximate fair value, particularly

when:
i. Little biological transformation has taken place since
initial cost incurrence (e.g., seedlings planted immediately
prior to reporting date); or
ii. The impact of the biological transformation on price is not
expected to be material (e.g., the initial growth in a 30-year
pine tree plantation production cycle).
d. Biological assets attached to land (e.g., trees in a plantation
forest) may not have a separate market but an active market

may exist for the combined assets (i.e., biological assets, raw
land, and land improvements) as a package. In such case, the
fair value of the raw land and land improvements may be
deducted from the fair value of the combined assets to arrive
at the fair value of the biological assets.
e. A biological asset that is previously measured at fair value less

costs to sell shall be measured at fair value less costs to sell
until it is disposed.
210
Chapter 8
Disclosures
The following are the peculiar disclosures related to agriculture:

a.
The aggregate gain ot loss on initial recognition of biological
assets and agricultural produce and from the change in fair
value less costs to sell of biological assets.
b.
Consumable and Bearer biological assets and biological assets
held for sale and held for distribution at no charge or for a
nominal charge.
Consumable Biological Assets — are those that are to be
harvested as agricultural produce or to be sold or
distributed as biological assets. Examples: livestock
intended for production of meat, annual crops like maize

and rice, and trees being grown for lumber.
Bearer Biological Assets — are those that are self-generating
and are used repeatedly for more than one year.
Examples: dairy cattle held for the production of milk,
fruit trees, and trees from which firewood is harvested

while the tree remains.
c. Mature and immature biological assets
Mature Biological Assets — are those that have attained
harvestable specifications (for consumable biological

assets) or are able to sustain regular harvests (for bearer
biological assets).
d. The amount of change in fair value less costs to sell due to
physical changes and due to price changes.
Illustration 1: Journal entries
a. Entity A purchases five breeding stocks at 93,000 each, equal

to the fair value less costs to sell (FVLCS) at the acquisitiOn
date. The journal entry is as follows:
Agriculture 211
Date Breeding Stocks 15,000

Cash in Bank-Local Currency, Current
Account 15,000
b. Ten breeding stocks are born. The FVLCS on date of birth is
P2,000 each. The journal entry is as follows:
Date Breeding Stocks 20,000

Gain on Initial Recognition of Biological
Assets 20,000
Illustration 2: (Adapted from GAM for NGAs, Chapter 11, Sec. 12)
On January 1, 20x1, Entity A has five 2-year old breeding stocks
with total carrying amount of P25,000.
The following transactions occurred during the period:

a. On July 1, 20x1, ten breeding stocks were born. The FVLCS on
this date is P2,000 each.
b. On July 1,two 2-year old breeding stocks were

20x1,
purchased for 95,100 each, equal to the FVLCS on this date.
c. On December 31, 20x1, three breeding stocks were bom. The
FVLCS on this date is P2,100 each.
The FVLCS on December 31, 20x1 are as follows:

Age FVLCS
new born P2,100
0.5 yr. old P2,150
2 yrs. old P5,200
2.5 yrs. old P5,400
3 yrs. old P5,700
Requirements: Compute for the change in FVLCS (a) due to price
change and (b) due to physical change.
Solu tions:
212 Chapter 8
Requirement (a): Due to Price Change
Formula:
(FVLCS, end. Age beg.) - (FVLCS, Age beg.) x Qty.
FVLCS No. of animals

FVLCS of 2 yrs. of 2 yrs.
old on Dec. 31 old on Jan. 1 in the group
Asset Grou n einFVLCS
From beg. (2 yrs.; 2 yrs.)

(P5,200 - P5,OOO) x 5 1,000
Born on July 1 (0 yr.; 0 yr.) (P2,100 - P2,OOO) x 10 1,000
Purchased on July 1 (2 yrs.; 2 yrs.) (P5,200 - P5,100) x 2 200
Born on Dec. 31 (0 yr.; 0 yr.) (P2,100 - P2,100) x 3
Change in FVLCS due to Price Change 2,200
Requirement (b): Due to Physical Change
Formula:
(FVLCS, end. Age end.) - (FVLCS, end. Age beg.) x Qty.

+ FVLCS of newborn at date of birth
FVLCS of 3 yrs. FVLCS of 2 yrs.

old on Dec. 31 old on Dec. 31
Asset Grou Chan e in FVLCS

('5,700 - P5,200) x 5 2,500
From beg. (3yrs.; 2yrs.)
Born on July 1 (0.5 yr..; 0 yr.) (2,150 - 2,100) x 10 500
Purchased on July 1 (3yrs.; 2yrs.) (P5,400 - P5,200) x 2 400
Born on Dec. 31 (0 yr..; 0 yr.) (2,100 - 2,100) x 3

FVLCS of new born on July 1 (P2,000 x 10) 20,000
FVLCS of new bom on Dec. 31 (P2,100 x 3) 6,300
Change in FVLCS due to Physical Change 29,700

Agriculture 213
Chapter 8 Summary:
Biological Asset — is a living animal or plant.

Agricultural Produce — is the harvested product of the entity's
biological assets. An agricultural produce subjected to post-

harvest processing is inventory.
Biological assets are initially and subsequently measured at fair
value less costs to sell. Gain or loss arising from measurement
are recognized in surplus or deficit.
Agricultural produce is initially measured at fair value less
costs to sell at the point of harvest.
Fair value = Quoted price in an active market less Transport
costs
f there are more than one active markets, the entity shall use
the rice in the market ex ected to be used.
PROBLEMS
PROBLEM 8-1: TRUE OR

l. Living onin1Ålh and
biological
2. Biological initially
fair value less costs to hell
3. Agricultural produce iH foil'
only at the point of harveht
4. An essential elejnent of
management of the biological Oj
assets.
5. Entity A's dairy cattle gave birth to a calf, fair
costs to sell of the new born calf is A recogni//+t.,
a gain of froin the initial recognition of the calf,
6. A loss can arise from the initial measurement of a biological
asset.
7. Fair value is quoted price in an active market less transaction

costs.
8. Entity A acquires a biological asset for P 1()(), equal to fair
value, and incurs transaction cost of Pl() on the purchase, Jf
the asset's costs to sell is P2(), Entity A will recognize a loss Of
P30 on the initial recognition of the purchased asset.
9. Entity A recognizes a gain of from the change in FVLCS

of its biological assets during the period. If the change in
FVLCS due to price change is P7(), the change in FVLCS due to

physical change must be P40.
Agriculture
215
10. If there are more than one active markets for a biological asset,
the entity shall use the price in the market expected to be used
when determining fair value.
pROBLEM 8-2: MULTIPLE CHOICE

1.
for NGAs, a biological asset is
a. an animal or plant
c. a living animal Or plant
b, an asset used in farming
d. a harvested product
2.
The common features of agricultural activities include all of
the following except
a. capability to change
c.measurement of change
b. management of change d. wind of change
3.
Which of the following is an agricultural produce?
a. carabao c. extra rice
b. harvested palay d. powdered milk
4.
According to the GAM for NGAs, biological assets are
Initial measurement Subsequent measurement
a. fair value less costs to sell fair value less costs to sell
b. cost cost less accumulated
depreciation
c. cost cost less accumulated
depreciation and
impairment losses
d. fair value less costs to sell cost
Which of the following are not considered costs to sell?

a. commissions to brokers
b. leviesby regulatory agencies and commodity exchanges
c. transfer taxes and duties
d. transport costs
Chapter 8
216
6. According to the GAM for NGAs, if there is no active market

for a biological asset
a. the entity shall measure the biological asset at cost less
accumulated depreciation.
b. the entity shall measure the biological asset at cost less
accumulated depreciation and accumulated impairment

losses.
c. the entity shall use a contract price in determining the fair
value.
d. the entity shall estimate the market price using the
guidance set forth in the GAM for NGAs.
7. Agricultural produce after the point of harvest is accounted
for
a. Inventory c. Prepaid assets

b. PPE d. Investment property
8. The carrying amount of a group of biological assets of Entity
A is PIOO,OOO before any year-end adjustment. If the year-end

fair value is P120,000 while the year-end estimate of costs to
sell is P5,000, which of the following statements is correct?

a. Entity A will recognize a gain of P 15,000 in surplus or
deficit.
b. Entity A will recognize a gain of 915,000 directly in equity.

c. Entity A will recognize a gain of 910,000 in surplus or
deficit.
d. Entity A will recognize a gain of P25,000 in surplus or
deficit.
9. Which of the following need not be disclosed in relation to the

accounting for biological assets?
a. Consumable and bearer biological assets
b. Mature and immature biological assets
c. The amount of change in fair value less costs to sell due to
physical changes and due to price changes

d. The gain or loss on initial recognition of agricultural
produce separately from that of biological assets
Agrt
•culture 217
10. Entity A is determining the measurement of its biological

assets at the end of the period. Entity A's biological assets
consist of trees in a plantation forest. There is no separate
active market for these trees. However, Entity A was able to
gather the following information:
FVLCS of land, land improvements and trees as a package,

PIOM.
FVLCS of land, P8M.
FVLCS of land improvements, P500,000.
How much is the valuation of the trees in Entity A's year-end

statement of financial position?
c. 1,500,000

1. Living animals and plants are accounted for as biological
assets
a. only if they are harvested for sale.
b. only if they relate to agricultural activity.
c. in all cases.
d. all of these.
2. The essential element of an agricultural activity is

a. the management of the biological transformation of
biological assets.
b. the assets are alive.
c. it involves harvesting activity.
d. the conversion of raw materials into finished goods.
3. Which of the following is a biological asset?

c. Fruit cocktail
a. Land used in farming
d. Trees in a plantation forest
b. Picked fruits
Which of the following statements is correct regarding the
measurement of assets related to agricultural activities?

218 Chapter 8
a. Biological assets are initially and subsequently measured

at fair value.
b. No gain or loss shall be recognized on the initial
recognition of a biological asset.

c. Agricultural produce is initially and SUbsequent1y
measured at fair value less costs to sell.
d. The gain or .10ss arising from the initial measurement of
biological asset or agricultural produce is recognized in
surplus or deficit.
5. According to the GAM for NGAs, biological assets whose fair

value cannot be reliably determined on initial recognition are
Initial measurement Subsequent measurement
a. fair value less costs to sell fair value less costs to sell
b. cost cost less accumulated
depreciation
c. cost cost less accumulated
depreciation and
impairment losses
d. fair value less costs to sell cost
use the following information for the next three questions:
A group of Entity A's biological assets has a carrying amount of
PIOO,OOO before year-end adjustments. Information at year-end is
as follows:
Active Market #1 Active Market #2
Quoted rice m 30,000 Quoted rice P135,ooo
Trans ort costs 10,000 Trans ort costs 12,000
Costs to sell 2,000 Costs to sell
3,000
6. If Entity A expects to transact in Active Market #1, how much

is the fair value?
a. 130,000 c. 118,000
b. 120,000 d. 123,000
Agriculture
219

is the carrying amount of the biological assets in the year-end
statement of financial position?
a. 135,000 c. 120,000
b. 132,000 d. 123,000

is the gain or loss from the year-end remeasurement?
a. 18,000 c. 32,000
b. 28,000 d. 23,000
use the following information for the next two questions:

On January 1, 20x1, Entity A has one I-year old biological asset
with carrying amount of PI,OOO.
The following transactions occurred during the period:

a. On July 1, 20x1, one I-year old biological asset is acquired for
PI,IOO, equal to the FVLCS on this date.
b. On October 1, 20x1, one biological asset is born. The FVLCS of
a newborn on this date is P500.
The FVLCS on December 31, 20x1 are as follows:
Age FVLCS
new born P600
3 mos. old P800
1 yr. old Pl,200
1.5 yr. old Pl,500
2 yrs. old P2,ooo
9, How much is change in FVLCS due to price change?

a. 400 c. 1,800
b. 800 d. 2,400
10• How much is change in FVLCS due to physical change?

a. 600 c. 1,600
b. 800 d. 1,800
Chapter 9
220
Chapter 9
Investment Property
Learning Objectives
1. Define investment property and give examples.
2. State the initial and subsequent measurements of an
investment property.
3. Account for the impairment of investment property, and the
reversal thereof.
Introduction
Investment Property — is land and/or building held for rentals or
capital appreciation. It is not held for use in the production or
supply of goods or services, for administrative purposes, or sale in
the ordinary course of business.
Examples of investment property:

a. Land held for long-term capital appreciation rather than for
short-term sale in the ordinary course of operations;

b. Land held for a currently undetermined future use;
c. A building owned by the entity (or held by the entity under a
finance lease) arhd leased out under one or more operating
leases on a commercial basis;

d. A building that is vacant but is held to be leased out under
one or more operating leases on a commercial basis to external
parties;
e. Property that is being constructed or developed for future use
as investment property; and
f. Significant portion of a property that is held to earn rentals or
for capital appreciation rather than to provide services, and

insignificant portion that is held for use in the production or
supply of goods or services or for administrative purposes,

Investment Property 221
The following are items not considered as investment property:

Biological assets related to agricultural activity;
a.
b.
Mineral rights and mineral reserves such as oil, natural gas
and similar non-regenerative resources;
c.
property held for sale in the ordinary course of operations or
in the process of construction or development for such sale;
d. property being constructed or developed on behalf of third
parties;
Owner-occupied property, including:
i. Property held for future use as owner-occupied property;
ii. Property held for future development and subsequent use
as owner-occupied property;
iii. Property occupied by employees; or
iv.Owner-occupied property awaiting disposal.
f.
Property that is leased to another entity under a finance lease;
Property held to provide a social service and which also

g.
generates cash inflows;

h. Property held for strategic purposes; and,
i. Property held for use in the production or supply of goods or
services or for administrative purposes:
Initial Measurement
An investment property is initially measured at cost. The
measurement of cost depends on the mode of acquisition.
Modes of Acquisition
l. Cash purchase — the cost of an invesment property acquired
through cash purchase comprises the purchase price and any
direct costs necessary in bringing the asset to its intended
Condition, e.g., professional fees for legal services and
property transfer taxes.

Chapter 9
Example:
Entity A purchases land to be held for capital appreciation for
P 1,000,000. Entity A pays P80,000 for legal services and

transfer taxes related to the acquisition.
1,080,000
Date Investment Property, Land
(MDS), Regular
To recognize the purchase of investtnent
ro 'ert
2. Installment purchase — the cost of an investment property

acquired through installment purchase is the cash price
equivalent. The difference between this amount and the total
payments is recognized as interest expense over the period of

credit.
3. Non-exchange transaction — the cost of an investment property

acquired through a non-exchange transaction is the fair value
at the acquisition date.
Example:
Entity A receives an unconditional donation of land with fair
value of
Date Investment Property, Land 1,000,000

Income from Grants and Donations
in Kind
To reco nize recei to donated land
4. Self-construction — the cost of a self-constructed investment

property includes the costs of direct materials, labor, and
construction overhead. The cost of wasted materials, labor or
other resources incurred in constructing the property are
recognized as expense.
Construction costs incurred are initially recorded in
the "Construction in Progress" account pending the

Investment Property
223
completion of the investment property. Upon completion, the

construction costs are reclassified to the "Investment
Property" account.
The cost of an investment property does not include the following:

a. Start-up costs, unles? they are necessary to bring the property
to the condition necessary for be capable of operating in
it to
the manner intended by management;
b. Operating losses incurred before the investment property
achieves the planned level of occupancy; or
c. Abnormal amounts of wasted materials, labor or other
resources incurred in constructing or developing the property.
Subsequent Measurement
Investment properties are subsequently measured under the cost
model. Under this model, investment properties are measured at
cost less accumulated depreciation and accumulated impairment

losses.
The fair value model, which is available to business
entities, is not allowed for government entities.
Transfers To or From
Investment Property
Transfers to or from investment property shall be made only
when there a change in use, as evidenced by the following:
is
Commencement of owner-occupation, for a transfer from

investment property to owner-occupied property;
b.
End of owner-occupation, for a transfer from owner-occupied
property to investment property;
Commencement of an operating lease (on a commercial basis)
to another party, for a transfer from inventories tq investment
property; or
Commencement of development with a view to sale, for a
transfer from investment property to inventories.

224 Chapter 9
A government entity accounts for transfers to or from
investment property at cost. Accordingly, no gain or loss shall
arise from the transfer, except when the transferred asset is
impaired, in which case, impairment loss shall be recognized first
before making the reclassification.
Illustration 1: Transfers to Investment Property
Case A: From PPE to IP

Entity A transfers a building with a historical cost of to
investment property. At the date of transfer, the building has an

accumulated depreciation of P400,000 and an accumulated
impairment losses of PIW,OOO.
500,000
Date Investment Property, Buildings
Accumulated Impairment L. — Buildings 100,000
Buildin s 1,000,000
Case B: From Inventories to IP

Entity A transfers a building held as inventory with a carrying
amount of PI,OOO,OOO to investment property.
Date Investment Property, Buildings

Merchandise Invento
Illustration 2: Transfers from Investment Property
case A: From IP to PPE

Entity A transfers a building with a historical cost of to
owner-occupied property. At the date of transfer, the investment
property has an accumulated depreciation of P400,000 and an

accumulated impairment losses of PIOO,OOO.
Date Buildings
500,000
Accumulated Depreciation — I.P., Buildings 400,000
Accumulated Impairment L. — I.P., Bldgs. 100,000
Investment Pro e , Buildin s
Case B: From IP to Inventories
Entity A
decides to redevelop the building referred to in Case A
above with the view of subsequent sale.
Date Merchandise Inventory 500,000

Accumulated Depreciation — I.P., Buildings 400,000
Accumulated Impairment L. I.P., Bldgs. 100,000
Investment Pro ert , Buildin s
Derecognition
An investment property is derecognized when it is disposed or
when it is permanently withdrawn from use and no, future
economic benefits or service potential is expected from its
disposal.
When an investment property is derecognized, the
difference between the net disposal proceeds (if any) and its
carrying amount is recognized as gain or loss in surplus or deficit.
Impairment
An asset is impaired if its carrying amount exceeds its recoverable
amount. The excess represents impairment loss which shall be

recognized in surplus or deficit.
Recoverable amount is the higher of an asset's fair value less
costs to sell and value in use.

Value in use is the present value of the estimated future cash
flows expected to be derived from the continuing use of an
asset and from its disposal at the end of its useful life.
226 Chapter 9
At each reporting date, an entity shall assess whether there

is an indication that an asset may be impaired. If such indication
exists, the entity shall estimate the recoverable amount of the
asset. An entity shall consider the following indications of

impairment:
I. External sources of information:

a. Significanf decline in the asset's market value.
b. Significant changes in technological, market, economic, or
legal environment that adversely affect the recoverable
amount of an asset.
c. Increase in market interest rates that adversely affect the
discount rate used in calculating an asset's value in use, and
consequently, its recoverable amount.
II. Internal sources of information

a. Obsolescence or physical damage of an asset
b. Significant changes in the expected use of an asset that
adversely affect its recoverable amount (e.g., the asset
becomes idle, plan to discontinue or restructure the
operation to which an asset belongs, plan to dispose of the

asset earlier than expected, and reassessment of an asset's
useful life from indefinite to finite).

c. Cessation of the construction of an asset before it is
completed.
d. Indications that the economic performance of an asset is, or
will be, worse than expected (e.g., the maintenance costs of
the asset are significantly higher than expected, cash inflows

from the asset are significantly lower than expected)
After impairment, depreciation charges on an asset will be

based on its recoverable amount.
Investment'Propcyty
227
Cash Generating Unit
If there is an indication for impairment, recoverable amount is
determined for an individual asset, except when this is not

possible, in which case the recoverable amount of the cash
generating unit where the individual asset belongs is determined.
Cash Generating unit (CGII) is the smallest identifiable group

of assets held with the primary objective of generating a
commercial return that generates cash inflows from
continuing use that are largely independent of the cash
inflows from other assets or groups of assets.
An impairment loss is recognized if the CGU's carrying

amount exceeds its recoverable amount. The impairment loss is
allocated to the individual assets in the CGU on a pro rata basis,

based on their carrying amounts.
In allocating an impairment loss, the carrying amount of

an individual asset shall not bé reduced below the highest of:
a. Its fair value less costs to sell (if determinable);

b. Its value in use (if determinable); and
c. Zero.
Reversal of Impairment
An entity shall assess whether there is any indication that an
impairment loss recognized in prior periods for an asset may no
longer exist or may have decreased. If such indication exists, the
entity shall estimate the recoverable amount of that asset.
In making the assessment, the entity shall consider the
exact opposites of the indications of impairment provided earlier

(e.g., significant increase in the asset's market value — rather than
decline, changes in technological.......that favorably
significant
affect the recoverable amount of an asset — rather than adversely,
etc•)•
Chapter 9
The reversal of impairment shall not result to a carrying

amount in excess of the asset's carrying amount had no
impairment loss been recognized in prior periods.
The reversal Of impairment is recognized in surplus or
deficit in the period of reversal.
Illustration:
On January 1, 20x1, Entity A acquires a building to be held as

investment property for a total cost of The building is
estimated to have a 30-year useful life and a 5% residual value.

Entity A uses the straight-line method of depreciation.
The annual depreciation is P38,000 [(1.2M x 95%) + 301.
12/31/x1 Depreciation-Investment Property 38,000

Investment Pro e , Buildin s 38,000
On December 31, 20x5, Entity A determines that the building is
impaired and makes the following estimates:
Fair value less costs to sell P650,ooo

Value in use P750,OOO
The impairment loss is computed as follows:
Recoverable amount (higher) 750,000

Carrying amount II 2M (38,000 x 5 yrs.))
Impairment loss (260,000)
12/31/x5 Impairment Loss Investment Property 260,000

Accumulated Impairment Losses
Investment Pro e Buildin
260,000
Residual value is revised to 5% of the recoverable amount.

Investment Property
229
The revised annual depreciation for the subsequent periods is

'28,500 [(750K x 95%) + 251.
12/31/x6 Depreciation-Investment Property 28,500

Accumulated Depreciation —
Investment Pro Buildin s 28,500
On December 31, 20x8, Entity A determines an indication that the

impairment loss recognized in the prior period may no longer
exist. Entity A makes the following estimates and computations:
Fair value less costs to sell P800,ooo

Value in use 900,000
The new recoverable amount is P900,000 (higher).
Carrying amount - 12/31/x5 750,000

Accumulated depreciation (28,500 x 3 yrs.) (85,500)
Historical Cost 1,200,000
Accumulated (original) depreciation (38,000 x 8 yrs.) (304,000)

Carrying amount had no impairment loss been
recognized in prior period - 12/31/x8 896,000
The reversal of impairment is computed as follows:

230 Chapter 9
New Recoverable Amount 900,000
Excess is ignored
C.xumlLhreTitüpriNFid 896,000
Difference is gain on
C.A. at date of impairment reversal 664,500
From the graph above, the gain on Reversal of Impairment

Loss is P231500 (896,000 - 664,500).
12/31/x8 Accumulated Impairment Losses — 231,500
Investment Property, Buildings

Reversal of Impairment Losses 231,500
To reco nize reversal o im airment loss
Compensation from third parties

Compensation from third parties for an investment property that
was impaired, lost or given up

be recognized in surplus or
shall
deficit when the compensation becomes receivable.
Illustration:
A building held as investment property was razed by fire. The

building has a historical cost of PI,OOO,OOO and an accumulated
depreciation of P400,000. The building is insured for 9700,000.
• The entry to recognize the loss from the fire is as follows:
Date LOSS of Assets

600,000
Accumulated Depreciation —
Investment o er
231
Investtnent Property
When the insurance claim is approved and becomes

receivable, the entry is as follows:
pate Due from GOCC's 700,000

Other Service Income 700,000
The loss event and the approval of insurance claim are

separate events and therefore are accounted for separately.
Chapter 9 Summary:
Investment Property is land and/or building held for rentals or
capital appreciation.
• Investment property is initially measured at cost and
subsequently measured at costless accumulated depreciation and
intpairntent losses. The fair value model is not allowed for
• Transfers to or from investment property shall be made only
when there is a change in use. A government entity accounts
for transfers to or from investment property at cost.
Accordingly, no gain or loss shall arise from the transfer,
except when the transferred asset is impaired.
• On derecognition of an investment property, the difference
between the net disposal proceeds (if any) and the carrying
amount is recognized as gain or loss in surplus or deficit.
• An asset is impaired if its carrying mnount exceeds its recoverable
amount. Recoverable amount is the higher of an asset's fair value
less costs to sell and value in use.
The reversal of impairment shall not result to a carrying
amount in excess of the asset's carrying amount had no
im airment loss been reco •zed in rior eriods.
Chapter 9
232
PROBLEMS

1. An entity shall capitalize as part of the cost of an investment
property the operating losses incurred before the investment
property achieves the planned level of occupancy
2. According to the GAM for NGAs, government entities may

choose to use either the cost model or the fair value model to
subsequently measure investment properties.
3. According to the GAM for NGAs, an entity shall not
depreciate an asset while it is classified as investment
property.
4. Recoverable amount is the lower of an asset's fair value less
costs to sell and value in use.
5. If an asset's recoverable amount exceeds its carrying amount,
the asset is impaired.
6. An investment property with carrying amount of PIO is
determined to have a fair value less costs to sell of P7 and a
value in use of P8. The impairment loss is P3.
7. An investment property with carrying amount of PIO is sold
for P7. Transaction costs on the sale amounted to Pl. The loss
on derecognition is P4.
8. An investment property that was previously impaired is
determined to have a new recoverable amount of PIO. Right

now, the asset's carrying amount is P7. However, if no
impairment loss had been recognized in the prior year, the
'asset would have a carrying amount of P9 by now. The gain
on reversal of impairment, therefore, is Pl.

9. According to the GAM for NGAs, a government entity shall,

at each reporting date, determine the recoverable amount of
an investment property and compare it with its carrying
amount.
10. An entity need not compute for the value in use of an asset if
the entity has no reason to believe that the value in use

exceeds the fair value less costs to sell.

1. Which of the following is considered an investment property?
a. Owner-occupied property awaiting disposal.
b. Property that is leased to another entity under a finance
lease.
c. Property held for use in the production or supply of goods

or services or for administrative purposes.
d. A building held by the entity under a finance lease and
leased out under one or more operating leases on a
commercial basis.
2. Which of the following would not be reported as investment
property?
a. Property owned by the entity and leased out under one or
more operating leases.
b. Property held by the entity to be leased out under one or
more operating leases
c. Real estate held with an undetermined future use.
d. Property owned by the entity and leased out to another
entity under a finance lease.
3. Which of the following costs may properly be included in the
carrying amount of an investment property?

a. Start-up costs, such as opening costs.
b. Operating losses incurred before the investment property
achieves the planned level of occupancy.
Chapter 9
234
c. Abnormal amounts of wasted materials, labor or
resources incurred in constructing or developing the
property.
d. Accrued taxes prior to acquisition date that the entity
assumes an obligation to pay.
4. Entity A, a government entity, acquires a building to be leased

out under various operating leases on commercial basis. Entity
A incurs the following costs on the acquisition:
Purchase price
Legal services and transfer taxes 10,000
Refurbishments before occupancy 30,000
Occupancy permit fees 25,000
Property taxes after occupancy 8,000
Opening costs (blessing and feng shui) 500,000
The entry to initially recognize the investment property in
Entity A's books of accounts is
a. Investment Property, Land

b. Investment Property, Land
c. Investment Property, Land
d. Investment Property, Land
10,040,000
5. During the period, Entity A, a government entity, decides to
use as an office one of its buildings that has previously been
leased out under various operating leases on commercial

basis. Information on the investment property is as follows:
235
J'tvesttnent Property
Investment property - Building

At the date of change in use, the fair value of the investment

property is P250,000. How much is the gain (loss) on the
transfer?
a. 50,000
b. (50,000) d. A transfer is prohibited.
6. On January 1, 20x1, Entity A acquires a building to be held as

investment property for a total cost of Pl,500,000. The building
is estimated to have a 30-year useful life and a 5% residual
A uses the straight-line method of depreciation.
value. Entity
On December 31, 20x5, Entity A sells the building for
Pl,300,000. How much is gain (loss) on the sale?
a. 35,700 c. 53,700
b. 37,500 d. 75,300
use thefollowing information for the next three questions:

Entity A determines an indication that its investment property
might be impaired. Entity A then gathers the following
information:
Carrying amount of investment property

Fair value less costs to sell 900,000
Following the impairment, Entity A revises its estimate of residual

value to 5% of the iecoverable amount and the remaining useful
life to 10 years.
7. How much is the impairment loss?

a. 120,000 c. 100,000
b. 20,000
Chapter 9
8. How much is the annual depreciation after the impairment?

a. 85.51k)
c. 85,000
d. 95,000
b. 90,000
9. Five years after the impairment, Entity A determines an

indication that the impairment may no longer exist. Entity A
makes the following estimates and computations:
P800,OOO
P750,OOO
Value in use
The investment property would have a carrying amount of
P600,000 by now if no impairment loss had been recognized in

the past.
How much is the gain on the reversal of impairment?

c. 127,500
a. 125,000
b. 129,500
d. 327,500
10. During the period, one of the buildings of Entity A, a
government entity, was completely destroyed by fire. The

building has a historical cost of and an accumulated
depreciation of P400,000. The building is insured for
Which of the following statements is correct?
a.
Entity A reports a net gain of P300,000 from the event in its
year-end financial statements.

Entity A reports a net gain of PIOO,OOO from the event in its
year-end financial statements.

c. Entity A recognizes a loss of 9600.000 but no gain.
d. Entity A shall treat the loss event and the insurance claim
as separate events.
I!ttte5tment Property
237

1.
Which of the following is an investment property?
a. property held to provide a social service and which also
generates cash inflows.
b. Property held for strategic purposes.
Property occupied by employees.
d. Property that is being constructed or developed for future
use as investment property.
2, Which qf the following is not an investment property?

a. Land held for long-term capital appreciation rather than
for short-term sale in the ordinary course of operations.
b. Land held for a currently undetermined future use.
c. A building owned by by the entity
the entity (or held
under a finance lease) and leased out under one or more
operating leases on a commercial basis.
d. Equipment held to be leased out under one or more
operating leases on a commercial basis to extemal parties.
measure an investment property as follows:

Initial Subsequent
a. cost Cost Model or Fair value Model
b.- cost Cost Model
c. fair value Model
Fair value
d. fair value Cost Model of Fair value Model
4. Investment property acquired through donation is initially
measured
a. equal to the carrying amount in the donor's books
b. at the cost to the donor
c. at fair value on acquisition date
d. equal to the costs incurred in transferring title of the
investment property to the entity

238 Chapter 9
5. An entity acquires investment property in exchange for a

long-term noninterest-bearing note. Assuming all of the
following are determinable with sufficient reliability but differ
in amounts, which of them is most likely to be used in the
initial measurement of the investment property?

a. cash price equivalent of the investment property
b. cash price equivalent of the note payable
c. present value of future cash flows on the note payable
discounted at the current market rate
d. face amount of note which is equal to the installment price
6. Entity A acquires an investment property for cash.
Additional costs incurred are as follows:

• Repairs and remodelling before occupancy, P50,000.
• Legal costs of transferring title to the property, P20,000.
• Repairs after occupancy, P15,000.
The investment property is estimated to have a remaining

useful life of 10 years and a residual value equal to 5% of
initial cost. Entity A uses the straight method of

line
depreciation. How much is the carrying amount of the
investment property after one year?
a. 914,850 c. 923,100
b. 968,350 d. 872,100
7. According to the GAM

NGAs, transfers to or from
for
investment property shall be made only when there is a

a. change in management's intention
b. change in use
c. change in business model
d. change in classification
8. During the period, Entity A decides to lease out under various

operating leases on commercial basis one of its buildings that
has previously been used as office building. Information on
the building is as follows:
I'tvestntent Property
239
Historical cost
800,000
At the date of change in use, the fair value of the building is
p250,000. Which of the following is the correct reclassification

entry?
a. Investment Property, Buildings 200,000
Buildings
b. Investment Property, Buildings 250,000
Buildings
Gain on reclassification
50,000
Buildings
Revaluation Surplus 50,000
d. a or c, depending on the entity's accounting policy.
On January 1, 20x1, Entity A acquires a building to be held as

investment property for a total cost of Pl,500,000. The building is
estimated to have a 30-year useful life and a 5% residual value.

Entity A uses the straight-line method of depreciation.
On December 31, 20x5, Entity A determines that the building is

impaired and makes the following estimates:
Fair value less costs to sell P900,OOO

Value in use
Following the impairment, Entity A revises its estimate of residual

value to 5% of the recoverable amount.
240 Chapter 9
9. How much is the impairment loss on December 31, 20x5?

a. 226,500 c. 257,500
b. 326,500 d. 262,500
10. On December 31, 2x10, Entity A determines an indication that

the impairment loss recognized in the prior period may no
longer exist. Entity A makes the following estimates and
computations:
Value in use
How much is the gain on the reversal of impairment?

a. 215,000 c. 75,000
b. 290,000 d. 218,000
Property, Plant and Equipment 241
Chapter 10
Property, Plant and Equipment
Learning Objectives
1. State the initial and subsequent measurements of items of PPE
of government entities.
2. Describe the following and state their peculiar accounting

requirements: Heritage Assets, Infrastructure Assets, and
Reforestation Projects.
3. Account for Borrowing Costs by a government entity.
Introduction
Property, Plant and Equipment are:
a. tangible assets;
b. held for use in the production or supply of goods, services or
program outputs, for rental to others, or for administrative
purposes, and not intended for resale in the ordinary course of

operations; and
c. expected to be used for more than one reporting period
Recognition
An item of PPE is recognized if it meets the definition of a PPE
and the recognition criteria for assets, as well as the capitalization
threshold of P15,000.
The P15,OOO capitalization threshold is the minimum cost an
item should have before it is capitalized as PPE. This threshold is
applied on a per item basis, except as follows:

a, Individual items with values below the threshold but work
together as a group of assets are recognized as PPE if the total
cost of the assets as a group is P15,000 or more (e.g., the costs
Of web servers, routers, modems, and other hardware
242 Chapter 10
comprising a communications network are capitalized as PPE

under the 'communications network' account).
b. Bulk acquisitions of small items of PPE' like library books,
computer peripherals, and small items of equipment are
recognized as PPE if their aggregate cost is P15,000 or more.
Items below the capitalization threshold are recognized as
inventories (i.e., Semi-Expendable Property).
Initial Measurement
PPE are initially measured at cost. The initial cost comprises the
following:
a. Purchase price, including import duties and non-refundable
purchase taxes, after deducting trade discounts and rebates;
b. Direct costs of bringing the asset to the location and condition
necessary for it to be capable of operating in the manner
intended by management; and
c. Present value of Decommissioning and Restoration costs -
Decommissioning costs refer to the costs of dismantling or
uninstalling a PPE at the end of its useful life. Restoration
costs refer to the cost of restoring the site where the PPE is
previously installed. The present value of these estimated

costs are capitalized as cost of the PPE, with a corresponding
credit to a liability account (i.e., 'Other Provisions').
Examples of directly attributable costs:

a. Costs of employee benefits arising directly from the
construction or acquisition of PPE;

b. Costs of site preparation;
c. Initial delivery and handling costs (e.g., freight costs);
d. Installation and assembly costs;
e. Testing costs, net of disposal proceeds of samples generated
during testing; and
f. Professional fees.
Examples of costs that are expensed outright:

a. Costs of opening a new facility.
b. Costs of introducing a new product or service (including costs
of advertising and promotional activities).
c. Costs of conducting business in a new location or with a new

class of customers (including costs of staff training).
d. Administration and other general overhead costs.
Illustration:
Entity A
acquires a scientific equipment on January 1, 20x1.
Information on costs is as follows:
Purchase price, net of trade discounts

Testing costs 30,000
during testing 5,000
Estimated costs of dismantling the equipment at
the end of its 5-year useful 10,000
The current market rate of interest on acquisition date is 10%.
The initial cost of the equipment is computed as follows:
Purchase price, net of trade discounts

during testing (5,000)
PV of dismantling costs (10,000 x PV of 1 @10%, n=5) 6,209
Initial measurement
1/1/x1 Technical and Scientific Equipment 1,051,209

Other Provisions
244
Chapter 10
The provision for dismantling costs is SUbseqUently

measured at amortized cost. The amortization table is provided
below:
Date Interest expense Present value

1/1/x1 6,209
12/31/x1 621 6,830
12/31/x2 683 7,513
12/31/0 751 8,264
12/31/x4 826 9,090
12/31/x5 909 10,000
12/31/x1 Interest Expenses 621

Other Provisions 621
Assume the equipment has a 5% residual value. The

depreciation expense in 20x1 under the straight-line method
would be: P199,730 x 95%) + 51.
Modes of Acquisition
a. Acquisition by Purchase — acquisitions of PPE through purchase
are classified as Capital Outlays(CO) in the budget registries.
Cash discounts, whether taken or not, are excluded from

the initial measurement of an item of PPE. A cash discount
not taken is recognized as "Other Losses."
A PPE purchased under installment basis is initially
measured at the cash price equivalent. The difference
between the cash price and the installment price is
amortized as interest expense over the credit term.

Promotional items acquired in conjunction with the
purchase of PPE are accounted for as follows:

a. If the promotional item is the same as those
purchased, the total acquisition cost is allocated to all
the items acquired including the promotional item.

property, Plant and Equipment
b. If the promotional item is different from the other

items acquired, the initial cost of the promotional item
is its fair value. The purchase price, net of the fair
value of the promotional item, is allocated to the other

assets acquired.
Example:
Entity A acquires 10 pick-up trucks for a total price of

P15M.
Case 1: The supplier provides Entity A one (1) additional

pick-up truck, which is the same as the other pick-up
trucks purchased, as a promotional item.
For individual costing purposes, the- P15M

acquisition cost will be allocated to the 11 pick-up trucks,
i.e., 91,363,636 per pick-up truck (P15M + 11).
Case 2: The supplier provides Entity A one car as

promotional item. The car has a fair value of P500,OOO.
The initial cost of the car is its fair value of
P500,000. The remainder of the purchase price is allocated
to the 10 pick-up trucks, i.e., [(P15M — 500K) + 101
Pl,450,000 per pick-up truck.
• The individual costs of items of PPE acquired at a "lump

sum price" are determined by allocating the "lump sum
price" based on the relative fair values of the items
acquired.
Example:
Entity A
acquires land and building for a lump sum price
of P15M. The land has a fair value of P4M while the
building has a fair value of 912M. The allocation is as
follows:
246 Chapter 10
Fair values Allocation Initial measurements

Land (15M x 4/16)
Building 1200,ooo (15M x 12/16)
• If the individual costs of items of PPE acquired at a "lump

sum price" are indicated in the invoice, the items shall be
recognized at their individual costs as indicated in the
invoice.
Example:
Entity A
acquires a laptop computer and a printer for
PIOO,OOO. The invoice indicates the following individual

costs: P70,000 for the laptop and P30,000 for the printer. In
this case, the laptop and the printer are initially recognized
at their individual costs of P70,000 and P30,000,
respectively.
b. Acquisition by Construction — acquisitions of PPE through

construction are also classified as Capital Outlays (CO) in the
budget registries.
Construction costs incurred are initially recorded in
the "Construction in Progress" account pending the
completion of the asset. Upon completion, the construction

costs are reclassified to the appropriate PPE account.
a. Acquisition through Construction Contracts awarded to
contractors — the cost of PPE acquired through a
construcåon contract is the contract price.
b. Construction by Administration (Self-construction) — the
cost of a self-constructed PPE includes the costs of direct

materials, labor and other construction overheads. The
cost of wasted materials, labor or other resources
incurred in constructing the property are recognized as
expense.
247
Illustration 1: Acquisition through Construction Contract

On January 1, 20x1, Entity A awards a contract for the
construction of a building to Contractor Z. The contract price is
p40M.
Upon awarding the contract, Entity A requires a P4M

performance bond from the contractor.
1/1/x1 Cash-Collecting Officers
Guaranty/Security Deposits 4,000,000

Payable
To recognize receipt of performance
bond om the contractor
1/1/x1 Cash-Treasury/Agency Deposit, Trust

4,000,000
To recognize the deposit of performance
bond to BTr
On February20x1, Entity
1, A makes a 15% advance
payment to the contractor.
2/1/x1 Advances to Contractors
To recognize payment of 150/0 of
contract amount as advances to contractor
(40M x 15%)
On July 31, 20x1, Entity A receives the first progress billing

from the contractor. The progress billing reflects a 50% stage of
completion. Entity A records the progress billing after recoupment
for the advances, based on the stage of completion.
7/31/xl Construction in Progress-Buildings 20,000,000

and Other Structures (40M x 50%)
Advances to Contractors (6M x 50%) 3,000,000
Accounts Payable
To reco ize ro ess billin
248 Chapter 10
On August 8, 20x1, Entity A pays the progress billing after

deductions for the following:
a. 10% retention computed on the billing, net of the reCOUpment
for the advances. This is credited to the "Guaranty/Security
Deposits Payable" account.

b. Pl,200,000 representing withholding tax.
The net payment is computed as follows:

Net billing (Accounts payable)
Retention (10% x 17M)
Withholding tax
Net payment
8/8/x1
Accounts Payable
Guaranty/Security Deposits
Payable
Due to BIR
To recognize payment offirst
ro ess billin
On December 1, 20x1, Entity A receives the final billing

from the contractor.
12/1/x1 Construction in Progress-Buildings 20,000,000

and Other Structures (40M x 50%)
Advances to Contractors (6M x 50%)
Accounts Payable
To reco ize ro ress billin
Entity A charges the contractor 940,000 representing

liquidated damages for the delayed completion.
12/1/x1 Cash-Collecting Officers 40,000

Miscellaneous Income 40,000
To recognize collection of liquidated
dama es
property, Plant and Equipment 249
On December 8, 20x1, Entity A pays the final billing after

retention and P 1,200,000 withholding tax.
12/8/x1 Accounts Payable

Guaranty/Security Deposits
Payable
Due to BIR
To recognize payment offinal
ro ess billin
Entity A reclassifies the construction costs to the

"Buildings" account and settles the performance bond and
retentions after inspection and aeceptance of the completed asset.
12/31/x1
Buildings
Construction in Progress-
Buildings and Other Structures
To recognize turn-over and
acc tanceo buildin
12/31/x1 Guaranty/Security Deposits Payable

To recognize the retunt of the P4M
performance bond and the release of the
P3.4M (1.7M x 2) retentions.
The taxes withheld are remitted to the BIR through Tax

Remittance Advice (TRA) — see discussion in Chapter 3.
Illustration 2: Construction by Administration

Entity A purchases construction materials worth to be
used in the self-construction of a building.
Date
Accounts Pa able
Chapter 10
Entity A issues the construction materials.
Date Construction in Progress-Buildings

and Other Structures
Construction Materials Invento
Entity A incurs labor costs and construction overhead amounång

to
Date Construction in Progress-Buildings

Accounts Pa able
* (See Chapter 3 for accounting entries on the granting of advances for payroll and
its liquidation.)
Entity A reclassifies the construction costs after completion of the

building.
12/31/x1 Buildings
Construction in Progress-
Buildin s and Other Structures
c. Acquisition through Exchange — the measurement of the asset
acquired depends on whether the exchange transaction has

commercial substance or not.
i. With Commercial Substance — an exchange has a
commercial substance if the subsequent cash flows of
the entity change as a result of the exchange. The asset
received is measured using the following order of
priority:
1. Fair value of asset Given up (plus any cash paid or
minus any cash received);

2. Fair value of asset Received; or
3. Carrying amount of asset Given up (plus any cash

paid or minus any cash received)
251
ii.
Lacks Commercial Substance — The asset received is
measured at the:
1. Carrying amount of asset Given up (plus any cash

paid or minus any cash received)
No gain or loss shall arise if the asset received is

measured at the carrying amount of the asset given up (plus
any cash paid or minus any cash received).
d. Acquisition through Non-Exchange Transaction — The asset

acquired in a non-exchange transaction (e.g., donation, grant)
is initially measured at its fair value at the acquisition date.
Those received without condition are recognized

immediately as income (i.e., 'Income from Grants and
Donations in Kind').
Those with condition are initially recognized as
liability (i.e., 'Other Deferred Credits') and subsequently
recognized as income when the condition is met.
e. Acquisition through Intra-agency or Inter-agency Transfers — The

asset acquired from either intra or inter-agency transfer is
measured at the carrying amount of the asset received.

Intra-agency transfers are transfers within the same
agency (e.g., from Central Office to a Regional Office or
Operating Unit, and vice versa.
Inter-agency transfers are transfers between different
agencies (e.g., from BIR to DPWH).
Illustration:
The Regional Office of Entity A receives equipment from the
Central Office. The equipment has a historical cost of PIO,OOO and
accumulated depreciation of P4,000 in the Central Office's books.
252 Chapter 10
Entity A — Regional Office

Entity A — Central Office
(Reci ient)
Equipment 6K Accumulated Surplus (Deficit) 6K
AQrmulated Surplus (Deficit) 6K Accumulated Depreciation 4K
E ui ment 10K
* If the transfer is made in the year the equipment is purchased, the "Subsidy
from Central Office" and "Subsidy to Regional Offices" accounts are used in
lieu of the "Accumulated Surplus (Deficit)" account.
Similar entries are made for inter-agency transfers.
f. Acquisition through Finance Lease — we will discuss this later in
Chapter 13.
Subsequent Expenditures on recognized PPE

Capitalization of costs ceases when the PPE is in the location and
condition necessary for it to be capable of operating in the manner

intended by management. Therefore, costs incurred in using or
redeploying a PPE are not capitalized.

