Xavier University-Ateneo de Cagayan

School of Business and Management

Department of Accountancy
Academic Year 2021-2022

AEC 81- Accountancy Learning Outcomes Appraisal 1

FINANCIAL ACCOUNTING & REPORTING
Professor’s Comprehensive Notes

TOPIC 1: STATEMENT OF FINANCIAL POSITION

 It is also known as balance sheet, it is used by decision makers to assess the company’s
liquidity and solvency
 An asset is considered as current when it is realizable within 1 year or within the normal
operating cycle whichever is higher
 Financial assets held for trading are considered as Current while those that are held through
other comprehensive income are considered as Non-Current
 Bank overdraft is considered as current liability, no offsetting is allowed except when the
company maintains multiple accounts in one same bank and one of the accounts have a
negative balance
 Deferred tax asset or liability is always considered as Non-current regardless of when they
are reversible
 FA through other comprehensive income and those that are measured at amortized cost are
considered as Non-Current
 Intangible assets are considered as non-current assets
 Non-current asset held for sale is considered as current, they cease to be depreciated but is
subject to impairment
 Sinking Fund & Investments in Associate are non-current assets
 Goods received on consignment is not part of inventories of the consignee but that of the
consignor
 Cash is generally unrestricted as to withdrawal
 If cash is restricted to pay a specific liability, its classification depends on the related liability
 Inventories are recorded at LCNRV or lower between cost and net realizable value
 Notes Receivable Discounted Account is deducted to the Notes receivable in arriving at the
total current assets
 Accounts receivable whether assigned or not assigned is to be added in arriving for the
computation of current assets
 Advances to subsidiary is considered as Non-current in the separate books of the parent
 Subscription Receivable if collectible currently is considered as current, if not, it is presented
as deduction to the subscribed share capital
 Deferred charges are considered as Non-current
 Discount on Bonds Payable is a contra-liability and is to be amortized using the effective
interest rate method
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 A provision is probable and measurable therefore recognized as accrual in the financial
statements
 A contingent liability is either possible and immeasurable, it is only disclosed in the financial
statements
 Debit balances of AP represent overpayment on the part of the entity, it is a current asset,
there is no offsetting except when it is immaterial
 Credit balances of customer accounts, it is a current liability, it is an overpayment on the part
of the customer
 If the loan is refinanced after the reporting period but before the issuance of financial
statements, it is classified as current asset
 If before the end of the reporting period, it is considered as Non-current because it is an
adjusting event
 If the entity has the discretion to roll-over the payments of the liability, it is considered as
Non-Current
 Treasury shares are considered as deduction to equity
 Working capital is computed as the difference between current assets and CL
 Bond sinking Fund- Its classification depends on the related liability
 Foreign currency translation adjustment is part of the other comprehensive income, thus part
of the reserve section
 Cost in excess of billings in construction contracts, is a current asset
 Billings in excess of cost in construction contracts, is a current liability
 The interest based on the nominal rate in issuing bonds is to be recognized as accrued liability
but for interest expense it is based on the carrying amount multiplied by the effective rate
 If the loan is payable on demand, then it is considered as current
 Undelivered checks issued by the entity at the end of the reporting period is to be reverted
back to cash and accounts payable
 Cash surrender value applies only to Life Insurance Expense and when the entity is the
beneficiary; it is classified as non-current asset
 Unamortized issue cost of note payable is treated as deduction to its carrying amount

TOPIC 2: NOTES TO FINANCIAL STATEMENTS

 Intercompany sales are always eliminated when consolidated FS is prepared
 PAS 24 paragraph 16 requires disclosure of key management personnel compensation
 Sales to affiliated entities shall be disclosed in their separate FS but eliminated in the
consolidated FS
 Adjusting events are those events happening after the end of the reporting period but is
reflective of the events happening during that year, it calls for an adjustment
 The bankruptcy of a customer after the end of the reporting period is an event that gives a
condition for the uncollectibility of any receivable from that customer, therefore it is an
adjusting event.
 Issuance of share capital after the end of the reporting period is a Non-adjusting event

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 The decline of the market value of trading securities after the end of the reporting period is a
Non-Adjusting event, it is recorded in the period on which such decline occurs.
 Declaration of any dividend after the end of the reporting period is an adjusting event.
 Destruction of assets caused by circumstances beyond the control of man are considered
Non-Adjusting event (but is to be disclosed). It is to be recorded in the period on which it
occurred.
TOPIC 3: STATEMENT OF COMPREHENSIVE INCOME
 Distribution costs are costs incurred relating to the selling activity of the entity
 Cost of Goods Sold:
Beginning Inventory
Plus: Net Cost of Purchases
Less: Ending Inventory at LCNRV
 An increase in an account by an amount is placed in the opposite side of the normal balance
of such account while decrease in such account is placed in the normal balance of such
account
 Gross Margin is synonymous to Gross Profit
 Accounts Receivable Turnover
Net Sales/Average Accounts Receivable
 Inventory Turnover
Cost of Goods Sold/Average Inventory
 Unrealized loss on foreign currency translation is presented in the other comprehensive
income
 Any adjustment of profit of prior year is treated as an adjustment to the Retained Earnings
(net of any tax effect)
 Any dividend from an associate is not considered an income, but a deduction to the
investment in associate account
 Depreciation error has no counterbalancing effect therefore treated retrospectively
 Any error in the valuation of ending inventory has a counterbalancing effect in the
succeeding year
 Any loss on disposal of a division/segment is recorded in the profit/loss from discontinued
operations
 Unrealized gain from a derivative contract, revaluation surplus during the year, foreign
currency translation adjustment is recorded as part of the other comprehensive income

