Notes:

EFFECT ON EFFECT ON
SHARE IN ASSOCIATE INVESTMENT IN INVESTMENT INCOME
ASSOCIATE
CHAPTER 17- INVESTMENT IN ASSOCIATE
Investment in Associate
 An entity over which the investor has
significant influence
Significant Influence
 is the power to participate in the
financial and operating policy decisions
of the investee but is not control or
joint control of those policies
 Presumed to exist (holds directly or
indirectly 20% or more voting power of
the investee.
Voting Rights
 For significance influence to exist, the
investment should provide the investor
voting rights. Thus, investment in
preference shares, regardless of the
percentage of ownership, is not
accounted for under PAS 28 because
preference share do not give the
investor voting rights.
Equity Method
 Investment is initially recognized at cost
and subsequently adjusted for the
investor’s share in the investee’s
changes in equity.
 Both the share in the associate’s profit
and cash dividends received is recorded
to the investment in associate account.
 Under the equity method, cash
dividends are not income but rather a
deduction to the “investment in
associate” account
 The share in the associate’s other
comprehensive income is presented as
separate line item in statement of profit
or loss and other comprehensive
income under the caption “share of
other comprehensive income of
associate
Associate’s Share Dividends
Share dividends do not result to change in the
total equity of the investee. Accordingly, they
do not affect also the investment in associate
account. Even though share dividends increase
the number of shares held, they do not affect
investor’s ownership interest
Application of the Equity Method
 Starts using the equity method from the
date it obtains significant influence over
an investee.
 If cost is greater than the fair value of
the interest acquired, the excess is
goodwill
 If cost is less than the fair value of the
interest acquired, the deficiency is
included as income in determining the
entity’s share in the investee’s profit or
loss in the period of acquisition.
Equity Method not Applicable
 The investment is classified as held for
sale under PFRS5 Non-current Assets
 Held for Sale and Discontinued
Operations.
 The investor is a parent that is
exempted from resenting consolidated
financial statements.
 The investor is a subsidiary whose
parent allows it not to apply the equity
method; the investor’s securities are
not traded in public market nor the
investor is in the process of enlisting its
securities to be traded in the market;
and investor’s parent produces
consolidated FS.
 The investment is held indirectly
through, an entity that is a venture
capital organization, or a mutual fund,
unit trust and similar entities including
investment-linked insurance funds, and
the entity elects to measure the
investment at FVPL in accordance with
PFRS 9.
EXCESS OF COST OVER CARRYING AMOUNT
 An accounting arises if the investor pays
more or less for an investment than the
carrying amount of underlying assets.
1. Undervaluation of an investee’s assets,
such as building, land and inventory.
2. Goodwill (fairly valued)
 Attributable to undervaluation of
depreciable asset, it is amortized over
the remaining life
 The amount is expensed when land or
inventory is sold
EXCESS OF NET FAIR VALUE OVER COST
 Included as income in determination of
the associate’s profit or loss in the
period in which the investment is
acquired.
INVESTEE WITH HEAVY LOSSES
 Equals or exceed (discontinues)
 The investment is reported at nil or zero
value
 Additional losses are provided for or a
liability is recognized
 If the associate subsequently reports
income, the investor resumes including
its share of such income after its share
of the income equals the share of losses
not recognized.
IMPAIRMENT LOSS
 Shall be recognized whenever the
carrying amount of the investment in
associate exceeds recoverable amount.
 Recoverable amount is measured as the
higher between FV less cost of disposal
and value in use.
 Value in use is the present value of the
estimated future cash flows expected to
arise from the continuing use of an
asset and from its ultimate disposal.
INVESTEE WITH PREFERENCE SHARES
 When an associate has outstanding
cumulative preference shares, the
investor shall compute its share of
earnings or losses after deducting the
preference dividends
 Non cumulative preference shares, the
investor shall compute its share of
earnings after deducting the
preference dividends only when
declared.
 CHAPTER 18- INVESTMENT IN ASSOCIATE
(OTHER ACCOUNTING ISSUES)
Adjustment of Investee’s Operations
 Most recent available FS
 Reporting dates of investee and
investor are different (shall be no more
than 3 months)
 Profits and losses resulting from
upstream and downstream transactions
between an investor and an associate.