The following subsequent expenditures on PPE are
recognized as expenses:
a. Costs incurred while an item capable of operating in the
manner intended by management has yet to be brought into
use or is operated at less than full capacity.
b. Initial operating losses, such as those incurred while demand

for the item's output builds up.
c. Costs of relocating or reorganizing part or all of the entity/ s
operations.
As a general rule, subsequent expenditures on reco

PPE are expensed. Subsequent expenditures are capitalized only
when it is clear that they meet the recognition criteria for PPE'
including the P15,000 capitalization threshold.
The GAM for NGAs provides the following guidelines
when accounting for subsequent expenditures on recognized PPE:
253
a. Repairs and Maintenance -- these are classified into:

1. Minor repairs — costs of day-to-day servicing of an item of
PPE, necessary to maintain its operating capability. These
are charged as expenses.
2. Major repairs
—
considered 'betterments'
are and are
capitalized. See discussion in 'd' below.
If it is not clear that a cost is a major repair, it shall be

treated as expense.
b. Replacement costs — the cost of replacing a part of an item of

PPE is The carrying amount of the replaced part is
capitalized.
derecognized and recognized as loss on derecognition.
If the carrying amount of the replaced part cannot be
determined, the cost of the replacement part is used as an
indication of what the cost of the replaced part was at the
time it was acquired or constructed.
c. Spare parts and servicing equipment — Minor spare parts are

recognized as inventory and charged as expense when
consumed.
Major spare parts and stand-by equipment are
recognized as PPE when they meet the recognition criteria,
e.g., they are expected to be used over more than one period.
Spare parts and servicing equipment that can only be
used in conjunction with an item of PPE are accounted for as
PPE.
d. Bettennents — are enhancements to the future economic

benefits or service potential of a PPE, such as:
a. an increase in the previously assessed physical output or

service capacity;
b. a reduction in associated operating costs;
c. an extension of the estimated useful life; or
d. an improvement in the quality of output.
254 Chapter 10
Costs of betterments are capitalized (if they meet the
recognition criteria for PPE) and are subsequently depreciated
as follows:
i. Over the remaining useful life, if the betterment increases
the service potential of the asset without extending its
useful life; or
ii. Over the extended useful life, if the betterment extends the
useful life of the asset. The extended period shall not

exceed the original estimate of useful life of the asset.
If the betterment involves the replacement of an

the replacement is accounted for under 'b' above.
If it is not clear that a cost is a betterment, it shall be
treated as expense.
e. Additions and Rearrangements

Additions are modifications which increase the
physical size or function of the PPE. An addition can be:

i. a new unit that is physically distinct from the old unit (e.g.,
a wing of a building); or
ii. an expansion, extension or enlargement of the old unit (e.g., a
new floor to a building).
The cost of an addition that is a new unit is depreciated
over its own useful life while an expansion cost is depreciated
over the shorter of its useful life and the remaining life of the
PPE of which it is part.
Rearrangement is the relocation or reinstallation of an
asset which proves to be less efficient in its original location.
Rearrangement costs are capitalized and depreciated over the

remaining life of the related asset. The carrying amount of the
original installation cost is derecognized and charged as loss
(GAM for NGAs, Chapter 10, sec. 26)
An entity should be very careful when assessing if
rearrangement costs qualify for capitalization as GAM for
NGAs, Chapter 10, Sec. 9 states the following: "Recognition Of

propert , Plant and Equipment
255
costs in the carrying amount of an item of PPE ceases when

the item is in the location and condition necessary for it to be
capable of operating in the manner intended by management.

Therefore, costs incurred in using or redeploying an item are
not included in the carrying amount of that item."
PPE are subsequently measured using the cost model. Under this
model, an item of PPE is measured at its cost less any accumulated
depreciation and any accumulated impairment losses.
— is the systematic allocation

Depreciation of the depreciable
amount of an asset over its useful life.
Depreciable Amount — is the cost of an asset, or other amount
substituted for cost, less its residual value.
Residual Value — is the amount the entity would currently
obtain from disposal of the asset, after deducting the
estimated costs of disposal, were already of the age
if the asset
and in the condition expected at the end of its useful life
Depreciation is recognized as expense unless it forms part

of the carrying amount of another asset (e.g., depreciation of a
factory equipment is included in the carrying amount of
inventory).
Guidelines in depreciating items of PPE:
a. The three factors considered when determining depreciation

are: initial cost, useful life, and residual value.
b• All items of PPE shall be depreciated, except land and heritage
assets.
Depreciation begins when the asset is available for its
intended use. For simplicity, if a PPE becomes available for its
intended use:
i• On or before the 15th of the month — depreciation is computed
at the beginning of that month.
256 Chapter 10
ii. After the 15th of the month — depreciation is computed at th
beginning of the following month.
d. Depreciation ceases when the asset is derecognized or fully
depreciated. Depreciation does not cease when the asset
becomes idle or retired from active use and held for disposal.
e. The straight line method of depreciation shall be used unless
another method is more appropriate. That method is applied
consistently from period to period unless there is a change in
the expected pattern of consumption of those future economic
benefits or service potential,
f. The estimation of the useful life of an asset is a matter of
judgment, based on the entity's experience with similar assets.
As a guideline, PPE shall be depreciated over the following

life spans:
Pro e , Plant and E ui ment Estimated use I Li e

Infrastructure Assets 20 to 50 ears
Buildin s and Other Structures 30 to 50 ears
Machine and E ui ment 5 to 15 ears

Trans ortation E ui ment:
Motor Vehicles 5 to 15 ears
Milita Vehicles 3 to 20 ears
Trains 10 to 20 ears
Aircrafts and Ground E ui t. 10 to 20 ears
Watercrafts 10 to 25 ears
Furniture, Fixtures and Books 2 to 15 ears
Leased assets, excluding land Shorter of the asset's useful life
and lease term, including
extension period if renewal is
ex ected.
Leased Assets Improvements Shorter of the asset's useful life
and lease term, including
ex ected.
257
service Concession Assets

Shorter of the asse€s useful life
and term of service concession
arrangement,
including
ex ected.
Land Improvements
Over the useful life of the asset
to which the improvement was
made or the useful life of the
Improvement if significantly
shorter
Others
2 to 15 ears
(GAM for NGAs, Chapter 10, Sec. 27.f)
g. Residual value shall be at least 5% of cost, unless an entity

determines a more appropriate estimate, subject to the
approval of COA.
h. The residual value and the useful life of an asset shall be

reviewed at least at each annual reporting date and, if
expectations differ from previous estimates, the change(s)

shall be accounted for as a change in an accounting estimate
i. Depreciation shall be recognized on a monthly basis.
Illustration:
Entity A acquires a motor vehicle on July 26, 20x1 for Pl,500,000.
The estimated useful life is 5 years. The motor vehicle is available
for its intended use as at the date of acquisition.
Depreciation starts on August 1, 20x1 because the vehicle is
acquired after July 15.

The monthly depreciation is computed as follows:
1500,ooo
Cost
(75,000)
Residual value (5% x 1,500,000) 1,425,000
Depreciable amount
258 Chapter 10
5
Divide by:
285,000
Annual depreciation
12
Divide by:
23,750
Monthly depreciation
• Monthly depreciation is recognized at the end of each month
starting on August 31, 20x1.
8/31/xl Depreciation-Transportation
23,750
Equipment, Motor Vehicles
Accumulated Depreciation-
23,750
Motor Vehicles
j. Each part of an item of PPE with a cost that is significant in

relation to the total cost of the item shall be recorded and
depreciated separately.
For example, each part of an aircraft (i.e., its engines,
passenger seats, and other parts) shall be depreciated

separately. Each part shall also be assigned a 5% residual
value based on the cost of each part.
Impairment
A PPE is impaired if its carrying amount exceeds its recoverable
service amount or recoverable amount.

Recoverable service amount — is the higher of a non cash-
generating asset's fair value less costs to sell and its value in use.
At each reporting date, an entity shall assess whether there
is an indication that an asset may be impaired. If such indication
exists, the entity shall estimate the recoverable amount of the
asset. An entity shall consider the following indications Of
impairment:
1. External sources of information:

a. Cessation, or near cessation, of the demand for services
provided by the asset.
259
b. Significant long-term changes with an adverse effect on the

entity have taken place during the period, or will take place
in the near future, in the technological, legal, or government
policy environment in which the entity operates.
2. Internal sources of information:
a. Physical damage of an asset.

b. Significant changes in the expected use of an asset that
adversely affect its recoverable amount (e.g., the asset
becomes idle, plan to discontinue or restructure the
operation to which an asset belongs, plan to dispose of the
asset earlier than expected, and reassessment of an assevs
useful life from indefinite to finite).
c. Cessation of the construction of an asset before it is
completed.
d. Indications that the service performance of an asset is, or
will be, significantly worse than expected.
Computation of Value in Use

Value in use ofa cash generating asset — the present value of the
estimated future cash flows expected to be derived from the
continuing use of an asset and from its disposal at the end of
its useful life.
• Value in use ofa non-cash generating asset — the present value of

the asset's remaining service potential.
Value in use can be compu ted using one of the following methods:
a. Depreciated Replacement Cost Approach

Under this approach, value in use is equal to the asset's
replacement cost adjusted for depreciation to reflect the asset's
used condition.
Replacement cost is the cost of repladng or
the asset, whichever is lower.

Chapter 10
260
When determining the replacement cost of an asset, any
overdesign or overcapacity of that asset is ignored

Overdesign refers to features that are unnecessary for the
goods or services the asset provides. Overcapacity refers to

excess capacity over what is needed to meet the demand for
the goods or services the asset provides.
b. Restoration Cost Approach

Under this approach, value in use is equal to the asset's
depreciated replacement cost or depreciated reproduction cost
(whichever is lower) minus estimated restoration cost.

Restoration cost is the cost of restoring the service potential
of an asset to its pre-impaired level.
c. Service units Approach

Under this approach, value in use is equal to the asse(s
depreciated replacement cost or depreciated reproduction cost
(whichever is lower) minus a proportionate reduction to
reflect the reduced number of service units expected from the
asset in its impaired state.
The choice of the most appropriate approach to
measuring value in use depends on the availability of data and the
nature of the impairment:
Indication o im airment Method

a. Significant long-term Depreciated replacement
changes in the cost approach or Service
technological, legal, or units approach, whichever
govemment policy is more appropriate.

environment
b. Significant long-term Depreciated replacement
change in the extent or cost approach or Service
manner of use, including units approach, whichever
cessation or near cessation is more appropriate
of demand
Plant and Equipment
261
c.
physical damage
Restoration cost approach
or Depreciated replacement
cost approach, whichever is
more a ro riate
Illustration: (Adapted from illustration in the GAMfor NGAs)

On January 1, 20x1, Entity A acquires an equipment for P500,000.
The equipment is estimated to have a useful life of 5 years and a
10% residual value.
On December 31, 20x3, Entity A determines an indication

that the equipment is impaired. Entity A then revises the asset's
residual value from 10% to 5% of the initial cost and determines
the following information:

P100,ooo
Replacement cost P300,OOO
Case 1: Depreciated Replacement Cost Appreach

The carrying amount of the equipment as of January 1, 20x3, the
beginning of the period of change (in residual value), is computed
as follows:
Historical cost 500,000

Accumulated depreciation - 1/1/x3 (500K x 90% x 2/5) (180,000)
The depreciation in 20x3, taking into account the change in
residual value is computed as follows:
320,000
Carrying amount - 1/1/x3
(25,000)
Revised Residual value (500K x 5%)
295,000
Revised Depreciable amount 3
Divide by:
98,333
Depreciation - 20x3
262 Chapter 10
The carrying amount of the equipment on December 31
20x3 is computed as follows:
Depreciation - 20x3 (98,333)
The depreciated replacement cost of the equipment will be
computed in a similar fashion as above.
300,000
Replacement cost
Accumulated depreciation - 1/1/x3 (300K x 90% x 2/5) (108,000)
Carrying amount based on replacement cost - 1/1/x3 192,000
Revised Residual value (300K x 5%) (15,000)
177,000
Revised Depreciable amount
3
Divide by:
Depreciation based on replacement cost - 20x3 59,000
Depreciation based on replacement cost - 20x3 (59,000)
Depreciated Replacement Cost - 12/31/x3 133,000
The recoverable service amount is determined as follows:
Value in use (Depreciation replacement cost) 133,000
Fair value less costs to sell 100,000
Recoverable service amount (higher) 133,000
The impairment loss is computed as followe•
Carrying amount - 12/31/x1 (221,667)

Impairment loss - 20x3 (88,667)
263
Case 2: Restoration Cost Approach
Assume the indication of impairment is physical damage to the

equipment. Entity A estimates that it would cost P15,000 to restore
the equipment's service potential to the level before the physical
The value in use is computed as follows:
Depreciated replacement cost (see Case 1 above)

Less: Restoration cost 133,000
Value in use (15,000)

118,000
The recoverable service amount.is determined as follows:
Value in use
118,000
100,000
Recoverable service amount (higher)
118,000

Carrying amount - 12/31/x1
(221,667)
Impairment loss - 20x3
(103,667)
Case 3: Service Units Approach

Assume the indication of impairment is a significant decline in the
expected output of the equipment, which Entity A estimates to be
The value in use is computed as follows:
Depreciated replacement cost (see Case 1 above) 133,000
Multiply by: (100% - 15% reduction)

113,050
Value in use
264 Chapter 10
The recoverable service amount is determined as follows:

100,000
113,050
113,050
Carrying amount - 12/31/x1 (221,667)
Impairment loss - 20x3 (108,617)
After impairment, depreciation charges on an asset will be
based on its recoverable amount.
The principles used in recognizing reversals of impairment loss on
items of PPE are the same as those used for investment property.
See discussions in Chapter 9.
Heritage Assets
Heritage assets are those which have historical, cultural and
environmental significance, and are intended to be preserved for
future generations.
Examples include: historical buildings and monuments,
statues, museum and gallery collections, archeological sites,
national archives, ruins, conservation areas, nature reserves, and

works of art.
The characteristics of heritage assets are:

a. Their value in cultural, environmental, educational, and
historical terms is unlikely to be fully reflected in a financial
value based purely on market price;
b. The law may impose restrictions on their disposal by sale;
265
c. They are often irreplaceable and their value may increase over
time, even if their physical condition deteriorates; and
d. It may be difficult to estimate their useful lives, which in some

cases could be several hundred years.
Heritage assets are measured at cost. If acquired through

non-exchange transaction, the cost is the fair value at the
acquisition date.
Heritage assets are not depreciated, but subject to

impairment. If determinable, a heritage asset's fair value is
disclosed.
However, heritage assets that have future economic
benefits or service potential other than their heritage value are
depreciated similar to the other items of PPE, e.g., a historic
building being used as office.
Heritage assets not recognized in the books of accounts are
recorded in the Registry of Heritage Assets.
Infrastructure Assets
Infrastructure assets include road networks (including facilities,
such as traffic lights and road signage), flood control, sewer, water
and power supply systems, communications networks, railways,

seaports, airports, and the like.
Infrastructure assets have the following additional
characteristics:
a. Part of a system or network;

b. Specialized in nature and do not have alternative uses;
-c. Immovable; and
d. May be subject to constraints on disposal.
Infrastructure assets are accounted for similar to the other
items of PPE, i.e., they are initially measured at cost and
subsequently depreciated.
266 Chapter 10
However, generally, infrastructure assets have no residual
value. In cases where a part of an infrastructure asset has a

residual value, it shall be at least 5% of the cost of that part.
Reforestation Projects
Reforestation refers to the renewal of a forest cover by planting
seeds or young trees.

Reforestation projects are recorded as land improvements
in the books of accounts of the Department of Environment and
Natural Resources (DENR) or other entity concerned.
The initial costs of reforestation projects include the
following:
a. Survey, mapping and planning
b. Nursery operation and seedling production or procurement
c. Plantation establishment (site preparation, hauling of
seedlings and planting)
Initial costs are recorded in the "Construction in Progress-

Land Improvements" account pending the completion of the
project, which normally takes 3 years. Upon completion and turn-
over of the
• project, the costs are reclassified to the "Land
Improvements, Reforestation Projects" account.
Subsequent costs on reforestation projects are accounted
for as follows:
a. Maintenance and protection costs incurred within the
duration of the project, such as construction of fire lines, strip
brushing, replanting, pest control, and patrolling, are
capitalized.
b. Maintenance and protection costs incurred after the turn-over

of the project are charged as repairs and maintenance expense.
c. The cost of replacing trees are expensed where small numbers
of trees are being replaced in any one particular area.
Reforestation projects are not depreciated but subject to

impairment. Impairment loss is recognized when a reforestati011
project is destroyed by a force majeure or fortuitous event beyond
plant and Equipment 267
property,
the control of man (e.g., typhoon, flood, landslide, earthquake,
etc.).
Derecognition
The carrying amount of a PPE is derecognized when it is disposed
or when no future economic benefits or service potential is
expected from the asset.
On derecognition, the difference between the carrying

amount of thé derecognized PPE and the net disposal proceeds, if
any, is recognized as gain or loss in surplus or deficit.
PPE shall be in accordance with the Supply

Disposals of
and Property Management Manual and Sec. 79 of P.D. No. 1445.
Illustration:
Entity A
disposes an old motor vehicle with historical cost of
pl,000,000 and accumulated depreciation of P900,000.
Case 1: Disposal by Sale

Entity A sells the equipment at a net disposal proceeds of P80,000.
Equipment, Motor Vehicles 900,000
Loss on Sale of Property, Plant and
20,000
Equipment
Motor Vehicles
Case 2: Disposal by Donation

Entity A donates the equipment.
Date Donations 100,000
900,000
Equipment, Motor Vehicles
1,000,000
Motor Vehicles
268 Chapter 10
Idle, Fully Depreciated, Unserviceable and Lost PPE

Idle PPE refers to assets that are temporarily taken out of
active use or temporarily abandöned. Idle PPE are not

derecognized but continued to be depreciated because future
benefits are consumed not only through usage but also
through obsolescence and wear and tear.
A PPE is fully depreciated when its carrying amount is equal to

zero or its residual value. Fully depreciated PPE are not
derecognized, meaning the historical cost and aCCUmulated
depreciation are not removed from the books of accounts.
Unserviceable property are those which do not have future
economic benefits or service potential. Unserviceable property

is derecognized. The carrying amount is recognized as
impairment loss. Unserviceable properties are reported in the
Inventory and Inspection Report of Unserviceable Property.
When a PPE is lost, either through theft, fire or other force
majeure, the officer having custody of the PPE shall
immediately notify the COA within 30 days and shall submit

an application for relief, together with supporting evidence. If
warranted by the evidence, a credit for loss shall be allowed.
Failure to do the requirements will not relieve the officer of
liability. (P.D. No. 1445, sec. 73)
The carrying amount of the lost PPE is derecognized
and charged as loss, upon receipt of the Report of Lost, Stolen,

Damaged, or Destroyed Property together with the Notice Of
Loss by the Accountable Officer.

Pending the result of the investigation, the
accountability of the officer shall be established, equal to the

depreciated replacement cost of the lost PPE. If a credit for loss is
subsequently allowed to the officer, the entry to establish the

accountability is simply reversed. If not, the officer shall pay
cash to settle his accountability.
Plant and Equipment
property,
269
In case of a partial loss Of PPE, the loss recognized is equal to
the asse€s carrying amount less the fair value of the remaining
serviceable portion.
Illustration:
Entity A
has an equipment with historical cost of PI,OOO,OOO and
accumulated depreciation of P800,000.
Case 1: Idle or abandonment

The equipment becomes idle.
No entry. The equipment is not derecognized, but continued

to be depreciated.
Case 2: Fully depreciated

The equipment has a residual value of P200,000.
No entry. The equipment is not derecognized, but

depreciation ceases.
Case 3: Unserviceable property

The equipment is found to be unserviceable.
Date 200,000
Impairment loss
Accumulated Depreciation 800,000
E ui ment 1,000,000
Case 4: Lost property

The equipment is lost from theft. The equipment has a depreciated
replacement cost of P250,000.
Date Loss of Assets 200,000

800,000
1,000,000
Equipment
to reco izelosso asset
270 Chapter to
250,000
Date Due from Officers and Employees
Other Deferred Credits
To establish the accountability of
the accou n table officer
Variation 1:
The officer is granted a relief for the loss.
Date Other Deferred Credits

250,000
Due from Officers and Employees
To adjust the officer's accvuntdbility
r the rantin of relie
Variation 2:
The officer is not granted a relief for the loss.
Due from Officers and Employees 250,000
To recognize receipt of pat/tnent front
accountable o Icer for the lost asset
Date Other Deferred Credits 250,000
Miscellaneous Income 250,000
To recognize inconte realized frotn lost
asset due to tnent bl/ accountable officer
In addition to either Variation 1 or 2, the government

collects P50,000 from insurance taken on the lost PPE.

Proceeds from Insurance/ 50,000
Indemnities
To recognize proceeds from insurance
claim
Case 5: Partial loss

The asset is partially damaged. The fair value of the undamaged
portion is P70,000.
pro;grty, plant and Equipment 271
The loss is P130,000 (P200,000 carrying amount less P70,000

fair value of undamaged portion).
Receipt and Disposition of PPE

The procedures in the receipt and disposition of PPE are similar to
those of inventories (see discussion in Chapter 7). Only those that are
culiar to PPE are discussed below:
pe
property Card — used by the Supply/Property Division to

record all movements in items of PPE. It is maintained for
each class of PPE. This is the equivalent of the Stock Card used
for inventories.
b. Property, Plant and Equipment Ledger Card — used by the

Accounting Division to record all movements in items of PPE,
both in quantity and monetary amount. It also shows the
estimated life, depreciation, impairment and other
information on the PPE. This is the equivalent of the Stock
Ledger Card used for inventories.
As an internal control, the PC and PPELC are
periodically reconciled.
c. Property Acknowledgement Receipt used by the

Supply/Property Division to record the issuance of PPE to the
end user. This is based on the approved Requisition and Issue
Slip (RIS) submitted by the requesting individual. The PAR is
renewed every after 3 years or whenever there is a change in
custodianship. This is the equivalent of the Report of Supplies
and Materials Issued used for inventories.
d. Report on the Physical Count of Property, Plant and Equipment —

At the end of each year, the entity shall perform a physical
Count of PPE and prepare this report. This report shall be
Submitted to the COA not later than January 31 of the
following year.
272
Chapter 10
e.
Inventory and Inspection Report for Unserviceable Property — used
to account for all unserviceable property subject to disposal. It
is the basis for derecognizing the unserviceable properties in
the books of accounts.
f.
Report of Lost, Stolen, Damaged or Destroyed Property — used by
the accountable officer to notify the concerned officials of the
lost, stolen, damaged or destroyed property.

Items 'e' and 'f' above are the equivalent of the Waste
Materials Report used for inventories..
g. Property Transfer Report — used to record transfers of property

from one accountable officer to another.
Borrowing Costs
Borrowing costs — are interest and other expenses incurred by an
entity in connection with the borrowing of funds. (PPSAS 5.5)
Examples:
a. Interests on notes, loans, bonds and finance lease payables,
b. Amortization of discount, premium, issue costs and other
ancillary costs •relating to payables

c. Exchange differences arising from foreign currency
borrowings, to the extent that they are regarded as an
adjustment to interest costs.
Recognition of Borrowing costs

1. Benchmark Treatment — expensed in the period incurred.
2. Allowed Alternative Treatment — capitalized if the borrowing

costs are directly attributable to the acquisition of a qualifying
asset.
Qualifying asset — is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. (PPSAS
5.5)
273
lications:
App
The borrowing costs on loans borrowed by:
1. National Govemment (recorded by BTr) are expensed (i.e.,
Benchmark Treatment).
2. Government agencies are capitalized, if they relate to the
acquisiåon of a qualifying asset (i.e., Allowed Alternative
Treatment).
commencement, Suspension and Cessation of Capitalization

The capitalization of borrowing costs as part of the cost of a
qualifying asset shall (be):
a. Commence when outlays for the asset are being incurred,

borrowing costs are being incurred, and activiåes that are
necessary to prepare the asset for its intended use or sale are
in progress.
b. Suspended during extended periods in which active
development is interrupted, and expensed.
c. Cease when the qualifying asset is substantially complete. If
completed in parts, capitalization of borrowing costs ceases as

each part is completed; capitalization continues for the
uncompleted parts.
Specific Borrowings
For specific borrowings, the borrowing costs eligible for
capitalization are computed using the following formula:
Capitalizable BC = Actual borrowing costs — Investment income
Illustration:
On January 1, 20x1, Entity A obtained a T/o, PIM loan,
SPecifically to finance the construction of a building. The proceeds

Of were temporarily invested and earned interest income
the loan
Of 20,000. The construction was completed on December 31, 20x1.
274 Chapter
12/31/x1 Construction in Progress-Buildings

Interest Payable
To capitalize borrowing costs are part
o the costo buildin
General Borrowings
For general borrowings, the borrowing costs eligible for
capitalization are computed using the following formula:
Capitalizable BC = Ave. Expenditure x Capitalization Rate
The borrowing costs capitalized shall not exceed the actual
borrowing costs incurred.
Illustration:
On January 1, 20x1, Entity A

had the following general
borrowings. A part of the proceeds was used to finance the
construction of a qualifying asset:
Principal
12% short-term note
14% bank loan (3-year)
16% note payable (5-year) 22,000,000
Expenditures made on the qualifying asset were as follows:

Jan. 1 P 4,800,000
Mar. 31 2,200,000
July 31
October 1
December 31 300,000
The capitalization rate is computed as follows:
Capitalizable BC = Ave. Expenditure x Capitalization Rate

property, plant and Equipment 275
The avera e ex enditure is com uted as follows:

Month outstanding over Average
Expenditures 12 Months expenditure
pate
(a) (b)
12/12
Jgtt.l 2,200,000 9/12
Mar. 31
5/12 1,458,333
July 31
3/12
Oct. 1
300,000 0/12
Dec. 31
9,258,333
The capitalization rate is computed as follows:
Total interest expense on general borrowings

Capitalization
rate Total general borrowings
Total interestexpense on general borrowings

(10M x 12%) + (18M x 14%) + (22M x 16%)
Divide by: Total general borrowings (10M + 18M + 22M) 50 000 000
O
Capitalization rate
Capitalizable BC = 9,258,333 x 14.48% =
The amount computed above compared with the actual

is
interest expense incurred during the period. The actual interest

expense on the general borrowing is P7,240,000 (see computation
above). Therefore, the borrowing cost eligible for capitalization is
the lower amount.
276 Chapter 10
Chapter 10 Summary:
For govemment entities, the capitalization threshold for PPE is

P15,OOO.
PPE are initially measured at cost. Cost comprises the purchase
price, including non-refundable taxes but excluding trade and
cash discounts; direct costs; and present value of decommissioning
and restoration costs.
Promotional items:
If the same, allocate total cost to all items acquired
including the promotional item.

If different, assign the promotional item its fair value; the
remainder to the other items acquired.

Acquisition by Construction:
Through Construction Contract — cost is contract price.
By Administration — cost is sum of DM, DL, & OH.
Construction costs are initially recorded in the "Construction
in Progress" account.
Acquisition through Exchange:

With commercial substance — GRG (plus cash paid)
No commercial substance CA of given up (pp)
Acquisition through Non-Exchange Transaction — the asset
received is measured at fair value at the acquisition date.
No condition, recognized immediately as income.

With condition, initially recognized as liability.
Acquisition through Intra-agency or Inter-agency Transfers —
measured at the carrying amount of the asset received
Repairs and Maintenance minor, expensed; major,

capitalized. If not clear, treat as minor.
Replacement costs — charge carrying amount of old part as
loss; capitalize new part. If carrying amount of old part is not

determinable, use the cost of new part as basis.
Spare parts and servicing equipment — minor, expensed;
major, capitalized. Those that can only be used in conjunction
with an item of PPE are accounted for as PPE.
Chapter
278
Not derecognized; continued to be

Idle PPE
depreciated
Fully depreciated
Not derecognized
Unserviceable property Derecognized

Lost PPE Derecognized (if total loss)
• Borrowing costs by:

NG - expensed (Benchmark Treatment).
NGAs — capitalized, if related to the acquisition of a
qualifying asset (Allowed Alternative Treatment).
PROBLEMS

1. The capitalization threshold for items of PPE by government
entities is P15,000, which is equal to the petty cash
disbursement limit.
2. Individual items of PPE with values below the capitalization

threshold but work together as a group are recognized as PPE
if the total cost of the group meets the capitalization threshold.
3. Items below the capitalization threshold of PPE are recognized

as Semi-Expendable Property — a separate class of PPE.
4. According to the GAM for NGAs, trade discounts are
excluded from the initial measurement of items of PPE but not

cash discounts.
5. The provision for decommissioning and restoration costs of an

item of PPE is subsequently measured at amortized cost.
279
6. According to the GAM for NGAs, government entities may

choose either the cost model or the revaluation model to
subsequently measure their PPE.
7. Government entities record depreciation on a monthly basis.
g. An item of PPE, with historical cost of PIO, accumulated

depreciation of P5 and accumulated inåpairment losses of Pl is
sold for P7. The gain on the sale is P2.
9. Heritage assets are measured at cost. However, they are not

subsequently depreciated, but subject to impairment
10. Infrastructure assets are accounted for in the same manner as

the other items of PPE. However, infrastructure assets are
generally assigned a residual value of zero.
II. Reforestation projects are classified as land improvements.
12. Entity A's equipment has a carrying amount of PIO before

replacement of an old part. The old part has a carrying
amount of P2. The cost of the replacement part is P5. The loss
on replacement is P3.
13. Entity A acquires an equipment in exchange for another

equipment owned by Entity B. The carrying amount of Entity
A's equipment is PIO while its fair value is P9. Entity B's
equipment has a fair value of only P7. However, Entity B pays
Entity A P2 for the difference. If the exchange has commercial
Substance, Entity A will recognize a loss of Pl on the
exchange.
14. Entity A acquires an item of PPE from an inter-agency

transfer. Entity A will not recognize any gain or loss from this
transaction.
Qapter 10
15. Govemment entities normally assign items of PPE a residual

value of 15% of cost.
PROBLEM 10-2 MULTIPLE CHOICE

1. Entity A acquires an equipment for PIM. The equipment is
acquired not for active use in the production of goods but

rather as a standby equipment that will only be used if
main equipment needs to be repaired. Does this equipment

qualify for recognition as property, plant and equipment?
a. Yes, all of the recognition criteria for a PPE are met.
b. No. The equipment does not satisfy all the recogniåon
criteria for a PPE.

c. No. Although, the equipment satisfies some of the
recognition criteria for a PPE, it does not satisfy all. The
equipment shall be classified as "Other Assets."
d. Yes and no. During the periods the equipment is idle, it
shall be classified as "Other Assets." During the periods

the equipment is in active use, it shall be classified as
"PPE."
2. For government entities, the capitalization threshold for PPE is

a. P15,000 or more c. not less than P25,000
b. more than P15,000 d. at least P5,000
3. According to the GAM for NGAs, cash discounts not taken on

purchases of items of PPE are
a. included in the cost of PPE
b. recognized as "Other Losses"
c. ignored
d. debited to the "Purchase Discount Lost" account
4. According to the GAM for NGAs, estimates Of
decommissioning and restoration costs of an item of PPE are

(choose the incorrect statement)
a. included in the initial cost of the item of PPE at the present

value of the estimates.
Plant and Equipment
281
b. credited to the "Other Provisions" account at their present

value.
c. included in the initial cost of an item of PPE but not

subject to subsequent depreciation, although subtect to
amortization using the effective interest method
d. are recognized as provisions, at Present value, and
subscquently measured similar to a financial liabilfty
5. Which of the following costs is not added to the cost of an item

of PPE?
a. Costs of site preparation
b. Initial delivery and handling costs
c. Net disposal proceeds of samples generated during testing

d. Employee benefits arising directly from the acquisition of
PPE
6. Entity A acquires 5 motor vehicles for a package price of

PIOM. In conjunction with the purchase, the supplier provides
Entity A a promotional item of 1 motor vehicle which is not of
the same type as those acquired. The fair value the motor
vehicle is P2M. Which of the following statements is correct?
a. For individual costing purposes, the cost of each of the 5

motor vehicles is
b. For individual costing purposes, the cost of each motor

vehicle acquired is Pl,666,667.
c. The promotional item is recognized as gain equal to fair

value.
d. a and c
7. Entity A acquires a building through self-construction

(COnstruction by administration). The initial cost of t}w•
building will most likely be based on which of the following?

a. The contract price.
b. The costs of direct materials, direct labor and construction
overhead, excluding wastages.
c. a orb
Chapter 10
282
d. Fair value at the acquisition date.
8. Entity A acquires a building through self-construction

(construction by administration). The construction costs
incurred are
a. initially recorded in the Registries and recorded in the
books of accounts only upon completion of the
construction.
b. initially recorded in the "Construction in Progress"
account.
c. recorded in the "Buildings" account in the period they
arise.
d. initially recorded as "Receivables" during the construction
period.
9. Entity A, a government entity, acquires an equipment for
PIM on August 6, 20x1. The equipmenes estimated useful life
is 5 years. How much is the carrying amount of the equipment

on December 31, 20x1?
a. 920,833 c. 916,667
b. 936,667 d. 979,167
10. Which of the following assets would most likely not be
assigned a residual value by a government entity?

a. A major part of an equipment
b. A building held as investment property
c. A major tool
d. Infrastructure asset
11. Which of the following assets is generally not subject to
depreciation?
a. Heritage assets c. Roads
.1
b. Infrastructure assets d. a and b
12. Which of the following is considered a heritage asset?

a. road networks
c. bridges
b. museum d. forest
l, plant and Equiptnent 283
13. Which of the following assets of a government entity is not

subject to impairment?
Heritage assets c. Idle land
a.
b. Reforestation projects d. None of these
14. A government entity derecognizes an item of PPE that is

a. idle c. unserviceable
b. fully depreciated d. all of these
15. The national government receives a PIOM grant from a foreign

government conditioned on the construction of a highway.
According to the GAM for NGAs, when shall the national
government recognize revenue from the grant?

a. when the grant is received
b. when the grant becomes receivable
c. when the grant becomes receivable and there is reasonable
assurance that the attached condition will be satisfied
d. when the condition is satisfied

1. Entity A acquires a train on January 1, 20x1, Information on
costs are as follows:
Purchase price
Import duties 200,000
Cash discount not taken 100,000
Repairs after the train is brought to its operational state 600,000
Estimated costs of dismantling the train at the end of its
20-year useful 120,000
e CUrrent market rate of interest on acquisition date is 12%. The

entry to recognize the train in the books of accounts is?
284 Chapter 10
a. Trains
100,000
Other Losses
12,440
Other Provisions
10,312,440
b. Trains
12,440
Other Provisions
c. Trains
100,000
Other Losses
d. Trains
2. During the period, Entity A starts the construction of a

building by administration. Entity A acquires construction
materials for PIOM. The entry to record the transaction is
a. Construction Materials Inventory

Accounts Payable
b. Construction in Progress-Buildings
Accounts Payable
c. Construction in Progress-Buildings
and Other Structures 10,000,000
d. None of these.
3. Entity A exchanged an equipment with Entity B. Entity A,
however, did not recognize any gain or loss on the exchange.

Which of the following is a valid reason for this?
a. No cash was involved in the exchange.
b. The fair values of the equipment exchanged were equal.
c. The exchange lacks commercial substance.
d. All of these.
property, plant and Equipment 285
Entity A receives a donation of land with fair value of PIM.

The donor stipulated that the land shall only be used as a
portion of a proposed highway. If in case the project is
discontinued, Entity A shall retum the land to the donor. At
the date of receipt of the donation, the construction of the
highway is not yet started. When should Entity A recognize

the land in its books of accounts?
a. Upon receipt of the donation.
b. When the construction of the highway is started.
c. When the construction of the highway is completed.
d. When the land is used in the construction of the highway.
5. During the year, Entity A, an NGA, incurred interest of

P200,000 on a loan taken to specifically finance the
construction of a building. The proceeds of the loan were
temporarily invested and earned interest income of P20,000.
Which of the following entries best reflects the recognition of
the interest in the books of accounts of Entity A?
a. Interest expense 200,000
b. Interest expense 180,000
c. Construction in Progress-buildings 180,000
d. Buildings and Other Structures 180,000
286 Chapter 10

1. Which of the following is not one of the characteristics of
property, plant and equipment?

a. It is a tangible asset.
b. It is held for use in the production or supply Of goods,
services or program outputs, for rental to others, or for
c. It is expected to be used for more than one reporting
period.
d. It is intended for resale in the ordinary course of
operations.
2. Which of the following does not result to the recognition of

PPE?
a. A single purchase of equipment costing P15,000.
b. Purchases of equipment that work together as a group,
individually costing PI,OOO to P5,000 but with a sum total
cost of more than P15,000.

c. Bulk acquisitions of small items of PPE with aggregate
cost of more than P15,000.
d. Acquisition of a building for PIOM intended to be leased
out under various operating leases on commercial basis.
3. Entity A acquires an equipment on account with the following

terms: P500,000 list price, 20%, 10%, 2/10, n30. Entity A incurs
the following additional costs:
Non-refundable purchase taxes
(not yet included in the list price above) plO,ooo
Installation costs 100,000
Estimated costs of dismantling the equipment at
the end of its 10-year useful 20,000
The current market rate of interest on acquisition date is 10%.
How much is the initial cost of the equipment?

a. 468,713 c. 472,341
b. 470,511 d. 489,313
plant and Equipment 287
property,
Entity A acquires 5 motor vehicles for a package price of

PIOM. In conjunction with the purchase, the supplier provides
Entity A a promotional item of 1 motor vehicle which is the
same as those acquired. The fair value the motor vehicle is
p2M. Which of the following statements is correct?

For individual costing purposes, the cost of each motor
a.
vehicle acquired is P2,000,000.
For individual costing purposes, the cost of each motor
vehicle acquired is Pl,666,667.
c.
The promotional item is recognized as gain equal to fair
value.
d. b and c
5. Entity A acquires a building by awarding a construction

contract to a contractor. The initial cost of the building will
most likely be based on which of the following?
a. The contract price.
b. The costs of direct materials, direct labor and construction
overhead, excluding wastages.
c. a orb
d. Fair value at the acquisition date.

Entity A exchanged equipment with Entity B. Pertinent data are
shown below:
Entity A Entity B
Carrying amount 85,000 130,000
Fair value 95,000 115,000
Cash paid by Entity A to Entity B 15,000
If the exchange has commercial substance, how much is the

initial measurement of the equipment received by Entity A?
a. 95,000 c. 115,000
b. 110,000 d. 85,000
288
Chapter 10
7. If the exchange has commercial substance, how much is the
gain (loss) recognized by Entity A in the exchange?

a. 10,000 c. (15,000)
b. (10,000) d. 15,000
8. EntityA incurs costs in repairing an item of PPE. It is not clear

whether the repair is a minor or a major repair. Entity A shall
a. recognize the repair costs as expense
b. capitalize the repair costs
c. a orb
d. none of these
9. Entity A, a government entity, acquires an equipment for PIM

on August 26, 20x1. The equipment's estimated useful life is 5
years. How much is the accumulated depreciation of the
equipment on December 31, 20x1 ?
C. 66,666 c. 83,333
d. 63,333 d. 79,167
At year-end, Entity A determines an indication that an equipment

with carrying amount of P400,000 is impaired. This equipment
was acquired 5 years earlier and was originally estimated to have
a useful life of 10 years and a 5% residual value. Entity A

determines the following information:

Replacement cost P700,ooo
10. How much is the impairment loss assuming Entity A

computes for the value in use using the Depreciated
Replacement Cost Approach?

a. 32,667 c. 50,000
b. 32,500 d. 37,500
11. Assume the indication of impairment is physical damage•t0

the equipment. Entity A estimates that it would cost PIO,OOO to
289
restore the equipment's service potential to the level before the

physical damage. How much is the impairment loss under the
Restoration Cost Approach?
a. 42,667 c. 50,000
b. 42,500 d. 47,500
12. Assume the indication of impairment is a significant decline in

the expected output of the equipment, which Entity A
estimates to be 10%. How much is the impairment loss under
the Service units Approach?
a. 62,667 c. 50,000
b. 62,500 d. 69,250
13. Which of the following statements is correct?

a. Heritage assets are initially measured at cost and
subsequently measured at cost less accumulated
depreciation and accumulated impairment losses.
b. Infrastructure assets are accounted for similar to the other
items of PPE. However, they are generally assigned a 10%

residual value.
c. Reforestation projects are not considered PPE.
d. Fully depreciated PPE are derecognized.
14. Which of the following is derecognized?

a. Idle PPE c. Unserviceable PPE
b. Fully depreciated PPE d. Partially damaged PPE
15. How do government entities account for borrowing costs?

a. Capitalized if the borrowing costs relate to the acquisition
or construction of a qualifying asset.
b• Expensed even if the borrowing costs relate to the
acquisition or construction of a qualifying asset.
c. Choice (a) for the national government; choice (b) for
national government agencies.
d, Choice (a) for national government agencies; choice (b) for
the national government.
290
Chapter 11
Intangible Assets
learning ()bjectives
l. Define intangible assets.
2. State the recognition, and account for the initial and

subsequent measurements, of intangible aswts.
Introduction
Intangible Assets are identifiable non-monetary aswts without

physical substance.
Essential elements of an intangible asset
1. Identifiability an intangible asset is identifiable when it:

a. is separable, i.e., capable of being separated and divided
from the entity and sold, transferred, licensed, rented, or
exchanged, either individually or together with a related
contract, identifiable asset or liability, regardless (f

whether the entity intends to do so; or
b. arises from binding arrangements including contractual or
other legal rights, regardless of whether those rights are

transferable or separable from the entity or from other
rights and obligations.
2. Control — the entity has the ability to benefit from the

intangible asset or prevent others from benefitting from it.
Control of an intangible asset normally ariæs from legal
rights that are enforceable in a court of law. However, legal
enforceability of a right is not a necessary condition for control

because an entity may be able to control the future econcmiC
bénefits or service potential in some other way.
W tangible Assets 291
3.
Future economic benefits or service potential — the future
economic benefits OF service potential flowing from an
intangible asset may include revenue from the sale of products
or services, cost savings, or other benefits resulting from the
use of the asset by the entith For example, the use of
intellectual property in a production or service process may
reduce future production or service costs or improve service
delivery rather than increase future revenues (e.g., an on-line
system that allows citizens to apply or renew licenses more
quickly on-line, resulting in a reduction in office staff required
to perform this function while increasing the speed of
processing).
Common examples of intangible assets. are computer

software, patents, copyrights, franchise, motion picture films,
trademarks or brand names, licenses, acquired import quotas, lists
of users of a service, and relationships with users of a service.
Recognition
An intangible asset is recognized if it meets the definition of an
intangible asset and the recognition criteria for assets.
Initial Measurement
An intangible asset is initially measured at cost.
The measurement of cost depends on the mode of
acquisiåon, which is similar to those of PPE and investment
property. A summary is provided below:
Measurement o Initial Cost
Mode o Ac uisition
Purchase price plus Direct costs
a. Purchase
(including non-refundable taxes
but excluding trade discounts
and rebates).
If payment is deferred, the cost
is the cash ricee uivalent.

292
Chapter II
b. Non-exchan e transaction air value at the ac uisition date

c. Exchange With commercial substance
(order of priority):
a. F V of asset given up (plus
cash paid/minus cash
received).
b. FV of asset received.
c. CA of asset given up (plus
cash paid/minus cash
received).
Without commercial substance:

CA of asset given up (plus cash
paid/minus cash received).
d. Entit Combination air value at the ac uisition date
Peculiar measurement is made when the intangible asset is

internally generated (self-generated).
e. Internal Generation — to assess whether an internally generated

intangible asset meets the criteria for recognition, an entity
classifies the generation of the asset into: (a) research phase;
and (b) development phase.
I. Research — is and planned investigation undertaken

original
with the prospect of gaining new scientific and technical
knowledge and understanding.
Expenditures during the research phase are recognized
as expense.
Examples of research activities:
i. Activities aimed at obtaining new knowledge;

ii. The search for, evaluation and final selection Of'
applications of research findings or other knowledge;

iii. The search for altematives for materials, devices, products'
processes, systems or services; and
293
Illtangible Assets
The formulation, design, evaluaåon, and final selection of

possible alternatives for new or improved materials,
devices, products, processes, systems, or services.
2. Development — is the application of,research findings or other

knowledge to a plan or for the production of new or
substantially improved materials, devices, products,
processes, systems, or services before the start of commercial
production or use.
Expenditures during the development phase are

capitalized if the entity can demonstrate all of the following:
a. Technical feasibility of completing the intangible asset;
b. Intention to complete the intangible asset;
c. Ability to use or sell the intangible asset;
d. Probable future economic benefits or service potential;
e. Availability of adequate resources needed to complete the
development and to use or sell the intangible asset; and
f. Reliable measurement of the cost of the intangible asset.
If it is not clear whether an expenditure is a research or a

development cost, it shall be treated as research cost.
Expenditures already charged as expenses cannot be

subsequently capitalized, i.e., reinstatement of expenditure
previously recognized as an expense is prohibited.
Internally generated brands, mastheads, publishing titles,
customer lists, and similar items shall not be recognized as

intangible assets.
Selling, administrative and other general overhead, costs of

inefficiencies, initial operating losses, and training costs are
expensed and shall not form part of the cost of an intangible
asset.
294
Chapter 11
Subsequent expenditures on recognized intangible assets are

generally expensed, unless they meet the definition of an
intangible asset and the asset recognition criteria.
The accounting for replacement of a part of an intangible asset

is the same as those of PPE and invesment property.
An intangible asset is subsequently measured at cost less any
accumulated amortization and any accumulated impairment

losses.
Amortization
Amortization is the systematic allocation of the depreciable amount
of an intangible asset over its useful life.
For
purposes of amortization, intangible assets are
classified according to their assessed useful life as follows:

a. Indefinite life — an intangible asset is considered to have an
indefinite life if there is no foreseeable limit to the period over
which it is expected to provide economic benefits or service
potential to the entity.

Intangible assets with indefinite life are not amortized
but tested for impairment at least annually.
b. Finite life — an intangible asset is considered to have a finite life

if it has a limited period of benefit to the entity.
Intangible assets with finite useful life are amortized
using the straight line method over a period of 2 to 10 years•
Amortization when the intangible asset is available for
starts
use and ceases when the asset is derecognized or classified as

held for sale, whichever comes earlier. Amortization does not
cease when the asset is no longer used, except when it is filly
depreciated or classified as held for sale.
The residual value is assumed to be zero except when

there is a third party commitment to purchase the asset at the
end of its useful life or there is an active market where the
entity expects to sell the asset at the end of its useful life•
Intangible Assets 295
The amortization period and amortization method

shall be reviewed at each reporting date. Changes in useful life
or amortization method shall be accounted for as changes in

accounting estimates.
Impairment
An entity is required to test for impairment an intangible asset with
indefinite useful life or an intangible asset not yet available for use at
least annually or whenever there is an indication of impairment.
An entity shall test for impairment an intangible asset with
definite useful life only when an indication of impairment exists.
Indications of impairment shall be assesSed at each reporting date.

The accounting impairment of intangible assets, and
for
reversal thereof, is the same as those of investment property and
PPE (see discussions in Chapters 9 and 10, respectively).
Derecognition
An intangible asset is derecognized when it is disposed or when
no future economic benefits or service potential is expected from
the asset.
On derecognition, the difference between the carrying

amount and the net disposal proceeds, .if any, is recognized as
gain or loss in surplus or deficit.
Illustration: Journal entries

Initial and Subsequent Measurement:
On January 1, 20x1, Entity A acquires a computer software for
P 1,000,000. The software's useful life is 5 years.
1/1/x1 Computer Software

S stem MDS , Re lar
12/31/x1 Amortization-Intangible Assets 200,000

Accumulated Amortization-
Com uter Software (1M + 5 yrs.) 200,000
296 Chapter II
Impairment
On December 31, 20x1, Entity A assesses an indication of
impairment and estimates a recoverable amount of P700,000.
100,000
12/31/xl Impairment Loss-Intangible Assets
Accumulated Impairment Losses -
Com uter Software (700K RA 800K CA) 100,000
Derecognition
On January 1, 20x2, Entity A sells the computer software for
P720,OOO.
1/1/x2 Cash-Collecting Officers 720,000

Accumulated Amortization —
Computer Software 200,000
Computer Software
Gain on Sale of Intan • ble Assets 20,000
1 gtjngil'le Assets
297
Chapter 11 Summary:
Intangible Assets are identifiable non-monetary assets without

physical substance.
Essential elements: (1) Identifiability (separable or arises from

binding arrangements); (2) Control; and (3) Future economic
benefits or service potential.
Intangible assets are initially measured at cost. The

measurement of cost depends on the mode of acquisition,
which is similar to those of PPE and investment property.
Internal generation:
1. Research cost — recognized as expense.
2. Development cost — capitalized only if all of the conditions

listed in the GAM for NGAs are met.
If it is not clear whether an expenditure is a research or a
development cost, it is treated as research cost.
Reinstatement of costs already expensed is prohibited.
Internallygenerated brands, mastheads, publishing titles,

customer lists, and similar items are not recognized as
intangible assets.
Subsequent expenditures on recognized intangible assets are
generally expensed, unless they meet the definition of an
• Subsequent measurement:
1. Indefinite life — not amortized but tested for impairment at
least annually.
2. Finite life — amortized using the straight line method over a
period of 2 to 10 years. The residual value is assumed to be
zero except when the entity has the ability to sell the asset
at the end of its useful life.