TOPIC 4: NON-CURRENT ASSET HELD FOR SALE

 PFRS 5, paragraph 15, provides that an entity shall measure a Non-current asset or a disposal
group classified as held for sale at the lower of carrying amount and the Fair value less cost
of disposal
 The loss on disposal of a NCA held for sale is calculated as the difference between the
proceeds and the value designated at the time of sale (lower between carrying amount and
the FV-cost of disposal)

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
  The entity shall not depreciate a NCA while it is classified as held for sale or while it is part
of a disposal group classified as held for sale
 Any gain on reversal of impairment loss shall not exceed the impairment loss previously
recognized
 An entity shall measure a NCA that ceases to be classified as held for sale at the lower
between
a. Carrying amount on the basis that the asset had never been classified as Held for Sale
b. Fair value less cost of disposal at the time it was not intended to be sold

TOPIC 5: DISCONTINUED OPERATIONS

 Termination costs related to the discontinued operation expected to be incurred shall be
accrued in the year the legally binding contract was signed
 When the fair value less cost of disposal (recoverable amount) is less than the carrying amount
of the disposal group, there is an impairment loss
 When the fair value less cost of disposal of a segment or a disposal group exceeds the carrying
amount, any gain is not to be recognized, the basic rule is LCNRV
 A segment is a separate identifiable component

TOPIC 6: CHANGE IN ACCOUNTING POLICY

 It is accounted for retrospectively
 Change from FIFO to weighted-average is a change in accounting policy on inventory
valuation
 The cumulative effect of a change in inventory method is determined by considering only the
ending inventory of the immediately preceding year. Changes in inventory valuation of prior
years has a counterbalancing effect
 Any prior period effect is charged to retained earnings

TOPIC 7: CHANGE IN ACCOUNTING ESTIMATE

 Change in the useful life, depreciation method, residual value of the asset is a change in
accounting estimate; it is treated currently and prospectively
 There is no entry to be made to reflect the accounting change of a change in the useful life of
the asset
 Of all the depreciation methods, only the Declining balance method ignores residual value
when it comes to computation for depreciation
 In the sum of year’s digit method (SYD), the denominator’s formula: (n) (n+1/2), where n=
useful life

TOPIC 8: PRIOR PERIOD ERROR

 A prior-period error is not included in profit/loss but is treated as an adjustment of the
beginning balance of the retained earnings

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 Change in the depreciation method, is a change in accounting estimate, therefore no effect in
current net income and not considered as a prior-period error, it is treated currently and
prospectively
 Change in the method of computing inventory obsolescence and provision of uncollectible
accounts are changes in accounting estimate and therefore has no effect on retained earnings

TOPIC 9: OPERATING SEGMENT

 Under PFRS 8, an entity shall disclose information about an operating segment that meets
any of the following quantitative thresholds:
a. Segment revenue (both intersegment and external) should be 10% or more of the total
combined revenue of all segments (both intersegment & external)
b. Segment’s profit or loss is at least 10% of the greater in absolute amount between the
combined segments profits and the combined segment’s losses
c. The assets of the segment are 10% or more of the combined assets of all operating segments
 The total external revenues of the reportable segments must be at least 75% of the total entity’s
external revenues
 A major customer disclosure is required if an entity derived 10% or more of its external
revenue from a single customer or group of entities under common control
 Expenses regularly received by the chief operating decision maker as a measure of profit/loss
is to be allocated by all the segments on a specified basis.
 General corporate expenses are not traceable to a specific segment and therefore not to be
allocated among them
 Interest expense and interest revenue must be reported separately unless a majority of the
segment revenue is from interest and the chief operating decision maker relies primarily on
net interest revenue in assessing performance
 Segments that are below the 10% threshold can be aggregated into one segment if they have
similar economic characteristics and share a majority of the 5 aggregation criteria:
a. Nature of the product
b. Nature of the production process
c. Class of customer
d. Method of distributing product
e. Regulated environment

TOPIC 10: INTERIM REPORTING

 PAS 34, paragraph 28, the general rule in preparing interim FS is that cost and expenses that
clearly benefit more than 1 interim periods are allocated to the interim periods affected
 Gains and losses are not allocated over the interim periods, it is recorded in the period on
which it occurs
 Inventories shall be measured at the lower of cost and net realizable value even for interim
purposes
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 If NRV<COST, a loss on inventory write-down shall be recognized regardless of whether the
write-down is temporary or non-temporary
 Inventory loss from market decline is reported in the interim period in which the decline
occurs. Recovery of such loss on the same inventory in later interim periods is recognized as
gain, but such amount is limited only to the amount of loss previously recognized
 The effects of a disposal of segment of business are reported separately in the interim periods
in which they occur
 Gain should be recognized in the interim periods realized
 The cumulative effect of a change in accounting policy is shown in the statement of retained
earnings not in the income statement