Upstream Transactions
 Sale of assets from an associate to the
investor
 Unrealized profit must be eliminated
Downstream Transactions
 Sales of assets from the investor to an
associate
 Unrealized profit must be also
eliminated
Discontinuance of Equity Method- change from
Equity
 From the date that it ceases to have
significant influence over an associate
 FVPL and FVOCI
 Nonmarketable investment at cost or
investment in unquoted equity
instrument
 Significant influence must be lost
Measurement after loss of Significant Influence
 Measure any retained investment in
associate at fair value.
 Difference of CA at the date SI is lost
shall be included in Profit or Loss
Equity Method not applicable
 Investor is wholly-owned subsidiary
 Debt and equity instruments are not
traded
 Investor did not file or it’s not in the
process of filing FS with the SEC
 Any intermediate parent of the investor
produces consolidated FS available for
public use.
Associate Held for Sale
 Shall be measured at the lower of CA
and fair value less cost of disposal
Accounting for investment of less than 20%
a. Fair value method
b. Cost Method
Dividend from Pre acquisition RE
 No distinction between pre acquisition
and post acquisition dividends
 Recognized as dividend income
FV Approach
 Existing interest (P&L)
 Existing interest accounted for at FVOCI
(retained earnings)
 FV of existing interest plus cost of the
additional interest= total cost of
investment
 Total cost minus CA= excess of cost over
CA or excess net FV
CHAPTER 19- FINANCIAL ASSET AT AMORTIZED
COST
Definition of Bond
 Unconditional promise
 Contract of debt
 Issuer borrows fund from another party
called the investor
 Issuer (debtor) Bondholder (creditor)
 Evidenced by a certificate and
contractual agreement – bond
indenture
Classification of Bond Investment
a. Financial asset held for trading
b. Financial asset at amortized cost
c. Financial asset at FVOCI
d. Financial asset at FVPL by irrevocable
designation or by FV option
Initial measurement
 FV plus transaction costs that are
directly attributable to the acquisition
 Expensed immediately
Subsequent measurement
a. FVPL
b. Amortized Cost
c. FVOCI
Acquisition of Bond Investment
 May be acquired at interest date or
between interest dates.
 When bonds are acquired between
interest date purchase price normally
includes the accrued interest
 Accrued Interest should to be reported
as part of the cost
Investment in Bonds at Amortized Cost
a. Business model is to hold financial asset
in order to collect contractual cash
flows on specified dates
b. The contractual cash flows are solely
payments of principal and interest on
the principal amount outstanding
 Amortized cost is the initial
measurement minus repayments, plus
amortization discount, minus
amortization premium, and minus
reduction for impairment
uncollectibility
 Classified as noncurrent investments
Callable Bonds
 Called or redeemed issuing prior to
their date of maturity
 At premium more than the face
amount of bonds
Convertible Bonds
 Give the bondholders the right to
exchange their bond for share capital at
any time prior to maturity
 Can be classified as financial assets
measured at Fair Value
Serial Bonds
 Those which have a series of maturity
dates or those bonds which are payable
in instalments
Term Bonds
 Bonds that mature on a single date
- Callable and convertible bonds can be
classified as term bonds despite their features.
Method of Amortization
a. Straight Line Method- provides equal
amount
b. Bond Outstanding- provides decreasing
amount of amortization
c. Effective interest Method- provides
increasing amount of amortization
CHAPTER 20- EFFECTIVE INTEREST METHOD
AMORTIZED COST, FVOCI AND FVPL
Fair Value Option
Effective Interest Method (Scientific Method)
 Comparison between the interest
earned or interest income and the
interest received
 Difference between the two represents
the premium or discount amortization
 Effective rate is the yield rate or market
rate (actual rate of interest)
 Nominal rate is the coupon rate or
stated rate (appearing on the face of
the bond)
 CA=Initial cost
Effective Rate versus Nominal Rate
Market Price of Bonds
 They are the same if the cost of bond
investment is equal to face amount
 Premium- effective rate is lower than
the nominal rate (loss on the part of
bondholder
 Discount- effective rate is higher than
the nominal rate (gain on the part of
bondholder)
 Both necessary in applying EIM
Requirement for Reclassification
Bond Investment FVOCI
a. The business model is achieved both by
collecting contractual cash flows and by
selling or trading the financial asset
b. Contractual cash flows are solely
payments of principal and interest on
the principal outstanding
 Interest income is recognized using
the EIM as in amortized cost
measurement
 Derecognition of BI at FVOCI shall
be reclassified to profit or loss
 Derecognition of equity investment
at FVOCI shall classified to retained
earnings.