298 Chapter II
PROBLEMS

1. If it is not clear whether an expenditure is a research or a
development cost, it is treated as development cost.
2. The development costs of an internally generate intangible

asset may be capitalized if certain conditions are met.
3. A government entity does not amortize intangible assets.
4. Government entities amortize all of their intangible assets over
a period of 2 to 10 years, unless a more appropriate estimate of

useful life is available.
5. For subsequent measurement, government entities classify

intangible assets into those with finite and indefinite useful
lives, similar to business entities.
6. Government entities normally assign their intangible assets a

residual value of 5% of cost.
7. Subsequent expenditures on recognized intangible assets are

generally expensed unless it is clear that the expenditures
meet the recognition criteria for intangible assets.
8. A government entity acquires an intangible asset with

indefinite useful life for PIOO. Assuming the entity uses the
maximum amortization period for intangible assets under the
GAM for NGAs, the appropriate annual amortization expense

on the intangible asset is PIO.
9. The amortization of an intangible asset is credited directly to
the intangible asset account, according to the GAM for NGAS•

10. An entity determines an indication of impairment for its
intangible asset with carrying amount of PIOO. The entity

Intangible Assets
calculates a fair value less costs to sell of '90 and a value in

use of P105. The impairment loss is P5.

1. In which of the following instances is an asset not considered
to be identifiable?
a. The asset can be sold separately regardless of whether the
entity intends to do so.
b. The asset arises from a contractual right.
c. The asset can be leased out separately on its own or
licensed to be used separately by other entities in
exchange for cash payments.
d. The asset can only be transferred if the entity is liquidated.
2. Which of the following is most likely to be recognized as

intangible asset by a government entity?
a. Internally generated brand
b. Subsequent expenditure on a copyright
c. Development costs incurred in internally generating a
patent
d. Publishing title acquired as a donation
3. Subsequent expenditures on recognized intangible assets are

a. generally capitalized and amortized over the remaining
useful life or the extended useful life.
b. generally expensed, unless they meet the definition of an

c. generally capitalized if they meet the conditions of
technical feasibility, probable future economic benefits,
and reliable measurement.
d. not accounted for.
4' According to the GAM for NGAs, government entities shall
use this measurement model in subsequently measuring

Intangible assets.
300
Chapter 11
a. Cost model c. Fair value model

b. Revaluation model d. a or b
5. Intangible assets held by government entities are measured as
follows:
Initial Subsequent
a. cost cost less accumulated amortization and
impairment losses
b. cost fair value less accumulated amortization
and impairment losses

c. cost fair value through surplus or deficit
d. a orb
6. The default amortization method for intangible assets with

finite useful life is
a. straight line method c. double declining

b. sum-of-the-years digits d. none of these
7. Which of the following statements is incorrect regarding the

accounting for impairment of intangible assets under the
GAM for NGAs?

a. An entity is required to test for impairment an intangible
asset with indefinite useful life or an intangible asset not

yet available for use at least annually or whenever there is
an indication of impairment.
b. An entity shall test for impairment an intangible asset with
definite useful life only when an indication of impairment
exists.
c. The accounting for impairment of intangible assets, and
reversal thereof, is the same as those of investment

property and PPE.
d. Intangible assets are subject to amortization using the
straight line method over a period of 2 to 10 years but are

301
littotgible Assets
use thefollowing information for the next three questions:

December 1, 20x1, Entity A acquired a computer software for
pl 000,000 and incurred the following costs:

Non-refundable purchase taxes of P30,000, not included in
the purchase price above.
professional fees incurred in the installation of the
software, PIOO,OOO.
Modifications to the software before it was brought to the
condition intended by management for use, P60,000.

Costs of testing the software, PIO,OOO.
Training costs of staff who will be using the software,
P200,OOO.
Costs of updating the software after it was available for
use in the condition originally intended by management,
P5,OOO.
Administrative and other general overhead costs incurred
on the acquisition and installation of the software, 915,000.
The software's useful life is 5 years.
8. The entry to initially recognize the software is

a. Computer Software
b. Computer Software 1,140,000
Computer.Software
1,400,000
Computer Software
1,190,000
9.
The entry to recognize the amortization expense for the
current year is
302 Chapter 11
a. 240,000
240,000
Computer Software
b. 240,000
240,000
Computer Software
c. 20,000
20,000
Computer Software
d. Amortization-Intangible Assets 20,000
10. On December 31, 20x2, Entity A assesses an indication of
impairment and makes the following estimates:

Value in use P800,ooo
The entry to recognize the event is

a. Impairment Loss-Intangible Assets 140,000
b. Impairment Loss-Intangible Assets 140,000

c. None, the intangible asset is not impaired.

d. None, intangible assets held by govemment entities are

1. Which of the following is not one of the essential elements Of
an intangible asset?
a. Separability
b. Arising from binding arrangement
c. Control
d. Held for use in the production or supply of goods
Igtangible Assets
303
2.
An intangible asset is identifiable if it
a. is separable
b. arises from binding arrangements
c. is a non-monetary asset without physical substance.
d. a orb
3. Which of the following is an indicator of control?

a. the ability of an entity to benefit from an asset.
b. the ability of an entity to deny or regulate the access of

others to the benefit of an asset.
c. an entity can, depending on the nature of the asset,
exchange it, use it to provide goods or services, exact a
price for others' use of it, use it to settle liabilities, hold it,
or perhaps even distribute it to owners.

d. all of these.
4. Which of the following is most likely not an intangible asset?

a. Computer
c. Acquired import quota
b. Trademark d. Customer list
5. A purchased intangible asset is initially measured at

a. cost c. the sum of research and development costs
b. fair value d. the total of development costs
6. The development costs of an internally generated intangible

asset can be capitalized if certain conditions are met. Which of
the following is not one of those conditions?
Technical feasibility of completing the intangible asset.
b. Intention to complete the intangible asset.
c• Ability to measure reliably the expenditure attributable to
the intangible asset during development. its

d' Existence Of similar assets in the market or economic
environment where the entity operates.

304
Chapter II
7. Internally generated brands, mastheads, publishing titles, lists
of users of a service, and items similar in substance are not

recognized as intangible assets because
a. it is illegal to recognize these items as assets, according to
international intellectual property laws and other business

laws.
b. it is often difficult to measure separately the costs of these
items.
c. these cannot be distinguished from the cost of developing
the entity's operations as a whole.
d. the entity normally cannot demonstrate its ability to use
these, when completed, during their development phase.
8. Government entities normally assign their intangible assets a
residual value of
a. 5% of cost c. 25% of cost
b. 10% of cost d. zero
9. Which of the following intangible assets is not amortized?

a. Intangible asset with infinite useful life
b. Intangible asset with finite useful life
c. All intangible assets held by a government entity

d. Intangible asset not yet available for use
10, An entity Shall test for impairment an intangible asset with

finite useful life
a. only when an indication of impairment exists.

b. at least annually or whenever there is an indication Of
impairment.
c. at each reporting date, including interim periods, if the
entity prepares interim financial statements.

d. Never, because intangible assets held by a government
entity is not subject to impairment; only amortization.
Liabilities
305
Chapter 12
Liabilities
Learning Objectives
1. State the recognition criteria for liabilities.
2. State the initial and subsequent measurements of financial

liabilities.
3. State the measurement of provisions, contingent liabilities and

contingent assets.
Introduction
Liability — is a present obligation arising from past event, the

settlement of which is expected to result in an outflow of
resources embodying economic benefits or service potential.
Present obligation means that as of the reporting date, an
obligating event must have already occurred. An obligating event
is an event that creates either (a) a legal obligation or (b) a

constructive obligation.
Legal Obligation — is an obligation that results from a contract,

legislation, or other operation of law.
Constructive Obligation — is an obligation that results from an
entity's actions (e.g., past practice, published policies) that
create a valid expectation from others that the entity will
accept and discharge certain responsibilities.
Liability Recognition Criteria

A liability is recognized only when all of the following are met:
a• The item meets the definition ofa liability (i.e., present obligation);
b' It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
The obligation has a cost or value (e.g., fair value) that can be
measured reliably.
306
Chapter 12
Scope of this Chapter

The following are discussed in this Chapter:
a. Financial liabilities; and
b. Piovisions, Contingent liabilities and Contingent assets
Financial Liabilities
A financial liability is any liability that is:
a. A contractual obligation to deliver cash or another financial
asset to another entity;
b. A contractual obligation to exchange financial assets or
financial liabilities with another entity under conditions that
are potentially unfavorable to the entity; or

c. A contract that will or may be settled in the entity's own
equity instruments.
Examples of financial liabilities: Accounts Payable, Notes

Payable, Interest Payable, Loans Payable, Bonds Payable, and Bail
Bonds Payable.
Initial Recognition
A financial liability is recognized when an entity becomes a party

to the contractual provisions of the instrument.- (PPSAS 29.16)
Initial Measurement
Financial liabilities are initially measured at fair value minus
transaction costs, except for financial liabilities at fair value
through surplus or deficit (e.g., designated financial liabilities and
derivative liabilities) whose transaction costs are expensed. (PEAS

29.45)
Transaction costs are incremental costs that are directly
attributable to the acquisition, issue, or disposal of a financial

instrument.
Liabilities
307
Financial liabilities are subsequently measured at amortized cost,

except for financial liabilities at fair value through surplus or
deficit which are subsequently measured at fair value.
Illustration:
On January 1, 20x1, the BTr issues a 5-year, 5%, 91,000,000 bonds

for p970,000. Transaction costs on the issuance (bond issue costs)
amount to P 12,124. The effective interest rate adjusted for both the
bond discount and bond issue costs is 6%.
The initial measurement of the bonds payable is

determined as follows:
Face amount
Bond discount (1M — 970K)
(30,000)
Bond issue costs
(12,124)
Carrying amount --- 1/1/x1
957,876
Or
Net issuance proceeds 970,000

Bond issue costs
(12,124)
Carrying amount — 1/1/x1 957,876
Bond issue costs are not expensed outright, but rather a

deduction when determining the carrying amount of the bonds
(similar to the bond discount). Bond issue costs are amortized to
interest expense over the term of the bonds (together with any
bond discount or premium). The amortization of bond issue costs
Increases interest expense.

970,000
Sentralng Pilipinas
Discount on Bonds Payable-Domestic 30,000
Bond Payable-Domestic
To recognize the issuance of bonds
a able b the BTr

308
Chapter 12
1/1/x1
Bond Issue Cost-Domestic 12,124
Cash in Bank-Local Currency,

Bangko Sentral ng Pilipinas 12,124
To recognize the incurrence of bond
isstle cost b the BTr
Amortization Table:
Interest Interest
Date Amortization Present value
payments expense
1/1/x1 957,876
12/31/x1 50,000 57,473 7,473 965,349
12/31/x2 50,000 57,921 7,921 973,270
12/31/x3 50,000 58,396 8,396 981,666
12/31/x4 50,000 58,900 8,900 990,566
12/31/x5 50,000 59,434 9,434
12/31/x1 Interest Expense 57,473

Discount on Bonds Payable-
Domestic (a) 5,322
Bond Issue Cost-Domestic (b) 2,151
Cash in Bank-Local Currency,

Bangko Sentral ng Pilipinas 50,000
To recognize interest expense on the

bonds a able
Carrying Allocation of
amounts amortization Allocations
(a) Bond discount 30,000 (7,473 x 5,322
(b) Bond issue costs 12,124 (12,124 x 2,151
Totals 42,124 7,473
Subsequent journal entries follow the same pattern. TO
simplify the illustration, withholding taxes on interest payments
are omitted.
Liabilities
Derecognition of Financial Liability
financial liability is derecognized when it is extinguished, such

as when it is discharged, waived, cancelled, or it expires.
provisions, Contingent liabilities and Contingent assets
provision — is a liability of uncertain timing or amount.
A provision is recognized if all the recognition criteria for

a liability are met (i.e., present obligation, probable outflow, and
reliable measurement). If one or more of the criteria are not met,
the item is a contingent liability, not a provision, and therefore not
recognized as liability.
Contingent Liability is:
1. A possible obligation that arises from past events, and whose

existence will be confirmed only by the occurrence or non-
occurrence of, one or more uncertain future events not wholly
within the control of the entity; or
2. A present obligation that arises from past events, but is not
recognized because:
i.
It is not probable that an outflow of resources embodying
economic benefits or service potential will be required to
settle the obligation; or

ii. The amount of the obligation cannot be measured with
sufficient reliability.
(PPSAS i9.18)
Contingent Asset — is a possible asset that arises from past events,

and whose existence will be confirmed only by the occurrence or
n On-occurrence of one or more uncertain future events not wholly
Within the control of the entity. (PPSAS 19.18)
310
Chapter 12
Summa
Contin ent Probable Possible
Remote
Liabilit Reco nize and Disclose Disclose onl 1
ore
Asset Disclose onl I nore 1
ore
Measurement
A provision is measured at the entity's best estimate of the
amount needed to settle the liability at the reporting date. Risks
and uncertainties shall be taken into account in reaching this best
estimate.
If the effect of time value of money is material, the

provision is measured at the present value of the settlement
amount discounted at a pre-tax rate.
Gains from the expected disposal of assets shall not be
taken into account in measuring a provision. (PPSAS 19.61)

Provisions shall be reviewed at each reporting date, and
adjusted to reflect the current best estimate. If it is no longer
probable that an outflow of resources embodying economic

benefits or service potential will be required to settle the
obligation, the provision shall be reversed. (PPSAS 19.69)

A provision shall be used only for expenditures for which
the provision was originally recognized. (PPSAS 19.71)
Reimbursements
If another party is expected to reimburse the settlement amount of
a provision, a reimbursement asset is recognized and presented in
the statement of financial position separately from the provision

However, in the statement of financial performance, the expense
related to the provision may be presented net of the
reimbursement.
The amount recognized for the reimbursement shall not
exceed the amount of the provision.

Liabilities 311
Application of the Recognition and Measurement Rules

a. Future Operating Net Deficits No provision shall be
recognized for expected net deficits from future operating
activities. Such expectation indicates that certain assets used in
these activities may be impaired. These assets shall be tested
for impairment.
b. Onerous Contracts — A contract is deemed onerous (i.e.,
burdensome) if the unavoidable costs of settling the

obligations under the contract exceed the economic benefits
expected to be received from it.
Thé obligation under an onerous contract is
recognized as a provision.
c. Restructuring — is a program that is planned and controlled by

management, and materially changes either:
a. The scope of an entity's activities; or
b. The manner in which those activities are carried out.
(PPSAS 19.18)
A legal obligation to restructure exists if, at the

reporting date, the entity has entered into a binding
agreement to sell or transfer an operation.
A constructive obligation to restructure exists if, at the
reporting date, both the following are present:

a. Detailed formal plan for the restructuring; and
b. The plan is announced to those affected by it.
A restructuring provision includes only the direct

costs resulting from the restructuring. It does not include
costs associated with the ongoing activities of the entity,
retraining or relocating continuing staff, marketing, or
investment in new systems and distribution networks.

312
Chapter 12
Chapter 12 Summary:
A liability is recognized only when all of the following are

met:
a. The item meets the definition ofa liability;
b. It is an outflow of resources embodying

probable that
economic benefits will be required to settle the obligation;
and
c. The obligation has a cost or value (e.g., fair value) that can
be measured reliably.
Financial liabilities are initially measured at fair value minus
transaction costs and subsequently measured at amortized
cost , except for financial liabilities at fair value through
surplus or deficit which are initially and subsequently

measured at fair value.
Provision is a liability of uncertain timing or amount.
Contingent liability is one that meets some but not all of the
liability recognition criteria. A contingent liability is not
recognized but disclosed only, if its occurrence or settlement is

reasonably possible; otherwise, it is ignored.
Contingent asset is not recognized but disclosed only, if its
occurrence or realization is probable; otherwise it is ignored.

provision is measured at the entity's best estimate of the
amount needed to settle the liability at the reporting date. If
the effect of time value of money is material, the provision is
measured at resent value.

313
Liabilities
pgoBLEMS
Legal obligåtions arise only from law.
1.
2. A financial liability cannot arise from constructive obligation.
3. Financial liabilities, except financial liabilities classified to be

subsequently measured at fair value through surplus or
deficit, are initially measured at fair value plus transaction
costs.

Entity A issues 10-year, term bonds with face amount of P20 for
p12 and incurs transaction costs of Pl on the issuance.
4. The initial carrying amount of the bonds is P13.
5. The nominal rate of the bonds is higher than the effective

interest rate.
6. If in Year 1, the interestpayment is Pl.50 while the interest

expense is P2, the carrying amount of the bonds at the end of
the period must be PII.50.
7. If one or more of the liability recognition criteria are not met,

the item is a contingent liability.
A provision is a liability of uncertain timing or amount.
Provisions are never discounted to their present value.
10' The obligation under an onerous contract is recognized as a
provision.
314 Chapter 12
1. Financial liabilities, other than those that are classified to be

subsequently measured at fair value through surplus or
deficit, are measured as follows:
Initial Subsequent
a. fair value amortized cost
b. fair value plus transaction costs amortized cost
c. fair value minus transaction costs amortized cost
d. fair value plus transaction costs fair value less costs
to sell
2. Which of the following is not a financial liability?
a. Accounts Payable c. Electricity bill payable
b. Notes Payable d. Due to BIR
3. Transaction costs on issuing bonds are
a. expensed outright
b. added to the initial carrying amount of the bonds
c. deducted from the initial carrying amount of the bonds
d. subsequently amortized as expense using the straight line
method
4.
An entity issues term bonds at a discount. If the bonds are
subsequently measured at amortized cost, which of the
following statements is not correct?
a. Interest expense each period exceeds interest payment.
b. Total interest expense over the term of the bonds equals

total interest payments plus the amount of discount on
initial recognition.
c.
The carrying amount of the bonds decreases each period
d. The carrying amount of the bonds increases each period,
Liabilities
315
5. The carrying amount of bonds payable in the prior year's

financial P 100,000. This year, the carrying
statements is
amount of the same bond issuance is P102,000. Which of the

following assumptions is least likely to be valid?
a. The face amount of the bonds is P120,000.
b. The bonds were issued at a discount of P20,000.
c.
The Interest expense during the period is PIO,OOO while the
interest payment is@12,000.
d. Total interest expense over the term of the bonds will

exceed tot@l interest payments by P20,000.
e. All of these are equally acceptable.
6. Entity A issues 5-year bonds at a discount. At the beginning of

the 3rd year, Entity A retires the bonds at a premium. Which of
the following statements is correct?
a. Entity A recognizes gain on the retirement.

b. Entity A recognizes loss on the retirement.
c. Entity A recognizes neither gain nor loss on the
retirement.
d. Answer cannot be determined due to insufficient data.

On January 1, 20x1, the BTr issues a 5-year, 5%, bonds
for P 2,640,656. Interest payments are due every December 31 but
the principal is due only at maturity date. The effective interest
rate is 8%.
7. The entry on December 31, 20x1 to recognize interest expense
211,252
a. Interest Expense
61,252
Domestic
Cash in Bank-Local Currency, 150,000
Bangko Sentral ng Pilipinas
316
Chapter 12
b.
Interest Expense 211,252
Domestic
61,252
c.
Domestic
61,252
Interest payable 150,000
d.
Discount on Bonds Payable-Domestic 61,252
8. The carrying amount of the bonds on December 31, 20x1 is

a. 2,579,404 c. 2,768,061
d. 2,786,061
9. The unamortized bond discount on December 31, 20x2 is

a. 359,344 c. 231,939
b. 298,092 d. 213,939
10. A provision is measured at

a. cost
b. fair value
c. lower of cost and fair value
d. the entity's best estimate of the settlement amount
Liabilities 317
pß0BLEM 12-3: FOR CLASSROOM DISCUSSION
1. Which of the following may result to the recognition of a

liability in Entity A's December 31, 20x1 statement of financial
position?
a. Entity A enters into an entity combination (business
combination) with Entity B on January 12, 20x2.
b. Entity A's building is razed by fire on January 1, 20x2 and

an adjacent building is affected. Investigation shows that
Entity A was negligent. It is probable that Entity A will be
held liable for damages. The owner of the adjacent
building is seeking compensation for damages amounting
to PIM; however, Entity A's legal Counsel believes that
A will probably settle the case for P800,000.
Entity
c. A lawsuit is filed against Entity A on January 3, 20x2.
Apparently, Entity A's geodetic engineer miscalculated
the area of the lot where Entity A has started constructing
an office building in December 20x1. This resulted to the
encroachment of an adjacent lot owned by a private

individual. Entity A has offered to settle the case out-of-
court for PIM; however, the defendant wants payment of
Pl.2M. Both parties agreed to a settlement of Pl.050M on
January 31, 20x1.
d. Entity A enters into a purchase contract involving the
acquisition of construction materials worth P2M on
December 26, 20x1. The materials are to be delivered in the
second week of January 20x2.
2. Entity A purchases office supplies and receives delivery

thereof. Entity A recognizes a liability from this transaction
because of which of the following obligating events?

c. Constructive obligation
a. Payable event
d. Legal obligation
b. External event
318
Chapter 12
3. Entity A obtains a 6%, 5-year, PIOM face amount loan. Entity

A pays transaction cost (service charge) of 3%. How much is
the carrying amount of the loan payable on initial recognition?
c. 10.3M
b. 9.7M
use the following infonnationfor the next three questions:
On January 1, 20x1, the BTr issues a 5-year, 6%, P2,000,000 bonds

forP 1,900,000. Transaction costs on the issuance (bond issue costs)
amount to P59,708. Interest payments are due every December 31
but the principal is due only at maturity date. The effective
interest rate adjusted for both the bond discount and bond issue
costs is 8%.
4. How much is the carrying amount of the bonds on initial
recognition?
c. 1,959,709
d. 1,840,292
5. How much is the interest expense for 20x1?

a. 160,000 c. 156,777
b. 152,000 d. 147,223
6. How much is the carrying amount of the bonds on December

31, 20x1?
a. 1,867,515 c. 1,932,000
b. 1,813,069
7. Which of the following distinguishes a provision from other
types of liabilities?
a. A provision requires disclosure in the notes.
b. A provision is supported by an internally generated
document (e.g., DVs) rather than externally generated
document (e.g., OR or delivery receipt).

c. A provision necessarily needs to be estimated because it is
a liability of uncertain timing or amount.

Liabilities
319
d. A Provision need not meet all of the recognition criteria

for a liability before it is recognized.
8. A present obligation whose cost can be measured reliably but

with improbable outflow of resources embodying economic
benefits or service potential is most likely to be
a. recognized
c. recognized and disclosed
b. disclosed only
d. ignored
9. Which of the following is correct regarding contingent assets?

a. Contingent assets are recognized if probable.
b. Contingent assets are recognized and disclosed if
probable.
c. Contingent assets are only disclosed if probable.
d. Contingent assets are always iB10red.
10. Which of the following statements is correct regarding

reimbursements of provisions?
a. A reimbursement asset is recognized and presented net of
the provision in the statement of financial position.
b. The provision is presented net of the related
reimbursement asset in the statement of financial position.
c. The expense related to the provision may be presented in
the statement of financial performance net of the
reimbursement.
d. The amount recognized for the reimbursement may be in
excess of the amount of the provision.
320 Chapter 13
Chapter 13
Leases
Learning ()bjectives
1. Differentiate between a finance lease and an operating lease.
2. Account by lessees and by lessors.

for finance leases
3. Account for operating leases by lessees and by lessors.
Introduction
Lease is an agreement whereby the lessor conveys to the lessee, in
return for a payment or series of payments, the right to use an

asset for an agreed period of time.
Leases include hire purchase contracts (i.e., contracts for
the hire of an asset which contain a provision giving the hirer an

option to acquire title to the asset upon the fulfillment of agreed
condi tions).
Classification of Leases
1. Finance lease — is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset.
2. Operating lease is a lease that does not that transfer
substantially all the risks and rewards incidental to ownership
of an asset.
The classification of a lease depends on the substance Of
the transaction rather than the form of the contract.
Finance lease
Any of the following would lead to a finance lease classification:
a. The lease transfers otvnership of the asset to the lessee by the
end of the lease term.

321
b. The lessee has the option to purchase the asset at a price that is
expected to be sufficiently lower than the fair value at the date

the option becomes exercisable for it to be reasonably certain;
at the inception of the lease, that the option will be exercised

('bargain purchase option').
c. The lease term is for the major part of the economic life of the
asset even if title is not transferred. A lease qualifies to be
accounted for as finance lease if the contract is a non-
cancellable contract.
At the inception of the lease, the present value of the
minimum lease payments amounts to at least substantially all

of the fair value of the leased asset.
The leased assets are of such a specialized nature that only the
lessee can use them without major modifications.
The leased assets cannot easily be replaced by another asset.
If the lessee can cancel the lease, the lesso€s losses associated
with the cancellation are bome by the lessee.
h. Gains or losses from the fluctuation in the fair value of the
residual (leased asset) accrue to the lessee (for example in the
form of a rent rebate equalling most of the sales proceeds at
the end of the lease).

i.
The lessee has the ability to continue the lease for a secondary
period at a rent that is substantially lower than market rent.
of Land and Building

Lease
When a lease includes both land and buildings elements, each
element shall be classified separately as either operating or finance
lease.
The minimum lease payments are allocated based on the
relative fair values of the leasehold interests in the land and
buildings elements at the inception of the lease.

If the lease payments cannot be allocated reliably, the
entire lease is classified as a finance lease, unless it is clear that

322 Chapter 13
both elements are operating leases, in which case the entire lease is
classified as an operating lease.

If the land element is immaterial, the land and buildings
may be treated as a single unit and classified as finance or
operating lease. In such case, the economic life of the buildings is
regarded as the economic life of the entire leased asset.
Inception of the lease — is the earlier of the date of the lease
agreement and the date of commitment by the parties to the
principal provisions of the lease. It is on this date that:
a. A lease is classified as either an operating or a finance
lease; and
b. In the case of a finance lease, the amounts to be recognized
at the commencement of the lease term are determined.
Commencement of the lease term — is the date from which the

lessee is entitled to exercise its right to use the leased asset. It
is on this date that any asset or liability resulting from the
lease is initially recognized.
Accounting for Finance lease by Lessees

At the commencement date, a lessee recognizes the asset acquired
under a finance lease and the related lease liability measured at the
lower of the:
a. fair value of the leased property at inception date; and

b. present value of the minimum lease payments at inception date
Minimum lease payments include the following:

a. Rentals, excluding contingent rent, costs for services and taxes
reimbursable to the lessor;
b. Bargain purchase option; and

c. Guaranteed residual value
Contingent rent — is lease payment that is not fixed in amount

but rather based on the future amount of a factor that changes
other than with the passage of time (e.g., percentage of future
vases
323
sales, amount of future use, future price indices, future market
rates of interest). Contingent rent is recognized as expense in

the period incurred.
The minimum lease payments are discounted using the

interest rate implicit in the lease, if this is determinable; if not, the
lessee's incremental borrowing rate is used.
Initial direct costs, such as costs incurred in negotiating and

securing leasing arrangements, are capitalized as part of the asset
recognized.
The lease liability is subsequently measured similar to an

amortized cost financial liability. Accordingly, the minimum lease
payments are apportion•ed between interest expense and a
reduction of the outstanding liability. Interest expense in each
period reflects a constant periodic rate of interest on the remaining
balance of the liability.
The leased asset is accounted for similar to an owned

asset, e.g., as PPE or investment property. Accordingly, the leased
asset is depreciated using the entity's existing depreciation
policies. If there is no reasonable certainty that the lessee will
obtain ownership by the end of the lease term, the asset shall be
depreciated over the shorter of its useful life and the lease term.
Accounting for Finance lease by Lessors

A lessor recognizes the lease payments receivable under a finance
lease at an amount equal to the net investment in the lease.
Initial direct costs are included in the initial measurement of

the finance lease receivable and reduce the amount of revenue
recognized over the lease term. The interest rate implicit in the
lease is defined in such a way that the iniüal direct costs are
Included automatically in the finance lease receivable. Therefore,
there is no need to add the initial direct costs separately.
Interest rate implicit in the lease — is the discount rate that, at the
inception of the lease, causes the aggregate present value of:

324 Chapter 13
1. The minimum lease payments; and

2. The unguaranteed residual value,
to be equal to the sum of (a) the fair value of the leased asset and
(b) any initial direct costs of the lessor.
The lease receivable (net investment in the lease) is
subsequently measured similar to an amortized cost financial
asset. Accordingly, the lease payments are applied against the
gross investment in the lease to reduce both the principal and the
uneamed finance revenue.
Illustration:
On January 1, 20x1, Lessee enters into a 4-year lease of machinery

with Lessor. Ownership of the machinery will be transferred to
Lessee at the end of the lease term. Annual rental payable at the
end of each year is PIOO,OOO. The implicit interest rate, known to
Lessee, is 10%.
Lessee estimates that the remaining useful life of the
machinery is 5 years.
The machinery has a historical cost of PI,OOO,OOO and
accumulated depreciation of P683,013 in the books of Lessor.
Initial measurement:
The present value of the lease payments is computed as follows:
Annual rental 100,000

Multiply by: PV ordinary annuity of 1 @10%, n=4 3.169865
PV of lease payments - 1/1/x1 316,987
Books o Lessee Books o Lessor

1/1/1! 1/1/x1
Leased Assets, Machinery Finance Lease Receivable 400K(a)

and Equipment 316,987
Finance Lease Payable 316,987
Déferred Finance Lease
Revenue 83,013
Machine 1M
vases
325
(a) 100,000 annual rent x 4 yrs. 400,000 Finance Lease Receivable (Gross
(b) 400,000 Gross investment in the lease - 316,987 Net investment in the lease
_ 83,013 Deferred Finance Lease Revenue (Unearned interest income)
Subsequent measurement:
Amortization table:
Date Pa ments
1/1/x1 Interest Amortization Present value
12/31/x1 100,000 316,987
31,699
68,301
12/31/x2 100,000 248,685
24,869
75,131
12/31/x3 100,000 173,554
17,355
82,645
12/31/x4 100,000 90,909
9,091
90,909
Books o Lessee
12/31/x1
Books o Lessor
12/31/x1
Interest Expense 31,'699
Deferred Finance Lease-
Cash-Modified Disbursement Revenue 31,699
System (MDS), Regular 100K Interest Income
31,699
Finance Lease Receivable 100K
12/31/x1
Depreciation-Leased Assets,
Machinery & Equipment
Leased Assets, Machinery
&E ui ment 63,397
(316,987 + 5 yrs.) = 63,397 annual depreciation. The leased asset is
depreciated over its useful life because there is reasonable certainty that the
lessee will obtain ownership by the end of the lease term
Journal entries in •subsequent periods follow the same

pattem.
326 Chapter 13
Operating lease
A lessee (lessor) under an operating lease recognizes the lease
payments as expense (income) on a straight line basis over the
lease term, unless another systematic basis is more representative
of the time pattern of the user's benefit.

Initial direct costs incurred by lessors are added to the
carrying amount of the leased asset and recognized as expense

over the lease term on the same basis as the lease income. Initial.
direct costs incurred by lessees (such as lease bonus paid to the

lessor) are treated as prepaid rent and recognized as expense on
the same basis as the lease expense.
Illustration:
On January 1, 20x1, Lessor acquires a machine for PIM and
immediately leases it out to Lessee under a 3-year non-cancellable
lease. Lessor incurs initial direct costs of P90,000 in negotiating
the lease. The estimated useful life of the machine is 10 years with
no residual value. The lease is an operating lease to both Lessor
and Lessee. The lease payments, payable at each year-end, are as
follows:
Year Rentals
20x1 145,000
20x2 115,000
20x3 100,000
The annual lease income (expense) on a straight line basis is
computed as follows:
Year Rentals
20x1 145,000
20x2 115,000
20x3
100,000
Total rentals
360,000
Divide by: Lease term 3
Annual lease income/expense
120,000
Leases
327
Books o Lessor
Books o Lessee
Machinery and Equipment 1.09M(a) 1/1/0
Cash-Modified Disbursement No entry

S stem lar
1.09M
(a) (1M cost of machine + 90,000 initial direct costs) =
Books o Lessor
12/31/x1 Books o Lessee
12/31/x1
Cash-Collecting Officer 145K
Rent/Lease Income Rent/Lease Expense 120K
120K Prepaid Rent
Other Unearned Revenue 25K
25K Cash-Modified Disbursement
S stem , Re lar 145K
12/31/x1
12/31/x1
Depreciation-Machinery and
No entry
Equipment 130K(b)
Machine and E ui ment 130K
(b) Cost of machine

Divide by: Useful life of machine 10
Depreciation of machine 100,000
Initial direct costs 90,000
Divide by: Lease term 3
Amortization of initial direct costs 30,000
Total depreciation 130,000
books o Lessor Books o Lessee

12/31/2 12/31/x2
Rent/Lease Expense 120K

115K
Cash-Collecting Officer
Other Unearned Revenue 5K
Rent/Lease Income 120K system 115K

Pre aid Rent 5K
12/31/2 12/31/x2
Depreciation -Machinery and No entry

Equipment 130K
Machine and E ui ment 130K
Journal entries in subsequent periods follow the same pattem.

328 Chapter 13
Cha ter 13 Summa

• A lease that transfers substantially all the risks and rewards
incidental to ownership of an asset is a finance lease; a lease
that does not is an operating lease.

• Any of the following would lead to a finance lease
classification:
1. Transfer of ownership
2. Bargain purchase option
3. The lease term is for the major part of the economic life of
the asset ('75% criterion').

4. The PV of the lease payments is at least substantially all of
the fair value of the leased asset ('90% criterion').

5. The leased asset is specialized nature.
• Inception of the lease is the earlier of the date of the lease
agreement and the date of commitment by the parties to the
principal provisions of the lease. Classification and

measurement are done on this date.
Commencement of the lease term is the date from which the
lessee is entitled to exercise its right to use the leased asset.
Initial recognition of any asset or liability is made on this date.

A lessee recognizes an asset and a liability from a finance lease.
Lease payments are discounted using the interest rate implicit
in the lease, if this is determinable; if not, the léssee's
ihcremental borrowing rate is used.
Initial direct costs are generally capitalized.
The lessee depreciates the leased asset under a finance lease
over the shorter of the asset's useful life and the lease term if
there is no reasonable certainty that the lessee will obtain

ownership over the asset by the end of the lease term.
• A lessor recognizes the lease payments receivable under a
finance lease at an amount equal to the net investment in the

lease.
• A lessee (lessor) under an operating lease recognizes the lease

payments as expense (income) on a straight line basis over the
lease term, unless another systematic basis is more
re resentative of the time attem of the user's benefit.
vases
329
PROBLEMS
pßOBLEM 13-1: TRUE OR FALSE
1.
If a lease transfers ownership of the property to the lessee by
the end of the lease term, it will be classified as a finance lease
by the lessor.
2. Minimum lease payments include any amount to be paid for

bargain purchase options and guaranteed residual values.
3. Any lease that contains a purchase option must be treated as a

finance lease by the lessor.
4. The lessee depreciates the leased asset under a finance lease.
5. The inception of the lease is defined as the date of the lease

agreement or the date of an earlier written commitment.
6. The commencement of the lease term is defined as the date on

which the leased property is actually transferred to the lessee.
7. A lessor under a finance lease recognizes a net investment in

the lease measured at the present value of the lease payments
and unguaranteed residual value, if any.
8. Interest rate implicit in the lease is the discount rate that, at the
inception of the lease, causes the aggregate present value of

the minimum lease payments and the unguaranteed residual
value to be equal to the sum of the fair value of the leased
asset and any initial direct costs of the lessor.

Entity A (lessor) enters into a 10-year finance lease with Entity B.
ase payments Of PIOO are due at the start of each year. The
Interest rate implicit in the lease is 100/0.

Chapter 13
330
9. At the commencement date, Entity A will recognize a net

investment in the lease computed as PIOO x PV of ordinary
annuity@10%, n=10.
10. Entity A will recognize interest income in Year 1 computed as

follows: (present value of lease paymenR — first payment) x
10%.

1. A government entity, which is a lessee under a finance lease,
recognizes an asset acquired under a finance lease, and the
related lease liability, measured at

a. the fair value of the leased property at inception date
b. the present value of the minimum lease payments at
inception date
c. the lower of a and b
d. the higher of a and b
2. Entity A acquires an asset under a finance lease. The lease
does not transfer ownership or contain any purchase option.

a. The lease cannot qualify for accounting as finance lease.
b. Entity A will depreciate the leased asset over the shorter of
the assevs useful life and the lease term.
c. Entity A will depreciate the leased asset over its useful life.
d. Entity A will not depreciate the asset.
3. In accounting for finance leases, lease payments are
discounted using
a. the interest rate implicit in the lease.
b. lessee's incremental borrowing rate.
c. aor b
d. a, if this is determinable; if not, then b.
331
On December 30, 20x5, Entity A leased a new machine from

Gregg Corp. The following data relate to the lease transaction
at the inception of the lease:
Lease term
10 years
Annual rental payable at the end of each lease year P 100,000
Useful life of machine
12 years
Implicit interest rate
Fair value of the machine
P700,OOO
The lease has no renewal option, and the possession of the

machine reverts to Gregg when the lease terminates. At the
inception of the lease, Entity A should record a lease liability of
c. 630,000
b. 615,000 d. 676,000
(AICPA)
5. On January 2, 20x6, Entity A entered into a ten-year non-

cancellable lease requiring year-end payments of PIOO,OOO.
Entity A's incremental borrowing rate is 12% while the lessor's
implicit interest rate, known to Entity A, is 10%. Ownership of
the property remains with the lessor at expiration of the lease.
There is no bargain purchase option. The leased property has

an estimated economic life of 12 years. What amount should
Entity A capitalize for this leased property on January 2, 20x6?

c. 565,000
b. 614,500
(AICPA)
6• Entity A entered into a nine-year finance lease on a warehouse

On December 31, 20x1, Lease payments of P52,000, which
include real estate taxes of P2,000, are due annually, beginning
On December 31, 20x1, and every December 31 thereafter.
Entity A does not know the interest rate implicit in the lease;
Entity A's incremental borrowing rate is 9%. What amount
should Entity A report as finance lease liability at December
31, 20x1?
c. 450,000
a. 280,000
332
Chapter 13
b. 291,200 d. 468,000
(AICPA)
7• On January 2, 20x9, Entity A (lessee) entered into a 5-year

lease for drilling equipment. Entity A accounted for the
acquisition as a finance lease for P240,000, which includes a

P 10,000 bargain purchase option. At the end of the lease,
Entity A expects to exercise the bargain purchase optiom

Entity A estimaQs that the equipment's fair value will be
P20,000 at the end of its 8-year life. Entity A regularly uses
straight-line depreciation on similar equipment. For the year
ended December what amount should Entity A
31, 20x9,
recognize as depreciation expense on the leased asset?

a. 48,000 c. 30,000
b. 46,000 d. 27,500
(AICPA)
8. Entity A leases computer equipment to customers under

direct-financing leases. The equipment has no residual value
at the end of the lease and the leases do not contain bargain
purchase options. Entity A wishes to earn 8% interest on a
five-year lease of equipment with a fair value of P323,400. The

first rental payment is due at the lease commencement.
is the total amount of interest revenue that Entity A will earn
over the life of the lease?
a. 51,600 c. 129,360
b. 75,000 d. 139,450
(AICPA)
9. On June 1, 20x0, Entity A entered into a five-year
nonrenewable commencing on that date, for office spac

lease,
and made the following payments to Cant Properties:

Bonus to obtain lease 30,000
First month's rent
10,000
Last month's rent
10,000
In its statement of financial performance for the year ended June

30, 20x0, what amount should Entity A report as rent expense?
a. 10,000 b. 10,500 c. 40,000 d. 50,000
(AICPA)
333
10. On July 1, 20x6, Entity A leased a delivery truck from Entity B

under a 3-year operating lease. Total rent for the term of the
lease will be P36,000, payable as follows:
12 months at P 500 - P 6,000
12 months at P 750 = 9,000
12 months at Pl,750 = 21,mo
All payments were made when due. In Entity B's June 30, 20x8,
balance sheet, the accrued rent receivable should be reported as
c. 12,000
b. 9,000 d. 21,000
(AICPA)
pROBLEM 13-3: FOR CLASSROOM DISCUSSION

1. Entity A entered into two lease contracts. Lease #1 transfers
substantially all the risks and rewards incidental to ownership
of the leased asset. Lease #2 does not transfer substantially all
the risks and rewards incidental to ownership of the leased
asset. How should Entity A classify the leases? (Lease #1);
(Lease #2)
a. Finance, Operating c. Finance, Finance
b. Operating, Finance d. Operating, Operating
2. Any asset or liability arising from a lease is initially
recognized at the
a. inception of the lease
b. conception of the lease
c. commencement of the lease term
d. a orc
3' This lease gives rise to the recognition of an asset and a
liability at the commencement date.

a. Finance lease by lessors c Operating lease by lessors
b, Finance lease by lessees d. Operating lease by lessees

334
Chapter 13
Fact pattern:
On January 1, 20x1, Lessor leases out a machinery to Lessee under
a 3-year lease. Annual rent of is payable at the end of each
year. The implicit interest rate, known to Lessee, is 1200 The
machinery has a remaining useful life of 4 years and a historical
cost of and an accumulated depreciation of P279,908 in
the books of Lessor.
4. The entry in the books of Lessee to initially recognize the lease

is
a. Leased Assets, Machinery & Equipment 120,092

b. Leased Assets, Machinery & Equipment 124,391
Finance Lease Payable 124391
a. Leased Assets, Machinery & Equipment 143,212
b. None, the lease is an operating lease
5. The entry in the books of Lessor to initially recognize the lease
is
a. Finance Lease Receivable 120,092

Deferred Finance Lease Revenue 120,092
b. Finance Lease Receivable 150,000
Deferred Finance Lease Revenue 29M)8
Machinery 400,000
c. Finance Lease Receivable 150,000
Machinery 400,000
d. None, the lease is an operating lease
6. The entry in the books of Lessee to recognize the first rental
payment is
a. Interest Expense
16,329
Finance Lease Payable
33,671
vases
335
b. Interest Expense
14,411
Finance Lease Payable
35,589
Cash-Modified bisbursement
c. Interest Expense
50,000
d. Rent/Lease Expense 50,000
7. The entry in the books of Lessor to recognize the first rental

collection is
a. Cash-Collecting Officers 50,000

Interest Income 14,411
Finance Lease Receivable 50,000
b. Cash-Collecting Officers 50,000
Finance Lease Receivable 50,000
c. Cash-Collecting Officers 50,000
d. Cash-Collecting Officers 50,000
Rent/ Lease Income 50,000
8. The entry in the books of Lessee to recognize the depreciation

on the leased asset after the end of the first year of the lease is
a. Depreciation-Leased Assets, Machinery &
40,031
Equipment
Accumulated Depreciation-Leased
Assets, Machinery & Equipment 40,031
b. Depreciation-Leased Assets, Machinery &

30,023
Equipment
30,023
Assets, Machinery & Equipment
Chapter 13
c. Depreciation-Leased Assets, Machinery &

Equipment 31,098
Assets, Machinery & Equipment 31,098
d.
None, Lessor will depreciate the asset.
9.
Assume the lease is an operating lease, the entry in the books
of Lessee to recognize the first rental payment is

a. 16,329
Interest Expense
System (MDS), Regular 50,om
b. Interest Expense 14,411
c. Interest Expense 50,000
d. RentLease Expense 50,000
10. Which of the following statements is correct?

a. Lessee recognizes a higher amount of total expenses over
the lease term if the lease is classified as a finance lease
rather than an operating lease.
b. Lessee recognizes a lower amount of total expenses over
the lease term if the lease is classified as a finance lease
rather than an operating lease.
c. Lessor recognizes a higher amount of net surplus over the
lease term if the lease is classified as a finance lease rather

than an operating lease.
d. Regardless of whether the lease is classified as finance

lease or operating lease, the net effect of the lease in
Lessee's or Lesso€s surplus or deficit over the lease term is
the same.
Financial Statements
337
Chapter 14
Learning Objectives
1. State the general principles in the presentation of financial
statements.
2. Prepare a complete set of general purpose financial statements
of a government enåty, including a partial notes to the

3. Describe the accounting and disclosure requirements for

events after the reporting date, changes in accounting policies,
changes in accounting estimates, and correction of errors.
4. State the "other reports" prepared by government entities.
Introduction
General Purpose Financial Statements are those intended to meet the
needs of users who are not in a position to demand reports
tailored to meet their particular information needs. (PPSAS 13)
Objectives of General Purpose Financial Statements

The objectives of general purpose financial statements of a public
sector entity are:

a. To provide information about the entity's financial position,
financial performance, and cash flows that is useful to a wide
range of users in making economic decisions; and

b. To demonstrate the accountability of the entity for the
resources entrusted to it.
Responsibility for Financial Statements

The responsibility over financial statements rests with the entity s
management, particularly the Head of the Entity jointly with the
Head of Finance/Accounting.
338 Chapter 14
A Statement of Management Responsibility for Financial

Statements shall be attached to the financial statements as a cover
letter.
Latt&od
STAÄr
FÄal telüd ot
Pefa—,
S— of
SÄ of Cqais« of
to S—
seny
ze —s of n
to
to re
ze a— re reco—
Components of General Purpose Financial Statements

A complete set of financial statements consists of:
a. Statement of Financial Position;
b. Statement of Financial Performance;
c. Statement of Changes in Net Assets/Equity;
d. Statement of Cash Flows;
e. Statement of Comparison of Budget and Actual Amounts; and
f. Notes to the Financial Statements, comprising a summary Of
significant accounting policies and other explanatory notes•

339
General Principles
Fair Presentation
Fair presentation means the faithful representation of the effects of
transactions and other events in accordance with the definitions
and recognition criteria for assets, liabilities, revenue, and

expenses in the PPSAS. The application of PPSAS, with
appropriate disclosures, if necessary, would result in the fair
presentation of the financial statements.
Fair presentation also requires the proper selection and

application of accounting policies in accordance with the PPSAS.
Additional disclosures shall be, made whenever relevant to the
understanding of the information contained in the financial
statements.
Compliance with PPSASs

An entity whose financial statements comply with the PPSASs
shall make an and unreserved statement of such
explicit
compliance in the notes. Financial statements shall not be

described as complying with the PPSASs unless they comply with
all the requirements of PPSASs. Inappropriate accounting policies
are not rectified either by disclosure of the accounting policies
used, or by notes or explanatory material.
Departure from PPSAS

In the event that Management strongly believes that compliance
with the requirement of PPSAS would result in misleading
Presentation that it would contradict the objective of the financial
Statements, the entity may depart from that requirement if the

relevant regulatory framework allows, or otherwise does not
prohibit, such a departure.
Going Concern
The financial statements shall be prepared on a going concem
basis unless there is an intention to discontinue the entity
OPeration or there is no realistic alternative but to do so.
Chapter 14
Consistency of Presentation
The presentation and classification of items in the financial
statements shall be retained from one period to the next unless
laws, rules and regulations, and PPSAS require a change in
presentation.
Materiality and Aggregation

Each material class of similar items shall be presented separately
in the financial statements. Items of a dissimilar nature or function
shall be presented separately unless they are immaterial. If a line
item is not material, it is aggregated with other items either on the
face of the financial statements or in the Notes. A specific
disclosure requirement in a PPSAS need not be satisfied if the
information is not material.
Offsetting
Assets and liabilities, and revenue and expenses shall not be offset
unless (a) required or permitted by a PPSAS, or (b) when

offsetting reflects the substance of the transaction or other event.
Comparative Information
Comparative information shall be disclosed with respect to the
previous period for all amounts reported in the financial
statements. Comparative information shall be included for
narrative and descriptive information when it is relevant to an

understanding of the current period's financial statements.
(GAM for NGAs, Chapter 2, Sec. 15-22)
Identification of the Financial Statements
The financial statements shall be identified clearly, and

distinguished from other information in the same published
document.
The following information shall be displayed prominently
and repeatedly:
Name of the reporting entity;
b. Whether the financial statements cover the individual entity or
a group of entity;
341
c.
The reporting date or the period covered by the financial
statements, whichever is appropriate to that component of the

financial statements;
d. Name of fund cluster;
The reporting currency; and
f. The level of rounding-off o? amounts.
(PPSAS 1.61)
Reporting Period
Financial statements shall be presented at least annually.