TOPIC 11: CASH AND CASH EQUIVALENTS

 Under PAS 7, treasury bills, money market placements and time deposit normally qualify as
cash equivalents only when they have a short maturity of 3 months or less from the date of
acquisition
 The classification of a cash fund depends on the nature of its purpose to which it is being set
aside
 Undelivered checks issued by the entity is restored back to cash balance
 A certificate of deposit is a cash equivalent
 Postdated customer check is reverted back to AR
 Share investments cannot qualify as cash equivalents although they are very actively traded,
such investments do not have maturity date
 Commercial papers are actually money market placements
 A compensating balance is a minimum checking or demand deposit account balance that
must be maintained in connection with a borrowing arrangement with a bank
-It is part of cash if it is not restricted as to withdrawal
-If it is legally restricted, it is excluded from the amount shown as cash and is to be shown
separately as current or non-current depending on the bank loan to which it is related.
 Outstanding checks are deducted from the cash in bank if the cash balance given is per bank
statement
 Deposit in a bank closed by BSP, is a non-current asset and is often reduced to its liquidation
value
 Checks drawn by the entity to the order of the petty cash custodian is actually a
replenishment check and therefore part of cash
 Checks drawn payable to the order of a petty cash custodian representing her salary is an
accommodation check
 Unrestricted foreign bank account in equivalent pesos is part of cash. If restricted, it is
reported as NCA
 A Bank overdraft is a current liability; offsetting is not allowed except when a company has
multiple accounts in one same bank and one account has a negative balance

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 TOPIC 12: BANK RECONCILIATION & PROOF OF CASH
 Bank Reconciling Items:
Deposits in Transit
Outstanding Checks
Errors
 Book Reconciling Items:
Debit Memo
Credit Memo
Errors
 A certified check is no longer outstanding for reconciliation purposes, such amount is
deducted from the total outstanding checks
 Cash balance per bank statement is an unadjusted balance per bank while cash balance per
ledger is an unadjusted per book

TOPIC 13: ACCOUNTS RECEIVABLE

 The recovery of accounts written off does not affect the balance of AR because the effect is
offsetting
 Net realizable value of AR
AR Balance
Less: Allowance for Bad Debts
Estimated future sales returns
A security deposit is a non-current receivable
TOPIC 14: ESTIMATION OF DOUBTFUL ACCOUNTS
 The allowance for doubtful accounts per aging is the required ending allowance for bad
debts, it is used in the computation for the Net realizable value
 Only the bad debt expense decreases working capital
 The write-off does not affect anymore the working capital because the effect is offsetting on
current assets
 Under the Aging Method, the amount computed represents the required ending allowance
for uncollectible accounts
 If the percentage of AR is used, the amount computed represents the required ending
allowance for bad debts
 Under the percentage of sales method, the amount computed already represents the
uncollectible accounts expense
 Historical bad debt loss percentage computation:
(Write-off – Recoveries)/ Credit Sales
 Individually significant accounts receivable shall be individually assessed for impairment, if
not impaired, it will be included in the other accounts receivable not individually significant
for collective assessment of impairment

TOPIC 15: ASSIGNMENT & FACTORING

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 Receivable financing is the financial flexibility or capability of an entity to raise money out
of its receivables
 When accounts are pledged, no entry would be necessary; disclosure is sufficient thereof in
the notes to FS
 In substance, Assignment of AR means that a borrower called the assignor transfer its rights
in some of its AR to a lender called the assignee, it is a more formal type of pledging
 Pledging is general while assignment is specific
 Assignment may be done either on a nonnotification or notification basis
 Equity in Assigned Accounts
AR Assigned – Notes Payable
 Factoring is a sale of AR on a without recourse notification basis, a gain or loss is recognized
for the difference between the proceeds received and the carrying amount of the receivables
assigned
 Factoring differs from assignment because the former actually transfers ownership to the
buyer
 In assignment, the assignor retains ownership of the assigned accounts
 In assignment, no gain or loss is recognized because it is a secured borrowing not a sale