 An entity at initial recognition may
irrevocably designate a financial asset
as measured at fair value through P&L
even FA satisfies the amortized cost or
FVOCI measurement.
 Can be designated without revocation
measured at FVPL even if the bonds are
held for collection
 Changes in FVPL are recognized in P&L
is recorded as an outright expense.
 Interest income is based on nominal
interest rate rather the effective
interest rate
 Is equal to the present value of the
principal plus the present value of
future interest payments using EIR
CHAPTER 21- RECLASSICATION OF FINANCIAL
ASSET
 Only when it changes the business
model
  Entity shall apply the reclassification
prospectively from the reclassification
date.
 Reclassification date is the first day of
the reporting period following the
change in business model
Exemptions from Reclassification
a. Equity investment held for trading or
measured at FVPL (actually, all equity
investments cannot be classified)
b. Equity investments measured at FVOCI
by irrevocable election
c. Only debt investment can classified
(debt investment measure at FVPL by
irrevocable election cannot be
reclassified)
Reclassification from FVPL to amortized cost
a. FV at reclassification date becomes the
new carrying amount of FA at
amortized cost
b. Difference between the FA at AC shall
be amortized through P&L using EIM
c. New Effective interest rate must be
determined based on the new CA or FV
at reclassification date.
Reclassification from Amortized Cost to FVPL
a. FV is determined at reclassification date
b. The difference between the previous CA
and FV is recognized in P&L
Reclassification from FVPL to FVOCI
a. Continues to be measured at FV
b. The FV at reclassification date becomes
the new CA
c. A new effective interest rate must be
determined based on the new carrying
amount or FV at reclassification date
Reclassification from FVOCI to FVPL
a. Continues to measured at FV
b. The FV at reclassification date
becomes the new CA
c. The cumulative gain or loss
previously recognized in other
comprehensive income is
reclassified to P&L at
reclassification date.
CHAPTER 22- INVESTMENT PROPERTY (CASH
SURRENDER VALUE)
Investment Property
 Defined as property (land or building or
part of a building) held by an owner or
by the lessee under a finance lease to
earn rentals or for capital appreciation
or both.
 Only land and building cannot qualify as
investment property
 Any movable property cannot qualify as
investment property
An investment property is not held:
a. Use in the production or supply of
goods or services or for administrative
purposes
b. Sale in the ordinary course of business
 Use in production or supply of goods or
services known as owner-occupied
property
Investment property held for lessee
 Recognize a right of use asset and lease
liability
Right of Use
 PV of lease payment
 Lease payment made to the lessor at or
before commencement date less any
lease incentive
 Initial direct cost incurred by the lessee
 Est. Of cost of dismantling and restoring
the underlying asset for which the
lessee has a present obligation
Subsequent measurement
 Fair value model in measuring
investment property, the lessee shall
also apply the FV model to the right of
use asset that meets the definition of
investment property.
Partly Investment and partly owner-occupied
 Insignificant portion is held for
manufacturing or administrative
purpose (investment property)
 Significant portion is held for
manufacturing or administrative
purpose (investment property)
Property leased to an affiliate
 Individual entity that owns it, the
property leased to another subsidiary or
its parent is considered an investment
property
 Group as a whole and for purposes of
consolidated FS, the property is treated
as owner-occupied property
Recognition of Investment Property
a. Future economic benefits that are
associated with the investment
property will flow to the entity
b. The cost of the investment property can
be measured reliably
Initial Measurement
 Measured at cost
 Transaction cost shall be included in
the initial measurement
 Cost of purchase IP comprises the
purchase price and any directly
attributable expenditure
 Directly attributable expenditure-
includes professional fees for legal
services, property transfer taxes
and other transaction costs.