When an entity changes its reporting date such that its
annual financial statements are presented for a period longer or

shorter than one year, the following shall be disclosed:
a. The period covered by the finandal statements;
b. The reason for using a longer or shorter period; and
c. The fact that comparative amounts are not entirely
comparable.
Statement of Financial Position

The statement of financial position shows the entity's financial
condition as at a certain date. It is presented in comparative,

condensed and detailed formats.
l. Condensed Statement of Financial Position — presents only the

line items shown below. The breakdowns and other relevant
information are disclosed in the Notes.

a. Cash and cash equivalents;
b. Receivables from exchange transactions;
Recoverable from non-exchange transactions (taxes and
transfers);
Financial assets (excluding amounts shown under (a), (b)
and (c));
Inventories;
Investment Property;
Property, Plant and Equipment;
342
Chapter 14
h.
Intangible assets;
i.
Taxes and Transfers Payable;
j. Payables under exchange transactions;
k.
Provisions;
l. Financial liabilities (excluding amounts shown under
(i) and (j)); and
m. Net assets/equity.
Additional line items, headings, and sub-totals shall be
presented whenever relevant to the understanding of the entity's
financial position.
2. Detailed Statement of Fillancial Position — presents all the asset,
liabiFfy and equity accounts in the Revised Chart of Accounts.
Condensed Detailed
(NANE OF (NANE OF THE ENTtTY)
STATEMENT OF POSrmN DETAILED STATEMENT OF FINANCIAL POsmoN
ALL FUNDS
(ALL FUNDS OR OF FUND) AS OF DECEMBER 31, 2016
AS AT DECEMBER at, 2015
ASETS
Assee
Cvr•M Cash
Cash 6
7 on Hard
8 CO.C.oecüV
9
oner 14
h Curary
Tool CErent Asge
Czh Cumcy. AcnA
Qrrncy. not
O.nene€
Both the condensed and detailed statement of financial
position form part of the entity's annual financial statements.

The statement of financial position shall show distinctions
between current and noncurrent assets and liabilifies.

Any of the following would lead to the current
classification of an asset or liåbility.

Financial Statements 343
Current Assets
Current Liabilities
Expected to be realized in, or a.
a. Expected to be settled in the
is
held for sale or
entity's normal operating
consumption in, the entity's cycle
normal o eratin c cle.
Held rimaril for tradin b. Held rimaril for tradin
b.
Expected to be realized C. Due to be settled within 12
c.
within 12 months after the months after the reporting
re ortin date. date.
It is cash or a cash d. The entity does not have an

equivalent, unless it is unconditional right to defer
restricted from being settlement of the liability for
exchanged or, used to settle a at least twelve months after
liability for at least twelve the reporting date.
months after the reporting
date.
All other assets and liabilities are classified as noncurrent.
An illustrative statement of financial position, presented
using the condensed format, is shown below:

Chapte
(NAME OF THE ENTITY)

STATEMENT OF FINANCIAL POSITION
(ALL FUNDS OR NAME OF FUND)
AS AT DECEMBER 31, 2015
Note 22.15 2014
ASSETS
Current Ass&
Cash and Cash Equivalents 6
Investnents 7
Receivables 8
Inventories 9
Other Current Assets 14
Total Current Assets
Non-Current Assets
Investrnent8
Investrnent Property 10
Biological Assets 12
Intangible Assets 13
Otv er Non-Current Assets 14
Total Non-Current Assets
Total xxx
LIABILITIES
Current Liabilities
Financial Liabilities 15
Inter-Agency Payables 16
Trust Liabilities 17
Deferred Credits/Uneamed Income 18
Provisions 19
Other Payables 20
Total Current Liabilities
Non-Current Liabilities
Financial Liabilities 15
Trust Liabilities 17
Deferred Credite/Uneamed Income 18
Provisions 19
Other Payables 20
Total Non-Current Liabilities
Total Liabilities
Total Assets less Total Liabilities
NET ASSETS/EQUITY
Accumulated Surplus/(Deficit)
Total Net Assets/Equity
notes.
345
statement of Financial Performance
The statement offinancial performance shows the revenue, expenses

d surplus or deficit for the period. It is presented in
comparative, condensed and detailed formats.
Generally, revenue and expenses are recognized in surplus
or deficit, except for the following which are recognized directly in
equity:
Correction of prior period errors;
b. changes in accounting policies; and
Effect of
c.
Gains or losses on remeasuring available-for-sale financial
assets.
The following are the minimum line items to be presented

on the face of the statement of financial performance:
a. Revenue;
b. Finance costs;
c. Share in the surplus or deficit of associates and joint ventures;
d. Gain or loss attributable to discontinuing operations; and
e. Surplus or deficit.
Additional line items, headings, and sub-totals shall be

presented whenever relevant to the understanding of the entity's
The nature and amount of material items of revenue and
expense are disclosed separately. Examples of items to be
disclosed separately include the following:
Write-downs of assets (e.g., inventory, PPE) and reversals
thereof;
Restructuring provisions and reversals thereof;

Disposals of items of property, plant, and equipment;
Privatizations or other disposals of investments;
Discontinuing operations;
Litigation settlements; and
Other reversals of provisions,
Chapter 14
Expenses may be presented according to their function or
nature, whichever is more relevant. If expenses are classified by

function, additional disclosures shall be made on the nature of
expenses, including depreciation, amortization and employee

benefits expenses.
An illustrative statement of financial performance,
presented using the condensed format, is shown below:

STATEMENT OF FINANCIAL PERFORMANCE
FOR THE YEAR ENDED DECEMBER 31, 2015
Note 2015 2014
Revenue
Tax Revenue 21
Service and Business Income 22
Shares, Grants and Donations 23
Gains 39
Total Revenue
Less: Current Operating Expenses

Personnel Services 24
Maintenance and Other Operating Expenses 25
Financial Expenses 26
Direct xxx
Non-Cash Expenses 27 xxx
Total Current Operating Expenses
Surplus/(Deficit) from Current Operations
Net Financial Assistance/Subsidy 28

Sale of Assets 29
Gus 29
Losses 29 (xxx) luz)
Surplus/(Deficit) for the period
ms reed In the amonpMYhg

347
filtattcial Statements
statement of Changes in Net Assets/Equity

The statement of changes in net assets/equity shows the increase or
decrease in the entity's net assets during the period resulting from
the following:
Surplus or deficit for the period;
b. Items of revenue and expense that are recognized d'irectly in
equity;
Effects of changes in accounting policies and corrections of
c.
errors; and
d. The balance of accumulated surpluses or deficits at the
beginning of the period and at the reporting date, and the
changes during the period.
An illustrative statement of changes in net assets/equity is
shown below:
(NAME OF THE ENT'TY)

OF CRANGE8 IN AS8ET&'EQUtTY
(ALL FUNDS NAME OF FUND)
FOR THE YEAR ENDED DECEMBER 31, m16
Surpw (Deficit)
2015 2014
Balance at January 1
Changes in accounting pdicy

Prior period errors
Other adjustrnents
Restated balance
Changes Net for Calendar Year

for the petiod
AdjU8tment of revenue in net asset&/ewv
Qanee •t December 31
Steten»nt shooed be read jn me

Chapter 14
Statement of Cash Flows

The statement of cash flows shows the sources and utilizations of
cash and cash equivalents during the period according to the
following activities:
a. Operating Activities — cash flows from operating activities are
primarily derived from the principal cash-generating activities
of the entity. They normally include cash flows on items of
revenue and expenses. Examples include:

i. Receipt of NCA and reversion of unused NCA
ii. Receipt or provision of assistance and subsidy to other
entities
iii. Collection of income and receivables
iv. Payments of expenses, cash advances and payables
v. Inter or intra-entity transfers of funds
b. Investing Activities — involve the acquisition and disposal of
noncurrent assets and other investments. Examples include:

i. Acquisition and disposal of PPE, investment property,
intangible assets and other noncurrent assets
ii. Acquisition and disposal of investment securities and
derivatives
iii. Collection and provision of long-term loans
c. Financing Activities — are activities that affect the entity's equity

capitaland borrowings. Examples include:
i. Issuing of notes, loans, and bonds payable, and their
repayments
ii. Finance lease payments pertaining to the reduction Of the
outstanding finance lease liability
Cash flow information provides a basis for assessing an
entity's ability to generate cash and cash equivalents and its
utilization of funds.
Cash flows exclude movements between 'cash' and 'cash
equivalents' (e.g., investment of excess cash in cash equivalents)

349
because these are part of the entity's cash management rather than
rating, investing or financing activities.
ope
presentation of Cash flows
Operating activities
cash flows from (used in) operating activities are presented using
the Direct Method. Under this method, major classes of gross cash
receiptsand gross cash payments are presented. The indirect
method, which is available to business entiåes, is not allowed for
Information about major classes of gross cash receipts and
gross cash payments may be obtained either:
a. From the accounting records of the entity; or
b. By adjusting relevant accounts for changes during the period,
non-cash items, and other items whose effects are investing or
financing cash flows. This can be done through T-account
analyses.
A reconciliation of the accrual basis surplus or deficit with

the net cash flow from operating activities shall be provided in the
notes to financial statements.
Investing & Financing activities

Cash flows from (used in) investing and financing activities are
also presented according to major classes of gross cash receipts
and gross cash payments.
Cash flows may be reported on a net basis for:

a• Receipts and payments made on behalf of customers,
taxpayers or beneficiaries that reflect the activities of the
Other party rather than those of the entity; and

b• Receipts and payments for items with quick tumover,
large amount, and short maturities.

350
Chapter 14
Cash flows denominated in a foreign currency are translated

using the spot exchange rate at the date of the cash flow
Exchange differences are not cash flows but a reconciliation of
the cash and cash equivalents at the beginning and end of the
period. Exchange differences are reported in the Statement of
cash flows separately from the operating, investing and

financing activities. (See illustrative statement ofcmshflows below.)
Any significant amount of cash and cash equivalents held that
is not available-for the entity's use shall be disclosed in the

notes.
An illustraåve statement of cash flows is shown below:

351

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2015
2016 2014
Cash Flows From Operating Activities
Receipt Notice of Cash Allocaüon
Collection of lnØme/Revenues
of Assistance and Subsidy front Other NGAs, LGUs and GOCCs

Collectim of Receivables
Receipt of Inter-Agency Fund Transfers
Trust Receipts
Total Cash Inflows
Remittance to National Treasury
Payment of Expenses
of Inventories
of Consumable BiobØcal Asseb
Grant of Cash Advances
Payment of Ac@urts Payable
Remittance of Persomel Contibutbns and hnd•iory Deductions
Total Cuh
Net Cash Provided by (Used in) Opera"' AcUvWes
Cash Flows from Investing Activities

Proceeds from Sale/Dispsal Property, Plant and Equipment
Sale of Investments
Receipt of Cash Dividends
Total Cash Inflows
Pur&tase/Construction of Investment
Purchase of Bearer BiologZal Assets
Cash Outflon
Total
Net Cash Provided by (Used in) Investing Activities
Cash Flon From Financing Activities

Proæeds from Dornestic and Foreign Loans
Total Cash Inflows
Payment of Interest Expense (BTR/NG Debt)
Total Cash Outflon
Net Cash Provided by (Used in) Financing Activities
Increase (Decrease) in Cash and Cash Equivalents
Effects of Exchange Rate Changes on Cash and Cash Equivalents
Ceh and Cash Equivalents, January 1

Cash and Cash Equivalents, 31
stet•npnt reed not"

352 Chapter 14
Statement of Comparison of Budget and Actual Amounts

The statement of comparison of budget and actual amounts shows the
differences (variances) between budgeted amounts and actual
results for a given reporting period. This enhances the
transparency of financial reporting of the government.

The statement of comparison of budget and actual
amounts shows the following:

a. Budget information — consists of, among others, data on
appropriations, allotments, obligations, revenues and other
receipts, and disbursements. This is based on the budget
registries and includes the following:
i. Original Budget — is the initially approved budget for the
period, usually the General Appropriations Act. The

original budget may include residual appropriated
amounts automatically carried over from prior years by
law such as prior year commitments or possible future
liabilities based on a current contractual agreement (e.g.,
prior year's not yet due and demandable obligations).
ii. Final Budget — is the original budget adjusted for all
reserves, carry-over amounts, realignments, transfers,
allocations and other authorized legislative or similar

authority changes applicable to the period.
Explanations regarding changes from original to
final budget (i.e., whether they are a consequence Of
reallocations within the budget) are disclosed in the notes•

Moreover, the budgetary basis (cash, accrual or
some modification thereof) used in preparing the budget

information vis-å-vis the accounting basis used in preparing
the financial statements shall be diSclosed in the notes.
b. Actual/ amounts on a comparable basis — These represent the
actual disbursements made during the period.

Since the 'actual amounts on a comparable basis' to the
budgeted amounts are on a 'cash basis', they may not always

353
be equal to the amounts presented in the other financial

statements, which are on 'accrual basis'. These, therefore, are
recondled in the notes. The differences are classified as
follows:
i. Basis Differences — occur when the approved budget is
prepared on a basis other than the accounting basis;

ii. Timing Differences — occur when the budget period differs
from the reporting period reflected in the financial
statements; and
iii. Entity Differences — occur when the budget omits program
or entities that are part of the entity for which the financial
statements are prepared. (GAM for NGAs, Chapter 3, sec. 28)
c. Differences between (a) and (b) above — Explanations of material

differences shall be made in the notes.
Example:
Entity A's appropriation for Capital Outlays for the current year
amounts to PIM. The original budget is PIM.
During the year, P50,000 is realigned to personnel services.
The final budget is P950,000 (1M- 50K).
Actual disbursements during the period totaled P870,000.
The actual amounts on a comparable basis is '870,000. The
additions to capital assets reflected in the finanä@l statements is
P930,000. This is calculated on the accrual basis. The 'basis
difference' of 960,000 is disclosed in the notes.

The difference between the 'final budget' and 'actual amount
on comparable basis' is P80,OOO (950,000 - 870,000). This difference is
reconciled with, among others, the unreleased appropriations,

Unobligated allotments, and unpaid obligations, as shown in the
budget registries.
The statement of comparison of budget and actual
amounts will show the following information:
354 Gaptet 14
The «tatcmcnt of compart'•on of budget and actual
amount« B•njliat to govcmmcnt cntlttcs. entitles ate
not requited to Ptvpatc this Gtatcmcnt for thor external rcvxyrttng

although they may prcpate a qrntlar statement fot their Internal
repotting
An "tatcmcnt of companson of budget and
actual amounts i' bclow
t •ctva.
nc.erts
355
Notes to Financial Statements

The Itotes to financial statements provides information in addition to
those presented in the other financial statements. It is an integral
art of a complete set of financial statements. All the other
financial statements are intended to be read in conjunction with

the notes. Accordingly, information in the other financial
statements shall be cross-referenced to the notes.
The notes shall be structured in a systematic and logical
manner to show the following:

1. General information on the reporting entity.
2. Statement of compliance with the PPSAS and Basis of
preparation of financial statements.
3. Summary of significant accounting policies.

This includes narrative descriptions of the line items in the
other financial statements, measurement bases, fransitional
provisions, and other relevant information.
4. Disaggregation (breakdowns) and other supporting
information for the line items in the other financial statements.
5. Other disclosures required by PPSAS, such as:
a. Explanations for the differences between budgeted and
actual amounts;
b. Events after the reporting date, if material;
c. Changes in accounting policies and accounting estimates
and prior period errors;
d. Contingent liabilities, contingent assets, and unrecognized
contractual commitments;
e. Related party disclosure; and
f. Non-financial disclosures, e.g., the entity's financial risk
management objecåves and policies.

6• Other disclosures not required by PPSAS but the management
deems relevant to the understanding of the financial
statements.
356
Chapter 14
Illustrations: Excerpts from Notes to financial statements
Excer ts 1 & 2:
Entity A
Notes to Financial Statements
December 31, 2015
1.
General Information/Agency Profile
Entity A was established by virtue of Republic Act No. otherwise
known as the which was signed into law on Entity A
operates under the Office of the President for administration purposes.
Pursuant to Republic Act No. Entity A is mandated to undertake the
followtng tasks:
Entity A's registered office is located in The financial
statements of Entity A were authorized for issue on (a)
2. Statement of Compliance and Basis of Preparation of Financial
Statements
The financial statements have been prepared in accordance with the
Philippine Public Sector Accounting Standards (PPSAS) issued by the
Commission on Audit per COA Resolution No. 2014-003 dated January

24, 2014.
The financial statements have been prepared on the basis of historical

cost, unless stated otherwise.
(a) Same date as the signing of the Statement of Management Responsibility for Filancial
Statements.
Excerpt 3:
3. Summary of Significant Accounting Policies
3.1 Basis of accounting

The financial statements are prepared on an accrual basis except for the
Statement of Cash flows.

3.4 Cash and cash equivalents

cash and cash equivalents comprise cash on hand, cash in bank, and
highly liquid Investments with an original maturity of three months or
less, which are readily convertible to known amounts of cash and are
subject to Insignificant risk of changes in value
Excerpt 4: Disaggregation of line items in the other financial statements
6. Cash and Cash Equivalents
2015 2014
Cash on Hand
Cash m Bank-Local Currency xxx
Cash m Bank-Foreign Currency xxx
Cash Equivalents xxx
Total Cash and Cash Equivalents
Excerpt 5: Other disclosures required by PPSAS
31. Related party transactions

31.3 Key Management Personnel
The key management personnel of Entity are the Head of the Entity, the
members of the governing body, and the members of the semor
management group. The govermng body consists of members appointed
by Ilead of the Entity. The semor management group consists of the
Chief Executive Officer, the Chief Financial Officer and the Heads of
departments.
31.4 Key Management Personnel Compensation

The aggregate remuneration of the key manaeemen!personnel are
358
Chapter 14
Events After the Reporting Date

Events after the reporting date are those events, both favorable and
unfavorable, that occur between the reporting date and the date
when the financial statements are authorized for issue. These
include the following:
a. Adjusting events — those that provide evidence of conditions

that existed at the reporting date; and
b. Non-adjusting events — those that are indicative of conditions
that arose after the reporting date.

(PPSAS 14.5)
• Reporting date — end of the calendar year (i.e., December 31).
Date of authorization of financial statements for issue — date of

signing of the Statement of Management's Responsibility for
Financial Statements by the Head of Agency and Head of
Finance Department.
Adjusting events after the reporting date

The financial statements are adjusted to reflect adjusting events
after the reporting date. Examples:

a. Settlement of a court case that evidences a present obligation
at the reporting date.
b.
Bankruptcy of a debtor that evidences an impairment of a
receivable at the reporting date.
c.
Sale of inventories that evidences the correct NRV Of
inventories at the reporting date.

Determination of the amount of revenue pursuant to a
d.
revenue sharing agreement with another entity.
e.
Determination of employee bonuses, if the entity has a present
make payments as of the reporting date.
obligation to
Discovery of fraud or errors that show that the financial
f.
statements were incorrect.

359
Non-adjusting events after the reporting date

Non-adjusting events are disclosed only, if they are material.
Examples:
Acquisition or disposal of a major controlled entity.
b. Announcement of a plan to discontinue an operation or a
major program.
Major purchases and disposal of asset.
d. Destruction of a building by a fire after the reporting date.
Changes in Accounting Policies

Accounting Policies — are the specific principles, bases, conventions,
rules and practices applied by an entity in preparing and
presenting financial statements. (PPSAS 3.7)
An entity shall select accounting policies using the
guidance in the PPSAS as well as the guidance issued by COA and
shall apply them consistently to similar transactions.
An entity may change an accounting policy if the change:
a. is required by PPSAS; or
b. results to a reliable and more relevant information.
The following are considered changes in accounting

policies:
a. Change from one basis of accounting to another basis of
accounting; and
b. Change in the accounting treatment, recopiition or
measurement of a transaction, event or. condition within a
basis of accounting. (GAM for NGAs, Chapter 19, sec. 37)
A change in accounting policy is accounted for as follows:

a. Using the transitional provision, if any;
b' In the absence of a transitional provision, by retrospective
application; or
If retrospective application is impracticable, by prospective
application.
360
Chapter 14
Retrospective application involves adjusting the opening

balance of each affected account for the earliest period Presented
as if the new accounting policy had always been applied. The net
effect of the adjustments is adjusted to the opening balance of
equity for the earliest period presented.

When it is difficult to distinguish a change in an
accounting policy from a change in an accounting estimate, the
change is treated as a change in an accounting estimate. (PpsAs 3.40)
Changes in Accounting Estimates

Changes in accounting estimates result from new information or new
developments and, accordingly, are not correction of errors. (PPSAS
3.7)
Examples include changes in estimates of: bad debts,

provisions, useful life of an asset, residual value, and the like.
A change in accounting estimate is accounted for by
prospective application. Prospective application involves

recognizing the effect of the change in surplus or deficit either in
the (a) period of change or (b) period of change and future

periods, if the change affects both.
Errors
Errors include mathematical mistakes, incorrect application of
accounting policies, oversights or misinterpretations of facts, and
fraud. Errors can arise in respect of recognition, measurement,

presentation or disclosure of items in the financial statements.
Financial statements do not comply with the PPSAS if they
contain material errors or immaterial errors made intentionally.

Errors can be classified as follows:
a. Current period errors — errors committed, and discovered, in the
current year. These are corrected by correcting entries within
the same year.
b. Prior period errors — errors committed in prior years that are
discovered in the current year. These arise from failure to use

information that:
financial Statements
361
i. was available when the prior yeaffs financial statements

were authorized for issue; and
ii. could reasonably be expected to have been obtained and
taken into account when preparing those financial
statements.
Material prior period errors are corrected by retrospective

restatement. Retrospective restatement involves correcting the prior
period errors as if they have never occurred. The procedures are
similar to the retrospective application for a change in accounting
policy.
Retrospective restatement shall be applied as far back as
practicable. If this is not practicable, prior period errors are
corrected prospectively.
Consolidated and Separate Financial Statements

A controlling entity is required to present consolidated financial
statements, except in cases where the controlling entity is a
controlled entity itself and its securities are not being traded.
Consolidated Financial Statements — are the financial statements
of an economic entity (controlling entity and controlled

entities) presented as those of a single entity.
Controlling Entity — is an entity that has one or more controlled
entities.
Controlled Entity — is an entity, including an unincorporated

entity such as a parmership, which is under the control of
another entity (known as the controlling entity). (GAM for NGAs,
Chapter 20, Sec. 2)
All controlled entities shall be consolidated, except for one

that is held to be sold within 12 months from acquisition. A
COnfr011ed entity is not excluded from consolidation simply
because its activities are dissimilar to those of the other entities in
e group.
362
Chapter 14
Control exists if the entity has both the power to govern
the financial and operating policies of another entity and the
ability to benefit from the activities of the other entity. Examples

of indicators of control are shown below:
Power Condition Bene •t Condition

a. a. Ability to dissolve the other
Ownership of majority
voting interest (whether
entity and obtain significant
directly or indirectly). residual economic benefits or

bear si ificant obli ations.
b. Power to appoint majority of b. Ability to extract
the members of board of distributions of assets from
directors. the other entity and exposure

to certain obligations of the
c. Power to cast majority votes other entity.

during board of directors or
eneral meetin s.
Consolidation Procedures
1. Similar items of assets, liabilities, revenue and expenses are
added line by line.

2. The carrying amount of the controlling entity's investment in
the controlled entity is eliminated. The resulting goodwill is
recognized.
3. The minority interests in the surplus or deficit and net assets
of the controlled entity are recognized and presented
separately.
The minority interest in the net assets is presented
within equity but separately from the equity of the controlling

entity. This consists of:
a. the minority interest in the net assets as at the combination

date; and
b. the minority's share in the subsequent changes in the
controlled entity s equity since the combination date.
4. The effects of inter-entity transactions are eliminated in full.
363
Fiøancial Statements
Separate Financial Statements — are those presented by a

controlling entity, an investor in an associate, or a venturer in
a jointly controlled entity, in which the investments are

accounted for on the basis of the direct net assets/equity
interest rather than on the basis of the reported results and net
assets of the investees. (PPSAS 6.7)
In the separate financial statements, investments in

controlled entities, jointly controlled entities, and associates are
accounted for:
a.
Using the equity method; or
b. As a financial instrument (i.e., at fair value).
Statements
Interim Financial
Government entities prepare interim financial statements on a
quarterly basis using the same accounting policies used in annual
reports.
Other Reports
In addition to the financial statements, government entities are
also required to prepare and submit the following reports:

1. Trial balances (Pre-closing and Post-closing)
2. Other schedules:
a. Regional Breakdown of Income
b. Regional Breakdown of Expenses
364
Chapter 14
Deadlines on Submission of Reports
a. Provincial offices and Operating units:
Re ort Deadline Submit to:

Monthl TBs & SSS 10 da s after end of month Auditor,
Quarterl FSs, TBS & SSs 10 da s after end of uarter Regional
Yearend FSs, TBS & SSs On or before Jan. 20 of the Accountant
followin ear
* TBS (Trial Balances); SSs (Supporting Schedules); FSs (Financial Statements)
b. Regional/Branch Offices:

Monthl TBs & SSS 10 da s after end of month Regional
Quarterl FSs, TBS & SSs 10 da s after end of, uarter Auditor, Central
Yearend FSs, TBS & SSs On or before Jan. 31 of the Office Chief
followin ear Accountant
c. Central/Head/Main Office:
Monthl TBs & SSS 10 da s after end of month Regional
Quarterly FSs, TBs & SSS 10 days after end of quarter Auditor, Central
Office Chief
Accountant
Yearend FSs, TBs & SSS Feb. 14 of the following COA Auditor,
(combined CO, year DBM, COA-GAS

ROS & OUs) (Gov't. Accountancy
Sector)
financial Statements
365
Chapter 14 Summary:
The responsibility over financial statements rests with the

entity'smanagement, particularly the Head of the Entity jointly
with the Head of Finance/Accounting,
A peculiar financial statement of a government entity is the

statement of Comparison of Budget and Actual Amounts.
This statement shows the differences between budgeted
amounts and actual results for a given reporting period.
The statements of financial position and financial performance

are presented in comparative, condensed and detailed
formats.
The statement of financial position of a govemment entity
shows distinctions between current and noncurrent assets and
liabilities.
The following are recognized directly in equity, rather than

through surplus or deficit: (a) correction of prior period errors;
(b) effect of changes in accounting policies; and (c) gains or
losses on remeasuring available-for-sale financial assets.
Government entities present cash flows from operating
activities using the direct method.
Adjusting events are those that provide evidence of conditions

that existed at the reporting date. Those that are indicative of
conditions that arose after the reporting date are non-adjusting
events. Adjusting events are recognized. Non-adjusting events
are disclosed only, if material.
A change in accounting policy is accounted for using the
following order of priority: (1) transitional provision; (2)
retrospective application; (3) prospective application.

A change in accounting estimate is accounted for by
prospective application.
The correction of a prior period error is accounted for by
retros ective restatement.
366
Chapter 14
PROBLEMS

present financial statements at least annually.
2. The statement of financial position is dated as at the reporting
date.
3. According to the GAM for NGAs, a Condensed Statement of

Financial Position is one that presents line items only rather
than all the accounts used by the entity.
4. The GAM for NGAs requires government entities to present

expenses in the statement of financial performance according
to the function of those expenses.
5. Government entities present information on other
comprehensive income, just like business entities.
6. The statement of financial performance of a govemment entity

is the exact equivalent of the statement of comprehensive
income of a business entity.
7. Non-adjusting events are never recognized but are always

disclosed.
8. Prior period errors are corrected by retrospective restatement.
9. In the first instance, changes in accounting policies are
accounted for by retrospective application.
10. Unlike business entities, government entities are required to
prepare interim financial statements on a quarterly basis.

1.
which of the following is not one of the components of a
complete set of general purpose financial statements of
government entities?
a. Notes to the Financial Statements
b. Statement of Appropriations, Allotments, Obligations,
d. Statement of Changes in Net Assets/Equity
2. Which of the following •is most likely applicable to a

government entity but not to a business entity?
a. Presenting a classified statement of financial position
showing distinctions between current and noncurrent
assets and liabilities.
b. Presenting additional disclosures in the notes when

expenses are presented in the statement of financial
performance by function.
c. Presenting cash flows from operating activities in the
statement of cash flows using the direct method.
d. Presenting a statement of financial position in a detailed
format.
3. Additional disclosures shall be made in the notes if an entity
presents expenses by
a. nature c. current/noncurrent
b. function d. all of these
4• The statement of financial performance of a government entity

differs from the statement of profit or loss of a business entity
in which of the following respects?

as The use of the term "surplus or deficit" rather than "profit
or loss."
b• The use of the term "surplus or deficit" rather than
''comprehensive income."
368
Chapter 14
c. The use of the term "revenues" rather than "income."
d. The presentation of expenses by nature rather than by

function.
5.
The closing of the "Cash-Treasury/Agency Deposit, Regular,
account to the "Accumulated Surplus (Deficit)" aCCOUnt is
presented in the statement of changes in equity

a. as an adjustment to the opening balance of equity.
b. as part of operating activities.
c. under the "Adjustment of net revenue recognized directly
in net assets/equity" line item.
d. not presented.
6. The GAM for NGAs requires which of the following methods

of presenting cash flows from (used in) operaCing activities in
the statement of cash flows?

a. Direct method c. a or b
b. Indirect method d. neither a nor b
7. A government entity presents payments for purchases of

inventories in the statement of cash flows
a. under investing activities.
b. net of withholding taxes.
c. gross of withholding taxes.
d. as footnote disclosure only.
8. Which of the following cash flows is presented in the
financing activities section of a statement of cash flows?

a. Lease payments under an operating lease
b. Lease payments under a finance lease
c. Receipt of repayment of loan
d. Amortization of a finance lease liability
Fittartcial Statements 369
The Notice of Cash Allocation (NCA) is least likely to be

9.
reported in which of the following financial statements?
a.
Statement of financial position
b. Statement of financial performance
c.
Statement of cash flows
d. Notes to the financial statements
10. Which of the following is an adjusång event?

a. Settlement of a court case that evidences a present
obligation after the reporting date.
b. Bankruptcy of a debtor caused solely by an event that
occurred after the reporting date.
c. Sale of inventories that evidences the correct NRV cf
inventories at the reporting date.
d. Destruction of a building due to fire that occurred after the
reporting date.
370 Chapter 14
PROBLEM 14-3: FINANCIAL STATEMENT PRESENTATION

The comparative pre-closing* adjusted trial balances of Entity A
on December 31, 20x2 are shown below:

20x1 20x2
Accounts
30,000
Cash - Collecting OffiG1•rs
290,000 250,000
Cash-Treasury/Agency Dep., Reg.
80,000 120,000
Accounts Receivable
Allowance for Impairment - A/R (5,000)
20,000
800,000 800,000
Buildings
Accumulated Depreciation - Buildings (650,000) (680,000)
Office Equipment
340,000 660,000
Accumulated Depreciation - Equipment (180,000) (200,000)
Accounts Payable (60,000) (90,000)
Due to BIR (20,000)

Due to GSIS (4,000)
Due to Pag-1BIG (2,000)

Due to PhilHealth (1,000)
Accumulated Surplus (Deficit) (160,000) (333,000)
Tax on Delivery Vans and Trucks (40,000) (50,000)
Waterworks System Fees (192,000) (240,000)
Subsidy from NG (934,000)

Salaries and Wages, Regular 303,000 380,000
PERA 16,000 20,000
Office Supplies Expense 104,000 130,000
Water Expenses 16,000 20,000
Electricity Expenses 48,000 60,000
Telephone Expenses 32,000 40,000
Janitorial Expenses 64,000 80,000
Security Expenses 80,000 100,000

Depreciation-Bldgs.& Other Structures 24,000 30,000
Depreciation-Machinery & Equipment 16,000 20,0

Impairment Loss - Loans & Receivables
Totals
371
*Hint: Recall that the "Cash-Treasury/Agency Deposit, Regular" account is
closed directly to the "AQrmulated Surplus (Deficit)" account. In the

statement of changes in net assets/equity, this is presented under the
0 Adjustment of net revenue recognized directly in net assets/equity" line
item.
Additional information:
a. Entity Areceived NCA of in 20x2. Unused NCA

reverted at year-end amounted to P43,000.
b. The unbilled tax revenues were collected in cash.
c. All collections of revenues, billed and unbilled, were remitted

to the National Treasury.
d. Taxes withheld in 20x2 on payments of:
Personnel Services, P90,000

Maintenance and Other Operating Expenses, P20,000
Purchases of inventories, PIO,OOO
Purchase of office equipment, P20,000
Salary deductions for contributions to GSIS, PhilHealth and
Pag-1BIG in 20x2 amounted to P60,ooo.
f. Taxes withheld and other salary deductions are aggregated
and presented under the "Inter-agency payables" line item.
g,
Only the purchases of office supplies inventory affected the
accounts payable in 20x2.

h. For simplicity, assume there are no basis, timing or entity
differences between 'budgeted amounts' and 'actual amounts on a
comparable basis'. The following are relevant to the preparation
of the statement of comparison of budget and actual amounts:
Budgeted and Actual Receipts

i. Original Budgeted Receipts
The total original budgeted receipts amounts to P300,000.
This is sourced from the 20x2 Budget of Expenditures and

Sources of Financing. It constitutes the projected
revenues/receipts for the following:

'40,000
Tax Revenue
260,000
Services and Business Income
372 Chapter 14
ii.
Final Budgeted Receipts
(There are no adjustments to the original budget).
iii.
Actual Receipts on Comparable Basis
The total actual receipts on comparable basis amounts to
P250,000. This is based on the Consolidated Actual

Revenue Collections per FAR No. 5, Statement of Financial
Performance and Statement of Cash Flows. It constitutes
the actual collections/receipts from Tax Revenue and
Services and Business 'Income that will accrue to the
General Fund and Special Account in the General Fund.
Budgeted and Actual Payments

iv.
Original Budget
The original budget for payments of PS, MOOE and CO
amounts to Pl,200,000. This is based on the Current Year's
Appropriations, sourced from the Statement of
Appropriations, Allotments, Obligations, Disbursements

and Balances (FAR No. 1). It consists of the following:
Personnel Services P420,OOO
Maintenance and Other Operating Expenses P480,ooo
Capital Outlay P300,OOO
v. Final Budget
The final budget amounts to Pl,200,000. This includes a
P20,000 realignment from PS to CO.
vi. Actual Payments
The actual payments for PS, MOOE, and CO, based on the
Disbursements for payment of Current Yeads Obligations
(from Current Year and Continuing Appropriations)
sourced from FAR No. 1 consist of the following:
Personnel Services
p400,ooo
Maintenance and Other Operating Expenses P450,000

Capital Outlay p320,ooo
financial Statements 373
Requirements:
prepare a comparative statement of financial position showing
a.
cross-references to the notes for the following line items:
1. Receivables
2. Property, Plant and Equipment
3. Inter-agency Payables
prepare a comparative statement of financial performance
showing cross-references to the notes for the following line
items:
4. Personnel Services
5. Maintenance and Other Operating Expenses
6. Non-cash Expenses
c.
prepare a comparative statement of changes in net
assets/equity.
d.
Prepare the 20x2 statement of cash flows.
Prepare the 20x2 statement of comparison of budget and
actual amounts.
f. Prepare a comparative partial notes showing the breakdowns
of the cross-referenced line items.

1. These refer to financial statements intended to meet the needs
of users who are not in a position to demand reports tailored
to meet their particular information needs.

a. All-Purpose Financial Statements
b. General Purpose Financial Statements
c. Managerial Reports
d. Financial Reports
2• Which of the following is an objective of the general purpose

financial statements of government entities?
a. To provide information about the entity's financial
position, financial performance, and cash flows that is
useful to a wide range of users in making economic
decisions.
374
Chapter 14
b. To demonstrate the accountability of the entity for the
resoUrces entrusted to it.
c. To provide information needed in the day-to-day
management of an entity.
d. a and b
3.
According to the GAM for NGAs, the responsibility over
financial statements rests with the entity's management,
particularly the
a. Head of the Entity c. COA Auditor
b. Head of Finance/Accounting d. a and b
4. Which of the following is a peculiar general purpose finanäal

statement of government entities?
a. Statement of Financial Performance
b. Statement of Appropriations, Allotments, Obligations,
d. Statement of Changes in Net Assets/Equity
5. Amounts in the statement of financial position show

a. cumulative balances for the reporting period.
b. cumulative balances from the formation of the entity up to
the reporting date.
c. amounts pertaining to the reporting period.
d. cumulative balances from the start of the reporting period
up to the reporting date.
6. According to the GAM for NGAs, the statement of financial
position is presented in comparative form and in

a. a condensed format c. a classified format
b. a detailed format d. all of these
7. The effect of which of the following is recognized directly in
equity rather than in surplus or deficit

a. Correction of current period errors
b. Effect of changes in accounting estimates
375
c.
Gains or losses on remeasuring available-for-sale financial
d. All of these.
8. Finance lease payments pertaining to the reduction of the

outstanding finance lease liability are classified in the
statement of cash flows as
a. Operating activities
c. Financing activities
b. Investing activities
d. Not presented
9. Entity A presents its cash flows from operating activities using

the direct method. Entity A holds foreign currencies. These are
appropriately translated to the spot exchange rates at the
reporting date. How should Entity A present the translation
differences in the statement of cash flows?
a. As an adjustment to surplus or deficit in the operating

activities.
b. As a reconciliation of the cash and cash equivalents at the

beginning and end of the period, presented separately
from the operating, investing and financing activities.
c. As a cash flow from either investing or financing activities
but not operating activities.
d. As a reconciliation of the cash and cash equivalents at the

beginning and end of the period, presented in the notes
but not on the face of the statement of cash flows.
10. Which of the following is not among the other reports

required to be submitted by government entities to the COA?
a. Pre-closing trial balance

b. Schedules showing the regional breakdowns of income
and expenses
c. Post-closing trial balance
d. A completed 14-column worksheet in yellow color
376
Chapter 15
Chapter 15
Miscellaneous Topics
Learning Objectives
1. Account for Service ConcesSion Arrangements by Grantor.
2. Account for Interests in Joint Venture.
3. State the accounting for The Effects of Changes in Foreign
Exchange Rates
Scope of this chapter

The following are discussed in this Chapter:
a. Service Concession Arrangements by Grantor;
b. Interests in Joint Ventures; and
c. The Effects of Changes in Foreign Exchange Rates.
Service Concession Arrangements by Grantor

Service Concession Arrangement — is a binding arrangement between
a grantor and an operator in which:
a. The operator uses the service concession asset to provide a
public service on behalf of the grantor for a specified period of
time; and
b. The operator is compensated for its services over the period Of
the service concession arrangement.
Binding Arrangements — are contracts and other arrangementS

that confer similar rights and obligations on the parties to it as
if they were in the form of a contract.
Grantor — is the public sector entity (government entity) that
grants the right to use the service concession asset to the
operator.
Miscellaneous Topics 377
Operator -e is the private entity that uses the service concession

asset to provide public services subject to the grantor's control
of the asset.
service Concession Asset — is an asset used to provide public
services in a service concession arrangement that:
1. Is provided by the operator which:
i. the operator constructs, develops, or acquires from a
third party; or
ii. is an existing asset of the operator; or
2. Is provided by the grantor which:
i. is an existing asset of the grantor; or
ii. is an upgrade to an existing asset of the grantor.
(PEAS 32.8)
Other terms for service concession arrangement are

"build-operate-transfer" (BOT) arrangements, "rehabilitate-
operate-transfer,"
"public-to-private service concession" and
"private-public partiership (PPP).
Examples of concession arrangements under R.A. No. 7718

(An Act Amending Certain Sections Of R.A. No. 6957, Entitled "An Act
Authorizing The Financing, Construction, Operation And Maintenance Of
Infrastructure Projects By The Private Sector, And For Othår Purposes"):
a. Build-operate-and-transfer (BOT) the private entity awarded

with the contract undertakes to finance the construction of an
infrastructure facility and operate it for a fixed term not to
exceed 50 years. At the end of the term, the facility is
transferred to the government. If the interest of the
Government so requires, the transfer of the facility includes
the transfer of process technology and training of Filipino
nationals.
be Build-transfer-and-operate (BTO) — the private entity awarded

With the contract undertakes to complete the construction of a
facility, assuming cost overruns, delays, and specified
378 Chapter 15
performance risks. Upon completion, the facility is
immediately transferred to the govemment. However, the

private entity operates the facility on behalf of the government
under an agreement.
c. Rehabilitate-operate-and-transfer (ROT) — the private entity

awarded with the contract undertakes to rehabilitate or
refurbish an existing facility of the government then operate it
for a certain period. At the end of that period, the facility is
reverted back to the government.
d. Develop-operate-and-transfer (DOT) — a private entity awarded

with an infrastructure project is also given the right to develop
an adjoining property, thereby enjoying some benefits in the
form of higher property or rent values brought about by the
government infrastructure project.
e. Contract-add-and-operate (CAO) — the private entity adds to an

existing infrastructure facility, which it is renting from the
government, then operates the added facility over an agreed
period. Ownership over the added facility may or may not be
transferred to the government. If there is a transfer of
ownership, the contract is accounted for as a service
concession arrangement
Recognition and Measurement of Asset

The grantor recognizes a service concession asset if:
a. The grantor controls or regulates what services the operator

must provide with the asset, to whom it must provide them,
and at what price; and
b. The grantor controls, through ownership, beneficial
entitlement or otherwise, any significant residual interest in

the assei at the end of the term of the arrangement.
(PPSAS 32.9)
379
Complete control of the price is not necessary. It is

sufficient,that the price is regulated.
II the operator has freedom to set prices, the grantor

controls the price if any excess profit is retumed to the grantor
the operato€s return is capped).
(i.e.,
Control shall be distinguished from management. If the

grantor retains both the degree of control described in (a) and (b)
above, the operator is only managing the asset on the grantor's

behalf, even though the operator may have wide managerial
discretion.
A grantor recognizes even a "whole-of-life" asset (i.e., an
asset used in a service concession arrangement for its entire useful
life) if the conditions in (a) and (b) above are met.
measurement
Initial
A service concession asset is initially measured at:
a. Fair value, if the asset is provided by the operator in

accordance with the recognition criteria in (a) and (b) above.
b. Cost, in accordance with the measurement principles for PPE
or Intangible Assets, as appropriate, if the asset is reclassified
from the existing assets of the grantor, e.g., an existing asset is
transferred to the operator for refurbishing.
A service concession asset is subsequently accounted for as service
concession tangible asset (a separate class of PPE) or as service
concession intangible asset (a separate class of intangible assets), as
appropriate.
Recognition and Measurement of Liability

When the grantor recognizes a service concession asset, the related
liability is measured at the same amount, adjusted for any other
C Onsideration (e.g., cash) received from or paid to the operator.

380 Chapter 15
No liability is recognized when an existing asset of the
grantor is reclassified as a service concession asset, except when

the operator provides additional consideration.
In exchange for the service concession asset, the grantor
may compensate the operator by one or a combination of the
following:
1. Making payments to the operator ('financial liability model');
2. Granting the operator the:
a. Right to collect fees from users of the service concession
asset; or
b. Right to access another revenue-generating asset for the
operator's use (e.g., a private wing of a hospital where the
remainder of the hospital is used by the grantor to treat
public patients or a private parking facility adjacent to a
public facility). (PPSAS 32.17)
Financial Liability Model

The grantor recognizes a financial liability if it incurs an
unconditional obligation to pay cash or another financial asset to
the operator in exchange for the service concession asset.

The payments shall be allocated as a reduction in the
liability, a finance charge, and charges for services provided by
the operator.
Where the asset and service components of a service
concession arrangement are separately identifiable, the payments

are allocated based on the relative fair values of the components.
If the components are not separately identifiable, the grantor shall
estimate the service component of the payments.
Grant of Right to the Operator Model

If the operator is compensated by a grant of right to earn revenue
from third-party users or another revenue-generating asset, the
grantor recognizes a liability for the unearned portion of the

revenue arising from the exchange of assets between the grantor
and the operator.
Mi"llmeous Topics 381
The grantor then recognizes revenue for the earned

over the contract term according to the economic
substance of the service concession arrangement.
Dividing the Arrangement

If the operator is compensated partly by payments and partly by
grant of right, the grantor shall allocate the total liability to these
elements and account for them separately.
The amount initially recognized for the total liability shall
be the same amount as the service concession asset adjusted for
any other consideration (e.g., cash) received from or paid to the
operator.
Impairment and Derecognition

The gantor uses the same principles used for PPE and intangible
assets to account for the impairment or derecognition of service
concession assets.
Illustrative Accounting Entries (GAM for NGAs, Chapter 14, Sec. 14)
I. Financial Liability Model
Date Service Concession-Road Networks xx
Service Concession Arrangement Payable

To reco ize the service concession asset
xx
Date Interest Expenses
Service Concession Arrangement Payable
To recognize finance charge prior to payment
xx
Date Service ConcessionArrangement Payable
Regular
To reco ize ento liabili
Date xx
Pepreciation-Service Concession, Road Networks
Accumulated Depreciation-Service Concession
To reco ized reciation
382
Chapter 15
II. Grant of Right to Operator Model
Date Service Concession-Road Networks xx

Deferred Service Concession Revenue xx
To reco ize the service concession asset
Date Deferred Service Concession Revenue xx

Service Concession Revenue xx
To recognize revenue based on economic substance
o the service concession arran ement
Interests in Joint Venture
Introduction
Joint Venture — is a binding arrangement whereby two or more
parties are committed to undertake an activity that is subject to
joint control.
— is the agreed sharing of control over an

Joint control activity
by a binding arrangement.
(PPSAS 8.6)
The following are the three forms of joint ventures:

a. Jointly controlled operations
b. Jointly controlled assets
c. Jointly controlled entities
Jointly Controlled Operations
In a jointly controlled operation, each venturer uses and

recognizes its own assets, incurs its own liabilities and expenses,
but each will share in the income from sales by the joint venture,
Each venturer records joint venture transactions in its own books
of account.
Venturer — a party to a joint venture and has joint control

is
over that joint venture. (PPSAS 8.6)
MiscdlanØus Topics 383
Illustration:
Entity
A and Entity B agreed to combine their operations,
resources and expertise to manufacture, market and distribute
jontly A particular product. Different parts of the manufacturing
process are carried out by each of the venturers. Each venturer
bears its own costs and shares equally on the revenue from the
sale of the product.