TOPIC 16: DISCOUNTING OF NOTE RECEIVABLE

 If weighted average time, use 365 days
 Cost of Factoring= Factor Fee + interest
 Discounting specifically pertains to Notes Receivable
 Endorsement may be with recourse which means that the endorser shall pay the endorsee
if the maker dishonors the note. This is the contingent/secondary liability of the endorser
 In the absence of any evidence to the contrary, endorsement is with recourse
 Net Proceeds
Maturity Value less Discount
 Maturity Value= Principal + Interest (If interest-bearing), If non-interest bearing, the face
value of the note is already the maturity date
 Discount = Maturity value * Discount rate * Discount period
 Gain or Loss on Discounting
Net Proceeds – Carrying Amount of Note Receivable
-recognized only if the discounting is without recourse and a conditional sale
 Types of Discounting with Recourse
a. Conditional Sale- Note Receivable Discounted
b. Secured Borrowing- Liability for NR discounted
 In discounting without recourse, the sale of the NR is absolute and therefore there is no
contingent liability
 Note Receivable Discounted in conditional sale is deducted from the total notes receivable
when preparing the statement of financial position with disclosure of the contingent liability

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 If the discounting is treated as a secured borrowing, the note receivable is not derecognized
but instead an accounting liability is recorded at an amount equal to the face amount of the
note receivable discounted
 There is no gain/loss on discounting, if it is a secured borrowing
 The entity shall derecognize an asset when:
a. The contractual rights to the cash flows have expired
b. It has been transferred based on the extent of the transfer of the risks and rewards of
ownership
 Rules on the transfer of Risks and Rewards:
a. If the entity has transferred substantially, derecognized
b. If retained, do not
 If neither transferred nor retained, it depends on whether the entity has retained control of
the asset
TOPIC 17: NOTE RECEIVABLE
 Notes Receivable are claims supported by formal promises to pay. Conceptually, notes
receivable I measured at present value
 Short term receivables are measured at face value
 Interest-bearing long-term notes are measured at face value which is actually the PV upon
issuance
 Non-interest bearing long-term notes are measured at present value which is the discounted
value of the future cash flows using the effective interest rate
 Subsequent measurement: Amortized cost using the effective interest method
 If the note is made under customary trade terms it is recorded at face value

TOPIC 18: LOAN RECEIVABLE & IMPAIRMENT OF LOAN

 A financial asset arising from a loan granted by a bank or other financial institution to a
borrower or a client
 Initial Measurement:
Fair Value + Direct Origination Cost – Direct Origination fees
 Indirect Origination Costs are expensed outright
 Subsequent measurement
Amortized cost using effective interest rate method
 Measurement of Impairment
The amount of loss is measured as the difference between the carrying amount of the loan
and the PV of estimated future cash flows discounted at the original effective rate of the
loan.
 It is important to take note of the date of assessment of impairment

TOPIC 19: INVENTORY

 Inventories are assets which are held for sale in the ordinary course of business, in the
process of production for such sale or in the form of materials/supplies to be consumed in
the production process or in the rendering of services.
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 As a rule, all goods to which the entity has title shall be included in the inventory, regardless
of location
 FOB Destination-seller owns the goods if still in transit
 FOB shipping point- The buyer owns if already in transit
 FAS or free alongside- buyer owns the moment the carrier possesses it
 CIF- buyer
 Ex ship- transfers to the buyer the moment the goods are unloaded
 Consigned goods shall be included in the consignor’s inventory and excluded from the
consignee’s
 Freight and other handling charges on goods out on consignment are part of the cost of
goods consigned
 Periodic system calls for the physical counting of goods on hand at the end of the reporting
period to determine the quantities
-this approach gives actual or physical inventories, used in individual inventory items that
are of small peso investment
 Perpetual system requires the maintenance of records called stock cards that usually offer a
running summary of the inventory inflow and outflow
-this gives book/perpetual inventories
 When physical count < book count, there is shortage. It is usually closed to COGS because
this is often a result of normal shrinkage and breakage in inventory
 Abnormal and Material shortage shall be separately classified and presented as Other
expense
 Trade discounts are not recorded, invoice price is usually net of any trade discounts
 Cost of inventories shall comprise the following:
Cost of purchase, cost of conversion, other cost incurred in bringing the inventories in its
present location and condition
 Cost of purchase comprises: purchase price, import duties, irrecoverable purchase taxes,
freight, handling and other costs directly attributable to the acquisition of finished goods,
materials and services
 Trade discounts, rebates are excluded
 The cost of purchase shall not include any foreign exchange differences from the recent
acquisition of inventories involving a foreign currency
 Storage costs for goods in process are capitalized while for finished goods they are expensed

TOPIC 20: INVENTORY VALUATION AND INCLUSION

 PAS 2, paragraph 9 provides that inventories shall be measured at LCNRV
 FIFO method assumes that the goods first purchased are first sold and consequently the
goods remaining in the inventory at the end of the period are those most recently purchased
or produced
 In a period of inflation or rising prices, FIFO yields the highest net income
 In a period of deflation or decreasing prices, FIFO yields the lowest net income
 Weighted Average-Periodic
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 Total cost of GAFS divided by the total units available for sale yield cost per unit
 Weighted Average-Perpetual (Moving Average)
A new weighted average unit cost must be computed after every purchase and purchase
return.
 Purchase commitments are obligations of the entity to acquire certain goods sometime in
the future at a fixed price and a fixed quantity
 Inventories specifically segregated per sale contract is excluded
 Goods sold to a customer which are being held for the customer to call at his convenience
are excluded
TOPIC 21: SALES REVENUE
 The goods sold FOB shipping point and lost in transit are properly included in sales
because the customer will suffer the loss because ownership has been transferred to the
latter
 Revenue should be recognized at the point of sale which is usually the point of delivery
 Revenue is recognized at the point of production for agricultural, mineral and forest
product when a sale is assured under a forward contract