The joint venture was completed, and thus terminated,
during the year. The following were the transactions:
Entity A incurred total costs of PIOO, assumed obligations
amounting to P20, and made sales amounting to P200.
Entity B incurred total costs of P80 and made sales amounting
to P150.
Accountin
Books o Enti A Bookso Enti B
Expenses 100 Expenses 80
Payables 20 Cash 80
Cash 80
Cash 200 Receivable from A 100
Sales (200 x 500/0) 100 Sales 100

Payable to Entity B 100 To recognize share in joint
To recognize share in joint

venture's sales
venture's sales and to recognize Entity
B'* share as payable.
Receivable from B 75 Cash 150

Sales 75 Sales (150 x 50%) 75
Pa able to Enti 75
Financial reporting:
The individual financial statements of the entities will show the
following:
384 Chapter lit
Enti A Enti B
Sales [(200 + 150) x 500/01 175 Sales [(200 + 150) x 500/01 175
Expenses (100) Expenses

Surplus _Z5 Surplus -95
For both venturers, no adjustments or other consolidation

procedures are necessary when each prepares its financial
statements.
Jointly Controlled 'Assets

In a jointly controlled assets, each venturer recognizes its share in
the assets, liabilities, income and expenses of the joint venture,
classified according to the nature of those items, rather than
through an investment account. Each venturer records joint
venture transactions in its own books of account.
Illustration:
Entity A and B agreed to contribute resources in constructing an
oil pipeline to be used by each to transport its own oil. In return,
the venturers shall share equally the acquisition cost and
operation costs of the pipeline. The acquisition cost of the pipeline
was PIOOM while operating expenses totaled P30M. Entity A had
total sales of P120M while Entity B had total sales of P150M.
AccoUntin
Books o Enti A Books o Entit B
Oil Pipeline (100M x 500/0) 50M Oil Pipeline (100M x 500/0) 50M
Cash 50M Cash 50M
Expenses (30M x 50%) 15M Expenses (30M x 50%) 15M

Cash 15M Cash 15M
Cash 120M Cash 150M

Sales 120M Sales 150M
.34
Mi$$llaneous Topics
385
The individual financial statements of the entities will show the
following:
Enti A Enti B
PPE (oil pipeline) 50M PPE (oil pipeline)
Sales 120M Sales 150M

Expenses (15M) Expenses (15M)
Surplus 105M Surplus
For both venturers, no other adjustments are necessary

when each prepares its financial statements because each
ventured s financial statements already reflect the economic reality
of the arrangement.
Jointly Controlled Entities
In a jointly controlled entity, a separate entity (e.g., a corporation)

is established. The separate entity recognizes its own assets,
liabilities, equity, income and expenses in its own books of
accounts, separate from those of the venturers.
Each venturer recognizes its interest in the net assets of the
separate entity through an investment account (i.e., Investrnent in

Joint Venture). The investment in joint venture is accounted for
under the equity method.

Under the equity method, the investment is initially
recognized at cost and subsequently adjusted for the venturer's

share in the changes in the equity of the investee (e.g., share in
surplus or deficit, share in dividends).
An investor that does not. have joint control but has
significant influence over the joint venture shall account for its
interest as investment in associates. Investment in associates is
also accounted for under the equity method.

386
Chapter 5
Significant influence — is the power to participate in the

financial and operating policy decisions of an activity but is
not control or joint control over those policies. (PPSAS 8.6)
The entity shall discontinue the use of the equity method

from the date it ceases to have joint control or siB1ificant influence
over a jointly controlled entity.
An interest in a jointly controlled entity that is acquired

with the exclusive view of disposal within 12 months from
acquisition shall be accounted for as financial asset heldfor trading.
An operator or manager of a joint venture recognizes the
management fees it receives as revenue while the joint venture
recognizes those fees as expenses.
Illustration:
Entity A and Entity B agreed to combine their resources to
establish a new entity, called Entity C. Using the contributed

resources and expertise of Entities A and B, Entity C shall
manufacture, market and distribute a particular product. Entity A

and Entity B shall each have an equal interest in the net assets of
Entity C.
Entities A and B contributed PIOM each in the formation
of Entity C. Entity C earned profit of P8M during the period and
declared P2M dividends.
Accounting:
Books o A Bookso B Books o C

Investment in JV 10M Investment in JV 10M Cash 20M
Cash 10M Cash 10M Share Capital 20M
Investment in JV 4M Investment in JV 4M Income Summary 8M

Share in profit of Share in profit of Retained Earnings 8M
Joint Venture 4M Joint Venture 4M
Cash 1M Cash 1M Retained Earnings 2M

Investment in JV 1M Investment in JV 1M Cash 2M
Mi«cllmtfitu.s Topics
The individual financial statements of the entities will show
following.
Enti A Entit B Enti C

Investment in JV Investment in JV Cash
Share Capital 20M

Retained earnings --6M
The Effects of Changes in Foreign Exchange Rates
Initial Measurement
A foreign currency transaction is initially measured by translating
the foreign currency amount into the functional currency using
the spot exchange rate.
Foreign Currency Transactions are transactions that are
denominated and require settlement in foreign currency, e.g.,
buying and selling goods or services at prices denominated in

a foreign currency and settling receivables and payables
denominated in foreign currency.
Foreign Currency — a currency other than the functional
currency of the entity. (PPSAS 4.10)
Functional Currency — the currency of the primarv econonuc
environment in which the entity operates. (PISA-S 4.10)
Spot exchange rate — the exchange rate for immediate delivery.

(PPSAS 4.10) ...or simply, the current exchange rate on a given
date.
Exchange Rate — the ratio of exchange for two currencies. (HSAS
4.10)
388 Chapter 15
For example, goods acquired for $100 are initially
recognized by translating the $100 into pesos using the spot

exchange rate on the date of acquisiüon.
For practical reasons, an average rate (e.g., for a week or a
month) may be used for all transactions occurring during that
period. However, if exchange rates fluctuate significantly, the use
of the average rate for a period is inappropriate.
At each reporting date, the following items are translated as
follows:
Items Translated usin
a. Moneta items Closin rate

Exchange rate at the date of
b. Nonmonetary items
measured at historical cost transaction
Exchange rate at the fair
c. Nonmonetary items
measured at fair value value measurement date
Closing rate — the spot exchange rate at the reporting date.

Monetary items — are units of currency held and assets and
liabilities to be received or paid in a fixed or determinable
nymber of units of currency. (PPSAS 4.10)
' Non-Monetary items — items which essential feature is the
absence of a right to receive (or an obligation to deliver) a
fixed or determinable number of units of currency. (PPSAS 4.10)
Exchange Differences
Exchange differences arising from the translation of:
a. Monetary items are recognized in surplus or deficit in the
period in which they arise.
b. Nonmonetary items — if the gain or loss is recognized in equity'

the exchange component of the gain or loss is also recognized
in equity; if the gain or loss is recognized in surplus or deficit'
389.
Misællaneous Topics
the exchange component is also recognized in surplus or
deficit.
Exchange difference — the difference resulting from translating a

given number of units of one currency into another currency
at different exchange rates. (PPSAS 4.10)
Illustration:
December 15, 20x0, the Philippine Government obtained a
$1M loan from the World Bank payable in 30 days. The exchange
rates are as follows:
December 15, 20x0 P50:$1

December 31, 20x0 P52:$1
January 14, 20x1 p49:$1
12/15/xo
Cash in Bank-Foreign Currency, Bangko
Sentral ng Pilipinas ($1M x '50) 50M
Loans Pa able-Forei 50M
12/31/xo Loss on Foreign Exchange [(P52 - '50) x SIMI 2M
Loans Pa able-Forei 2M
1/14/x1
Loans Payable-Foreign 52M
Cash in Bank-Foreign Currency,
BSP x P49) 49M
Gain on Forei Exchan e 3M
Translation of Financial Statements
An entity is required to present its financial statements using its
functional currency (i.e., Philippine pesos). However, whenever

needed, the entity may translate its financial statements into any
presentation currency (e.g., Japanese yen, US dollars, etc.), as
follows:
390 Chapter 15
Items Translated usin
a. Assets and Liabilities Closing rate at the date of
(including comparatives) the statement of financial

osition
b. Revenues and Expenses Exchange rates at the dates
(including comparatives) of the transactions
All resulting exchange differences are recognized as a separate

com onent Ofe ui
Chapter 15 Summary:
Under a service concession arrangement a private entity

('operator') uses the service concession asset to provide a
public service on behalf of the government ('grantor') in

exchange for compensation which is (a) payments in cash or
(b) grant of right to collect fees from users of the asset or right
to access another revenue-generating asset, or (c) a
combination of (a) and (b).
A service concession asset is either an asset that the operator

provides to the grantor or an existing asset of the grantor that
the operator undertakes to refurbish.

A service concession asset is initially measured at fair value if
it is provided by the operator to the grantor for which the

grantor obtains control of. In other cases, the service
concession asset is initially measured at cost.
A service concession asset is subsequently accounted for as

either PPE or intangible asset.
If the compensation to the operator is in the form of payments,
the grantor recognizes a financial liability that is
subsequently measured at amortized cost. If the compensation

is in the form of grant of •right, the grantor recognizes a
liability for unearned revenue that will be recognized as
revenue when earned in accordance with the substance of the

service concession arran ement.
391
The three forms of joint ventures under the GAM for NGAs
are (1) Jointly controlled operations, (2) Jointly controlled
assets, and (3) Jointly controlled entities.
Under jointly controlled operations, the joint venturer recopiizes

its own costs, assets, and liabilities but recognizes its share in
the sale revenue of the joint venture.
Under jointly controlled assets, the joint venturer recognizes its
share in the joint venture's assets, liabilities, income and

expenses and include them line-by-line to. its own assets,
liabilities, income and expenses.
Under jointly controlled entities, the joint venturer recognizes its
interest in the joint venture (a separate entity) under the
"Investment in Joint Venture" account, which is accounted for
using the equity method.
A foreign currency transaction is initially measured by
translating the foreign currency amount into the functional
currency using the spot exchange rate.
At each reporting date, monetary items are translated using

the closing rate; nonmonetary items measured at historical
cost are translated using historical exchange rates; and
nonmonetary items measured at fair value are translated
using the exchange rate at the date when the fair value was
determined.
Exchange differences on monetary items are recognized in

surplus or deficit while exchange differences on nonmonetary
items are recognized either in equity or in surplus or deficit.
An entity is required to present its financial statements using
its functional currency. However, it can translate its financial
statements to any presentation currency whenever needed.

When translating financial statements, assets and liabilities are
translated using the closing rate at the reporting date.
Revenues and expenses are translated at the exchange rates at
the dates of the transactions. All resulting exchange

differences are reco dine ui
392
pter 15
PROBLEMS

Entity A, a government entity, enters into a service concession
arrangement with a private entity. Under the arrangement; the
operator undertakes to provide the grantor a tangible service

concession asset. In return, Entity A will compensate the operator
by making payments of PIO per year in the next 20 years.
1. If the appropriate present value factor is 3.50, Entity A will
recognize the service concession asset, and the related
financial liability, at P35.
2. In subsequent periods, Entity A will recognize depreciation

expense on the asset and interest expense on the liabilitv.
3. Entity A is a joint venturer in a joint venture that is classified

as jointly controlled assets. Entity A owns 50% interest in the
joint venture. At the end of the period, Entity A has total
assets of PIOO while the joint venture has total assets of P50.
Entity A will report total assets of P125 in its current year
use the following information for the next five questions:

Entity A, a government entity, acquired inventory from a foreign
company for $10, on account, when the spot exchange rate was
$1:P50. At the reporting date, the exchange rate was Sl:P52. Entity
A settled the purchase after the reporting date when the exchange
rate was $1:P49.
4. If the inventory is consumed by the reporting date, the
carrying amount of the inventory charged as expense is P500•
5. If the inventory remains unsold at the reporting date, its
carrying amount in the statement of financial position is p520•

393
6. Entity A reports an accounts payable of P520 at the reporting

date.
7. Entity A recognizes a foreign exchange loss of P20 at the

reporting date.
8, Entity A
recognizes a net foreign exchange gain of P30 from
the transaction.
use the following infonnationfor the next two questions:
Entity A, a government entity, reports total assets of PIOO, total
liabilities of P80, total revenues of PIO and total expenses of P6 for

the current year. Entity A wants to translate its financial
statements into dollars. The following are the exchange rates:

Dec. 31 (reporting date) $1:PIO
Average rate for the year $1•.P8
9. The translated total assets is PI,OOO.
10. The translated total equity is P200.

1. Under this type of concession arrangement, the private entity
awarded with the contract undertakes to complete the
construction of a facility, assuming cost overruns, delays, and
specified performance risks. Upon completion, the facility is
immediately transferred to the government. However, the

private entity operates the facility on behalf of the government
under an agreement.
a. Build-operate-and-transfer (BOT)
b. Build-transfer-and-operate (BTO)
c. Develop-operate-and-transfer (DOT)
d. Develop-operate-and-never transfer (DON'T)
394
ChaptQ 15
2. Service concession arrangements in the Philippines have a

fixed term of
a. not more than 50 years c. 25 to 50 years
b. at least 50 years d. no fixed term
3. Entity A, a government entity, enters into a service concession

arrangement with a private entity. Under the arrangement, the
private entity (operator) undertakes to finance the
construction of a public infrastructure and shall operate it for a
period of 50 years. At the end of the contract term, ownership

over the public infrastructure shall be transferred to Entity A.
In exchange for the agreement, Entity A shall make specified
periodic payments to the operator over a period of 10 years.

Entity A reserves its right to collect fees from users of the
public infrastructure but shall pay management fees to the

operator. How should Entity A account for the service
concession arrangement?
a. Entity A should recognize an unearned revenue to be
subsequently amortized to income when earned, in
accordance with the substance of the agreement.

b. Entity A should recognize an intangible asset to be
amortized over the 50-year contract term.
c. Entity A should recognize a financial liability for the
agreed periodic payments to be subsequently measured at
amortized cost. Entity A shall recognize the management

fees as expenses when they are incurred.
d. a and b
4. The grantor in a service concession arrangement recognizes a

service concession asset if all of the following are met except
a. The grantor controls or regulates what services the
operator must provide with the asset and to whom it must
provide them.
b. The grantor has complete control of the price even though
management functions are delegated to the operator.
c.
The grantor regulates the price which the operator chargeS
the users of the service.
—llaneous Topics
395
d. The grantor controls, through ownership, beneficial
entitlement or otherwise, any significant residual interest

in the asset at the end of the term of the arrangement.
5. A service an asset used to provide public

concession asset is
services in a service concession arrangement that
a. is owned by the operator but it undertakes to provide to

the grantor.
b. the operator undertakes to construct and provide to the
grantor.
c. is an existing asset of the grantor that it temporarily
transfers to the operator for an upgrade.
d. Any of these.
6. Entity A acquires 50% interest in a joint venture for PIM and

appropriately records the transaction under an investment
account. At the end of the period, the joint venture reports
profit of PIM and makes a total distribution of P600,000 to the
owners. How much is the net effect of the transaction in Entity
A's surplus or deficit for the current year?
a. P.5M c. P.2M
b. P.3M d. none of these
7. A foreign currency transaction is initially measured by

translating the foreign currency amount into the functional
currency using the

a. spot exchange rate at the date of transaction
b. closing rate at the reporting date
c. average rate for the year
d. any of these

Entity A, a government entity, acquires a machine for $1,000 on
NOVember 1, on account, and settles the account on January
20x1,
3' 20x2. The machine is estimated to have a useful life of 5 years
396
15
and a residual value of 5% of cost. Entity A uses the straight line

method of depreciation. The exchange rates are as follows:
November 1, 20x1 $1:P50
December 31, 20x1 $1:P40
January 3, 20x2 $1:P45
8. How much depreciation expense is recognized on the machine

in 20x1?
a. 1,583 c. 9,500
b. 1,425
9. How much is the foreign exchange gain (loss) to be recognized

in the 20x2 surplus or deficit?
a. PIO,OOO c. (P5,OOO)
b. (PIO,OOO) d. P5,OOO
10. When translating financial statements into a presentation
currency,
a. assets and liabilities are translated using the closing rate at
the reporting date.

b. revenues and expenses are translated at the exchange rates
at the dates of the transactions.
c. all resulting exchange differences are recognized in equity.

d. all of these
Mißllaneous Topics
397

1. Under a service concession arrangement, the operator uses the
service concession asset to provide
a. public service c. concession service

b. private service d. a or b
2. The operator in a service concession arrangement is a

a. government entity c. controlled entity
b. private entity d. a orb
3. The operator in a service concession arrangement undertakes

to provide the grantor a service concession asset. If the grantor
regulates what services the operator must provide with the
service concession asset, to whom it must provide them, and
at what price, and the grantor controls significant residual
interest in the asset, the service concession asset is initially
measured at
a. cost c. either a or b
b. fair value d. cost less accumulated depredation
4. The grantor subsequently accounts for a service concession
asset as
a. PPE c. a or b
b. Intangible asset d. none of these
5. Which of the following is a joint venture that is classified as
'jointly controlled operations'?

a. Two parties agree to coproduce a product using their
existing facilities. Each party bears its own costs but share
in the revenue from sales of the coproduced product.
b. Two parties agree to contribute resources to acquire a
warehouse. Each of the parties shall have equal rights over
the use of the warehouse but shall share in the
maintenance costs.
c• Two parües agree to contribute capital in incorporating a
new entity. The new entity will issue shares of stocks to
398 Chapter
the parties representing their respective interests in the

new entity.
d. Two parties agree to contribute money to acquire a piece
of land and subdivide it after the acquisition.
6. Entity A acquires 50% interest in a joint venture for PIM and

appropriately records the transaction under an investmént
account. At the end of the period, the joint venture reports
profit of PIM and distributes P600,000 to the owners. How
much is the carrying amount of the investment account in
Entity A's current year financial statements?
a. Pl.3M c. PIM
b. Pl.2M d. none of these
7. The exchange differences arising from the translation of
monetary items are recognized in

a. surplus or deficit c. a or b
b. equity d.. not recognized
8. Entity A, a government entity, acquires a machine for $10,000

on September 1, 20x1, on account, and settles the account on
October 31, 20x1. Entity A classifies the machine as PPE. The
exchange rates are as follows:
September 1, 20x1 $1:P50
October 31, 20x1 $1:P45
December 31, 20x1 $1:P40
In Entity A's December 31, 20x1 statement of financial
position, how much is the reported cost of the machine?

a. P500,OOO c. P400,OOO
b. P450,OOO d. $10,000
9. . Entity A, agovernment entity, submits financial statements to
the COA using the Philippine peso. However, Entity A also
wants to prepare financial statements in North Korean won•

Topcs
Entity A may translate its financial statements to any

currency as there are no restrictions regarding
preg•ntation currency.
b. Entity A may translate financial statements in North
it',
Korean won cmly if thie is Entity A's functional currency.

C. Entity A shall only finanoal statements using a
single currency, which is the entity's functional currency
d. a and c
translating financial statements tnto a preq•ntation

currency other than the entity's functional currency, assets
and liabilities arc tran«latcd using the
a. closing ratc at thc rcv»rting date.
b. exchange rates at the dates of the transactions
c. average rate during vx•nod

d. exchange rates.
400
Chaptetd61•iA
Chapter 16
Non-profit Organizations
Learning Objectives
1. Explain the applicability of the PFRSs to NPOs.
2. Account for the assets, liabilities, equity, revenues and
expenses of NPOs.
3. Enumerate and describe the financial statements of NPOs.
4. State the accounting procedures peculiar to specific types of
NPOs.
Introduction
Although the IFRSs/PFRSs are designed to apply to business
entities, they can also be applied to non-profit organizations. This

is evidenced by the following excerpts from the IFRSs/PFRSs:
IFRSs are designed to apply to the general purpose financial

statements and other financial reporting of profit-oriented
entities. Although the IFRSs are not designed to apply to not-
for-profit activities, entities with such activities may find them
appropriate." (Preface to IFRSs.9)
PAS 1 Presentation of Financial Statements uses terminology that

is suitable for profit-oriented entities. If entities with not-for-
profit activities apply PAS 1, they may need to amend the
descriptions used for particular line items in the financial
statements and for the financial statements themselves. (PAS 1.5)
IFRSs generally do not have scope limitations for not-for-

profit activities. Although IFRSs are developed for profit-
oriented entities, a not-for-profit entity might be required, or

choose, to apply IFRSs. (IFRS 3 Business Combinations.BC63)
Pß-profit Organizations
401
As can be inferred from the foregoing statements, the

pFRSs can be applied to all reporting entities regardless of their
form (i.e., sole proprietorship, partnership, corporation or

cooperative) and purpose (i.e., for-profit or not-for-profit).
Accordingly, most of the concepts that we will be learning in this

Ütapter would be very familiar to you JO.
However, just like in the case of accounting for sole
proprietorships, partnerships, corporations and cooperatives, the
accounüng for non-profit organizations differs in respect of

accounting for equity.
Current trend in practice
In practice, the accounting for non-profit organizations is
essentially similar to the accounting for businesses. The notable

differences are the terminologies used' in the financial statements,
which are modified to suit the non-profit organization's purpose,

and the presentation and disclosure of equity.
Non-profit organizations in the private sector are normally
organized as non-stock, non-profit corporations. As such, they are
required to file audited annual financial statements to the
Securities and Exchange Commission (SEC). In most cases, the
auditors' reports in these financial statements state an opinion on
the organization's compliance with the PFRSs (OY IFRSs, for
international organizations).
Example 1: Auditors' Report

The following is an excerpt from an Independent Auditor's Report
On published audited financial statements of a non-profit
organization:
Opinion
In Our opinion, the financial statements give a true and fair view
Of the financial position of the Organization as at 31 December
2012, and of its finan&ial performance and its cash flows for the
Year then ended in accordance with International Financial
Reporting Standards.
Chapter 16•
Since the PFRSs do not provide specific guidance on thi

accounting for non-profit organizations, many non-profit
organizations resort to the exemptions provided under PAS 8
Accounting Policies, Changes in Accounting Estimates and Errors (i.e.,
'hierarchy of financial reporting standards'). For example, in cases

where the PFRSs are silent regarding the accounting treatment for,
or financial statement presentation of, a transaction peculiar to
non-profit organizations, the organization may refer to the general

guidelines set forth under the Conceptual Framework.
Example 2: Modified Statement ofcompliance

The following is an excerpt from the notes to financial statements
of a non-profit organization's published financial statements:
Note 2.1 Statement of compliance

The financial statements have been prepared in accordance with
and comply with International Financial Reporting Standards

(IFRS) as issued by the International Accounting Standards Board
(IASB) and interpretations issued by the International Financial
Reporting Interpretaåons Committee (IFRIC) of the IASB and are
presented in accordance with the Organization's Financial
Regulations.
Currently, IFRS do not contain specific guidance for non-profit

organizations (NPO) concerning the accounting treatment and the
presentation of financial statements. Where IFRS are silent or do
not give guidance on how to treat transactions specific to the not-
for-profit sector, accounting policies have been based on the
general principles of IFRS, as detailed in the IASB Conceptual
Framework.
403
characteristics of a non-profit organization
Non-profit organization (NPO) - (also called not-for-profit entity
INFP' or noncommercial organization 'NCO) is one that carries out

some socially desirable needs of the community or its members
and whose activities are not directed towards making profit.
The main objective of NPOs may be educational, religious,
social, cultural or charitable. NPOs may be in the form of
educational institutions, hospitals and other health care providers,
religious institutions, professional bodies, sports, social or literary
clubs,and other forms of charitable institutions.
earn revenues sufficient to cover their expenses. A
NPOs
major portion of these revenues are derived from charitable
donations and other fundraising activities. Surplus revenues do
not inure to the benefit of a particular individual or group of
individuals but rather retained in furtherance of the organization's
mission. Accordingly, none of the surplus revenues are
distributed as dividends.
Because NPOs carry out their activities in the interest of

the societyand without the intention of making profit, NPOs are
usually exempt from income taxation.
PFRS principles applicable to NPOs

As stated earlier, the recognition, measurement, derecognition,
presentation and disclosure requirements of the PFRSs can be
applied to NPOs. Examples are provided below:

Recognition criteria for assets and liabilities:
a. Meets the definition of an asset or liability;
b. Probable inflow or outflow of resources; and

c. Reliable measurement of cost or other value (e.g., fair value).
Measurement ofAsset or Liability:

a. measurement at cost except when a relevant PFRS
Initial
requires measurement at fair value or some other value.

b. Subsequent measurement at amortized cost, under the
cost model, or some other measurement model required
by a relevant PFRS.
Gapter 16/5},.
• Derecognition of Asset or Liability:

An asset (or liability) is derecognized when it ceases to
provide inflow (or require outflow) of resources embodying

economic benefits. The difference between the carrying
amount and net proceeds (or net settlement), if any, is
recognized in change in net assets.
• Presentation of Financial Statements:

General features: Fair presentation and compliance with PFRSs,
Going concern, Accrual basis, Materiality and aggregation,
Offsetting, Frequency of reporting, Comparative information,

and Consistency of presentation.
Our succeeding discussions on the accounting for NPOs are based

in part on the accounting principles specifically provided under
U.S. GAAP Statement of Finanäal Accounting Standards (SFAS
or FAS) No. 116 Accounting for Contributions Received and
Contributions Made and SFAS No. 117 Financial Statements of Not-
for-Profit Organizations.
Although these principles do not have the same authority
as those of the PFRSs, they may be adopted and used in
conjunction with the PFRSs (to the extent that they not
contravene the provisions of the PFRSs) in order to provide more
useful financial information to users of NPO financial statements.
Moreover, CPA board exam questions on accounting for NPOs

have traditionally been based on these principles.
Various illustrative financial statements are provided in
the next chapter. I encourage you to notice later on how the U.S.
GAAP principles are incorporated into PFRS-based financial
statements.
All throughout our discussions in this chapter, we will use
the term "non-profit organization (NPO)" to refer only to non-
profit organizations in the private sector. Those belonging to the
government entities) are outside the scope of this

public sector (e.g.,
chapter. They are discussed in the Government Accounting part Of
this book.
405
Accounting for non-profit organizations
Fund theory vs. Fund accounting

fhe financial statements of most NPOs are based on the fund
theory. The fund theory stresses great importance on the custody

and administration of funds. Accordingly, the source, nature and
purpose of the funds held by the NPO are disclosed in order to
giveinformation necessary for users to assess the organization's
stewardship over those funds.
Although fund accounting is an off-shoot of the fund

theory; SFAS 117 and the PFRSs do not require the use of fund
accounting. However, entities are not prohibited from using it.

Under fund accounting, the main accounting unit is the
fund. Accordingly, transactions are accounted for in thebooks and
presented in the financial statements strictly based on their fund
classifications as either (1) Unrestricted, (2) Temporarily restricted,
or (3) Permanently restricted.
Fund theory-based financial Fund accounting-based

statements •nancial statements
• Focuses on the reporting Views the entity as being

entity concept; thus, the made up of component
accounting unit is the parts; thus, the accounting
units are the various funds

organization as a whole.
held.
Adheres to the bookkeeping
• Adheres to the accounting
point-of-view of providing
useful information to
mana ers.
external users.
The term "funds" is used to
The term "funds" is more
refer to specific funds
commonly used to refer to consisting of cash and other
the net assets.
non-cash assets.
Focuses on classifying
Provides disclosures on the assets, net assets, and changes
types of restrictions on net
in them strictl in
assets and revenues (i.e.,
406 Chapter
accordance with their fund

unrestricted, temporarily
restricted, or permanently classifications (i.e.,
restricted). unrestricted, temporarily

restricted, or permanently
restricted).
Current trend Traditional
Contributions
A majority of the revenues of NPOs come from charitable
contributions or donations.
Contributions refer•to resources received in non-reciprocal
transactions. Contributions exclude those that result from
exchange tiansactions (i.e., resources received in exchange for other
resources or obligations).
SFAS 116 classifies contributions based on donor's
restrictions as follows:
1. Unrestricted — available for immediate use and for any

purpose.
2. Temporarily restricted — restricted by the donor in such a way

that the availability of the contribution for the NP(Ys use is
dependent upon:
a. the performance of a specific task;
b. the happening of a future event; or
c. the passage of time
The temporarily restricted contribution is available to the

organization when the task is performed, the event occurred,
or the time restraint passes. At that time, the support is
reclassified from temporarily restricted to unrestricted.
3. Permanently — restricted by the donor in such a way

restricted
that the organization will never be able to use the contribution
itself; however, the organization may be able to use the

income therefrom.
Nor-profit Organizations
407
gecognition and measurement
cash and other Non-cash assets
cash and other non-cash assets received as contributions are

recognized as revenues in the period received and as assets,
decreaseS Of liabilities, or expenses depending on the form of the

benefits received.
Contributions are measured at fair value at the date of

contribution, and are reported as either:
a. Unrestricted support revenue from unrestricted

contributions; or
b. Restricted support — revenue from temporarily restricted or
permanently restricted contributions.
Temporarily restricted contributions whose restrictions are

met in the same reporting period may be reported as unrestricted
support provided that the NPO discloses this accounting policy
and applies it consistently from period to period.

Unrestricted support increases unrestricted net assets while
restricted support increases either (a) temporarily restricted net
assets or (b) permanently restricted net assets.
Illustration 1: Unrestricted support

A non-profit organization receives cash of P200,000 and land with
fair value of to be used at the entity's discretion.
Date Cash 200,000
Land
Contributions revenue --
1,200,000
unrestricted support
To record receipt of unrestricted
donations o cash and land
Illustration 2: Restricted support

On January 1, 20x1, Entity A, a non-profit organization, receives
the following donations:

408 Chapter 16
Cash of to be used to acquire a truck. The truck will

be used in Entity A's outreach programs.
• Investment in equity securities with fair value of P500,000 to
be held indefinitely. Only the investment income shall be used

by Entity A in its operations.
On December 31, 20x1, Entity A acquirés a truck for
P2,200,000 and receives cash dividends of P60,000 from the equity
securities.
Jan. 1, Cash
20x1
Contributions revenue —
temporarily restricted support

To record receipt of tonporarily
restricted donation o cash
Jan. 1, Investment in equity securities 500,000

20x1
permanently restricted support

500,000
To record receipt of permanently

restricted donation
Dec. Transportation equipment — Truck

31,
Cash
20x1
Dec. Cash 60,000
31, Dividend income 60,000
20x1
Unconditional promises
Unconditional promise to give cash or other non-cash assets in a
future period is recognized when the unconditional promise to
give is received from the donor. Generally, such unconditional
promise is classified as a temporarily restricted contribution because
of the time restriction (i.e., to be received in the future). In the
event that the promised contribution becomes doubtful Of
collection, an allowance for uncollectability is recognized.

Organizations 409
Åorprofit
Conditional promises
cßidonal promises to give, which depend on the occurrence of
A Afied future and uncertain event to bind the promisor, are
a d only when the attached conditions are substantially

rec+ewhen the conditional promise becomes unconditional). A
Net (i.e.,
conditional promise to give is considered unconditional if the
ssibility that the condition will not be met is remote (that is, the
$sibility that the conditions will be met is reasonably certain).

P A transfer of assets with a conditional promise to
contribute them shall be accounted for as a refundable advance
(i.e., liability) until the conditions have been substantially met.
No. 11622)
Illustration: Unconditional and Conditional promises

On January 1, 20x1, Entity A receives a formal promise from
Donor X to donate
case 1: The donation is unconditional and is to be received on
February 14, 20x1.
Jan. 1, Donations receivable

20x1
tem oraril restricted su ort
Feb. Cash
u, Donations receivable
2011
When the effect of time value of money is material,
receivables shall be measured at present value.
case 2: The donation is conditioned on the submission of a

detailed formal plan for a proposed project. As of January 1, 20x1,
the plan is not yet substantially complete.
Jan. 1,
No entry
2011
410 Chapter 65
The conditional promise will be recorded when the
, attached condition is substantially met.
Case 3: (Use the information in Case 2 above.) On February 1, Entity
A receives the promised contribution before the attached
condition is substantially met.
Feb. Cash
1,
Liability for refundable advance
20x1
Services
Contributions of services are recognized if the services received
a. create or enhance nonfinancial assets; or
b. require specialized skills, are provided by individuals

possessing those skills, and would typically need to be
purchased if not provided by donation.
Services requiring specialized skills are provided by

accountants, architects, carpenters, doctors, electricians, lawyers,
nurses, plumbers, teachers, and other professionals and craftsmen.
Contributed services and promises to give services that do
not meet the above criteria are not recognized. (SFAS No. 116.9)
Illustration:
Entity A, a non-profit organization, received the following

services:
a. Carpenters repaired the ceiling of Entity A's office for free.
The fair value of the services is P20,000.

b. JPIA members from various universities helped in a tree-
planting activity initiated by Entity A for free. The fair value

of the services might be P50.
(a) Repairs and maintenance expense 20,000

unrestricted su ort 20,000
(b) No en
...2-24
411
Works of art and similar items
need not recognize contributions of works of art, historical

entity
treasures, and similar assets if the donated items are added to
collections that meet all of the following conditions:
a. Held for public exhibition, education, or research in

furtherance of public service rather than financial gain;
b. Protected, kept unencumbered, cared for, and preserved; and
c.
proceeds from sales of collection items are to be used to
acquire other items for collections. (SEAS No. 116.11)
The reason for the non-recognition as an asset or revenue

is that, when all of the conditions above are met, the work of art
(or similar item) does not meet the PFRS asset recognition
criterion of "probable economic benefits." Moreover, the financial
value of some works of art may be difficult to measure reliably.
In cases, however, where a work of art (or similar item)
meets all of the recognition criteria for an asset, the work of art is
recognized as asset and revenue measured at fair value.
Illustration: Fund Accounting

Entity A receives the following donations:
a. Unrestricted donation of PIM cash.
B. Cash of P2M restricted for the acquisition of a building.
c. Investment in stocks of P3M. Entity A can only use the
investnent income.
Entity A acquires a building for P2M and receives

dividends of PIOO,OOO from the investment at the end of the
period.
Requirement: Record the transactions above under a fund
accounting system.
412
16
Solution:
Underfund accounting, transactions are recorded in a manner that

as if the organization is divided into its component parts, i.e., the
funds. Accordingly, transfers between the funds are viewed as
accountable events that are recorded through journal entries.
Unrestricted fund Temporarily Pennanently

restricted nd restricted nd
Cash 1M Cash 2M Investment in stocks 3M
Contribution revenue 1 M Contribution revenue 2M Contribution revenue 3M
Cash 2M Net Assets Released
Net Assets Released from Restrictions 2M
from Restrictions 2M Cash 2M
To record funds To record funds
released from temporary released from temporary
restriction restriction
Building 2M
Cash 2M
Cash 1mK
Dividend income 100K
The net assets released from restrictions is shown in the
statement of activities (prepared using SFAS No. 117 format) as a

decrease in temporqrily restricted net assets and an increase in
unrestricted net assets. The balances of net assets are deterrnined
as follows:
Unrestricted Temporarily Permanently

restricted restricted
net assets
net assets net assets
ASSETS
Cash:
Cash donations
Transfer between fund
classifications
Payment for building

Cash dividends 100,000
Cash, end. 1,100,000
Investment in stocks
413
Buildin
TOTAL ASSETS
Less: LIABILITIES
NETASSETS
Other funds held by NPOs

Endowmentfrnd — classified into the following:
a. Term endowment fund — under the donor's restrictions, the
NPO can use a portion of the principal each period. This

is classified as temporarily restricted.
b. Regular endowment fund — under the donor's restrictions,
the NPO cannot spend any of the principal. This is

classified as permanently restricted.
Income from either term or regular endowment fund is
used according to the donor's instruction.
• Agency fund — funds held by the NPO acting as a custodian.
Agency funds are recognized as liabilities. For example, an

educational institution may receive funds from the
Commission on Higher Education (CHED) to be disbursed as
student loans.
Plant fund — consists of the following:

a. unexpended funds for the acquisition of plant assets;
b. funds for the renewal and replacement of plant assets;
c. funds for the retirement of indebtedness; and
d. investment in plant assets.
Board-designated fund ('quasi-endowmen€) — åmds which

are restricted at the sole discretion of the NPO's governing
board (i.e., Board of Trustees). Funds that are internally
restricted are classified as unrestricted. Only contributions

with donor-imposed restrictions are classified as restricted.
414 Chapter 16
Treating the various funds held by an NPO as separate

accounting units can make accounting cumbersome. Thus, SFAs
No. 117 and the PFRSs do not require fund accounting. Npos
normally use ftmd accounting as a managerial tool rather than a
system for providing general-purpose financial statements.
Illustration 1: Classification of contributions

An NPO disclosed the following:
a. Net resources of PI,OOO,OOO invested in plant assets.
b. Board-designated funds of P600,000.

c. Received P20,000 cash from a donor who did not specify any
use restrictions on the contribution. However, the donor
specified that the donation should not be used until 20x2.
d. Received P800,000 from a donor who stipulated that the
contribution shall be invested indefinitely and that the
earnings shall be used for scholarships. Investment income in
20x1 amounted to P50,000.
Requirement: How much of the items listed above would be

included in (a) unrestricted, (b) temporarily restricted, and (c)
permanently restricted net assets, respectively?
Solution:
Unrestricted Temporarily Permanently restricted
net assets restricted net assets net. assets
(a) 1,000,000
(b) 600,000
(c)
800,000
(d)
Totals 70,000 800,000
(a) time-restricted
(b) restricted for scholarships

pvpr$t Organizations 415
glgstraüon 2: Contributions revenue
An
NPO receives the following during 20x1:
p120,000 proceeds from sales Of calendars, mugs, T-shirts, and
other souvenir items. The fair value of the items sold is
p75,000 while the cost is P50,000.
to be used only upon the completion of a new

facility that is only 30% complete as of December 31, 20x1. If
the facility is not completed by September 2, 20x2, the cash
shall be returned to the donor.
Requirement: How much contribution revenue is recognized from

the donations above?
Answer:
Excess of sale price over fair value of items sold
45,000
(120,000 - 75,000)
Total contribution revenue (unrestricted) 45,000
Notes:
Only the excess of sale price over fair value is treated as

contribution revenue. The P75,000 fair value is treated as sale
revenue from exchange transaction.

The PI,OOO,OOO donation is initially recognized as a liability
(refundable advance) and recogüzed as contribution revenue
only when the condition is met.
Illustration 3: Net effect on net assets

An NPO had the following transactions during 20x1:
a. Received a P200,000 contribution to be used for research
purposes. Of this amount, P120,000 were expended during the
year.
be Expended P50,000 in research activities from a P60,000
research grant received in previous year.
ReqUirement: Determine the 20x1 net effects of the transactions in

net assets.
416 Chapter
Solutions:
Temporarily
Unrestricted restricted net
net assets assets
(a) Contributions revenue, 20x1 200,000

Net assets released from
restrictions 120,000 (120,000)
(120,000)
Expense
Net effect in net assets, 20x1 80,000
(b) Net assets released from

Expense (50,000)
Net effect in net assets, 20x1 (50,000)
Total net e ect in net assets - 20x1 30,000
Notes:
Transaction (a) increased the temporarily restricted net assets
in 20x1 by '80,000 but has no effect on unrestricted net assets.
Transaction (b) decreased the temporarily restricted net assets
in 20x1 by 250,000 but has no effect on unrestricted net assets.
Illustration 4: Receipt of resources as an Agent

An NPO received relief goods to be distributed to flood victims in
a specified area. The NPO has no discretion in determining the
parties to be benefited; it must deliver the resources to the
specified beneficiaries (i.e., flood victims). The relief goods have a

fair value of PIOO,OOO. How much contributions revenue shall be
recognized on the goods received?
Answer: Nome. The NPO is merely acting as an agent (i.e., as a
recipient of goods to be distributed to specified third-party
beneficiaries).
NM-profit Organizations
417
IllusEation 5: Intermediary between donor and donee

An NPO is formed to help patients find donors of blood. The NPO
is not a blood bank and does not accept blood donaåons. Instead,
the NPO maintains a list of blood banks that are interested in
accepting and providing blood donations. The blood banks

determine how they can serve the referred patients,
During the period, the NPO helped several patients get

blood donations from blood banks. Without the referrals, the
patients would have spent PIM.
Requirement: How much is the NPO's contributions revenue?
Answer:
Nane — the NPO is merely acting as an agent in bringing together

a willing donor and donee. The blood donations are not
contributions received by the NPO.
Illustration 6: Endowments
A donor establishes a PIM fund in a third-party trust company in
favor of an NPO. The NPO cannot withdraw the Kind but is
entitled to any investment income thereof.
Requirement: Prepare the journal entry to record the event in the

NPO's books.
Answer:
NO journal entry shall be made because no asset has been

received. The event is recorded through memo entry. A journal
entry will be made When the fund earns investment income.
418
Chapter 16
On January 1, 20x1, an NPO receives PIOO,OOO cash donation
under a "charitable remainder annuity trust agreemen€' with the
following provisions:
The NPO is the designated trustee who undertakes to invest
the cash donation and make annual year-end payments of
P5,000 to Mr. A, the annuitant, for the remainder of his life.
Upon death of Mr. A, the NPO may use its remainder interest
for any purpose consistent with its mission.
Per actuarial valuation, the appropriate discount rate is 10%

and the annuitant's life expectancy is 5 years.
Requirement: Prepare the entry on January 1, 20x1.
Solution:
1/1/20x1 Cash 100,000
Annuities payable (a) 18,954
tem oraril restricted su ort (b) 81,046
(a) (5,000 x PV of ordinary annuity of 1 @ 10%, n=5) = 18,954

(b) (100,000 - 18,954) = 81,046
Note: The transaction is partly an exchange transaction and partly
a contribution. The exchange component is recognized as liability
(annuities payable). This is subsequently measured at amortized

cost. The contribution component is recognized as temporarily
restricted support because of the 'time restriction.'
Deferral method of recognizing contributions

In its publication titled "A Guide to Financial Statements of Not-For-
Profit Organizations — Questions For Directors to Ask, " the Chartered
Accountants of Canada suggest a Method"
"Deferral in
accounting for restricted contributions received by NPOs.

419
The "deferral method" is similar to the provisions of PAS 20

Accounting for Government Grants and Disclosure of Government
Assistance, in such a way that income from donations is recognized
based on the "matching concept.'
Under the "deferral method," restricted contributions are

initially recognized as liability (i.e., as deferred revenue) and
recognized as revenue in the same period where the related
expenditures, for which the contributions were intended to
reimburse, are incurred.
Illustration: Deferral method - Canadian GAAP

On February 15, 20x1, an NPO receives P2M cash donation
conditioned on the acquisition of a truck.
Feb. Cash
15,
20x1
Deferred revenue
The NPO acquires a truck for P2M on January 1, 20x2. The

truck will be depreciated over a 10-year useful life using the
straight-line method.
Jane 1' Transportation equipment — truck

20x2
Cash
Dec• Depreciation expense (2M 10 yrs.) 200,000

31,
20x2
Dec. Deferred revenue 200,000

31, 200,000
20x2
Contributions revenue
The "deferral method" parallels more the prindples under the

PFRSs. However, we will be using the principles of SFAS 116 and
117, unless otherwise indicated, because Philippine CPA board
exam questions on NPOs have traditionally been based on these
principles.
420 Chapter 16
Financial statements
A complete set of general-purpose financial statements of an Npo
consists of the followin
PFRSs SFAS No. 117

(based on IASCF's published audited
nancial statements)
Statement of financial Statement of financial
osition osition
Statement of activities
• Statement of cash flows

Notes Notes

The statement of financial position shows information on assets,
liabilities, and net assets.
Classification of Net assets

SFAS No. 117 requires reporting of net assets in the statement of
financial position according to the following classifications:

1. Unrestricted net assets
2. Temporarily restricted net assets
3. Permanently restricted net assets
PFRS-based financial statements may present net assets
using the classifications above either on the statement of financial
position or in the notes.
The statement of activities shows information on revenues
expenses, and changes in net assets for a period. This statement
takes the place of the income statement and statement of changes
in equity for a business entity. However, NPOs may opt to present

a separate statement of changes in net assets (or statement Of
changes in reserves). This separate statement takes the place Of a
statement of changes in equity.

421
SFAS No.117 requires that the statement of activities

report the changes in net assets for each of the three categories of
support separately (i.e., unrestricted, temporarily restricted and
permanently restricted).
PFRS-based financial statements may present changes in

net assets using the classifications above either on the statement of
activities or in the notes.
In a statement of activities, the term "profit" or "net

income" is replaced by the term "change in net assets."
NPOs adopting the PFRSs shall apply PFRS 15 Revenue
from Contracts with Customers for revenues arising from
transactions other than charitable contributions.
Expenses
A statement of activities shall report expenses as decreases in
unrestricted net assets.
SFAS No. 117 requires expenses to be presented in the

statement of activities or in the notes according to their function.
The functional classifications are as follows:
1. Program services — are the activities that result in goods and
services being distributed to beneficiaries, customers, or
members that fulfill the purposes or mission for which the
organization exists. Those services are the major purpose for
and the major output of the organization and often relate to
several major programs.

2. Supporting activities — are all activities other than program
services. Generally, these include management and general,
fund-raising, and membership-development activities.

(SFAS No. 117, 26 to 28)
Illustration: Functional classification of expenses

An NPO had the following expenses during the year:
50,000
Administrative salaries
150,000
Work to help elderly citizens
25,000
Fund-raising costs
140,000
Child care services provided for indigent families
422 Chapter 16
The expenses are classified according to function as follows:
Program Support
Administrative salaries 50,000
150,000
Fund-raising costs 25,000
Child care services provided for indigent

families 140,000
290,000 75,000

The statement of cash flows of an NPO is similar to that of a
business entity and can also be prepared using the direct or

indirect method.
Restricted assets acquired during the period that are used
for long-term purposes because of donor restrictions are classified
as financing activities.
Illustration: Statement of cash flows
An NPO had the following cash flows during the year:

a. P50,000 unrestricted contributions.
b. P600,000 from fundraising activities to support current
operations.
c. PIOO,OOO from a donor who stipulated that the money be spent
in accordance with the wishes of the NPO's governing board.
d. P200,000 cash dividends restricted for the purchase Of
equipment.
e. P200,000 on acquisition of equipment using the cash dividends
above.
f. P300,000 from a donor who stipulated that the contribution be
invested indefinitely. Income from the contribution may be

used in furtherance of the NPO's mission.
Requirement: Present the items above in a statement of cash flows•

423
Solution:
Unrestricted contributions
50,000
Fundraising activities to support aarrent operations
600,000
Unrestricted contributions - for board-designation
100,000
Net cash flows from operating activities
750,000
Irvesting activities
Acquisition of equipment
(200,000)
Financing activities
Cash dividends restricted for acquisition of equipment 200,000
Permanently restricted contribution
300,000
Net cash flows from financing activities 500,000
Total net cash flows during the period
Accounting procedures peculiar to specific types of NPOs

The principles that we have discussed so far apply to all types of
NPOs. In this section, we will discuss accounting procedures
unique to specific types of NPOs. For this purpose, we will
subdivide NPOs into the following:

1. Health Care Organizations
2. Private, non-profit, Colleges and Universities
3. Voluntary Health and Welfare Organizations
4. Other non-profit organizations
Health Care Organizations

Health Care Organizations include hospitals, clinics, medical group
associations, individual
practices, individual practice
Practitioners, emergency care facilities, laboratories, surgery
Centers, other ambulatory care organizations, continuing care
!etirement communities, health maintenance organizations, home
health agencies, nursing home, and rehabilitation centers.
424 Chapter 16;•
In accordance with the "AICPA Audit and ACCOUnång

Guide, Health Care Organizations," the following are the accounting
requirements unique to health care organizations:
1. Components of a complete set of financial statements
2. Presentation of revenues in the statement of operations

3. Presentation of contributions in the statement of operations
4. Disclosure of performance indicator
Financial statements of a health care organization

According to the "AICPA Audit and Accounting Guide, Health
Care Organizations," health care organizations shall prepare the
following statements:
a. Statement of financial position
b. Statement of operations (in lieu of a statement of activities)
c. Statement of changes in net assets
d. Statement of cash flows, and
e. Notes to the financial statements.
Presentation of revenues in the statement of operations

Revenues in the statement of operations are classified into the
following:
a. Net patient revenue — gross patient service revenue less
contractual adjustments, employee discounts and billed charity
b. Premium revenue — results from capitation agreements

c. Other revenues — all other revenues not classifiable as net
patient revenue or premium revenue
Contractual adjustments
A portion of a hospital's revenues is collectible from third-party
payors, such as the Philippine Health Insurance Corporation

(PhilHealth) and other health insurance providers. In this regard'
a contractual adjustment may arise from the reimbursement

agreement.
A contractual adjustment is the difference between what
the hospital considers a fair price for a service rendered versus an
agreed upon amount for the service with the insurance companY•
NM-profit Organizations 425
For example, the hospital may consider P60,000 a fair price
for a service but agrees with PhilHealth to accept only P58,000.

The difference of P2,000 represents the contractual adjustment
which is written off as a direct reduction to patient semice
revenue.
Employee discounts
These are special discounts available only to the NPO's employees
(and their immediate family members) in the form of reduction in
the price of patient services. Employee discounts are accounted for
as direct reduction to patient service revenue.
Charity care
Charity care pertains to free services rendered to patients. Charity
care is not recognized but rather disclosed only in the notes.
Net patient service revenue

Illustration:
ABC Hospital, an NPO, bills P600,000 for services rendered to
patients, P500,000 of which is charged to PhilHealth. It is
estimated that only P530,000 will be collected. Of the P70,000

difference, P35,000 represent contractual adjustments with
PhilHealth, P5,000 for employee discounts, P20,000 for charity
care, and PIO,OOO for uncollectible accounts.
Requirement: How much is the net patient service revenue?

Solution:
Gross patient service revenue 600,000
Less: Contractual adjustments (35,000)

(5,000)
Employee discounts
(20,000)
Charity care
540,000
The uncollectible accounts are recognized as expenses (i.e.,
bad debt expense) rather than a direct adjustment to revenue.

426
Chapter 16
Journal entries:
(Date) Accounts receivable — patients 100,000
Accounts receivable — PhilHealth 500,000
Patient service revenue 600,000

To accrue atient service revenue
(Date) Patient service revenue 35,000

To recognize the contractual
adjustments representing amounts not expected to
be collected om PhilHealth
Accounts receivable patients 5,000

To reduce patient service revenue for
s ecial discounts allowed to em I ees

Accounts receivable — patients 20,000
chari care
(Date) Bad debt expense 10,000

Allowance for doubtful accounts 10,000
To accrue uncollectible accounts
Capitation agreements
Capitation agreements are agreements with third parties based on
the number of employees instead of services rendered. SFAS No.
117 requires revenues from capitation agreements to be shown
separately on the statement of operations under the caption
"Premium revenue," which is a line item below net patient
revenue.
Illustration: Capitation agreement

ABC Hospital, an NPO, agreed to provide medical services to
XYZ's 100 employees for P500 per month, per employee. In April
20x1, only 20 employees availed of the medical services.
Requirement: Provide the entry to recognize revenue from the

capitation agreement.
427
Solution:
ApnT Accounts receivable (100 x P500)
50,000
30t Premium revenue
20x1 50,000
To accrue billings for the month of April
20x1 under thec itationa eement.
Notice that even though only 20 employees availed of the

services, the total amount due on the contract is accrued.
Other revenues
Other revenues consist of revenues other than patient service
revenues and premium revenues. Examples are the revenues from
the hospital's pharmacy, parking deck, flower and gift shop,
educational programs, donated materials and services.
Illustration: Other revenues

ABC Hospital, an NPO, had the following transactions during the
period:
a. Sales of P120,000 shop and cafeteria.
from gift
b. Received P20,000 dividends from donated shares. The use of
the dividends is unrestricted.
c. A computer consultant upgraded ABC's information system

for free. ABC would have paid P50,000 for those services if
they had not been donated.

d. Received donations of medicines worth PIO,OOO from a
pharmaceutical company.
Requirement: Compute for the total other revenues to be presented

in ABC's statement of operations for the period.
Solution:
120,0
Sales from gift shop and cafeteria
20,000
Dividends received
50,000
Professional services received
10,000
Donated supplies
200,000
Other revenues
428
Chapter
Presentation of contributions in the statement of operations

Unlike for other NPOs, health care organizations do not Present
restricted contributions on the statement of operations as part of
revenues. The revenues discussed above (i.e., net patient service
revenues, premium revenues, and other revenues) pertain only to
unrestricted revenues and may include revenues from

unrestricted contributions. Revenues from unrestricted
contributions may be separately indicated as such or included in
the other revenues classification.

Revenues from restricted contributions are presented
separately at the bottom part of the statement of operations,' after
unrestricted revenues and expenses.
Illustration: Restricted contributions

ABC Hospital, an NPO, had the following receipts during the
year:
Net patient revenues

Premium revenue 200,000
Sales from canteen 300,000
Investment Income 56,000
Contributions to be used in renovating the Hospital 400,000
Requirement: How much is reported as total revenue in the

revenues section of the statement of operations?
Answer: eL550ÆP09 (1M + 200K + 300K + 50K). The restricted
contribution is presented separately from the revenues section Of
the statement of operations.
Disclosure of performance indicator

According to the AICPA Guide, the statement of operations shail
provide a performance indicator, such as operating income'

revenue over expenses, etc. The policy used in determining the
performance indicator shall be disclosed in the notes.

429
Unrealized gains and losses on investments in securities
are not a part of the performance indicator, but shall be reported

on the statement of operations after the performance indicator.
private, non-profit, Colleges and Universities
The accounting procedure that 'is unique to private, non-profit,
colleges and universities is the accounting for scholarships and

fellowships. The concepts are provided below:
a. Scholarships and fellowships granted freely are treated as

direct reduction of revenues from tuition and fees, e.g.,
academic scholarship.
b, Scholarships and fellowships granted as compensation for
services rendered by the grantee are treated as expenses, e.g.,
scholarships provided to student assistants and faculty

members or their dependents.
c. Refunds of tuition fees from class cancellations and other
withdrawal of enrolment are treated as direct reduction of
revenues from tuition and fees.
Illustration: Net revenues from tuition and fees

For the current semester, ABC University, an NPO, assessed its
students for tuition and fees. Additional information
follows:
Student scholarships granted to academic scholars 50,000
Student scholarships granted to student assistants

120,0
Refunds for class cancellations and withdrawals of
20,000
enrolment
80,000
Estimated uncollectible accounts
Requirement: How much is the net revenues from tuition and fees?
Solution:
430 Chapter 16
Total assessment of tuition and fees

Student scholarships granted to academic scholars (50,000)
enrolment (20,000)
Net revenues from tuition and fees 930,000
The other items are recognized as expenses.
Voluntary Health and Welfare Organizations

Voluntary Health and Welfare Organizations (VHWO) are non-
profit entities that derive their revenues primarily from donations
from the general public to be used for purposes connected with
health, welfare, or community services. Examples include: women
and children's health and welfare societies, human rights
advocates, environmental protection organizations, religious
organizations, museums and other cultural and arts societies,
libraries, research and scientific foundations, professional
associations, private elementary schools, social clubs, and
fraternal organizations.
What distinguishes a VHWO providing health care
services from a Health Care Organization is the source of revenue

rather than the type of services provided. A VHWO derives its
revenues from donations from the general public while a Health

Care Organization derives its revenues from patients.
The accounting requirement unique to VHWOs is the
provision of a statement of functional expenses that reports

expenses by both functional (i.e., program and supporting) and
natural classifications (salaries expense, depreciation expense'
etc.). According to SFAS No. 117, the statement of functional
expenses is useful in associating expenses with service efforts and

accomplishments of the organization.
Nott-pröfit Organizations
431
Other non-profit organizations
The general accounting requirements for NPOs apply to other

non-profit organizations. Thus, there are actually no accounting
requirements peculiar to these organizations.
Accounting for other assets held by NPOs

As mentioned earlier, the general principles of PFRSs apply to
NPOs. Accordingly, an NPO shall:
Use the accrual basis of accounting, in addition to the other
'general features' provided under PAS 1.

Apply PFRS 9 Financial Instruments (or PFRS for SMEs, as
appropriate) for financial assets and finandal liabilities.
Usually, NPOs account for marketable securities at fair value
with changes in fair values recognized in the statement of

activities — similar to FVPL securities (the FVOCI classification
is not applicable to NPOs adopting the PFRS for SMEs).
Under SFAS 124 Accounting for Certain Investments Held
by Not-for-Profit Organizations, the marketable securities of an
NPO, consisting of either equity or debt instruments, are
measured at fair value. Changes in fair values are recognized
in the statement of activities. Also, marketable securities can
be classified as either current or non-current assets. SFAS 124
does not apply to investments which result to significant
influence or control. Accounting Principles Board (APB)

Opinion No. 18, also a U.S. GAAP, requires the use of the
equity method for investments held by NPOs that result to
significant influence.
Depreciate its depreciable assets in accordance with PAS 16,
and Equipment.
Property, Plant
Recognize impairment loss in acCordance with PAS 36
Impairment of Assets when an asset's carrying amount exceeds
its recoverable amount.

Account for leases (other than those qualifying as
contributions) in accordance with PFRS 16 Leases.

432 Chapteri
Chapter 16 Summary:
Although the PFRSs are designed to apply to bUSiness,entities

they can also be applied to non-profit organizations.
Non-profit organizations carry out socially desirable needs of
the community or its members without the intention of
making profit. NPOs can be clas4fied into the following: (1)
Health Care Organizations, (2) Private, non-profit, colleges

and universities, (3) Voluntary Health and Welfare
Organizations, and (4) Other non-profit organizations.
Accounting principles under U.S. GAAP:
Contributions are classified based on donor's restrictions
as: (1) unrestricted, (2) temporarily restricted, and (3)
permanently restricted. These classifications are also
applied to the net assets. Internally-restricted funds are
unrestricted.
Unconditional promises to give contributions are
recognized when the promise is received from the donor.
Conditional promises are recognized only when the
performance of the attached condition is reasonably

certain.
Cash and other non-cash assets received as contributions
are recognized as assets and revenue measured at fair
value.
Services in-kind that enhance a non-financial asset or
require specialized skills are recognized as revenue and
expense. Other services are not recognized.
Works of art and similar items received as donation are
generally not recognized, unless they meet the asset
Contributions received by an NPO acting as an agent are
recognized as liabilities.
Net assets released from restrictions are presented as a
decrease in temporarily restricted net assets and an

increase in unrestricted net assets.
Organizations 433
NPOs shall prepare the following financial statements: (1)

Statement of financial position, (2) Statement of activities,
(3) Statement of cash flows, and (4) Notes.
Expenses are presented using the following functional

classifications: (1) Program services and (2) Supporting
activities.
For a health care organization:
a. Net patient revenue = Gross patient service revenue less
contractual adjustments, employee discounts and billed
charity care.
b. Premium revenue revenues from capitation
agreements.
c. Other revenues = all other unrestricted revenues.
Restricted contributions are presented separately from
the revenues section of the statement of operations.
For a private, non-profit, college or university: Net revenue
from tuition and fees = Total assessments less refunds and
scholarship grants that are not grantéd as compensation for
services rendered by the grantee. All other types of
scholarshi s are ex ensed.
PROBLEMS

l. Which of the following statements is correct?
a. The PFRSs are not applicable to non-profit organizations.
b. The financial statements of non-profit entities need not be
audited.
c. The preparation of a complete set of financial statements is
optional for non-profit organizations.

d. Although the PFRSs are designed to be applied by
business entities, they can also be applied by non-profit
organizations.
434 Chapter 16
2. an organization
It is that carries out socially desirable needs of
making profit.
a. NPO c. NCO
b. NFP d. All of these
3. According to PAS 1 Presentation of Financial Statements, a non-
profit entity that applies the PFRSs

a. must adopt all of the terminologies and principles under
the PFRSs without any exception.

b. need not present an additional statement of financial
position in cases where the entity Applies an accounting

policy retrospectively, restate its financial statements
retrospectively, or make reclassification adjustments
during the period.

c. may need to amend the descriptions used for particular
line items in the financial statements and for the financial
statements themselves.
d. may suffer negative consequences.
4. According to the Preface to International Financial Reporting
Standards, non-profit entities

a. are prohibited from using the IFRSs
b. are discouraged from using the IFRSs
c. may find the IFRSs appropriate
d. none of these
5. Which of the following principles used by business entities is
not applicable to non-profit organizations?

a. Accrual basis of accounting
b. Going concern
c. Use of fair value measurement
d. Disclosure of earnings per share
•t
6. For a non-profit entity, the operating activities section Of the
statement of cash flows can be prepared using

Non-profit Organizations 435
a. method
direct c; a or b
b. indirect method d. not prepared
7. Which of the following financial statements are prepared by

non-profit organizations?
1. Statement of financial position
II. Statement of activities
Ill. Statement of cash flows
lv. Notes
a. 1, and 11 c. 1, 11, and IV
b. 1,111 and1V d. All of these
8. In current practice, the financial reporting for non-profit

organizations (choose the incorrect statement)
a. is essentially similar to that of business entities
b. focuses on fund accounting
c. focuses on the reporting entity concept
d. adopts PFRS principles
Y. The statement of cash flows Qf a non-profit entity classifies

cash flows into
a. program services and support activities
b. unrestricted, temporarily restricted, and permanently
restricted
c. direct and indirect
d. operating, investing, and financing activities
10. Which of the following is not applicable to non-profit entities?

a. The statement of cash flows classifies movements in cash
and cash equivalents during the period into operating
activities, investing activities and financing activities.
b, Use of accrual basis of accounting

c• Presenting cash flows from operating activities in the
statement of cash flows using either direct or indirect
method.
436
Chapter 16
d. Measuring investments in equity securities using the

lower of cost and market value.
11. Which of the following is not applicable to non-profit

organizations?
a. Depreciating an equipment using the sum-of-the-years'
method.
digits
b. Amortizing an intangible asset with finite useful life
c. Recognizing impairment loss when an asse€s carrying
amount exceeds its recoverable amount.
d. Reporting extraordinary items in the financial statements.

organizations?
a. Accounting for combinations of entities using the
principles provided under PFRS 3 Business Combinations.

b. Measuring investments in marketable securities at fair
value and recognizing changes in fair values as unrealized

gains and losses in the statement of activities.
c. Use of present value techniques for financial assets and

financial liabilities.
d. Treating organization costs as assets to be amortized over

a period not exceeding 5 years.
13. Which of the following may appropriately be applied by a

non-profit organization when accounting for a lease contract
that does not qualify as a donation?
a. SFASN0.116 c. PFRS 16
b. SFASN0.117 d. All of these
14. According to SFAS No. 116, restricted contributions received

by an NPO are recognized
a.
when the performance of the condition is reasonably
certain
b. only in the notes
c. as liabilities
d. as restricted revenues
I
437
15. According to SFAS No. 116, a restricted fund for the

acquisition of a plant asset which was disbursed during the
a. increases temporarily restricted net assets

b. decreases unrestricted net assets
c. decreases temporarily restricted net assets

d. does not affect unrestricted net assets

Instruction: Use U.S. GAAP principles in answering the
succeeding questions.
1. What is the current-period effect of a fund received in the

previous period that was restricted for the payment of salaries
of personnel which was totally disbursed in the current
period?
a. net increase in temporarily restricted net assets
b. net decrease in unrestricted net assets
c. net decrease in permanently restricted net assets
d. zero net effect on unrestricted net assets
2. Unconditional promises to give contributions are recognized

by the donee NPO
a. when the promise is received from the donor.
b. when the condition becomes unconditional.
c. when the performance of the condition is reasonably
certain.
d. b orc
3• Conditional promises to give are recognized by the donee
NPO
c• when the performance of the condition is reasonably
certain.
Chapter
d. b orc
4. Contributions are measured at

c. lower of cost or fair value
a. cost to the donor
b. fair value d. fair value less costs to sell
5. Cash and other non-cash assets received as contributions are
recognized by a non-profit organization as

a. asset c. a and b
b. revenue d. not recognized
6. Donations of services that enhance a non-financial asset or
require specialized skills are recognized by a non-profit
organization as
a. asset c. expense
b. revenue d. b and c
7. Q•rvices received as donations that do not enhance a non-
financial asset or were not provided by a professional are

a. asset c. expense
8. Contributions received by a non-profit organization in the

form of works of art and similar items
a. are always capitalized.
b. need not be capitalized if they do not meet the recognition
criteria for an asset.
c. are expensed immediately if they do not meet the

recognition criteria for an asset.
d. b orc
9.
Contributions received by an NPO acting as an agent
recognized as
a. asset
c. a and b
b. revenue
d. liability
10. These refer to costs incurred by a non-profit organization on

activities that directly result to the fulfillment of the
organization's purpose
a. Program services c. Losses
b. Supporting activities d. Cost of goods sold
11. Restricted assets acquired during the period that are used for
long-term purposes because of donor restrictions are classified
in an NPO's statement of cash flows as
a. operating activities c. financing activities.
b. investing activities d. supporting activities
12. Which of the following is a deducted when computing for

health care organization's net patient revenue?
a. contractual adjustments
b. tuition refunds on cancelled enrolments
c. uncollectible accounts
d. direct costs on capitation agreements
13. Dividends received by a health care organization is classified
in the statement of operations as
a. Net patient revenue c. Other revenues

b. Premium revenue d. Any of these
14. Which of the following is deducted when computing for a

private, non-profit, college or university's net revenues on
tuition and fees?
b. charity care
c. tuition refunds on cancelled enrolments
d. uncollectible accounts
Scholarships and fellowships granted by a private, non-profit

college or university are deducted when computing for net
revenues on tuition and fees when
Chapter
a. the scholarships and fellowships were granted as
compensation for services rendered by the grantee.

b. the scholarships and fellowships were granted to faculty
c. the scholarships and fellowships were granted because of
academic excellence rather than as compensation for
services rendered.
d. scholarship grants are not deducted but rather recognized
as expenses.

Accounting for contributions
use thefc!!owing information for the next seven questions:
Budoy Organizaüon, a non-profit organization, received the

following donations during the period:
January 1, 20x1: Land with fair value of P4,000,000 to be used
at the discretion of Budoy Organization.
February 15, 20x1: Cash of restricted for the
acquisition of a truck. The truck will be used in Budoy
Organization's outreach programs.
March 1, 20x1: Investment in equity securities with fair value
of to be held indefinitely. Only the investment
income shall be used by Budoy Organization in its current
operations.
May 1, 20x1: JPIA members from various universities
contributed services in a tree-planting activity initiated by

Budoy Organizaåon. Although the volunteers rendered their
services for free, Budoy Organization estimates that the fair
value of these services would amount to P20,000.
On June 30, 20x1, Budoy Organization acquired a truck for

and received dividends of P240,000 from the equity
securities.
1. How much is the unrestricted contributions revenue?

441
c. 6,020m)
2. How much is the

temporarily restricted contributions
revenue?
3. How much is the permanently restricted contributions
revenue?
4. How much is the "net assets released from restrictions" in
20x1?
d. None
5. How much is the net effect of the transactions in the year-end

unrestricted net assets? Ignore depreciation. Increase (Decremo

temporarily restricted net assets? Ignore depreciation. Increase
(Decrease)
c. 4,240,000
7. How much is the net effect of the transactions in the »•ar-end

permanently restricted net assets? increase (decre&)
a. 2,000,000
442 Chapter
Classification of contributions

Doggy Organization, a not-for-profit entity, disclosed the
following in its 20x1 notes to the financial statements:

Received shares valued at to be retained with the
dividends used to support current operations.

Net resources of P4,000,000 invested in plant assets.
Received equipment valued at which is to be sold
with the proceeds used to renovate the children's playground.

Board-designated funds of
Received P80,000 cash from a donor who did not specify any
use restrictions on the contribution; however, the donor
Received P3,200,000 from a donor who stipulated that the
8. How much is included in the unrestricted net assets?
9. How much is included in the temporarily restricted net

assets?
10. How much is included in the permanently restricted net

assets?
c. 11,280,000
Non-cash assets
11. Bogart Organization, a not-for-profit entity, received the

following donations during 20x1:
• Land with fair value of@40,000,000 to be sold to acquire a

bus.
Noti-profit Organizations
443
Shares Of stocks with fair value of P 12,000,000 to be

retained indefinitely. The dividends from the shares will
be used to support current operations.
As a result of the donations above, how much should Bogart

report as increase in temporarily restricted net assets?
Services
12. A short-circuit destroyed the offset printing machine of
Scooby Organization, a not-for-profit entity. Mr. Doug, a
professional offset mechanic, repaired the machine for free.
The fair value of the services is estimated at P40,000. The entry

to record the transaction includes
a. debit to asset and credit to contributions revenue for
P40,OOO
b. debit to contributions revenue and credit to asset for
c. debit to expense and credit to contributions revenue for
P40,ooo
d. Only a memorandum entry shall be made.
13. Aw-aw Organization, a non-profit entity, received the
following during 20x1:

• 980,000 restricted by the donor to be used as allowances of
members of Aw-aw's choir.

• P480,000 proceeds from sales of calendars, mugs, T-shirts,
and other souvenir items. The fair value of the items sold
is P300,000 while the cost is P200,000.
• to be used only upon the completion of a new
jam room that was only 40% complete as of December 31,
20x1. If the facility is not completed by May 21, 20x2, the
cash shall be returned to the donor.

Chapter
How much contribution revenue shall Aw-aw recognize from

the cash receipts listed above?
a. 180,000 c. 560,000
d. 260,000
Net assets released from restrictions

Arf-arf Organization, a non-profit entity, received the following
contributions during 20x1:

• P400,000 cash restricted for the purchase of equipment.
• PI,OOO,OOO cash restricted for the renovation of an old building
owned by Arf-arf Organization.
Arf-arf made the renovation in 20x2 and acquired the equipment
in 20x3.
14. How much revenue is recognized on the contributions in
20x1?
a. 400,000
15. How much "net assets released from restrictions" is reported
in Arf-arf's 20x2 statement of activities?
a. 400,000
Net effect on net assetS

IJse the following information for the next two questions:
K9 Organization, a non-profit entity, had the following
transactions during 20x1:

• Received contribution of P800,000 to be used for student
scholarships. Of this amount, P480,000 was expended during

the year.
• Expended P200,000 for student scholarships from a P240'000
grant received in previous year.

445
16. What is the net effect of the transactions above in K9's 20x1
unrestricted net assets? Increase (decrease)
a. (120,000) c. 680,000
b. 120,000
17: What is the net effect of the transactions above in K9's 20x1
temporarily restricted net assets? Increase (decrease)
a. 120,000 c. 320,000
b. (680,000)
Receipt of resources as an Agent

18. Green Leaves Organization, a not-for-profit entity, received
relief goods to be distributed to typhoon victims in a specified
area. Green Leaves has no discretion in determining the

specified beneficiaries typhoon victims). The relief goods

(i.e.,
have a fair value of P400,000 and a cost of P250,000. How

much contributions revenue shall be recognized on the goods
received?
a. 400,000 c. 150,000
b. 250,000
Intermediary between donor and donee

19. Astig Organization, a non-profit entity, is formed to oversee
the welfare of battered husbands. Astig encourages these

pitiful husbands to seek legal advice. To provide these
services, Astig develops and maintains a list of lawyers and
law firms that are interested in providing free legal services to
victims. Astig theg encourages individuals in need of these
services to contact Astig for referral to lawyers that may be

Willing to serve them. The lawyer decides on whether and
how to serve a specific individual.
During the year, Asüg Organization referred Mr. Darrell, Mr.

Raymund, Mr. Rex, and Mr. Rhad Vic, all suffering from
serious physical injuries inflicted by their respective wives, to
446
Chapter
Macmod & Areno Law Firm, which provided these husband,

free legal services. The husbands would have paid a total of
PIOM if they asked legal advice from other lawyers.
How much is the contributions revenue to be recognized by

Astig Organization for the legal services provided to the
victims?
a. 10M c. 5M
b. 2M
Restricted contributions
20. Schneider Hospital, a non-profit entity, had the following
receipts during the year:

Sales from canteen
Investment income 200,000
Contributions for the renovation of the Hospital 300,000
How much shall be reported as other revenues on the
statement of operations?
c. 300,000

Unconditional and Conditional promises to give
On December 31, 20x1, Kulasa Organization, a not-for-profit
entity, had the following transactions:

Ms. Alpha made an unconditional pledge to give Kulasa
Organization P48,000 each year over the next five years

starting on December 31, 20x2. The appropriate discount rate
is 10%.
Ms. Beta promised to provide half of the funds needed to
construct a new building if Kulasa can get the remaining half
of the needed funds from other donors by March 1, 20x2. As Of

December 31, 20x1, Kulasa has already accumulated 48% Of
the needed construction funds. Kulasa's Board of Trustees
strongly believes that the remaining 2% will be received by the

end of January 20x2. The estimated total costs of construction
is
Mr. Charlie promised to give Kulasa Organization a used
offset printing equipment if Kulasa acquires a paper cutting

machine. The offset printing equipment has a fair value of
Because of recent cash flow problems, Kulasa's
Board of Trustees believes that it will not be able to acquire a
paper cutting equipment in the near term.

Mr. Delta gave Kulasa Organization cash of P2,000,000 as a
challenge grant. Kulasa Organization can keep the P2,000,000
if it can raise an additional P2,000,000 by the end of March
20x2. If Kulasa Organization fails to comply with the
condition, it shall retum the amount received to Mr. Delta.
1. How should the transaction with Ms. Alpha be accounted for
by Kulasa?
a. as an unrestricted support for P181,958
b. as a temporarily restricted support for P181,958
c. as asset and liability measured at P181,958
d. not accounted for but disclosed only in the notes
2. How should the transaction with Ms. Beta be accounted for by

Kulasa?
a. as an unrestricted support for P2,000,000
b. as a temporarily restricted support for
c. as asset and liability measured at
3• HOW should the transaction with Mr. Charlie be accounted for

by Kulasa?
a. as an unrestricted support for
b. as a temporarily restricted support for P4,800,000

Chapter
4. How should the transaction with Mr. Delta be accounted
by Kulasa?
c. as an asset and a liability, each measured at
5. What is the total net effect of the transactions above in
Kulasa's net assets?

a. Increase in temporarily restricted net assets
b. Decrease in temporarily restricted net assets
c, Decrease in unrestricted net assets
d. No effect on net assets
Endowments
6. During 20x1, Blacky Organization, a not-for-profit entity,
received the following donations:
On October 1, 20x1, Mr. Meow established a P4,000,000
endowment fund in favor of Blacky Organization by
appointing Whitey Bank and Trust Co. as the trustee. The
income from the fund be paid to Blacky Organization

is to
for use in its current operations. Income from the fund is 'a
dependent on the investment performance of the fund.

On December 31, 20x1, Blacky Organization received
P400,000 in cash from Ms. Mingming Too under a
charitable remainder annuity trust agreement designating

Blacky Organization as the trustee and charitable
remainder beneficiary. The terms of the trust agreement

require Blacky Organization, as trustee, to invest the trust
assets and pay P20,000 each year, starting on December 31'

20x2, to Mr. Cute Puppy, the annuitant (i.e., income
beneficiary) for the remainder of Mr. Cute Puppy's life•
Upon death of Mr. Cute Puppy, Blacky Organization may i
use its remainder interest for any purpose consistent with

its mission. The appropriate discount rate is 10% and the
life expectancy of Mr. Cute Puppy is 5 years.

449
What the total net effect of the transactions above in

is
Blacky's net assets?
a. increase in temporarily restricted net assets by P324,184

b. increase in temporarily restricted net assets by P4,324,184
c. increase in temporarily restricted net assets by P75,816
d. no effect
Functional classification of expenses

use thefollowing information for the next seven questions:
Ranger Organization, a non-profit entity, had the following
expenditures during the year:
Child care services provided for indigent families 560,000

Work to help elderly dtizens 6m,ooo
7. How much is classified as "program" expenses?

a. 300,000 c. 200,000
8. How much is classified as "support" expenses?

c. 300,000
b. 200,000

9. Gary Hospital, a non-profit entity, rendered in
services to patients, of which is charged to
PhilHealth. It is estimated that only 92,120,000 will

collected. Of the P280,000 difference, P140,000 is the estimated
contractual adjustments with PhilHealth, P20,000 is allowance
for discounts to hospital employees, P80,000 is charity care,
and is the uncollectible accounts. How much is the net
service revenue?
a. 2,120,000 c. 2,160,000
450
Chapter 16
Capitaüon agreement
10. Sparky Hospital, a non-profit entity, signed an agreement
with Melay, Inc. to provide medical services to each of Melay•s
100 employees for '2,000 per month, per employee. Du
the month of April 20x1, only 20 employees availed of
medical services. How much is the premium revenue
recognized in April 20xl ?
a. 200,cm
b. 40,000
Other revenues
11. Heart Hospital, a non-profit entity, had the following
transactions during the period
Sales of P480,0()0 from gift shop and cafeteria.
Received dividends from donated shares. Use of
the dividends is unrestricted
A
computer consultant provided free services on
upgrading of Heart's information system. Heart would
have paid for these services if they had not been
donated.
Purchased medicines from a pharmaceutical company for
P40,0()(). However, the pharmaceutical company did not

charge Heart Hospital for the purchase because the
medicines were being donated to Heart Hospital.
How much is classified as other revenues in Heart Hospital's

a. 520,0 c. 800,o
b. 600,000

12. Umpong Hospital, a non-profit entity, had the following
Billings to patients
Sales from canteen
Undesignated gifts (Unrestricted contributions) 200,0

451
Contractual adjustnents
Billings on capitation agreements 1,200,000
Uncollectible accounts 80,000
Salaries of doctors 400,000
How much is the net patient service revenue?

c. 4,040,000
Net revenues from tuition and fees

13. For the current semester, Piper University, a non-profit entity,
assessed its students P4,000,000 for tuition and fees. The

following information was also determined:

enrolment 80,000
Student scholarships granted to student assistants 480,000
Student scholarships granted to faculty members

enrolled in the post-graduate program 120,000
Student scholarships granted to faculty members'

240,000
dependents
Estimated uncollectible accounts 320,000
How much is the net revenues from tuition and fees?
Accounting for marketable securities

14. Pipita Organization, a non-profit entity, acquired short-term
investment in shares of stocks for P800,000 using unrestricted

net assets. During the year, Pipita received cash dividends of
940,000. At year-end, the shares have a fair value of P880,000.
What is the effect of the transactions described above on the
year-end statement of activities of Pipita?

452 Chapter 16 '
c. 40,000
a. 120,000
b. 80,000
Depreciation
15. On January 1, 20x1, Toby Organization, a non-profit enåty,
had the following transactions:

• Purchased a vehicle cosång P600,O using unrestricted cash
• Received a vehicle with fair value of P480,000 from donation
Both vehicles have estimated useful lives of 5 years and no

residual value. Toby has an accounting policy implying a time
restriction on gifts of long-lived assets. In Toby's 20x1
statement of activities, what amount of total depreciation
expense should be included under changes in unrestricted net

assets?
c. 216,000
b. 120,000

Brownie Organization, a non-profit entity, had the following cash
flows during the year:

P200,000 unrestricted contribuåons.
2,400,000 from fundraising activities to support current
operations.
P400,000 from a donor who stipulated that the money be spent
in accordance with the wishes of Brownie's governing board.
P800,000 cash dividends restricted for the purchase Of
equipment.
P800,000 expenditure to- acquire equipment with the cash
dividends above.
from a donor who stipulated that the contribution
shall be invested indefinitely. Income from the contributi011
may be used in furtherance of Brownie's mission.
16. How much is the net cash flows from operating activities?
d. 1,800,000
453
17, How much is the net cash flows from investing activities?
c. 2,000,000
b. 400,000
18. How much is the net cash flows from financing activities?
a. 400,000
kecoylition and measurement

1. An NPO receives unconditional donations of P300,000 cash
and equipment with fair value of P2,000,000 and carrying
amount of What is the journal entry to record the•
receipt of the donations?
2. On January 1, 20x1, an NPO receives the following donations:

• Cash of P3,000,000 to be used to acquire an equipment.
• Investment in equity securities with fair value of
to be held indefinitely. Only the investment
income shall be used by the entity in its operations.
On December an equipment for

31, 20x1, the entity acquires
and receives cash dividends of P50,000 from the
equity securiåes.
Requirement: Provide the journal entries.
Unconditional and Conditional promises

3• On January 1, 20x1, Entity A receives the following promises:
a. Donor X promises to give an unconditional donation of
mo,ooo on January 15, 20x1.
b. Donor Y promises to donate construction materials with
fair value of P300,000 if Entity A starts the construction of
a children's playground.
Chapter 16
454
Entity A receives the donation of Donor X on January 15, 20x1 and

the donation of Donor Y on February 1, 20x1, although the"i
construction of the playground is not yet started.
Fund Accounting
4. Entity A receives the following donations:
Cash of P2M to be used at the discretion of Entity A's
management.
Cash of P3M restricted for the acquisition of equipment.
Trust fund of P5M which Enüty A shall never use; only the
income therefrom.
Entity A acquires an equipment for P3M and receives cash

dividends of P200,000 from the investment at the end of the
period.
Requirements:
a. Record the transactions above under a fund accounting
system.
b. Compute for the ending balances of unrestricted,
temporarily restricted, and permanently restricted net

assets.
Other forms of contributions

5. The receipt of which of the following will give rise to the
recognition of a revenue by a non-profit organization?

a. Services in-kind provided by non-professionals.
b. Donation of work of art to be held for public exhibition'
must be preserved and never to be sold.

c. Services in-kind that enhance a non-financial asset or
require specialized skills.
d. Relief goods to be distributed to flood victims in a

specified area.
455
NON-profit Organizations
Which of the following financial statements is generally not
6.
required of non-profit organizations?
a.
b. Statement of changes in equity
d. Notes
Presentation of Expenses
7. According to SFAS No. 117, the functional classifications of
expenses of non-profit organizations are

a. Program services and Supporting activities
b. Sellingand Administrative costs
c. Nature and Function expenses
d. Cash and Non-cash expenses
8. According to SFAS No. 117, this functional classification of

expenses of non-profit organizations pertains to activities that
goods and services being distributed to beneficiaries,
result in
customers, or members that fulfill the purposes or mission for
which the organization exists.

a. Distribution costs c. Supporting activities
b. Program services d. Consumption activities

9. ABC Hospital, a non-profit entity, had the following receipts
during the year:

50,000
Undesignated gifts (Unrestricted contributions)
300,000
60,000
Billings on capitation agreements
20,000
Interest income
100,000
Uncollectible accounts
50,000
Employee discounts
20,000
Charity care, included in billings
456
Chapter 16
Performance indicator
10. A Health Care Organizatiön uses revenues and gains over
expenses and losses as its performance indicator. Which of the
following items would be included in the calculation of this
indicator?
1.
Sales from the hospital's canteen
II. Unrealized gains on marketable securities
Ill. Net assets released from restriction used for operating
expenses
IV. Contributions received from a donor in the current
year that cannot be spent until the following year.
a. I and Ill c. 1, 111 and IV

b. I and II d. 1, 111 and IV
Private, non-profit, Colleges and Universities

11. For the current semester, a non-profit university, assessed its
students P2,000,000 for tuition and fees. Additional

information follows:
enrolment 40,000
dependents 120,000
160,000
400
Chaptetd61•iA
Chapter 16
Learning Objectives
1. Explain the applicability of the PFRSs to NPOs.
2. Account for the assets, liabilities, equity, revenues and
expenses of NPOs.
3. Enumerate and describe the financial statements of NPOs.
4. State the accounting procedures peculiar to specific types of
NPOs.
Introduction
Although the IFRSs/PFRSs are designed to apply to business
entities, they can also be applied to non-profit organizations. This

is evidenced by the following excerpts from the IFRSs/PFRSs:
IFRSs are designed to apply to the general purpose financial

statements and other financial reporting of profit-oriented
entities. Although the IFRSs are not designed to apply to not-
for-profit activities, entities with such activities may find them
appropriate." (Preface to IFRSs.9)
PAS 1 Presentation of Financial Statements uses terminology that

is suitable for profit-oriented entities. If entities with not-for-
profit activities apply PAS 1, they may need to amend the
descriptions used for particular line items in the financial
statements and for the financial statements themselves. (PAS 1.5)
IFRSs generally do not have scope limitations for not-for-

profit activities. Although IFRSs are developed for profit-
oriented entities, a not-for-profit entity might be required, or

choose, to apply IFRSs. (IFRS 3 Business Combinations.BC63)
Pß-profit Organizations
401
As can be inferred from the foregoing statements, the

pFRSs can be applied to all reporting entities regardless of their
form (i.e., sole proprietorship, partnership, corporation or

cooperative) and purpose (i.e., for-profit or not-for-profit).
Accordingly, most of the concepts that we will be learning in this

Ütapter would be very familiar to you JO.
However, just like in the case of accounting for sole
proprietorships, partnerships, corporations and cooperatives, the
accounüng for non-profit organizations differs in respect of

accounting for equity.
Current trend in practice
In practice, the accounting for non-profit organizations is
essentially similar to the accounting for businesses. The notable

differences are the terminologies used' in the financial statements,
which are modified to suit the non-profit organization's purpose,

and the presentation and disclosure of equity.
Non-profit organizations in the private sector are normally
organized as non-stock, non-profit corporations. As such, they are
required to file audited annual financial statements to the
Securities and Exchange Commission (SEC). In most cases, the
auditors' reports in these financial statements state an opinion on
the organization's compliance with the PFRSs (OY IFRSs, for
international organizations).
Example 1: Auditors' Report

The following is an excerpt from an Independent Auditor's Report
On published audited financial statements of a non-profit
organization:
Opinion
In Our opinion, the financial statements give a true and fair view
Of the financial position of the Organization as at 31 December
2012, and of its finan&ial performance and its cash flows for the
Year then ended in accordance with International Financial
Reporting Standards.
Chapter 16•
Since the PFRSs do not provide specific guidance on thi

accounting for non-profit organizations, many non-profit
organizations resort to the exemptions provided under PAS 8
Accounting Policies, Changes in Accounting Estimates and Errors (i.e.,
'hierarchy of financial reporting standards'). For example, in cases

where the PFRSs are silent regarding the accounting treatment for,
or financial statement presentation of, a transaction peculiar to
non-profit organizations, the organization may refer to the general

guidelines set forth under the Conceptual Framework.
Example 2: Modified Statement ofcompliance

The following is an excerpt from the notes to financial statements
of a non-profit organization's published financial statements:
Note 2.1 Statement of compliance

The financial statements have been prepared in accordance with
and comply with International Financial Reporting Standards

(IFRS) as issued by the International Accounting Standards Board
(IASB) and interpretations issued by the International Financial
Reporting Interpretaåons Committee (IFRIC) of the IASB and are
presented in accordance with the Organization's Financial
Regulations.
Currently, IFRS do not contain specific guidance for non-profit

organizations (NPO) concerning the accounting treatment and the
presentation of financial statements. Where IFRS are silent or do
not give guidance on how to treat transactions specific to the not-
for-profit sector, accounting policies have been based on the
general principles of IFRS, as detailed in the IASB Conceptual
Framework.
403
characteristics of a non-profit organization
Non-profit organization (NPO) - (also called not-for-profit entity
INFP' or noncommercial organization 'NCO) is one that carries out

some socially desirable needs of the community or its members
and whose activities are not directed towards making profit.
The main objective of NPOs may be educational, religious,
social, cultural or charitable. NPOs may be in the form of
educational institutions, hospitals and other health care providers,
religious institutions, professional bodies, sports, social or literary
clubs,and other forms of charitable institutions.
earn revenues sufficient to cover their expenses. A
NPOs
major portion of these revenues are derived from charitable
donations and other fundraising activities. Surplus revenues do
not inure to the benefit of a particular individual or group of
individuals but rather retained in furtherance of the organization's
mission. Accordingly, none of the surplus revenues are
distributed as dividends.
Because NPOs carry out their activities in the interest of

the societyand without the intention of making profit, NPOs are
usually exempt from income taxation.
PFRS principles applicable to NPOs

As stated earlier, the recognition, measurement, derecognition,
presentation and disclosure requirements of the PFRSs can be
applied to NPOs. Examples are provided below:

Recognition criteria for assets and liabilities:
a. Meets the definition of an asset or liability;
b. Probable inflow or outflow of resources; and

c. Reliable measurement of cost or other value (e.g., fair value).
Measurement ofAsset or Liability:

a. measurement at cost except when a relevant PFRS
Initial
requires measurement at fair value or some other value.

b. Subsequent measurement at amortized cost, under the
cost model, or some other measurement model required
by a relevant PFRS.
Gapter 16/5},.
• Derecognition of Asset or Liability:

An asset (or liability) is derecognized when it ceases to
provide inflow (or require outflow) of resources embodying

economic benefits. The difference between the carrying
amount and net proceeds (or net settlement), if any, is
recognized in change in net assets.
• Presentation of Financial Statements:

General features: Fair presentation and compliance with PFRSs,
Going concern, Accrual basis, Materiality and aggregation,
Offsetting, Frequency of reporting, Comparative information,

and Consistency of presentation.
Our succeeding discussions on the accounting for NPOs are based

in part on the accounting principles specifically provided under
U.S. GAAP Statement of Finanäal Accounting Standards (SFAS
or FAS) No. 116 Accounting for Contributions Received and
Contributions Made and SFAS No. 117 Financial Statements of Not-
for-Profit Organizations.
Although these principles do not have the same authority
as those of the PFRSs, they may be adopted and used in
conjunction with the PFRSs (to the extent that they not
contravene the provisions of the PFRSs) in order to provide more
useful financial information to users of NPO financial statements.
Moreover, CPA board exam questions on accounting for NPOs

have traditionally been based on these principles.
Various illustrative financial statements are provided in
the next chapter. I encourage you to notice later on how the U.S.
GAAP principles are incorporated into PFRS-based financial
statements.
All throughout our discussions in this chapter, we will use
the term "non-profit organization (NPO)" to refer only to non-
profit organizations in the private sector. Those belonging to the
government entities) are outside the scope of this

public sector (e.g.,
chapter. They are discussed in the Government Accounting part Of
this book.
405
Accounting for non-profit organizations
Fund theory vs. Fund accounting

fhe financial statements of most NPOs are based on the fund
theory. The fund theory stresses great importance on the custody

and administration of funds. Accordingly, the source, nature and
purpose of the funds held by the NPO are disclosed in order to
giveinformation necessary for users to assess the organization's
stewardship over those funds.
Although fund accounting is an off-shoot of the fund

theory; SFAS 117 and the PFRSs do not require the use of fund
accounting. However, entities are not prohibited from using it.

Under fund accounting, the main accounting unit is the
fund. Accordingly, transactions are accounted for in thebooks and
presented in the financial statements strictly based on their fund
classifications as either (1) Unrestricted, (2) Temporarily restricted,
or (3) Permanently restricted.
Fund theory-based financial Fund accounting-based

statements •nancial statements
• Focuses on the reporting Views the entity as being

entity concept; thus, the made up of component
accounting unit is the parts; thus, the accounting
units are the various funds

organization as a whole.
held.
Adheres to the bookkeeping
• Adheres to the accounting
mana ers.
external users.
The term "funds" is used to
The term "funds" is more
refer to specific funds
commonly used to refer to consisting of cash and other
the net assets.
non-cash assets.
Focuses on classifying
Provides disclosures on the assets, net assets, and changes
types of restrictions on net
in them strictl in
assets and revenues (i.e.,
406 Chapter
accordance with their fund

unrestricted, temporarily
restricted, or permanently classifications (i.e.,
restricted). unrestricted, temporarily

restricted, or permanently
restricted).
Current trend Traditional
Contributions
A majority of the revenues of NPOs come from charitable
contributions or donations.
Contributions refer•to resources received in non-reciprocal
transactions. Contributions exclude those that result from
exchange tiansactions (i.e., resources received in exchange for other
resources or obligations).
SFAS 116 classifies contributions based on donor's
restrictions as follows:
1. Unrestricted — available for immediate use and for any

purpose.
2. Temporarily restricted — restricted by the donor in such a way

that the availability of the contribution for the NP(Ys use is
dependent upon:
a. the performance of a specific task;
b. the happening of a future event; or
c. the passage of time
The temporarily restricted contribution is available to the

organization when the task is performed, the event occurred,
or the time restraint passes. At that time, the support is
reclassified from temporarily restricted to unrestricted.
3. Permanently — restricted by the donor in such a way

restricted
that the organization will never be able to use the contribution
itself; however, the organization may be able to use the

income therefrom.
Nor-profit Organizations
407
gecognition and measurement
cash and other Non-cash assets
cash and other non-cash assets received as contributions are

recognized as revenues in the period received and as assets,
decreaseS Of liabilities, or expenses depending on the form of the

benefits received.
Contributions are measured at fair value at the date of

contribution, and are reported as either:
a. Unrestricted support revenue from unrestricted

contributions; or
b. Restricted support — revenue from temporarily restricted or
permanently restricted contributions.
Temporarily restricted contributions whose restrictions are

met in the same reporting period may be reported as unrestricted
support provided that the NPO discloses this accounting policy
and applies it consistently from period to period.