TOPIC 22: GROSS PROFIT METHOD

 Gross profit rate is assumed to be based on sales
 The cost of any inventory not covered by an insurance is to be reported as loss from
explosion
 The sales discounts are ignored for purposes of estimating inventory under the gross profit
method
 Loss from explosion is presented as a separate expense not part of the cost of goods sold
 Like sales discounts sales allowances are ignored in determining net sales under the gross
profit method

TOPIC 23: RETAIL INVENTORY METHOD

 PAS 2, paragraph 22 provides that this method is often used in the retail industry for
measuring inventory of large number of rapidly changing items with similar margin for
which it is impracticable to use other costing methods
 Basic Formula:
GAFS at retail price
Less: Net sales (net of any sales returns only)
=Ending Inventory at Retail price
Multiply: Designated cost ratio
= Ending inventory at cost
 Employee Discounts- added back to sales
 Normal Shortage- deducted to GAFS retail
 Abnormal Shortage- deducted from GAFS cost and retail
 Approaches in the use of Retail method
1. Conventional/Conservative/LCNRV
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 -includes net mark-up but excludes net markdown in determining the cost ratio
2. Average Approach
-both mark-up and mark-down
3. FIFO Retail Method
-same as average but excludes beginning inventory in the computation of the cost ratio
 Estimated shoplifting losses is deducted together with sales from GAFS at retail price
 Employee discounts, normal shortage, abnormal shortage are not included in the
computation of the cost ratio

TOPIC 24: BIOLOGICAL ASSETS

 PAS 2
-applies after the point of harvest, inventory shall be recorded at the lower between cost and
net realizable value
 Initial measurement of inventory at the point of harvest shall be at fair value less cost of
disposal
 Gain from the changes in the fair value consists of:
a. Physical Change-Different Age, Same date
b. Price Change – Same age, different date
 Gain from Agricultural produce, used when an inventory is harvested at the point of harvest
 Gain from change in fair value, used when an offspring is born (physical change)
 PAS 41
-relates to agricultural activity, biological assets
-applied to agricultural produce at the point of harvest
-does not deal with processing of agricultural produce after harvest
 Hierarchy of Fair Value Measurement
Level 1- quoted price for identical assets in an active market
Level 2- quoted price for similar assets in an active market or quoted prices for identical
assets in an inactive market
Level 3- unobservable inputs for the asset
-uses the best available information from the entity’s own data

TOPIC 25: FINANCIAL ASSET AT FAIR VALUE

 Reasons for handling investments:
 Accretion of wealth/regular income
 Capital appreciation
 Ownership control
 Meeting Business requirements
 For Protection
 Characteristics of a Financial Instrument
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 1. There must be a contract
2. At least 2 parties to a contract
3. Give rise to a financial asset on one party and a financial liability/equity instrument
of another
 Financial Assets are:
1. Cash
2. A contractual right to receive cash or another FA from another entity
3. A contractual right to exchange financial instrument under conditions that are
potentially favorable
4. Equity instrument of another entity
 2 major classifications of financial assets:
a. FA at fair value (P&L /OCI)
b. FA at amortized cost
 Initial measurement
1. FA at FV through P&L
-any transaction costs are expensed
2. FA at OCI
-any transaction costs are capitalized
 Subsequent Measurement
-either at fair value or amortized cost
- depending on the entity’s business model for managing financial assets
 FA through P&L
1. Trading Securities
2. Irrevocable Designation through P&L
3. Quoted Equity instruments
 FA through OCI
By irrevocable election, any investment in equity instrument not held for trading

TOPIC 26: INVESTMENT IN EQUITY SECURITIES

 Initial Measurement
If trading, any transaction costs are expensed
If not, any TC are capitalized
 Acquisition by Exchange
Acquisition cost is determined in the order of priority:
a. FV of the asset given
b. FV of the asset received
c.CA of the asset given
 Lumpsum Acquisition
-the single cost is allocated based on the securities fair value

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 -If only 1 security has a known market value, then that amount will be allocated to that
security and the remainder is allocated to a security with no known market value.
-Investment in unquoted equity instruments: Cost
 Cash Dividends
Dividend-On
-From the date of declaration to the date of record
Ex-Dividend
-date of record to date of payment
 PAS 18, paragraph 29, provides that dividends shall be recognized as revenue when the
shareholders right to receive payment is established (Date of declaration)
 Property Dividends or dividends in kind are dividends in the form of property or NCA.
They are considered as income and recorded at fair value
 Liquidating dividends represent return of invested capital and therefore they are not
income. It can also be partially income as well as liquidating one.
 Stock dividends are not income, there is no distribution of assets to the stockholder
 They are recorded by means of a memorandum entry. It does not affect the total cost of
investment but reduce the investment cost per share
 Stock dividends different from those held, the original cost of the investment is
apportioned between the original shares and the stock dividends on the basis of market
value of each at the date of receipt.

TOPIC 27: INVESTMENT IN ASSOCIATE

 If the investor holds directly or indirectly through subsidiaries 20% or more of the voting
power of the investee, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case
 If less than 20%, presumed that investor does not have significant influence, unless such
influence can be clearly demonstrated
 Equity method is an accounting method used to account for the investment in associate
 The investment is initially recorded at cost, and the carrying amount is increased by the
investor’s share of the profit of the investee and decreased by the investor’s share of the
loss of investee.
 Dividends received reduced the carrying amount of the account
 Excess of cost over carrying amount is attributable to:
a. Undervaluation of investee’s assets: building, land and inventory
b. Goodwill
 If attributable to a depreciable asset, the excess is amortized over the remaining useful life
of the asset
 If attributable to land and goodwill, not amortized
 If attributable to inventory, expensed the moment it is sold
 Excess of net fair value over cost is included as income in the determination of the
investor’s share of the associate’s profit/loss in the period in which the investment is
acquired
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
  PAS 28, if an investor’s share of losses of an associate equals or exceeds the CA of an
investment, the investor discontinues recognizing its share of further losses.
 The investment is reported at nil/zero value
 If the associate subsequently reports income, the investor resumes including its share of
such income after its share of such income after its share of the income equals the share of
the losses not recognized
TOPIC 28: FINANCIAL ASSET AT AMORTIZED COST
 Any transaction cost is part of the cost of financial asset measured at amortized cost
 Under the effective interest method, the interest income is computed by multiplying the
carrying amount by the effective rate
 The nominal/stated rate is used in computing accrued interest or interest receivable

TOPIC 29: MARKET PRICE OF BONDS

 In computing the market price of term bonds; get the present value of the nominal interest
payments using the yield/effective rate and the PV of the principal using also the yield-
effective rate and add the two PVs to get the market price.
 If there is discount, ER>NR
 If there is premium, ER<NR
 Serial bonds are those that mature in installments
 Formula to get the PV of a serial bond:
(Installment payment + Nominal interest payment) (Present value of 1)
TOPIC 30: BOND INVESTMENT-FVOCI/FAIR VALUE OPTION
 If the business model is to collect contractual cash flows (primarily for principal and interest)
and to sell the financial asset, it is recorded at the FV through OCI
 In this case, interest income is recognized using the effective interest method as in amortized
cost measurement
 On derecognition, the cumulative gain/loss in other comprehensive income shall be
reclassified to profit or loss
 The increase in unrealized gain is reported in the statement of comprehensive income but the
cumulative unrealized gain is reported in the statement of changes in owner’s equity
 PFRS 9 provides that an entity at initial recognition may irrevocably designate a financial
asset as measured at FVTPL even if the said FA satisfies the amortized cost measurement
 Under the FV option, all changes in the fair value are recognized in P &L.
 Moreover, under the FV option, the interest income is based on the nominal interest rate
rather than using the effective rate. There is no discount/premium amortization.

TOPIC 31: INVESTMENT PROPERTY

 Only land and building can qualify
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 If the investment property is accounted for under the fair value model, no depreciation is
recognized.
 If accounted for under the cost model, depreciation is to be computed.
 Property held by a subsidiary in the ordinary course of business is included in the subsidiary’s
inventory
 A land leased by the parent company to its subsidiary under an operating lease is an owner’s
occupied property for purposes of consolidated financial statements.
 However, from the perspective of the separate financial statements of the parent such asset is
an investment property
 Movable property like machinery cannot qualify for investment property

TOPIC 32: FUND AND OTHER INVESTMENTS

 Any income earned on the sinking fund investments should form part of the sinking fund
balance
 The annual deposits to the fund and the interest earned on those deposits should form part of
the non-current sinking fund
 The future value factor of an annuity due is used if the annual deposits are made at the
beginning of each year
 Annual deposit to a fund is computed by dividing the amount of the fund by the future value
factor
 Increase in the cash surrender value decreases life insurance expense
 Gain on Life Insurance Settlement:
Proceeds
Less: Cash Surrender Value
Unexpired Life Insurance
TOPIC 33: DERIVATIVES-INTEREST SWAP, FORWARD CONTRACTS etc.
 Unrealized gain-OCI for cash flow hedge is part of OCI
 Received-Variable (Derivative Asset)
 Pay-Fixed (Derivative Liability)
 The Notional of the interest rate swap agreement is equal to the principal amount of the loan
 The forward contract receivable is not discounted if the expected transaction is less than a
year
 The cost of purchases under the futures contract is the notional amount plus the amount paid
for the call option
 The loss on call option is equal to the option money paid to acquire such. Option is a right
not an obligation.
 If purchase transaction (received-variable, pay-fixed)
 If sale transaction (received-fixed, pay-variable)