Unrestricted support increases unrestricted net assets while
restricted support increases either (a) temporarily restricted net
assets or (b) permanently restricted net assets.
Illustration 1: Unrestricted support

A non-profit organization receives cash of P200,000 and land with
fair value of to be used at the entity's discretion.
Date Cash 200,000
Land
Contributions revenue --
1,200,000
unrestricted support
To record receipt of unrestricted
donations o cash and land
Illustration 2: Restricted support

On January 1, 20x1, Entity A, a non-profit organization, receives
the following donations:

408 Chapter 16
Cash of to be used to acquire a truck. The truck will

be used in Entity A's outreach programs.
• Investment in equity securities with fair value of P500,000 to
be held indefinitely. Only the investment income shall be used

by Entity A in its operations.
On December 31, 20x1, Entity A acquirés a truck for
P2,200,000 and receives cash dividends of P60,000 from the equity
securities.
Jan. 1, Cash
20x1
temporarily restricted support

To record receipt of tonporarily
restricted donation o cash
Jan. 1, Investment in equity securities 500,000

20x1
permanently restricted support

500,000
To record receipt of permanently

restricted donation
Dec. Transportation equipment — Truck

31,
Cash
20x1
Dec. Cash 60,000
31, Dividend income 60,000
20x1
Unconditional promises
Unconditional promise to give cash or other non-cash assets in a
future period is recognized when the unconditional promise to
give is received from the donor. Generally, such unconditional
promise is classified as a temporarily restricted contribution because
of the time restriction (i.e., to be received in the future). In the
event that the promised contribution becomes doubtful Of
collection, an allowance for uncollectability is recognized.

Organizations 409
Åorprofit
Conditional promises
cßidonal promises to give, which depend on the occurrence of
A Afied future and uncertain event to bind the promisor, are
a d only when the attached conditions are substantially

rec+ewhen the conditional promise becomes unconditional). A
Net (i.e.,
conditional promise to give is considered unconditional if the
ssibility that the condition will not be met is remote (that is, the
$sibility that the conditions will be met is reasonably certain).

P A transfer of assets with a conditional promise to
contribute them shall be accounted for as a refundable advance
(i.e., liability) until the conditions have been substantially met.
No. 11622)
Illustration: Unconditional and Conditional promises

On January 1, 20x1, Entity A receives a formal promise from
Donor X to donate
case 1: The donation is unconditional and is to be received on
February 14, 20x1.
Jan. 1, Donations receivable

20x1
tem oraril restricted su ort
Feb. Cash
u, Donations receivable
2011
When the effect of time value of money is material,
receivables shall be measured at present value.
case 2: The donation is conditioned on the submission of a

detailed formal plan for a proposed project. As of January 1, 20x1,
the plan is not yet substantially complete.
Jan. 1,
No entry
2011
410 Chapter 65
The conditional promise will be recorded when the
, attached condition is substantially met.
Case 3: (Use the information in Case 2 above.) On February 1, Entity
A receives the promised contribution before the attached
condition is substantially met.
Feb. Cash
1,
Liability for refundable advance
20x1
Services
Contributions of services are recognized if the services received
a. create or enhance nonfinancial assets; or
b. require specialized skills, are provided by individuals

possessing those skills, and would typically need to be
purchased if not provided by donation.
Services requiring specialized skills are provided by

accountants, architects, carpenters, doctors, electricians, lawyers,
nurses, plumbers, teachers, and other professionals and craftsmen.
Contributed services and promises to give services that do
not meet the above criteria are not recognized. (SFAS No. 116.9)
Illustration:
Entity A, a non-profit organization, received the following

services:
a. Carpenters repaired the ceiling of Entity A's office for free.
The fair value of the services is P20,000.

b. JPIA members from various universities helped in a tree-
planting activity initiated by Entity A for free. The fair value

of the services might be P50.
(a) Repairs and maintenance expense 20,000

unrestricted su ort 20,000
(b) No en
...2-24
411
Works of art and similar items
need not recognize contributions of works of art, historical

entity
treasures, and similar assets if the donated items are added to
collections that meet all of the following conditions:
a. Held for public exhibition, education, or research in

furtherance of public service rather than financial gain;
b. Protected, kept unencumbered, cared for, and preserved; and
c.
proceeds from sales of collection items are to be used to
acquire other items for collections. (SEAS No. 116.11)
The reason for the non-recognition as an asset or revenue

is that, when all of the conditions above are met, the work of art
(or similar item) does not meet the PFRS asset recognition
criterion of "probable economic benefits." Moreover, the financial
value of some works of art may be difficult to measure reliably.
In cases, however, where a work of art (or similar item)
meets all of the recognition criteria for an asset, the work of art is
recognized as asset and revenue measured at fair value.
Illustration: Fund Accounting

Entity A receives the following donations:
a. Unrestricted donation of PIM cash.
B. Cash of P2M restricted for the acquisition of a building.
c. Investment in stocks of P3M. Entity A can only use the
investnent income.
Entity A acquires a building for P2M and receives

dividends of PIOO,OOO from the investment at the end of the
period.
Requirement: Record the transactions above under a fund
accounting system.
412
16
Solution:
Underfund accounting, transactions are recorded in a manner that

as if the organization is divided into its component parts, i.e., the
funds. Accordingly, transfers between the funds are viewed as
accountable events that are recorded through journal entries.
Unrestricted fund Temporarily Pennanently

restricted nd restricted nd
Cash 1M Cash 2M Investment in stocks 3M
Contribution revenue 1 M Contribution revenue 2M Contribution revenue 3M
Cash 2M Net Assets Released
Net Assets Released from Restrictions 2M
from Restrictions 2M Cash 2M
To record funds To record funds
released from temporary released from temporary
restriction restriction
Building 2M
Cash 2M
Cash 1mK
Dividend income 100K
The net assets released from restrictions is shown in the
statement of activities (prepared using SFAS No. 117 format) as a

decrease in temporqrily restricted net assets and an increase in
unrestricted net assets. The balances of net assets are deterrnined
as follows:
Unrestricted Temporarily Permanently

net assets
net assets net assets
ASSETS
Cash:
Cash donations
Transfer between fund
classifications
Payment for building

Cash dividends 100,000
Cash, end. 1,100,000
Investment in stocks
413
Buildin
TOTAL ASSETS
Less: LIABILITIES
NETASSETS
Other funds held by NPOs

Endowmentfrnd — classified into the following:
a. Term endowment fund — under the donor's restrictions, the
NPO can use a portion of the principal each period. This

is classified as temporarily restricted.
b. Regular endowment fund — under the donor's restrictions,
the NPO cannot spend any of the principal. This is

classified as permanently restricted.
Income from either term or regular endowment fund is
used according to the donor's instruction.
• Agency fund — funds held by the NPO acting as a custodian.
Agency funds are recognized as liabilities. For example, an

educational institution may receive funds from the
Commission on Higher Education (CHED) to be disbursed as
student loans.
Plant fund — consists of the following:

a. unexpended funds for the acquisition of plant assets;
b. funds for the renewal and replacement of plant assets;
c. funds for the retirement of indebtedness; and
d. investment in plant assets.
Board-designated fund ('quasi-endowmen€) — åmds which

are restricted at the sole discretion of the NPO's governing
board (i.e., Board of Trustees). Funds that are internally
restricted are classified as unrestricted. Only contributions

with donor-imposed restrictions are classified as restricted.
414 Chapter 16
Treating the various funds held by an NPO as separate

accounting units can make accounting cumbersome. Thus, SFAs
No. 117 and the PFRSs do not require fund accounting. Npos
normally use ftmd accounting as a managerial tool rather than a
system for providing general-purpose financial statements.
Illustration 1: Classification of contributions

An NPO disclosed the following:
a. Net resources of PI,OOO,OOO invested in plant assets.
b. Board-designated funds of P600,000.

c. Received P20,000 cash from a donor who did not specify any
use restrictions on the contribution. However, the donor
d. Received P800,000 from a donor who stipulated that the
Requirement: How much of the items listed above would be

included in (a) unrestricted, (b) temporarily restricted, and (c)
permanently restricted net assets, respectively?
Solution:
Unrestricted Temporarily Permanently restricted
net assets restricted net assets net. assets
(a) 1,000,000
(b) 600,000
(c)
800,000
(d)
Totals 70,000 800,000
(a) time-restricted
(b) restricted for scholarships

pvpr$t Organizations 415
glgstraüon 2: Contributions revenue
An
NPO receives the following during 20x1:
p120,000 proceeds from sales Of calendars, mugs, T-shirts, and
other souvenir items. The fair value of the items sold is
p75,000 while the cost is P50,000.
to be used only upon the completion of a new

facility that is only 30% complete as of December 31, 20x1. If
the facility is not completed by September 2, 20x2, the cash
shall be returned to the donor.
Requirement: How much contribution revenue is recognized from

the donations above?
Answer:
Excess of sale price over fair value of items sold
45,000
(120,000 - 75,000)
Total contribution revenue (unrestricted) 45,000
Notes:
Only the excess of sale price over fair value is treated as

contribution revenue. The P75,000 fair value is treated as sale
revenue from exchange transaction.

The PI,OOO,OOO donation is initially recognized as a liability
(refundable advance) and recogüzed as contribution revenue
only when the condition is met.
Illustration 3: Net effect on net assets

An NPO had the following transactions during 20x1:
a. Received a P200,000 contribution to be used for research
purposes. Of this amount, P120,000 were expended during the
year.
be Expended P50,000 in research activities from a P60,000
research grant received in previous year.
ReqUirement: Determine the 20x1 net effects of the transactions in

net assets.
416 Chapter
Solutions:
Temporarily
Unrestricted restricted net
net assets assets
(a) Contributions revenue, 20x1 200,000

Net assets released from
(120,000)
Expense
Net effect in net assets, 20x1 80,000
(b) Net assets released from

Expense (50,000)
Net effect in net assets, 20x1 (50,000)
Total net e ect in net assets - 20x1 30,000
Notes:
Transaction (a) increased the temporarily restricted net assets
in 20x1 by '80,000 but has no effect on unrestricted net assets.
Transaction (b) decreased the temporarily restricted net assets
in 20x1 by 250,000 but has no effect on unrestricted net assets.
Illustration 4: Receipt of resources as an Agent

An NPO received relief goods to be distributed to flood victims in
a specified area. The NPO has no discretion in determining the
specified beneficiaries (i.e., flood victims). The relief goods have a

fair value of PIOO,OOO. How much contributions revenue shall be
recognized on the goods received?
Answer: Nome. The NPO is merely acting as an agent (i.e., as a
recipient of goods to be distributed to specified third-party
beneficiaries).
417
IllusEation 5: Intermediary between donor and donee

An NPO is formed to help patients find donors of blood. The NPO
is not a blood bank and does not accept blood donaåons. Instead,
the NPO maintains a list of blood banks that are interested in
accepting and providing blood donations. The blood banks

determine how they can serve the referred patients,
During the period, the NPO helped several patients get

blood donations from blood banks. Without the referrals, the
patients would have spent PIM.
Requirement: How much is the NPO's contributions revenue?
Answer:
Nane — the NPO is merely acting as an agent in bringing together

a willing donor and donee. The blood donations are not
contributions received by the NPO.
A donor establishes a PIM fund in a third-party trust company in
favor of an NPO. The NPO cannot withdraw the Kind but is
entitled to any investment income thereof.
Requirement: Prepare the journal entry to record the event in the

NPO's books.
Answer:
NO journal entry shall be made because no asset has been

received. The event is recorded through memo entry. A journal
entry will be made When the fund earns investment income.
418
Chapter 16
On January 1, 20x1, an NPO receives PIOO,OOO cash donation
under a "charitable remainder annuity trust agreemen€' with the
following provisions:
The NPO is the designated trustee who undertakes to invest
the cash donation and make annual year-end payments of
P5,000 to Mr. A, the annuitant, for the remainder of his life.
Upon death of Mr. A, the NPO may use its remainder interest
for any purpose consistent with its mission.
Per actuarial valuation, the appropriate discount rate is 10%

and the annuitant's life expectancy is 5 years.
Requirement: Prepare the entry on January 1, 20x1.
Solution:
1/1/20x1 Cash 100,000
Annuities payable (a) 18,954
tem oraril restricted su ort (b) 81,046
(a) (5,000 x PV of ordinary annuity of 1 @ 10%, n=5) = 18,954

(b) (100,000 - 18,954) = 81,046
Note: The transaction is partly an exchange transaction and partly
a contribution. The exchange component is recognized as liability
(annuities payable). This is subsequently measured at amortized

cost. The contribution component is recognized as temporarily
restricted support because of the 'time restriction.'
Deferral method of recognizing contributions

In its publication titled "A Guide to Financial Statements of Not-For-
Profit Organizations — Questions For Directors to Ask, " the Chartered
Accountants of Canada suggest a Method"
"Deferral in
accounting for restricted contributions received by NPOs.

419
The "deferral method" is similar to the provisions of PAS 20

Accounting for Government Grants and Disclosure of Government
Assistance, in such a way that income from donations is recognized
based on the "matching concept.'
Under the "deferral method," restricted contributions are

initially recognized as liability (i.e., as deferred revenue) and
recognized as revenue in the same period where the related
expenditures, for which the contributions were intended to
reimburse, are incurred.
Illustration: Deferral method - Canadian GAAP

On February 15, 20x1, an NPO receives P2M cash donation
conditioned on the acquisition of a truck.
Feb. Cash
15,
20x1
Deferred revenue
The NPO acquires a truck for P2M on January 1, 20x2. The

truck will be depreciated over a 10-year useful life using the
straight-line method.
Jane 1' Transportation equipment — truck

20x2
Cash
Dec• Depreciation expense (2M 10 yrs.) 200,000

31,
20x2
Dec. Deferred revenue 200,000

31, 200,000
20x2
The "deferral method" parallels more the prindples under the

PFRSs. However, we will be using the principles of SFAS 116 and
117, unless otherwise indicated, because Philippine CPA board
exam questions on NPOs have traditionally been based on these
principles.
420 Chapter 16
A complete set of general-purpose financial statements of an Npo
consists of the followin
PFRSs SFAS No. 117

(based on IASCF's published audited
nancial statements)
Statement of financial Statement of financial
osition osition
• Statement of cash flows

Notes Notes

The statement of financial position shows information on assets,
liabilities, and net assets.
Classification of Net assets

SFAS No. 117 requires reporting of net assets in the statement of
financial position according to the following classifications:

1. Unrestricted net assets
2. Temporarily restricted net assets
3. Permanently restricted net assets
PFRS-based financial statements may present net assets
using the classifications above either on the statement of financial
position or in the notes.
The statement of activities shows information on revenues
expenses, and changes in net assets for a period. This statement
takes the place of the income statement and statement of changes
in equity for a business entity. However, NPOs may opt to present

a separate statement of changes in net assets (or statement Of
changes in reserves). This separate statement takes the place Of a
statement of changes in equity.

421
SFAS No.117 requires that the statement of activities

report the changes in net assets for each of the three categories of
support separately (i.e., unrestricted, temporarily restricted and
permanently restricted).
PFRS-based financial statements may present changes in

net assets using the classifications above either on the statement of
activities or in the notes.
In a statement of activities, the term "profit" or "net

income" is replaced by the term "change in net assets."
NPOs adopting the PFRSs shall apply PFRS 15 Revenue
from Contracts with Customers for revenues arising from
transactions other than charitable contributions.
Expenses
A statement of activities shall report expenses as decreases in
unrestricted net assets.
SFAS No. 117 requires expenses to be presented in the

statement of activities or in the notes according to their function.
The functional classifications are as follows:
1. Program services — are the activities that result in goods and
services being distributed to beneficiaries, customers, or
members that fulfill the purposes or mission for which the
organization exists. Those services are the major purpose for
and the major output of the organization and often relate to
several major programs.

2. Supporting activities — are all activities other than program
services. Generally, these include management and general,
fund-raising, and membership-development activities.

(SFAS No. 117, 26 to 28)
Illustration: Functional classification of expenses

An NPO had the following expenses during the year:
50,000
Administrative salaries
150,000
25,000
Fund-raising costs
140,000
Child care services provided for indigent families
422 Chapter 16
The expenses are classified according to function as follows:
Program Support
150,000
Child care services provided for indigent

families 140,000
290,000 75,000

The statement of cash flows of an NPO is similar to that of a
business entity and can also be prepared using the direct or

indirect method.
Restricted assets acquired during the period that are used
for long-term purposes because of donor restrictions are classified
as financing activities.
Illustration: Statement of cash flows
An NPO had the following cash flows during the year:

a. P50,000 unrestricted contributions.
b. P600,000 from fundraising activities to support current
operations.
c. PIOO,OOO from a donor who stipulated that the money be spent
in accordance with the wishes of the NPO's governing board.
d. P200,000 cash dividends restricted for the purchase Of
equipment.
e. P200,000 on acquisition of equipment using the cash dividends
above.
f. P300,000 from a donor who stipulated that the contribution be
invested indefinitely. Income from the contribution may be

used in furtherance of the NPO's mission.
Requirement: Present the items above in a statement of cash flows•

423
Solution:
Unrestricted contributions
50,000
Fundraising activities to support aarrent operations
600,000
Unrestricted contributions - for board-designation
100,000
Net cash flows from operating activities
750,000
Irvesting activities
Acquisition of equipment
(200,000)
Financing activities
Cash dividends restricted for acquisition of equipment 200,000
Permanently restricted contribution
300,000
Net cash flows from financing activities 500,000
Total net cash flows during the period
Accounting procedures peculiar to specific types of NPOs

The principles that we have discussed so far apply to all types of
NPOs. In this section, we will discuss accounting procedures
unique to specific types of NPOs. For this purpose, we will
subdivide NPOs into the following:

1. Health Care Organizations
2. Private, non-profit, Colleges and Universities
3. Voluntary Health and Welfare Organizations
4. Other non-profit organizations
Health Care Organizations

Health Care Organizations include hospitals, clinics, medical group
associations, individual
practices, individual practice
Practitioners, emergency care facilities, laboratories, surgery
Centers, other ambulatory care organizations, continuing care
!etirement communities, health maintenance organizations, home
health agencies, nursing home, and rehabilitation centers.
424 Chapter 16;•
In accordance with the "AICPA Audit and ACCOUnång

Guide, Health Care Organizations," the following are the accounting
requirements unique to health care organizations:
1. Components of a complete set of financial statements
2. Presentation of revenues in the statement of operations

3. Presentation of contributions in the statement of operations
4. Disclosure of performance indicator
Financial statements of a health care organization

According to the "AICPA Audit and Accounting Guide, Health
Care Organizations," health care organizations shall prepare the
following statements:
a. Statement of financial position
b. Statement of operations (in lieu of a statement of activities)
c. Statement of changes in net assets
d. Statement of cash flows, and
e. Notes to the financial statements.
Presentation of revenues in the statement of operations

Revenues in the statement of operations are classified into the
following:
a. Net patient revenue — gross patient service revenue less
contractual adjustments, employee discounts and billed charity
b. Premium revenue — results from capitation agreements

c. Other revenues — all other revenues not classifiable as net
patient revenue or premium revenue
A portion of a hospital's revenues is collectible from third-party
payors, such as the Philippine Health Insurance Corporation

(PhilHealth) and other health insurance providers. In this regard'
a contractual adjustment may arise from the reimbursement

agreement.
A contractual adjustment is the difference between what
the hospital considers a fair price for a service rendered versus an
agreed upon amount for the service with the insurance companY•
NM-profit Organizations 425
For example, the hospital may consider P60,000 a fair price
for a service but agrees with PhilHealth to accept only P58,000.

The difference of P2,000 represents the contractual adjustment
which is written off as a direct reduction to patient semice
revenue.
Employee discounts
These are special discounts available only to the NPO's employees
(and their immediate family members) in the form of reduction in
the price of patient services. Employee discounts are accounted for
as direct reduction to patient service revenue.
Charity care
Charity care pertains to free services rendered to patients. Charity
care is not recognized but rather disclosed only in the notes.

Illustration:
ABC Hospital, an NPO, bills P600,000 for services rendered to
patients, P500,000 of which is charged to PhilHealth. It is
estimated that only P530,000 will be collected. Of the P70,000

difference, P35,000 represent contractual adjustments with
PhilHealth, P5,000 for employee discounts, P20,000 for charity
care, and PIO,OOO for uncollectible accounts.

Solution:
Gross patient service revenue 600,000
Less: Contractual adjustments (35,000)

(5,000)
Employee discounts
(20,000)
Charity care
540,000
The uncollectible accounts are recognized as expenses (i.e.,
bad debt expense) rather than a direct adjustment to revenue.

426
Chapter 16
Journal entries:
(Date) Accounts receivable — patients 100,000
Patient service revenue 600,000

To accrue atient service revenue

To recognize the contractual
adjustments representing amounts not expected to
be collected om PhilHealth
Accounts receivable patients 5,000

s ecial discounts allowed to em I ees

Accounts receivable — patients 20,000
chari care
(Date) Bad debt expense 10,000

Allowance for doubtful accounts 10,000
To accrue uncollectible accounts
Capitation agreements
Capitation agreements are agreements with third parties based on
the number of employees instead of services rendered. SFAS No.
117 requires revenues from capitation agreements to be shown
separately on the statement of operations under the caption
"Premium revenue," which is a line item below net patient
revenue.
Illustration: Capitation agreement

ABC Hospital, an NPO, agreed to provide medical services to
XYZ's 100 employees for P500 per month, per employee. In April
20x1, only 20 employees availed of the medical services.
Requirement: Provide the entry to recognize revenue from the

capitation agreement.
427
Solution:
ApnT Accounts receivable (100 x P500)
50,000
30t Premium revenue
20x1 50,000
To accrue billings for the month of April
20x1 under thec itationa eement.
Notice that even though only 20 employees availed of the

services, the total amount due on the contract is accrued.
Other revenues
Other revenues consist of revenues other than patient service
revenues and premium revenues. Examples are the revenues from
the hospital's pharmacy, parking deck, flower and gift shop,
educational programs, donated materials and services.
Illustration: Other revenues

ABC Hospital, an NPO, had the following transactions during the
period:
a. Sales of P120,000 shop and cafeteria.
from gift
b. Received P20,000 dividends from donated shares. The use of
the dividends is unrestricted.
c. A computer consultant upgraded ABC's information system

for free. ABC would have paid P50,000 for those services if
they had not been donated.

d. Received donations of medicines worth PIO,OOO from a
pharmaceutical company.
Requirement: Compute for the total other revenues to be presented

in ABC's statement of operations for the period.
Solution:
120,0
Sales from gift shop and cafeteria
20,000
Dividends received
50,000
Professional services received
10,000
Donated supplies
200,000
Other revenues
428
Chapter
Presentation of contributions in the statement of operations

Unlike for other NPOs, health care organizations do not Present
restricted contributions on the statement of operations as part of
revenues. The revenues discussed above (i.e., net patient service
revenues, premium revenues, and other revenues) pertain only to
unrestricted revenues and may include revenues from

unrestricted contributions. Revenues from unrestricted
contributions may be separately indicated as such or included in
the other revenues classification.

Revenues from restricted contributions are presented
separately at the bottom part of the statement of operations,' after
unrestricted revenues and expenses.
Illustration: Restricted contributions

ABC Hospital, an NPO, had the following receipts during the
year:
Net patient revenues

Premium revenue 200,000
Investment Income 56,000
Contributions to be used in renovating the Hospital 400,000
Requirement: How much is reported as total revenue in the

revenues section of the statement of operations?
Answer: eL550ÆP09 (1M + 200K + 300K + 50K). The restricted
contribution is presented separately from the revenues section Of
the statement of operations.
Disclosure of performance indicator

According to the AICPA Guide, the statement of operations shail
provide a performance indicator, such as operating income'

revenue over expenses, etc. The policy used in determining the
performance indicator shall be disclosed in the notes.

429
Unrealized gains and losses on investments in securities
are not a part of the performance indicator, but shall be reported

on the statement of operations after the performance indicator.
private, non-profit, Colleges and Universities
The accounting procedure that 'is unique to private, non-profit,
colleges and universities is the accounting for scholarships and

fellowships. The concepts are provided below:
a. Scholarships and fellowships granted freely are treated as

direct reduction of revenues from tuition and fees, e.g.,
academic scholarship.
b, Scholarships and fellowships granted as compensation for
services rendered by the grantee are treated as expenses, e.g.,
scholarships provided to student assistants and faculty

c. Refunds of tuition fees from class cancellations and other
withdrawal of enrolment are treated as direct reduction of
revenues from tuition and fees.
Illustration: Net revenues from tuition and fees

For the current semester, ABC University, an NPO, assessed its
students for tuition and fees. Additional information
follows:
Student scholarships granted to student assistants

120,0
20,000
enrolment
80,000
Solution:
430 Chapter 16
Total assessment of tuition and fees

Student scholarships granted to academic scholars (50,000)
enrolment (20,000)
Net revenues from tuition and fees 930,000
The other items are recognized as expenses.
Voluntary Health and Welfare Organizations

Voluntary Health and Welfare Organizations (VHWO) are non-
profit entities that derive their revenues primarily from donations
from the general public to be used for purposes connected with
health, welfare, or community services. Examples include: women
and children's health and welfare societies, human rights
advocates, environmental protection organizations, religious
organizations, museums and other cultural and arts societies,
libraries, research and scientific foundations, professional
associations, private elementary schools, social clubs, and
fraternal organizations.
What distinguishes a VHWO providing health care
services from a Health Care Organization is the source of revenue

rather than the type of services provided. A VHWO derives its
revenues from donations from the general public while a Health

Care Organization derives its revenues from patients.
The accounting requirement unique to VHWOs is the
provision of a statement of functional expenses that reports

expenses by both functional (i.e., program and supporting) and
natural classifications (salaries expense, depreciation expense'
etc.). According to SFAS No. 117, the statement of functional
expenses is useful in associating expenses with service efforts and

accomplishments of the organization.
Nott-pröfit Organizations
431
Other non-profit organizations
The general accounting requirements for NPOs apply to other

non-profit organizations. Thus, there are actually no accounting
requirements peculiar to these organizations.
Accounting for other assets held by NPOs

As mentioned earlier, the general principles of PFRSs apply to
NPOs. Accordingly, an NPO shall:
Use the accrual basis of accounting, in addition to the other
'general features' provided under PAS 1.

Apply PFRS 9 Financial Instruments (or PFRS for SMEs, as
appropriate) for financial assets and finandal liabilities.
Usually, NPOs account for marketable securities at fair value
with changes in fair values recognized in the statement of

activities — similar to FVPL securities (the FVOCI classification
is not applicable to NPOs adopting the PFRS for SMEs).
Under SFAS 124 Accounting for Certain Investments Held
by Not-for-Profit Organizations, the marketable securities of an
NPO, consisting of either equity or debt instruments, are
measured at fair value. Changes in fair values are recognized
in the statement of activities. Also, marketable securities can
be classified as either current or non-current assets. SFAS 124
does not apply to investments which result to significant
influence or control. Accounting Principles Board (APB)

Opinion No. 18, also a U.S. GAAP, requires the use of the
equity method for investments held by NPOs that result to
significant influence.
Depreciate its depreciable assets in accordance with PAS 16,
and Equipment.
Property, Plant
Recognize impairment loss in acCordance with PAS 36
Impairment of Assets when an asset's carrying amount exceeds
its recoverable amount.

Account for leases (other than those qualifying as
contributions) in accordance with PFRS 16 Leases.

432 Chapteri
Chapter 16 Summary:
Although the PFRSs are designed to apply to bUSiness,entities

they can also be applied to non-profit organizations.
Non-profit organizations carry out socially desirable needs of
making profit. NPOs can be clas4fied into the following: (1)
Health Care Organizations, (2) Private, non-profit, colleges

and universities, (3) Voluntary Health and Welfare
Organizations, and (4) Other non-profit organizations.
Accounting principles under U.S. GAAP:
Contributions are classified based on donor's restrictions
as: (1) unrestricted, (2) temporarily restricted, and (3)
permanently restricted. These classifications are also
applied to the net assets. Internally-restricted funds are
unrestricted.
Unconditional promises to give contributions are
recognized when the promise is received from the donor.
Conditional promises are recognized only when the
performance of the attached condition is reasonably

certain.
Cash and other non-cash assets received as contributions
are recognized as assets and revenue measured at fair
value.
Services in-kind that enhance a non-financial asset or
require specialized skills are recognized as revenue and
expense. Other services are not recognized.
Works of art and similar items received as donation are
generally not recognized, unless they meet the asset
Contributions received by an NPO acting as an agent are
recognized as liabilities.
Net assets released from restrictions are presented as a
decrease in temporarily restricted net assets and an

increase in unrestricted net assets.
Organizations 433
NPOs shall prepare the following financial statements: (1)

Statement of financial position, (2) Statement of activities,
(3) Statement of cash flows, and (4) Notes.
Expenses are presented using the following functional

classifications: (1) Program services and (2) Supporting
activities.
For a health care organization:
a. Net patient revenue = Gross patient service revenue less
contractual adjustments, employee discounts and billed
charity care.
b. Premium revenue revenues from capitation
agreements.
c. Other revenues = all other unrestricted revenues.
Restricted contributions are presented separately from
the revenues section of the statement of operations.
For a private, non-profit, college or university: Net revenue
from tuition and fees = Total assessments less refunds and
scholarship grants that are not grantéd as compensation for
services rendered by the grantee. All other types of
scholarshi s are ex ensed.
PROBLEMS

l. Which of the following statements is correct?
a. The PFRSs are not applicable to non-profit organizations.
b. The financial statements of non-profit entities need not be
audited.
c. The preparation of a complete set of financial statements is
optional for non-profit organizations.

d. Although the PFRSs are designed to be applied by
business entities, they can also be applied by non-profit
organizations.
434 Chapter 16
2. an organization
It is that carries out socially desirable needs of
making profit.
a. NPO c. NCO
b. NFP d. All of these
3. According to PAS 1 Presentation of Financial Statements, a non-
profit entity that applies the PFRSs

a. must adopt all of the terminologies and principles under
the PFRSs without any exception.

b. need not present an additional statement of financial
position in cases where the entity Applies an accounting

policy retrospectively, restate its financial statements
retrospectively, or make reclassification adjustments
during the period.

c. may need to amend the descriptions used for particular
line items in the financial statements and for the financial
statements themselves.
d. may suffer negative consequences.
4. According to the Preface to International Financial Reporting
Standards, non-profit entities

a. are prohibited from using the IFRSs
b. are discouraged from using the IFRSs
c. may find the IFRSs appropriate
d. none of these
5. Which of the following principles used by business entities is
not applicable to non-profit organizations?

a. Accrual basis of accounting
b. Going concern
c. Use of fair value measurement
d. Disclosure of earnings per share
•t
6. For a non-profit entity, the operating activities section Of the
statement of cash flows can be prepared using

a. method
direct c; a or b
b. indirect method d. not prepared
7. Which of the following financial statements are prepared by

non-profit organizations?
1. Statement of financial position
II. Statement of activities
Ill. Statement of cash flows
lv. Notes
a. 1, and 11 c. 1, 11, and IV
b. 1,111 and1V d. All of these
8. In current practice, the financial reporting for non-profit

organizations (choose the incorrect statement)
a. is essentially similar to that of business entities
b. focuses on fund accounting
c. focuses on the reporting entity concept
d. adopts PFRS principles
Y. The statement of cash flows Qf a non-profit entity classifies

cash flows into
a. program services and support activities
b. unrestricted, temporarily restricted, and permanently
restricted
c. direct and indirect
d. operating, investing, and financing activities
10. Which of the following is not applicable to non-profit entities?

a. The statement of cash flows classifies movements in cash
and cash equivalents during the period into operating
activities, investing activities and financing activities.
b, Use of accrual basis of accounting

c• Presenting cash flows from operating activities in the
statement of cash flows using either direct or indirect
method.
436
Chapter 16
d. Measuring investments in equity securities using the

lower of cost and market value.

organizations?
a. Depreciating an equipment using the sum-of-the-years'
method.
digits
b. Amortizing an intangible asset with finite useful life
c. Recognizing impairment loss when an asse€s carrying
amount exceeds its recoverable amount.
d. Reporting extraordinary items in the financial statements.

organizations?
a. Accounting for combinations of entities using the
principles provided under PFRS 3 Business Combinations.

b. Measuring investments in marketable securities at fair
value and recognizing changes in fair values as unrealized

gains and losses in the statement of activities.
c. Use of present value techniques for financial assets and

financial liabilities.
d. Treating organization costs as assets to be amortized over

a period not exceeding 5 years.
13. Which of the following may appropriately be applied by a

non-profit organization when accounting for a lease contract
that does not qualify as a donation?
a. SFASN0.116 c. PFRS 16
b. SFASN0.117 d. All of these
14. According to SFAS No. 116, restricted contributions received

by an NPO are recognized
a.
when the performance of the condition is reasonably
certain
b. only in the notes
c. as liabilities
d. as restricted revenues
I
437
15. According to SFAS No. 116, a restricted fund for the

acquisition of a plant asset which was disbursed during the
a. increases temporarily restricted net assets

b. decreases unrestricted net assets
c. decreases temporarily restricted net assets

d. does not affect unrestricted net assets

Instruction: Use U.S. GAAP principles in answering the
succeeding questions.
1. What is the current-period effect of a fund received in the

previous period that was restricted for the payment of salaries
of personnel which was totally disbursed in the current
period?
a. net increase in temporarily restricted net assets
b. net decrease in unrestricted net assets
c. net decrease in permanently restricted net assets
d. zero net effect on unrestricted net assets
2. Unconditional promises to give contributions are recognized

by the donee NPO
c. when the performance of the condition is reasonably
certain.
d. b orc
3• Conditional promises to give are recognized by the donee
NPO
c• when the performance of the condition is reasonably
certain.
Chapter
d. b orc
4. Contributions are measured at

c. lower of cost or fair value
a. cost to the donor
b. fair value d. fair value less costs to sell
5. Cash and other non-cash assets received as contributions are

a. asset c. a and b
6. Donations of services that enhance a non-financial asset or
require specialized skills are recognized by a non-profit
organization as
a. asset c. expense
b. revenue d. b and c
7. Q•rvices received as donations that do not enhance a non-
financial asset or were not provided by a professional are

a. asset c. expense
8. Contributions received by a non-profit organization in the

form of works of art and similar items
a. are always capitalized.
b. need not be capitalized if they do not meet the recognition
criteria for an asset.
c. are expensed immediately if they do not meet the

recognition criteria for an asset.
d. b orc
9.
Contributions received by an NPO acting as an agent
recognized as
a. asset
c. a and b
b. revenue
d. liability
10. These refer to costs incurred by a non-profit organization on

activities that directly result to the fulfillment of the
organization's purpose
a. Program services c. Losses
b. Supporting activities d. Cost of goods sold
11. Restricted assets acquired during the period that are used for
long-term purposes because of donor restrictions are classified
in an NPO's statement of cash flows as
a. operating activities c. financing activities.
b. investing activities d. supporting activities
12. Which of the following is a deducted when computing for

health care organization's net patient revenue?
b. tuition refunds on cancelled enrolments
c. uncollectible accounts
d. direct costs on capitation agreements
13. Dividends received by a health care organization is classified
in the statement of operations as
a. Net patient revenue c. Other revenues

b. Premium revenue d. Any of these
14. Which of the following is deducted when computing for a

private, non-profit, college or university's net revenues on
tuition and fees?
b. charity care
c. tuition refunds on cancelled enrolments
d. uncollectible accounts
Scholarships and fellowships granted by a private, non-profit

college or university are deducted when computing for net
revenues on tuition and fees when
Chapter
a. the scholarships and fellowships were granted as
compensation for services rendered by the grantee.

b. the scholarships and fellowships were granted to faculty
c. the scholarships and fellowships were granted because of
academic excellence rather than as compensation for
services rendered.
d. scholarship grants are not deducted but rather recognized
as expenses.

Accounting for contributions
use thefc!!owing information for the next seven questions:
Budoy Organizaüon, a non-profit organization, received the

following donations during the period:
January 1, 20x1: Land with fair value of P4,000,000 to be used
at the discretion of Budoy Organization.
February 15, 20x1: Cash of restricted for the
acquisition of a truck. The truck will be used in Budoy
Organization's outreach programs.
March 1, 20x1: Investment in equity securities with fair value
of to be held indefinitely. Only the investment
income shall be used by Budoy Organization in its current
operations.
May 1, 20x1: JPIA members from various universities
contributed services in a tree-planting activity initiated by

Budoy Organizaåon. Although the volunteers rendered their
services for free, Budoy Organization estimates that the fair
value of these services would amount to P20,000.
On June 30, 20x1, Budoy Organization acquired a truck for

and received dividends of P240,000 from the equity
securities.
1. How much is the unrestricted contributions revenue?

441
c. 6,020m)
2. How much is the

temporarily restricted contributions
revenue?
3. How much is the permanently restricted contributions
revenue?
4. How much is the "net assets released from restrictions" in
20x1?
d. None

unrestricted net assets? Ignore depreciation. Increase (Decremo

temporarily restricted net assets? Ignore depreciation. Increase
(Decrease)
c. 4,240,000
7. How much is the net effect of the transactions in the »•ar-end

permanently restricted net assets? increase (decre&)
a. 2,000,000
442 Chapter
Classification of contributions

Doggy Organization, a not-for-profit entity, disclosed the
following in its 20x1 notes to the financial statements:

Received shares valued at to be retained with the
dividends used to support current operations.

Net resources of P4,000,000 invested in plant assets.
Received equipment valued at which is to be sold
with the proceeds used to renovate the children's playground.

Board-designated funds of
Received P80,000 cash from a donor who did not specify any
use restrictions on the contribution; however, the donor
Received P3,200,000 from a donor who stipulated that the
8. How much is included in the unrestricted net assets?
9. How much is included in the temporarily restricted net

assets?
10. How much is included in the permanently restricted net

assets?
c. 11,280,000
Non-cash assets
11. Bogart Organization, a not-for-profit entity, received the

following donations during 20x1:
• Land with fair value of@40,000,000 to be sold to acquire a

bus.
Noti-profit Organizations
443
Shares Of stocks with fair value of P 12,000,000 to be

retained indefinitely. The dividends from the shares will
be used to support current operations.
As a result of the donations above, how much should Bogart

report as increase in temporarily restricted net assets?
Services
12. A short-circuit destroyed the offset printing machine of
Scooby Organization, a not-for-profit entity. Mr. Doug, a
professional offset mechanic, repaired the machine for free.
The fair value of the services is estimated at P40,000. The entry

to record the transaction includes
a. debit to asset and credit to contributions revenue for
P40,OOO
b. debit to contributions revenue and credit to asset for
c. debit to expense and credit to contributions revenue for
P40,ooo
d. Only a memorandum entry shall be made.
13. Aw-aw Organization, a non-profit entity, received the
following during 20x1:

• 980,000 restricted by the donor to be used as allowances of
members of Aw-aw's choir.

• P480,000 proceeds from sales of calendars, mugs, T-shirts,
and other souvenir items. The fair value of the items sold
is P300,000 while the cost is P200,000.
• to be used only upon the completion of a new
jam room that was only 40% complete as of December 31,
20x1. If the facility is not completed by May 21, 20x2, the
cash shall be returned to the donor.

Chapter
How much contribution revenue shall Aw-aw recognize from

the cash receipts listed above?
a. 180,000 c. 560,000
d. 260,000

Arf-arf Organization, a non-profit entity, received the following
contributions during 20x1:

• P400,000 cash restricted for the purchase of equipment.
• PI,OOO,OOO cash restricted for the renovation of an old building
owned by Arf-arf Organization.
Arf-arf made the renovation in 20x2 and acquired the equipment
in 20x3.
14. How much revenue is recognized on the contributions in
20x1?
a. 400,000
15. How much "net assets released from restrictions" is reported
in Arf-arf's 20x2 statement of activities?
a. 400,000
Net effect on net assetS

IJse the following information for the next two questions:
K9 Organization, a non-profit entity, had the following
transactions during 20x1:

• Received contribution of P800,000 to be used for student
scholarships. Of this amount, P480,000 was expended during

the year.
• Expended P200,000 for student scholarships from a P240'000
grant received in previous year.

445
16. What is the net effect of the transactions above in K9's 20x1
unrestricted net assets? Increase (decrease)
a. (120,000) c. 680,000
b. 120,000
17: What is the net effect of the transactions above in K9's 20x1
temporarily restricted net assets? Increase (decrease)
a. 120,000 c. 320,000
b. (680,000)
Receipt of resources as an Agent

18. Green Leaves Organization, a not-for-profit entity, received
relief goods to be distributed to typhoon victims in a specified
area. Green Leaves has no discretion in determining the

specified beneficiaries typhoon victims). The relief goods

(i.e.,
have a fair value of P400,000 and a cost of P250,000. How

much contributions revenue shall be recognized on the goods
received?
a. 400,000 c. 150,000
b. 250,000
Intermediary between donor and donee

19. Astig Organization, a non-profit entity, is formed to oversee
the welfare of battered husbands. Astig encourages these

pitiful husbands to seek legal advice. To provide these
services, Astig develops and maintains a list of lawyers and
law firms that are interested in providing free legal services to
victims. Astig theg encourages individuals in need of these
services to contact Astig for referral to lawyers that may be

Willing to serve them. The lawyer decides on whether and
how to serve a specific individual.
During the year, Asüg Organization referred Mr. Darrell, Mr.

Raymund, Mr. Rex, and Mr. Rhad Vic, all suffering from
serious physical injuries inflicted by their respective wives, to
446
Chapter
Macmod & Areno Law Firm, which provided these husband,

free legal services. The husbands would have paid a total of
PIOM if they asked legal advice from other lawyers.
How much is the contributions revenue to be recognized by

Astig Organization for the legal services provided to the
victims?
a. 10M c. 5M
b. 2M
Restricted contributions
20. Schneider Hospital, a non-profit entity, had the following

Sales from canteen
Investment income 200,000
Contributions for the renovation of the Hospital 300,000
How much shall be reported as other revenues on the
c. 300,000

Unconditional and Conditional promises to give
On December 31, 20x1, Kulasa Organization, a not-for-profit
entity, had the following transactions:

Ms. Alpha made an unconditional pledge to give Kulasa
Organization P48,000 each year over the next five years

starting on December 31, 20x2. The appropriate discount rate
is 10%.
Ms. Beta promised to provide half of the funds needed to
construct a new building if Kulasa can get the remaining half
of the needed funds from other donors by March 1, 20x2. As Of

December 31, 20x1, Kulasa has already accumulated 48% Of
the needed construction funds. Kulasa's Board of Trustees
strongly believes that the remaining 2% will be received by the

end of January 20x2. The estimated total costs of construction
is
Mr. Charlie promised to give Kulasa Organization a used
offset printing equipment if Kulasa acquires a paper cutting

machine. The offset printing equipment has a fair value of
Because of recent cash flow problems, Kulasa's
Board of Trustees believes that it will not be able to acquire a
paper cutting equipment in the near term.

Mr. Delta gave Kulasa Organization cash of P2,000,000 as a
challenge grant. Kulasa Organization can keep the P2,000,000
if it can raise an additional P2,000,000 by the end of March
20x2. If Kulasa Organization fails to comply with the
condition, it shall retum the amount received to Mr. Delta.
1. How should the transaction with Ms. Alpha be accounted for
by Kulasa?
a. as an unrestricted support for P181,958
b. as a temporarily restricted support for P181,958
c. as asset and liability measured at P181,958
2. How should the transaction with Ms. Beta be accounted for by

Kulasa?
b. as a temporarily restricted support for
3• HOW should the transaction with Mr. Charlie be accounted for

by Kulasa?
a. as an unrestricted support for

Chapter
4. How should the transaction with Mr. Delta be accounted
by Kulasa?
c. as an asset and a liability, each measured at
5. What is the total net effect of the transactions above in
Kulasa's net assets?

a. Increase in temporarily restricted net assets
b. Decrease in temporarily restricted net assets
c, Decrease in unrestricted net assets
d. No effect on net assets
Endowments
6. During 20x1, Blacky Organization, a not-for-profit entity,
received the following donations:
On October 1, 20x1, Mr. Meow established a P4,000,000
endowment fund in favor of Blacky Organization by
appointing Whitey Bank and Trust Co. as the trustee. The
income from the fund be paid to Blacky Organization

is to
for use in its current operations. Income from the fund is 'a
dependent on the investment performance of the fund.

On December 31, 20x1, Blacky Organization received
P400,000 in cash from Ms. Mingming Too under a
charitable remainder annuity trust agreement designating

Blacky Organization as the trustee and charitable
remainder beneficiary. The terms of the trust agreement

require Blacky Organization, as trustee, to invest the trust
assets and pay P20,000 each year, starting on December 31'

20x2, to Mr. Cute Puppy, the annuitant (i.e., income
beneficiary) for the remainder of Mr. Cute Puppy's life•
Upon death of Mr. Cute Puppy, Blacky Organization may i
use its remainder interest for any purpose consistent with

its mission. The appropriate discount rate is 10% and the
life expectancy of Mr. Cute Puppy is 5 years.

449
What the total net effect of the transactions above in

is
Blacky's net assets?
a. increase in temporarily restricted net assets by P324,184

b. increase in temporarily restricted net assets by P4,324,184
c. increase in temporarily restricted net assets by P75,816
d. no effect
Functional classification of expenses

use thefollowing information for the next seven questions:
Ranger Organization, a non-profit entity, had the following
expenditures during the year:
Child care services provided for indigent families 560,000

Work to help elderly dtizens 6m,ooo
7. How much is classified as "program" expenses?

a. 300,000 c. 200,000
8. How much is classified as "support" expenses?

c. 300,000
b. 200,000

9. Gary Hospital, a non-profit entity, rendered in
services to patients, of which is charged to
PhilHealth. It is estimated that only 92,120,000 will

collected. Of the P280,000 difference, P140,000 is the estimated
contractual adjustments with PhilHealth, P20,000 is allowance
for discounts to hospital employees, P80,000 is charity care,
and is the uncollectible accounts. How much is the net
service revenue?
a. 2,120,000 c. 2,160,000
450
Chapter 16
Capitaüon agreement
10. Sparky Hospital, a non-profit entity, signed an agreement
with Melay, Inc. to provide medical services to each of Melay•s
100 employees for '2,000 per month, per employee. Du
the month of April 20x1, only 20 employees availed of
medical services. How much is the premium revenue
recognized in April 20xl ?
a. 200,cm
b. 40,000
Other revenues
11. Heart Hospital, a non-profit entity, had the following
transactions during the period
Sales of P480,0()0 from gift shop and cafeteria.
Received dividends from donated shares. Use of
the dividends is unrestricted
A
computer consultant provided free services on
upgrading of Heart's information system. Heart would
have paid for these services if they had not been
donated.
Purchased medicines from a pharmaceutical company for
P40,0()(). However, the pharmaceutical company did not

charge Heart Hospital for the purchase because the
medicines were being donated to Heart Hospital.
How much is classified as other revenues in Heart Hospital's

a. 520,0 c. 800,o
b. 600,000

12. Umpong Hospital, a non-profit entity, had the following
Sales from canteen
Undesignated gifts (Unrestricted contributions) 200,0

451
Contractual adjustnents
Billings on capitation agreements 1,200,000
Uncollectible accounts 80,000
Salaries of doctors 400,000
How much is the net patient service revenue?

c. 4,040,000
Net revenues from tuition and fees

13. For the current semester, Piper University, a non-profit entity,
assessed its students P4,000,000 for tuition and fees. The

following information was also determined:

enrolment 80,000


240,000
dependents
Estimated uncollectible accounts 320,000
How much is the net revenues from tuition and fees?
Accounting for marketable securities

14. Pipita Organization, a non-profit entity, acquired short-term
investment in shares of stocks for P800,000 using unrestricted

net assets. During the year, Pipita received cash dividends of
940,000. At year-end, the shares have a fair value of P880,000.
What is the effect of the transactions described above on the
year-end statement of activities of Pipita?