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 TOPIC 34: PROPERTY-PLANT & EQUIPMENT-ACQUISITION COST
 When a group of assets is acquired for a lump-sum price, the total cost should be allocated to
the individual assets based on their relative fair value/appraised value
 Total cost of the building= Cash paid + mortgage assumed
 If the PPE is acquired in deferred terms, the acquisition cost is equal to the cash price
 Installation costs are to be capitalized as part of the cost of an asset
 In the absence of any cash price, the cost of the asset acquired by installment is equal to the
present value of the total installment payments
 Capital gifts/grants from non-shareholders shall be recorded at income at fair value when it
is received or becomes receivable
 If shares are issued for non-cash consideration, the proceeds should be measured by the fair
value of the consideration received or the fair value of the shares issued in the absence thereof
 Assessed value of the land is only for real property tax purposes and not an evidence of fair
value
 Donated asset received from shareholders should be recorded at fair value and is credited to
donated capital (part of share premium). However legal expenses related to the acquisition or
the transfer of the donated property is not capitalized as cost of the said property but as
deduction of the donated capital.
 Cash discounts whether taken or not, trade discounts and rebates are deducted in arriving at
the cost of PPE

TOPIC 35: PROPERTY-PLANT & EQUIPMENT-ACQUISITION BY EXCHANGE

 PAS 16, paragraph 24, provides that an item of PPE acquired in a non-monetary exchange or
a combination of monetary and non-monetary exchange is measured at fair value of the asset
given up plus the cash payment
 The exchange has commercial substance if the configuration of the cash flows from the asset
acquired is expected to be significantly different from the configuration of cash flows of the
asset exchanged
 The exchange transaction is measured at the carrying amount of the asset given up adjusted
by the cash involved if the exchange lacks commercial substance
 If the old asset has no available fair value, the new asset received in exchange is recorded at
its cash price without trade-in.

TOPIC 36: GOVERNMENT GRANT

 PAS 20, paragraph 12 provides that government grants are recognized as income over the
periods necessary to match them with the related costs which they are intended to compensate
on a systematic basis.
 PAS 20, paragraph 17, provides that grants related to depreciable assets are usually recognized
as income over the periods and in proportion to the depreciation of the related assets
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 PAS 20, paragraph 18, provides that grants related to non-depreciable assets requiring
fulfillment of certain conditions are recognized as income over the periods which bear the
cost of meeting the conditions
 PAS 20, paragraph 20, provides that a government grant that becomes receivable as
compensation for expenses already incurred or for the purpose of giving financial support to
the entity with no related future costs is recognized as income over the period in which it
becomes receivable or when received
 PAS 20, paragraph 32, provides that repayment of government grant shall be accounted for
as a change in accounting estimate. The repayment of grant related to income shall be applied
first to the unamortized deferred income and any balance shall be recognized in P & L.
 PAS 20, paragraph 32, provides that repayment of grant related to an asset shall be recognized
by increasing the carrying amount of the asset if the “deduction from the asset approach” was
followed.
The cumulative additional depreciation that would have been recognized to date in the
absence of the grant shall be recognized in P&L immediately
 2 policies for recording grant:
a. Deduction from the asset approach
b. Deferred Income approach
 PAS 20, paragraph 10a, provides that the benefit from a below-market or zero-interest
government loan shall be measured as the difference between the face amount of the loan or
proceeds received and the present value of the loan. The deferred grant income is recognized
as income using the effective interest method.

TOPIC 37: LAND AND BUILDING

 Under PIC Interpretation, the net cost of demolishing an old building to make room for the
construction of new building is charged to the cost of the new building
 If the land is acquired as an investment property and the old building is razed, the net cost of
demolishing an old building is charged to the cost of the land
 Under PIC Interpretation, when land and an old building are acquired at a single cost, the
single cost is allocated to land and building based on their relative fair value
 If the old building is subsequently demolished for the construction of a new building, the
demolition cost is capitalized as cost of the new building but the allocated cost of the old
building is accounted for as loss
 Organization fees and corporate organization costs should be expensed immediately
 Delinquent property taxes are capitalized to the cost of the land
 Sidewalk and parking lot should be charged to land improvements
 Imputed interest is not to be capitalized. Only those interest actually incurred to finance the
construction should be capitalized
 Option fee for land not acquired should be treated as outright expense

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 TOPIC 38: MACHINERY & CAPITAL EXPENDITURE
 Cost of removing the old machinery is treated as outright expense
 Any cash discount is deducted from the cost of the machinery regardless of whether taken or
not
 Shipping, installation and testing costs are to be capitalized
 Recoverable VAT is not capitalizable
 Estimated dismantling costs (present value) are capitalizable
 Major improvements and costs incurred resulting to a significantly more efficient production
are to be capitalized
TOPIC 39: BORROWING COST
 PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of
acquiring a qualifying asset, the amount of capitalizable borrowing cost is the actual
borrowing cost incurred during the period less any investment income from the temporary
investment of these borrowings
 PAS 23, paragraph 14, provides that if the funds are borrowed generally and used for
acquiring a qualifying asset, the amount of capitalizable borrowing cost is equal to the average
carrying amount of the asset during the period multiplied by a capitalization rate or average
interest rate.
However, the capitalizable borrowing cost shall not exceed the actual interest incurred
 In general borrowings, any investment income is not deducted from the actual interest cost
incurred

TOPIC 40: DEPRECIATION-CHANGE IN THE USEFUL LIFE & METHOD

 If an asset is acquired by installment, the cost is equal to the cash price or present value of
future payments
 Any costs incurred in order to improve the efficiency and increase the inflow of economic
benefits is capitalizable
 Composite life= TDA/TAD
 Composite Rate= TAD/TC
 Under the composite method, no gain/loss is recognized on the derecognition of an asset
 If technological advancements have made the assets virtually obsolete and that they would
have to be replaced, any carrying amount in excess of the expected residual value should be
fully depreciated
 Any costs incurred in order to comply with pollution control ordinance is capitalizable

TOPIC 41: DEPLETION

 Exploration assets are expenditures incurred by an entity after the entity has obtained legal
rights for the exploration & evaluation of mineral resources but before the technical feasibility
and commercial viability of extracting mineral resource

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 Roads and infrastructure should not be recognized as exploration asset but as development
cost
 Under the successful effort method, only the exploration costs associated with successful wells
are capitalized. The exploration costs associated with dry holes are expensed immediately.
 Under the full cost method, all exploration costs whether associated with successful or dry
holes are capitalized.
 Depletion is a cost of production and therefore may be directly debited to inventory under the
perpetual system.
 Composition of the Wasting Asset:
1. Acquisition Cost
2. Exploration Cost
3. Development Cost
4. Estimated Restoration Cost (at PV)
 The development cost related to production equipment is not part of the cost of the mineral
property because it is subject to depreciation.
 Depletion rate per ton= Remaining Depletable Amount/Remaining Tons to be Extracted
 If there is an appropriate rate available for the restoration cost capitalized, such shall be used
to discount such cost
 If mining equipment is movable and can be used in future extractive project, the equipment
is depreciated over the useful life using the straight-line method
 If immovable, the shorter between the life of the mine and the life of the equipment. If the life
of the mine (output method) while if life of the equipment (straight-line method)
 Maximum dividend declared:
(Retained Earnings + Accumulated Depletion) – Capital liquidated - Unrealized Depletion
in Ending Inventory
 In the year of shutdown, the straight-line method is used, based on the remaining life of the
asset
TOPIC 42: REVALUATION
 Depreciated Replacement Cost/Sound Value
-Carrying Amount = Revaluation Surplus
 The revaluation surplus of land is not realized annually because it is non-depreciable. It is
realized in full upon disposal of it

TOPIC 43: IMPAIRMENT OF ASSETS

 If the recoverable amount of an asset is lower than the carrying amount, the difference is
recognized as an impairment loss. The recoverable amount is equal to the value in use or fair
value less cost of disposal, whichever is higher
 The discounted value of a stream of indefinite annual cash flows is simply computed by
dividing the annual cash flow by the discount rate

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
 In case of reversal of impairment, PAS 36 paragraph 117, provides that the fair value cannot
exceed the carrying amount assuming there was no impairment
Formula: Carrying amount assuming no impairment
Less: Carrying amount at the date of reversal
 The carrying amount plus the estimated cost of disposal should be recognized as impairment
loss if the asset will no longer be economically useful in the production process after the
reporting period
 PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash
generating unit, the loss is allocated to the assets of the unit in the following order:
a. Goodwill, if there’s any
b. To all other NCA of the unit, pro-rata based on their Carrying amount
 PAS 36 paragraph 105, provides that the carrying amount of an asset shall not be reduced
below the highest of FV less cost of disposal, value in use & zero
 PAS 36, paragraph 76, provides that the carrying amount of a cash generating unit includes
the carrying amount of only those assets that can be attributed directly or allocated on a
reasonable and consistent basis to the CGU and shall generate the future cash inflows used in
determining the value in use of the CGU
 Goodwill impairment is determined at the level of the individual reporting unit and not at the
entity level
TOPIC 44: INTANGIBLE ASSETS
 An in-process research and development project acquired separately is recognized as an asset
at cost, even if a component is a research
 Subsequent expenditure of an in-process research and development project is accounted for
as any other research and development expenditure which may be expensed or capitalized
depending on the criteria for the recognition of an intangible asset
 Research and Development expenditures are treated as outright expense, unless it is an
acquired in process R and D, separately
 The cost of litigation, whether successful or not, should be treated as outright expense because
such cost would only maintain and not enhance the originally assessed future benefits
 The patent should be amortized over the shorter between the remaining useful life and the
remaining legal life
 Considering the almost automatic renewal of a trademark, it can be classified as an intangible
asset with an indefinite useful life. It is not amortized but is tested for impairment at least
annually.

Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018
Compiled by:
KING CHRISTOPHER R. LAGANAO, CPA, MBA
Cumlaude-BS Accountancy, Xavier University-Ateneo de Cagayan
March 2018