452 Chapter 16 '
c. 40,000
a. 120,000
b. 80,000
Depreciation
15. On January 1, 20x1, Toby Organization, a non-profit enåty,
had the following transactions:

• Purchased a vehicle cosång P600,O using unrestricted cash
• Received a vehicle with fair value of P480,000 from donation
Both vehicles have estimated useful lives of 5 years and no

residual value. Toby has an accounting policy implying a time
restriction on gifts of long-lived assets. In Toby's 20x1
statement of activities, what amount of total depreciation
expense should be included under changes in unrestricted net

assets?
c. 216,000
b. 120,000

Brownie Organization, a non-profit entity, had the following cash
flows during the year:

P200,000 unrestricted contribuåons.
2,400,000 from fundraising activities to support current
operations.
P400,000 from a donor who stipulated that the money be spent
in accordance with the wishes of Brownie's governing board.
P800,000 cash dividends restricted for the purchase Of
equipment.
P800,000 expenditure to- acquire equipment with the cash
dividends above.
from a donor who stipulated that the contribution
shall be invested indefinitely. Income from the contributi011
may be used in furtherance of Brownie's mission.
16. How much is the net cash flows from operating activities?
d. 1,800,000
453
17, How much is the net cash flows from investing activities?
c. 2,000,000
b. 400,000
18. How much is the net cash flows from financing activities?
a. 400,000
kecoylition and measurement

1. An NPO receives unconditional donations of P300,000 cash
and equipment with fair value of P2,000,000 and carrying
amount of What is the journal entry to record the•
receipt of the donations?
2. On January 1, 20x1, an NPO receives the following donations:

• Cash of P3,000,000 to be used to acquire an equipment.
• Investment in equity securities with fair value of
to be held indefinitely. Only the investment
income shall be used by the entity in its operations.
On December an equipment for

31, 20x1, the entity acquires
and receives cash dividends of P50,000 from the
equity securiåes.
Unconditional and Conditional promises

3• On January 1, 20x1, Entity A receives the following promises:
a. Donor X promises to give an unconditional donation of
mo,ooo on January 15, 20x1.
b. Donor Y promises to donate construction materials with
fair value of P300,000 if Entity A starts the construction of
a children's playground.
Chapter 16
454
Entity A receives the donation of Donor X on January 15, 20x1 and

the donation of Donor Y on February 1, 20x1, although the"i
construction of the playground is not yet started.
Fund Accounting
4. Entity A receives the following donations:
Cash of P2M to be used at the discretion of Entity A's
management.
Cash of P3M restricted for the acquisition of equipment.
Trust fund of P5M which Enüty A shall never use; only the
income therefrom.
Entity A acquires an equipment for P3M and receives cash

dividends of P200,000 from the investment at the end of the
period.
Requirements:
a. Record the transactions above under a fund accounting
system.
b. Compute for the ending balances of unrestricted,
temporarily restricted, and permanently restricted net

assets.
Other forms of contributions

5. The receipt of which of the following will give rise to the
recognition of a revenue by a non-profit organization?

a. Services in-kind provided by non-professionals.
b. Donation of work of art to be held for public exhibition'
must be preserved and never to be sold.

c. Services in-kind that enhance a non-financial asset or
require specialized skills.
d. Relief goods to be distributed to flood victims in a

specified area.
455
NON-profit Organizations
Which of the following financial statements is generally not
6.
required of non-profit organizations?
a.
b. Statement of changes in equity
d. Notes
Presentation of Expenses
7. According to SFAS No. 117, the functional classifications of
expenses of non-profit organizations are

a. Program services and Supporting activities
b. Sellingand Administrative costs
c. Nature and Function expenses
d. Cash and Non-cash expenses
8. According to SFAS No. 117, this functional classification of

expenses of non-profit organizations pertains to activities that
goods and services being distributed to beneficiaries,
result in
customers, or members that fulfill the purposes or mission for
which the organization exists.

a. Distribution costs c. Supporting activities
b. Program services d. Consumption activities

9. ABC Hospital, a non-profit entity, had the following receipts
during the year:

50,000
Undesignated gifts (Unrestricted contributions)
300,000
60,000
Billings on capitation agreements
20,000
Interest income
100,000
Uncollectible accounts
50,000
Employee discounts
20,000
Charity care, included in billings
456
Chapter 16
Performance indicator
10. A Health Care Organizatiön uses revenues and gains over
expenses and losses as its performance indicator. Which of the
following items would be included in the calculation of this
indicator?
1.
Sales from the hospital's canteen
II. Unrealized gains on marketable securities
Ill. Net assets released from restriction used for operating
expenses
IV. Contributions received from a donor in the current
year that cannot be spent until the following year.
a. I and Ill c. 1, 111 and IV

b. I and II d. 1, 111 and IV
Private, non-profit, Colleges and Universities

11. For the current semester, a non-profit university, assessed its
students P2,000,000 for tuition and fees. Additional

information follows:
enrolment 40,000
dependents 120,000
160,000
Financial Statements ofNPOs 457
Chapter 17
Illustrative Financial Statements of NPOs

Illustrative financial statements - based on U.S. CAAP
American Not-for-profit Organization

Statements of Financial Position
June 30, 20x2 and 20x1
(in thousands)
20x2 20x1
Assets:
Ca;h and cash equivalents $ 75 $ 460
Accounts and interest receivable 2,130 1,670
Inventories and prepaid expenses 610 1,000
Contributions receivable 3,025 2,700
Short-term investments 1,400 1,000

Assets restricted to investment in land,
4,560
buildings, and equipment 5,210
Land, buildings, and equipment 61,700 63,590
Lon -term investments 218,070 203,500
Total assets $292,220 $278,480
Liabilities and net assets:

Accounts payable $ 2,570 $ 1,050
Refundable advance 650
Grants payable 875 1,300
Notes payable 1,140
Annuity obligations 1,685 1,700

Lon -term debt 5,500 6,500
Total liabilities 10,630 12,340
Net assets:
Unrestricted 115,228 103,670
Temporarily restricted 24,342 25,470

Permanentl restricted 142,020 137,000
Total net assets 281,590 266,140
Total liabilities and net assets $292,220 $278,480

458 Chapter 17

Statement of Activities
Year ended June 30, 20x1
in thousands)
Temporarily Permanently
Total
Unrestricted
Revenues, gains, and other support:

Contributions $8,110 $280 $17,030
$8,640
Fees 5,400 5,400
Income on long- 120

5,600 2,580
term investments 8,300
Other investment income 850 850
Net unrealized
and realized 8,228 2,952 4,620
gains on investments 15,800
Other 150 150
Net assets released from restrictions:

Satisfaction of
11,990 (11,990)
program restrictions
Satisfaction of equipment
1,500 (1,500)
acquisition restrictions
Expiration of time
(1,250)
restrictions 1,250
Totals 43,608 (1,098) 5,020 47,530
Expenses and losses:
Program A 13,100 13,100
Program B 8,540 8540

5,760 5,760
Program C
Management and
2,420 2,420
general
Fund raisin 2,150 2,150
Total 31,970 31,970
Fire loss 80 80
Actuarial loss on
annui obli ations 30 30
Totals 32,050 30 32,080
Change in net assets 11,558 (1,128) 5,020 15,450
Net assets, at be of ear . 103,670 25,470 137,000 266,140
Net assets at endo ear $115,228 $24,342 $142,020 $281,590

Illustrative Financial Statements ofNPOs

Statement of Changes in Net Assets
Year Ended June 30, 20x1
(in thousands)
Unrestricted net assets:
Total unrestricted revenues and gains

$ 28,868
14,740
Total unrestricted expenses and losses
(32,050)
Increase in unrestricted net assets
11,558
Temporarily restricted net assets:
Contributions 8,110
Income on long-term investments 2,580
Net unrealized and realized gains on long-term
2,952
investnents
Actuarial loss on annuity obligations (30)
Net assets released from restrictions 14,740)
Decrease in temporarily restricted net assets (1,128)
Pennanently restricted net assets:
Contributions 280
Income on long-term investments 120
Net unrealized and realized gains on long-term

4,620
investnents
Increase in permanently restricted net assets 5,020
Increase in net assets 15,450
266,140
Net assets at beginning of year
$281,590
Net assets at end of year
Chapter 17
(Indirect method)

Statement of Cash Flows
Year Ended June 30, 20x1
(in thousands)
Cash flowSfrom operating activities:

Change in net assets $15,450
Adjustments to reconcile change in net assets to net
cash used by operating activities:

3,200
Depreciation
Fire loss 80
Actuarial loss on annuity obligations 30
Increase in accounts and interest receivable (460)
Decrease in inventories and prepaid expenses 390
Increase in contributions receivable (325)
Increase in accounts payable 1,520
Decrease in refundable advance (650)
Decrease in grants payable (425)
Contributions restrictedsfor long-term investment (2,740)
Interest and dividends restricted for long-term

investment (300)
Net unrealized and realized gains long-term

investments (15,800
Net cash used b eratin activities (30)
Cash flows from investing activities:

Insurance proceeds from fire loss on building
Purchase of equipment (1,500)
Proceeds from sale of investments 76,100
Purchase of investments (74,900)
Net cash used b investin activities (50)
461
Cashßowsfromfinancing activities:
proceeds from contributions restricted for:
Investment in endowment 200

Investment in term endowment
70
Investment in plant 1,210
Investment sub'ect to annui a reements 200
1,680
Other financing activities:
Interest and dividends restricted for reinvestment 300
Payments of annuity obligations (145)
Payments on notes payable (1,140)
Pa ments on Ion -term debt 1,000
(1,985)
Net cash used nancin activities 305
Net decrease in cash and cash equivalents (385)
Cash and cashe uivalents at be •nnin of ear
Cash and cashe uivalents at endo ear $ 75
An excerpt from an Independent Auditors' Report attached

to published financial. statements prepared in accordance with II.S.
GAAP is provided below:
Opinion
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American
Non-profit Organization as of June 30, 20x1, and the changes in its
net assets and its cash flows for the year then ended in confonnity
with accounting principles generally accepted in the United States
ofAmerica.
462 Chapter 17
Illustrative financial statements — based on IFRSs

The following are the published audited financial statements of.
the Intemational Accounting Standards Committee FOUndation

(IASCF) for the years ended December 31, 2006 and 2005.
STATEMENT OF ACTIVITIES
2006 2005
Year ended 31 December Notes (E'000) (E'000)
REVENUES
Contributions 3 10,382 9,374
Revenues from publications and

related activities 4 5,058 4,514
income
Interest
568 534
25 27
Other income
16,033 14,449
Less direct cost of sales from

ublications and related activities 4 (2,922) (2,753
13,111 11,696
OPERATING EXPENSES
wages and benefits
Salaries, 5 9,177 8,316
6 1,238 984
Accommodation
822 781
Board meetings
Committees 419 394
Travel for consultations 468 323
External relations 121 136
3 72
Fundraising
121
Audit, legal & taxation 166
Communications 263 261
Other costs 153 167
Total o eratin ex enses 12,899 11,483
TRUSTEES' COSTS 7
Fees 436 333
198 208
Meeting expenses
634 541
Total ex enses 13,533 12,024

Illg$trative Financial Statements ofNPOs
463
EXPENSES IN EXCESS OF REVENUES

(422) (328)
Changes in fair value of financial
insEuments 159
(915)
ForeiB1 exchange gains 3 681
portfolio management fee (14) (14)
Taxation 8 (37)
(DECREASE)/INCREASE IN NET ASSETS (311) (576)
Net assets at be •nnin of ear
11,354 11,930
NETASSETS AT END OF YEAR 11,043 11,354
sTATEMENT OF FINANCIAL POSITION

2006 2005
At December 31 Notes E'000) E'000)
ASSETS
Non-current assets
Leasehold property, leasehold
improvements, fumiture and equipment 9 318 430
Financial assets 10 5,974 5,101
6,292 5,531
Current assets
Derivative financial assets 10 295

Accrued interest receivable on bonds 81 78
Financial assets 10 1,438
Cash at bank and in hand 10 5,371 6,104
Contributions receivable 3 305 180
Taxatim recoverable 26
Stocks and work in progress 11 64

Other receivables 282 280
Pr aid ex enses 378 361
7,928 8,534
TOTAL ASSETS 14,220 14,065

464 Chapter 17
LIABILITIES
Non-current liabilities
Contributions received in advance 3 128
Publication revenue received in
advance 5
Rent premium received on

6 50
assum tion of leases 119
55 247
Current liabilities
3 365 192
Contributions received in advance
Rent premium received on
6 69 70
assumption of leases
Publications revenue received in
advance 748 740
Accrued expenses and sundry

creditors 1,940 1,462
3,122 2,464
TOTAL LIABILITIES 3,177 2,711
NET ASSETS 11,043 11,354
(Direct Method)
CASH FLOW STATEMENT
2006 2005
Year ended 31 December Notes E'000)
OPERATING ACTIVITIES
Contributions 10,302 9,744
Cash receipts from customers 5,005 4,729
32 32
Other receipts
Cash paid to suppliers and employees:
Operating expenses (12,274) (11,721)
Publications direct expenses (2,929) (3,103)
Trustees' costs (573) (546)
Taxation (11)
Net cash om o eratin activities (448) (865)
465
INVESTING ACTIVITIES
purchase of bonds
(2,196) (2,162)
Matured bonds receipts 1,415 1,011
Interest received 624 562
purchase of furniture and
equipment (96) (95)

Leasehold ppperty and leasehold
improvements (20) (55)
portfolio management fee (14) (14)
Forei exchan e ains 217 679
Net cash decrease from investing
activities (70) (74)
Effects of exchange rate changes
on cash and cash e uivalents (214) 2
NET DECREASE IN CASH AND
CASH EQUIVALENTS (733) (937)
Cash and cash equivalents at
be of riod 6,104 7,041
CASH AND CASH
EQUIVALENTS
AT THE END OF THE PERIOD 10 5,371 6,104
NOTES TO THE FINANCIAL STATEMENTS (selected only)

For the year ended 31 December 2006
1. LEGAL FORM, OBJECTIVES AND RESTRUCTURING

Intemaåonal Accounting Standards Committee Foundation
Foundation) is. a not-for-profit corporation based in London, which was
incorporated in the State of Delaware, USA, on 6 February to continue the
work Of iG predecessor body, the Intemational Accounting Standards Committee.
The objectives of the IASC Foundation are:

as to develop, in the public interest, a single set of high quality, understandable
and enforceable global accounting standards that require high quality,
&ansparent and comparable information in financial statements and other
finandal re rtin to hel artici ants in the world's ca ital markets and
466
Chapter 17
other users make economic decisions;

b. to promote the use and rigorous application of those standards;
c. in fulfilling the objectives associated with (a) and (b) to take account of, as
appropriate, the special needs of small and medium-sized entities and

emerging economies; and
d. to bring about convergence of national accounting standards and
Intemational Accounting Standards and International Financial Reporting
Standards to high quality solutions.
The IASC Foundation has two main bodies, the Trustees and the International
Accounting Standards Board (IASB) and its related bodies, the International
Financial Reporting Interpretations Committee (IFRIC) and the Standards
Advisory Council. The Trustees appoint the members of the IASB and related
bodies, exercise govemance oversight over the IASB and other committees and
raise the funds needed, whereas the IASB has sole responsibility for setting
accounting standards in accordance with its mandate set out in the IASC
Foundation Constitution.
Beginning with commitments for financial year 2001, the Trustees raised funds to
cover costs associated with the reorganization of the IASC Foundation and
ongoing operations. Additionally, the Trustees sought to provide confidence that
the IASC Foundation would have sufficient funds to operate in future years. The
large majority of the initial funds were pledged on a multi-year basis to secure
financing through to the end of 2005.
During 2005 the Trustees pursued a financing solution on two tracks. First, the
Trustees sought and obtained two-year extensions of the initial commitments and
new sources of funding to compensate for the depreciation of the US dollar. This •
process proved successful with the Trustees expanding their resources of funding
and providing necessary revenue for 2006 and 2007. Second, the Trustees are
implementing an agreed plan for establishing a sustainable, broadly-based

funding system for 2008 and beyond. Work has commenced, and significant
commitments should be in place by the end of the first half of 2007.
2. ACCOUNTING POLICIES
(a) Basis of preparation
These financial statements have been prepared in accordance with InternatiOnal
Financial Reporting Standards (IFRSs). Any changes in accounting policies are

explained where these have occurred.
(b) Contributions
Contributions are recognized as revenue in the year designated by the
contributor.
(c) Publications and related revenue

Illustrative Financial Statements ofNPOs 467
sFriptions and licence fees are recognised as revenue on a straight-line basis
the period covered by the subscripüons and fees. Royalties are recognised as
revenue on an accruals basis.
publications direct cost of sales comprises only printing costs and other direct
including publications department salaries, promotion, and certain

omputér costs. The direct costs do not include other costs of publishing
sundaxds, including costs of Trustees or IASB meeångs, associated costs of the
Fouhdatipn's management team related to the publications programme, the

of the editorial function involved in preparing published materials, various
overheads including administration, computer and financial costs, cost of capital,
or costs relating to publications of the work of the, IFRIC, the IASB members
and technical staff.
(d) Stocks and work-in-progress

stocks and work-in-progress are stated at the lower of cost and net realisable
value.
(e) Depreciadon
Leasehold improvements are depreciated on a straight-line basis over the period
of the lease.
Furniture and equipment are depreciated on a straight-line basis over the

esåmated useful life of the asset. The annual rate applied is 20 per cent of cost for
all assets except computer equipment, which is depreciated at 33 1/3 per cent of
cost.
(0 Foreign currency transactions

Transactions denominated in currencies other than sterling are recorded at the
exchange rate at the date of the transaction. Monetary assets and liabilities are
translated into sterling at the exchange rate at the year-end.
(g) Operaång leases—office accommodation

Lease payments for office accommodation are recognised as an expense on a
straight-line basis over the non-cancellable term of the lease.
(h) Financial assets
In the years up to and including 2005, investments in bonds were classified as
available for sale and recognised at fair value, and the corresponding gains or
loses were included in the Statement of Activities.
The LASC Foundaåon elected to adopt the June 2005 amendments to IAS 39
Financial Instruments: Recognition and Measurement concerning the fair value option
from 1 Janua 2006. The accountin treatment is the same as revious ears:
468
Chapter 17
investnents in bonds are recognised at fair value, and the corresponding gains or
losses are included in the Statement of Activities.
(i) Derivative financial assets

Derivative financial instruments (forward contracts in 2W5 and zero-cost collars
in 2006 and 2007) were used hedge the exposure to foreign exchange risks from
to
US dollar contributions. The IASC Foundation uses the US dollar contributions to
finance a portion of sterling obligations arising from activities. In accordance with
financial risk management policy, the IASC Foundation does not hold or issue
derivative financial instruments for trading purposes. Derivative financial
instruments are recognised at fair value. The corresponding gains or losses are
included in the Statement of Activities.
3. CONTRIBUTIONS
When the IASC Foundation was incorporated in 2001, the IASC Foundation
Trustees asked contributors to make five-year pledges. The first round of funding
expired in 2005. To cover a two-year period while the Trustees investigated other
financing mechanisms, the Trustees sought two-year extensions from the original
group of contributors and contributions from new sources. As of 7 February 2007,

the Trustees achieved the following pledges under the interim system. The
pledges are primarily in US$.
Date 7 Feb 2007 19 Feb 2006
$'000 $'000
2006 16,142
2007 19,672 16,063
The US dollars have been translated at the financial year-end rate of US $1.9586 to
El (2005: US$I .7188). For convenience purposes, the sterling equivalents follow:
Year Feb 2007 15 Feb 2006

E'000 E'OOO
2006 9,392
2007 10, 044 9,345
Contributions received before 31 December 2006, amounting to €364,882 (2005:
E320,000), were specifically designated by the contributors for use by the IAC
Foundation in subsequent years, and were recognised as current and non-current
liabilities respectively. Contributions received or confirmed after 31 December
2006, amounting to a total of E305,298 (2005: E180,000) specifically designated by
the contributors for use by the IASC Foundation in were recognised as
revenues at the end of 2006.
In 2006 the Trustees initiated a plan aimed at creating a broad-based, sustainable
fundraising mechanism for 2008 and beyond. The goal is to raise E16 million to
cover the annual o eratin costs for the IASB and to rovide a mechanism for
matching increases in inflation.

Broad-based: The funding system will expand the base of support to include
major participants in the world's capital markets in order to ensure
diversification of resources.
Compelling: The system will carry sufficient pressure to make free riding
difficult.
Open-ended: The financing will not be contingent on any particular action
thatwould infringe on the independence of the organisation.
Country-specific: The funding burden should be shared by the major
economies •of the world on a proportionate basis, using Gross Domestic
Product as the determining factor of measurement. Each country should
meet its designated target in a manner consistent with the principles above.
The Trustees engaged a fundraising consulting firm to assist in the establishment

of the new fundraising system in the United States. The total cost for the
fundraising counsel in 2006 was E72,234.
4. PUBLICATIONS AND RELATED ACTIVITIES

(A) PUBLICATIONS AND RELATED REVENUE
2006 2005
E'OOO E'000
Sales of subscriptions and publications 3,997 3,756
Royalties and permission fees 936 610
Other related activities 125 148

5 058 4314
(B) PUBLICATIONS AND RELATED COST
2006 2005
E'OOO E'000
Salaries 1,121 1,034
Cost of goods sold 371 317

Other costs 1.402
2.753
5. EMPLOYEES (Omitted)
6. ACCOMMODATION
The IASC Foundation entered into an operating lease in 2001 for office
accommodation on the First Floor at 30 Cannon Street, London and in December
2004 acquired an assignment of an operating lease for part of the ground floor of
30 Cannon Street. Both leases expire in September 2008. In December 2006 a new
lease was signed for additional space on the ground floor through 2018 and new
terms were agreed on the existing space at 30 Cannon Street for a Friod
beginning September 2008 and ending in September 2018.
On assi the lease for art of the round floor at 30 Cannon Stret the
470 Chapter 17
outgoing tenant paid the IASC Foundation E172,000 covering a nine-month rent.
free period and, for the remaining term Of the lease thereafter, a E9 per square foot
differential between the rent payable under the lease and the lower current rent
agreed with the IASC Foundation. The E172,000 will be recognised as a reåucfion
in accommodation expense over the remaining term of the lease to September
2008. At the balance sheet date the balance outstanding in this regard and the
remaining value of Cannon Street leases was E119,000 (2005: E187,000), of which
E50,000 (2005: E117,000) is a non-current liability and E69,000 is a current liability
(The rest of the note disclosure is omitted)
7. TRUSTEES' COSTS
The Trustees are remunerated by annual and meeting fees and are reimbursed for
the expenses of their travel on IASC Foundaåon business. In 2006 the annual fee
for the Chairman of the Trustees reverted to E25,000 upon the appointment of
Philip Laskawy. During the tenure of Tommaso Padoa- Schioppa the agreed
annual fee was E75,000. The annual fee for the other Trustees was E12,500 (2005:
€12,500). Trustees received a fee of EI,OOO (2005: EI,OOO) for each formal meeting of
the Trustees or of any of the Trustees' committees.
8. CORPORATION TAX
For US tax purposes, the IASC Foundation is classified as a not-for-profit tax-
exempt organisation.
In 2006, the LASC Foundation reached an agreement with the UK authorities
regarding the status of its publications and related revenues. Under the
agreement, tax is calculated on the basis of a notional trade, where publications
revenue is offset by both direct and indirect costs of developing the published
materials.
The taxation charge of E36,686 relates to the year 2001. As a result of the
agreement with the UK authoriües no tax is payable for the years 2002-2006 as the
notional trade calculation produces a loss. At the end of 2006 the IASC
Foundation is carrying forward a loss for UK tax purposes Of E658,934 (2005:
573,140). Consistently with IAS 12, the IASC Foundation does not recognise this
loss as a deferred tax asset, due to the uncertainty connected to utilising this in the
future.
9. LEASEHOLD PROPERTY, LEASEHOLD IMPROVEMENTS, FURNITURE

AND EQUIPMENT (Omitted)
10. FINANCIAL ASSETS AND FINANCIAL LIABILITIES

The IASC Foundation holds sterling-denominated fixed rate bonds. The IASC
Foundation mana es and receives information on its investments in bonds on a
fair value basis. Information is provided on that basis to the Trustees and key
gunagement personnel. The Foundation's accounting policy, described in note
2(h), reflects this pracåce. (The rest of the note disclosure is omitted)
11. STOCKS AND WORK IN PROGRESS

Stocks of books amount to E 64,110 (2005: E66,637).
12. COPYRIGHT LITIGATION

nedispute regarding copyright relating to a 1998 and 1999 Russian translatiöQ of
International Financial Reporting Standards has been settled. All claims asserted
by the have been dismissed and the settlement is
parties against each other
structured in a manner that ensures there will be no future litigation. The cost of
the settlement is included in the direct cost of sales of publications and related
activities.
13. FINANCIAL RISK MANAGEMENT STRATEGY

The expenditures in the IASC Foundation's operating budget are largely in
sterling, whereas the organisation has received contribution pledges in US dollars
to cover the cost of operating the IASB and other overhead costs first to the end of
the year 2005, and then extended through 2007. As a result the Trustees have
implemented a strategy to mitigate the foreign exchange fluctuation and üming
risks connected with the voluntary contributions.
To address the exchange rate risk, the Trustees entered into a series of forward
contracts for 2005 and adopted a collar strategy for 2006 and 2007 to provide a
fixed sterling equivalent from the US dollar contributions. In 2005, this amount
approximated 90 per cent of the projected budget. In 2006 and 2007, the IASC
Foundation hedged US$9.5 million in US dollars each year. Details regarding the
transactions are in note 10.
To protect against the risks associated with voluntary contributions in future

years, the Trustees have invested the IASC Foundation's surplus funds in 10
sterling-denominated notes of the UK government, and intemational
organisations with an AAA rating. Funds are divided in relatively equal sums
with maturities in each ofthe next four years in order to provide a steady cash
flow upon their maturity to replace donor commitments if they are not fulfilled.
14. APPROVAL OF FINANCIAL STATEMENTS

These financial statements were approved by the Trustees of the IASC Foundation
on 3 April 2007 and authorised for issue on 3 April 2007.
473
Illustrative financial statements — based on IFRSs, some U.S.

GAAP principles are incorporated
INTERNATIONAL FEDERATION OF RED CROSS AND

RED CRESCENT SOCIETIES, GENEVA
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER
Note 2011 2010
ASSETS (CHF OOOS) (CHF OOOS)
Current Assets
Cash and cash equivalents 5 156,012 128,825
Short-term investments 6 60,000 160,000
Financial assets at fair value
through profit or loss 7 92,182 97,733
Accounts receivable, net 8 97,651 106,632
Other receivables 9 4,080 4,287
Prepayments and accrued
10
income 3,083 1,220
Inventories, net 11 3,700 1,811
Total Current Assets
416,708 500,508
Non-Current Assets
Accounts receivable, net 8 8,039 8,384
Property, net 12.1 1,798 3,330
Vehicles, net 12.2 26,612 24,323
Other equipment 12.3 2,228 1,363
Intangible assets, net 12.4 1,890 2,818
Retirement benefit asset 26 2,762
Total Non-Current Assets 40,567 42,980
TOTAL ASSETS 457,275 543,488
Current Liabilities
Accounts payable 13 11,597 22,551
Accrued expenses 14 10,879 13,518
Employee benefit liabilities 15 4,470 4,073
Provisions
16 19,274 21,226
474 Chapter 17
Deferred income and prepaid

17 43,514 44,483
contributions
89,734 105,851
Total Current Liabilities
Non-Current Liabilities
26 1,760
Retirement benefit obligation
17 6,798 3,408
Deferred income
Total Non-Current Liabilities 8558 3,408
98,292 109,259
TOTAL LIABILITIES
RESTRICTED RESERVES
18 293,071 365,800
Funds held for field o erations
RESTRICTED
Total
293,071 365,800
RESERVES
UNRESTRICTED RESERVES
Desigtated Reserves 19
1,317 1,175
Self-insurance
1,140
Statutory meetings
Actuarial valuations 2,762
829
S ecific ro•ects
Total Desi ated Reserves 1,317 5,906
Other Unrestricted Reserves

Retained su lus 64,595 62,523
Total UNRESTRICTED RESERVES 65,912 68,429
TOTAL RESERVES 358,983 434,229

Total LIABILITIES and RESERVES 457,275 543,488
Eoz
p to soo
9 00
VI 00
ON 00
O
sec
00
0
2.
o
1.0
00
S.
cen
479
The STATEMENT OF CASH FLOWS is similar to the previous
INTERNATIONAL FEDERATION OF RED CROSS AND RED

CRESCENT SOCIETIES, GENEVA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2011
(SELECTED NOTES ONLY)
2 Significant accounting policies

2.1 Statement of compliance
The consolidated financial statements have been prepared in accordance with and
comply with International Financial Reporting Standards (IFRS) as adopted by the
Intemational Accounting Standards Board (IASB) and interpretations issued by
the Intemational Financial Reporting Interpretations Committee (IFRIC) of the
IASB and are presented in accordance with the IFRC's Financial Regulations.
Currently, IFRS do not contain specific guidance for non-profit organisations
(NPO) and non-governmental organisations (NGO) concerning the accounting

treatment and the presentation of financial statements. Where IFRS is silent or
does not give guidance on how to treat transactions specific to the not-for-profit
sector, accounting policies have been based on•the general principles of IFRS, as
detailed in the IASB Framework for the Preparation and Presentation of Financial
Statements.
2.15 Reserves
Reserves are classified as either unrestricted or restricted.
a) Unrestricted reserves
Unrestricted reserves are not subject to any legal or third party restriction and can
be used as the IFRC sees fit.
Unrestricted reserves may be designated by the IFRC for specific purposes, to
meet future obligations or mitigate specific risks. DesiB1ated reserves include the
following:
Designated reserves
Self-insurance reserve
The IFRC self-insures its vehicles against collision and other damage. Based on an
assessment of risk exposure, this reserve is established to approved
insurance claims as they fall due.

480 Chapter 17
Statutory meetings reserve

Funds are set aside to meet the anticipated costs of future statutory meetings and
Governing Board initiatives as and when the events take place.
Actuarial valuations
The actuarial valuation of the IFRC's pension funds results in actuarial gains and
lossesand their subsequent amortisation. Movements on these valuations are
based on factors outside ithe IFRC's control, such, as changes in actuarial
assumptions and changes in pension fund profile, and are therefore allocated to a
reserve designated to record such movements.
Specific projects
As explained in note 32, in keeping with the IFRC's full cost recovery principles,
an additional 6.5% programme and services support recovery is added to the cost
of each operation as a contribution to fund the indirect costs of providing support

services essential to the success of operations. In the event that there is an
operation with expenditure in excess of CHF 50,000k and the total amount
charged for a given year exceeds the total amount incurred, the excess is allocated
to projects according to a Governing Board decision. Pending the Governing
Board decision, the excess is allocated to a designated reserve.
b)Res tricted reserves

These represent the cumulative excess of income,' from earmarked voluntary
contributions, over expenditures on stipulated field operations. Restricted
reserves include the following:
Funds held for field operations

Donor-restricted contributions
Some contributions pledged to, or received by the IFRC, have been earmarked to
the extent that donors stipulate that the funds are to be used on IFRC operations
at appeal, programme, project or sub-project level. The cumulative excess, of
earmarked voluntary contributions over stipulated field operation expenditure, is
recorded as Funds held for field operations within restricted reserves. In the event
that the funds cannot be spent, the IFRC obtains agreement from the donor for a
reallocation of those funds for a different use, or reimburses them to the donor, in
which case they are recognised as a liability until the effective repeyment takes
place.
Field operations with temporary deficit financing

Expenditures on individual field projects may exceed the amount of income from
voluntary contributions that have been allocated to projects at reporting dates,
The excess of expenditure over income, on individual projects, is separately
reflected within Funds held for field operations as Field operations with
temporary deficit financing, so long as management considers that future funding
will be forthcomin When mana ement considers that future fundin is unlikel
.
Illustrative Financial Statements of NPOs
481
be forthcominb the deficit is reclassified as unrestricted expenditure, and
reflected as a reduction in unrestricted reserves, through the provision for project
2.16 Income
Income comprises statutory contributions from member national societies,

contributions in cash or in-kind from donors, income from services and sundry
a) Statutory contributions
Statutory contributions are fixed by the General Assembly, the supreme

governing body of the IFRC, and are recognised in the year they fall due, unless
there is significant uncertainty over the collection of the amounts, or they are
subject to extended payment terms, in which case the income is not recognised
until payment is received.
As explained in note 2.12, the carrying amounts of the IFRC's assets are reviewed
at each period end date, in order to determine whether there is any indication of
impairment. Statutory contributions recognised that have not been paid by the
year end are considered as fully impaired, and are accordingly fully provided for
at the period end date. This does not invalidate the obligation of member national
i societies to pay the amounts due.
Statutory contributions receivable may be subject to appeal and subsequent
adjustments.
b) Voluntary contributions
Cash contributions are recognised when a written pledge has been received from
the donor.
Govemment grants and contributions that are based on contracts for specific
projects, akin to government grants, are recognised as expenditure is incurred and

contractual obligations are fulfilled. Contributions received, but not yet
recognised, are includéd in deferred income. The IFRC typically receives such
contributions from diplomatic missions, UN agencies, ECHO and other

government agencies such as USAID. Government grants that are not for specific
projects, and are both earmarked and managed at appeal level (see note 2.16 (c)),
are recognised when a confirmed written pledge has been received from the
donor.
Legacies and bequests in cash are recorded at the earlier of receipt, or where the
amount to be received is known, at the date legal title has passed
In-kind contributions of oods .com risin relief su lies and services in the
482
Chapter 17
form of staff or transport) are recognised on the date of receipt Of the goods or
services, and are recognised equally income and expenditure in
as both
Consolidated Statement of Comprehensive Income. In-kind goods and
received in response to appeals are measured at fair value.
The fair value of in-kind goods is taken as the value indicated by the donor. This
value is tested for reasonableness by comparing it to the cost that the IFRC Would
incur if it were to buy in the open market similar goods for the same intended use.
If the market value is found to be significantly different to the value indicated by
the donor, the value is revised to the market value.
The fair value of in-kind staff is taken as the average cost that would be incurred
by the IFRC, if it were to directly employ a person in a similar position.
In-kind contributions of tangible assets are recognised at fair value as VOIUntary

contributions. Depreciation and if applicable, impairment adjustments of such
assets, are included in operational expenditure in the same manner as for
purchased tangible assets.
The IFRC sometimes agrees with a donor, that the value of a confirmed written
pledge previously received, shall be changed — either increased or decreased. Such
changes are recognised as additions to, or reductions of income, during the period
in which the change was agreed. The IFRC is not able to evaluate the potential
impact of such changes on voluntary income reported in these consolidated
c)Earmarking
Voluntary contributions are identified according to the level of earmarking (see
note 2.15 (b)) Donor-restricted contributions).
Unearntarked contributions
Unearmarked contributions can be used for any purpose to further the objectives
of the organisation, and are recognised in the Consolidated Statement Of
Comprehensive Income as unrestricted income, when pledged. At the end of the
accounting period, unspent, unearmarked contributions are included in
unrestricted reserves.
Earmarked contributions
Earmarked contributions can be såpulated by donors for use on field operations

at the appeal, programme, project or sub-project level. Such earmarked
contributions are filly under the control of the IFRC, and, unless they are also
subject to specific contractual obligations or earmarked for use in a future period'
are recognised in the Consolidated Statement of Comprehensive Income as
restricted income, when pledged. At the end of the accounting period, unspent
earmarked contributions are included in restricted reserves.
Jllustrative Financial Statements ofNPOs 483
Contributions that are subject to specific contractual obligations or earmarked for

use in a future period are not fully under control of the IFRC. Contributions that
are subject to specific contractual obligations, similar to govemment grants, are
recognised as income as expenditure is incurred and contractual obligations are
fulfilled. Amounts received, but not recognised, are included in deferred income.
Contributions that are earmarked for use in a future period are recognised as
deferred income in the current period and subsequently recognised in the
.1
Consolidated Statement of Comprehensive Income in the future period for which
diey were earmarked.
d)Income from the sale ofgoods

Income from the sale of goods, principally from publications and promotional
goods, is recognised when the risks and rewards of ownership are passed to the
buyer.
e)Income from the provision of services

Income from services is recognised in the period in which the service is rendered.
For the provision of services across accounting periods, income is recogüsed
according to the stage of completion of the service, by reference to services
performed to date as a percentage of total services to be performed.
The majority of income from the provision of services is derived from services
provided to national societies, including vehicles under lease, logistics services
and in countries where national societies are working bi-laterally with the local
national society, rather than multi-laterally with the IFRC and the local national
society. Income from these types of services is included under Services income in
the Consolidated Statement of Comprehensive Income.
Excerpt from the Independent Auditor's Report attached to the
financial statements above:
Opinion
. In our opinion, the consolidated financial statements give a true
and fair view of the consolidated finandal posiåon of the
Federation as at 31. December 2011, and of its consolidated

financial performance and its consolidated cash flows for the year
then ended in accordance with Intemational Financial Reporting
Standards.
glgstratttv rinatrvl Statements of NPOs
481
to be forthc«nirw the deficit is reclawfved as unrestnctv•d

a rOcti€Mt in unrestncted thtrnagh the
defiöts.
2.16
Inayne compries statutory contnbution« from natxrtal
contributi«ts in cash or in-kind from donors, tncorne from and
tnc«ne from the sale of gcnxås
a) Statutory contn+utions
Statutory contributiors are fixed by the General Asc«nblv, the supreme
goveming of the IFRC, and are recognised in year thev fall due. unÆe•ss
there is significant uncertainty over the collection of the arrxnjnts. or are
suyect to extended payment terms, in which case the im-ome ts mt recogrused
until payment is received
As explained in note 212, the carrying amounts of the tFRCs are
at each end date, in order to determine whether there is anv indicati«t

impaiment. Statutory contributions recogmsed that have patd by the
year end are considered as fully impaired, and are accordingly fully pro•aded for
at the end date. This does not invalidate the obligati€rt of member natxw•l
societies to pay the amounts due.
Statutory contributions receivable may be subject to appeal and subsequent

adjustments.
b) contributions
Cash contributions are recognised when a written pledge has tx•en recetved from
donor.
Govemment grants and contributions that are based on contracts for SFOfic
proj«ts. akin to government grants, are recogmsed as exvynditure is Incurred

contractual obligations are fulfilled. Contributions recetved, but yet
are irrluded in deferred income. The IFRC typically receives such
contributions from diplomatic missions, UN agencies, ECHO and

government agencies such as USAID. Govemment grants that are for
proj«ts, and are both earmarked and managed at appeal level (see note 2.16
are recognised when a confirmed written pledge has been recetsed frtMt
dmor
Legacies and in cash are recorded at the earlier of receipt. or
amount to received is known, at the date legal title has
In-kind contributions of (kids .com risin relief su lies arul servos On tie
482
Chapter 17
form of staff or transport) are recognised on the date of receipt of the goods
or
services, and are recognised equally and expenditure in the
as both income
Consolidated Statement of Comprehensive Income. In-kind goods and services
received in response to appeals are measured at fair value.
The fair value of in-kind goods is taken as the value indicated by the donor. This
value is tested for reasonableness by comparing it to the cost that the IFRC would
incur were to buy in the open market similar goods for the same intended use.
if it
If the market value is found to be significantly different to the value indicated by

the donor, the value is revised to the market value.
The fair value of in-kind staff is taken as the average cost that would be incurred
by the IFRC, if it were to directly employ a person in a similar position.
In-kind contributions of tangible assets are recognised at fair value as VOIUntary

contributions. Depreciation and if applicable, impairment adjustments of such
assets, are included in operational expenditure in the same manner as for
purchased tangible assets.
The IFRC sometimes agrees with a donor, that the value of a confirmed written
pledge previously received, shall be changed — either increased or decreased. Such
changes are recognised as additions to, or reductions of income, during the period
in which the change was agreed. The IFRC is not able to evaluate the potential
impact of such changes on voluntary income reported in these consolidated
c) Earmarking
Voluntary contributions are identified according to the level of earmarking (see
note 2.15 (b)) Donor-restricted contributions).
Unearntarked contributions
Unearmarked contributions can be used for any purpose to further the objectives
of the organisation, and are recognised in the Consolidated Statement Of
Comprehensive Income as unrestricted income, when pledged. At the end of the
accounting period, unspent, unearmarked contributions are included in

unrestricted reserves.
Earmarked contributions
Earmarked contributions can be stipulated by donors for use on field operationS

at the appeal, programme, project or sub-project level. Such earmarked
contributions are fully under the control of the IFRC, and, unless they are also
subject to specific contractual obligations or earmarked for use in a future period'
are recognised in the Consolidated Statement of Comprehensive Income as
restricted income, when pledged. At the end of the accounting period, unspent
earmarked contributions are included in restricted reserves.
IllustrativeFinancial Statements ofNPOs 483
Contributions that are subject to specific contractual obligations or earmarked for

use in a future period are not fully under control of the IFRC. Contributions that
are subject to specific contractual obligations, similar to government grants, are
recognised as income as expenditure is iHcurred and contractual obligations are
fulfilled. Amounts received, but not recognised, are included in deferred income.
Contributions that are earmarked for use in a future period are recognised as
deferred income in the current period and subsequently recognised in the
Comsolidated Statement of Comprehensive Income in the future period for which
they were earmarked.
d) Income from the sale ofgoods

Income from the sale of goods, principally from publications and promotional
goods, is recognised when the risks and rewards of ownership are passed to the
buyer.
e)Income from the provision of services

Income from services is recognised in the period in which the service is rendered.
For the provision of services across accounting periods, income is recognised
according to the stage of completion of the service, by reference to services
performed to date as a percentage of total services to be performed.
The majority of income from the provision of services is derived from services
provided to national societies, including vehicles under lease, logistics services
and in countries where national societies are working bi-laterally with the local
national society, rather than multi-laterally with the IFRC and the local national
society. Income from these types of services is included under Services income in
the Consolidated Statement of Comprehensive Income.
Excerpt from the Independent Auditor's Report attached to the

financial statements above:
Opinion
In our opinion, the consolidated financial statements give a true
and fair view of the consolidated financial position of the

Federation as at 31 December 2011, and of its consolidated
financial performance and its consolidated cash flows for the year
then ended in accordance with Intemational Financial Reporting
Standards.
BOOKS BY THE AUTHOR
Financial Accounting and Reporting (Fundamentals)
Conceptual Framework and Accounting Standards
Intermediate Accounting 1
Accounting for Business Combinations
Accounting for Special Transactions

Government Accounting & Accounting for NPOs
Fundamentals of Accountancy, Business, & Management Part 1
(for Senior High School) • co-author
Fundamentals of Accountancy, Business, & Management Part 2

(for Senior High School) • co-author
ISBN 978-621-8029-15-6
eu6CisÆe' 6y.•
DANDOLIN
2u6Cisfing an' hinting
BAKAKENG CENTRAL, MARCOS HIGHWAY, BAGUIO CITY
—CONTACT •g: SMART (0928) 374 7571; GLOBE (0917) 813 6037
AUTHOR - (0917) 870 8962 9 786218 029156

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CHAPTER 1

PROBLEM 1-2:1-2: MULTIPLE

PROBLEM 2-3: 2-3: MULTIPLE

PROBLEM 3-4:3-4: MULTIPLE

d. The stage of completion can be measured

PROBLEM 5-2: 5-2: MULTIPLE

PROBLEM 5-3:5-3: MULTIPLE

PROBLEM 6-3: 6-3: MULTIPLE

PROBLEM 7-2: 7-2: MULTIPLE

PROBLEM 8-3: 8-3: FOR

Following the impairment,

Following the impairment,

PROBLEM 10-4: 10-4: FOR

11. Assume the

subsequently measuring intangible assets.

a. straight line method

ZEUS VERNON B. MILLAN

Nation's Foremost CPA Review Inc. (NCPAR)

ALL RIGHTS RESERVED

No part of this work covered by the

photocopying without the written

Any copy of this book not bearing the

professions in the practice of accountancy. You will not only be

Zeus vernnt B. Millan

and Dr. Remedios, and my teachers in elementary, high school

and college for inculcating in me the importance of education.

his experiences in the field of government accounting.

- zeus vervvovt B. Millan

Nation's Foremost CPA Review Inc. (NCPAR), a teacher, and an

OVERVIEW OF GOVERNMENT ACCOUNTING

RESPONSIBILITY, ACCOUNTABILITY AND LIABILITY OVER GOVERNMENT FUNDS AND

QUALITATIVE CHARACTERISTICS OF FINANCIAL REPORTING

THE BUDGET PROCESS 24

THE NATIONAL BUDGET

THE GOVERNMENT ACCOUNTING PROCESS 52

REVENUES AND OTHER RECEIPTS 116

FUNDAMENTAL PRINCIPLES FOR REVENUE 116

FUNDAMENTAL PRINCIPLES FOR DISBURSEMENT OF PUBLIC FUNDS 139

FINANCIAL ASSETS 162

CASH AND CASH EQUIVALENTS 164

INVESTMENT PROPERTY 220

INITIAL MEASUREMENT 221

PROPERTY, PLANT AND EQUIPMENT 241

INTANGIBLE ASSETS 290

FINANCIAL LIABILITIES 306

FINANCIAL STATEMENTS 337

GENERAL PRINCIPLES 339

MISCELLANEOUS TOPICS 376

SERVICE CONCESSION ARRANGEMENTS BY GRANTOR 376

THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 387

NON-PROFIT ORGANIZATIONS 400

CURRENT TREND IN PRACTICE 401

ILLUSTRATIVE FINANCIAL STATEMENTS OF NPOS 457

ILLUSTRATIVE FINANCIAL STATEMENTS - BASED ON U.S. GAAP 457

Overview of Government Accounting

The objectives ofgovernment accounting are:

in the receipt, disposition and utilizaåon of funds and

Like the accounting for business entities, government

in making economic decisions. Government accounting, however

The sources of government funds include receipts from taxes

govemments and intemational bodies.

The utilization of government funds includes expenditures on

Responsibility. Accountability and Liability over Government