Cost excluded from cost of IP
a. Start up cost
b. Operating losses
c. Abnormal amounts of wasted material,
labor or other resources
Subsequent Measurement
 Shall apply to all of the IP
a. FV model
b. Cost model
Fair Value of investment property
 The price that would be received to sell
an asset in an orderly transaction
between market participants at the
measurement date.
 Price in the principal market used to
measure FV shall not be adjusted for
transaction cost
 FV of investment property excludes
prepaid or accrued operating lease
income
Fair value model
 Changes in FV from year to year are
recognized in P&L
 No depreciation is recorded for the
investment property
Transfers of investment property
a. Commencement of owner occupation
or development with view to owner-
occupation
b. Commencement of development with
a view to sale
c. End of owner occupation
d. Inception of an operating lease to
another entity
Derecognition of investment property
a. On disposal
b. IP is permanently withdrawn from use
c. No future economic benefits
Cash surrender value
 Amount which the insurance firm will
pay upon the surrender and
cancellation of the life insurance policy.
 Cash surrender value legally
commences to accrue at the end of
third year
 Classified as non-current investment
CHAPTER 23- PROPERTY PLANT AND
EQUIPMENT
 Tangible assets held for use of
production
 Used during more than one period
Measurement at recognition
 Measured initially at cost
Measurement after recognition
 Cost model or revaluation model
 Apply to entire class
 Cost model = cost less any accumulated
depreciation and any accumulated
impairment loss
 Revaluation model= revalued carrying
amount
Acquisition of property
1. Cash basis
 Includes the cash paid plus directly
attributable costs
2. On account subject to cash discount
 Cost of asset equal to the invoice price
minus the discount, regardless of
whether the discount is taken or not
 Cash discount reduction of cost and not
as income
3. Instalment basis
 Cash price equivalent
 Offered at a cash price and at
instalment price , asset should be
recorded at the cash price
 No cash price equivalent to PV all
payment using implied interest rate
4. Issuance of share capital
 FV of the consideration received
a. FV of property received
b. FV of share capital
c. Par value or stated value of SC
5. Issuance of bonds payable
 FV plus transaction cost
a. FV of bonds payable
b. FV of asset received
c. Face amount of bonds payable
6. Exchange
 Measured at FV
 Recognized at CA
a. Lacks of commercial substance
b. Not reliably measurable
7. Donation
 IFRS does not address donation or
contribution
  Contributions received from
shareholders shall be recorded at the
FV with the credit going to donated
capital.
 Such expenses do not increase or
enhance the value of asset
 Directly attributable costs incurred
subsequently, such as installation and
testing cost to bring donated asset to
the location shall capitalized
 From nonshareholders gifts or grants of
funds that are restricted for property
and equipment additions.
 Capital gifts or grants shall be recorded
at FV when received or receivable
(recognized as income)
 If the Capital gifts or grants are not
subsidies the offsetting credit is a
liability account
 Initial recognition liability is transferred
to income.
8. Government grant
9. Construction
Shall Include:
 Direct cost of materials
 Direct cost of labors
 Indirect cost and incremental
overhead specifically
identifiable asset or traceable
to the construction
Saving or loss on construction
 Actual cost less than the price; the
difference is not income but saving.
 Any internal profit eliminated in the
cost of self-constructed asset
 Actual cost more than the price,
constructed asset shall be recorded at
actual cost
 Actual cost is materially excessive, the
excess shall be treated as loss
chargeable against management
 Cost of abnormal amount is not
included in the cost of asset
Intervening Operations
 Incidentals operations are not
necessary to bring an asset to the
location and condition for the intended
use, the income and related expenses
of incidental operations are recognized
in P&L
Property classified as held for sale
 Available for immediate sale in the
present condition within 1 year
 Such asset shall be excluded from PPE
but presented as current asset
 Measurement lower between CA an FV
less cost of disposal
 FV less cost of disposal is treated as an
impairment loss
 Shall not be depreciated
Optional Disclosures
 CA temporarily idle PPE
 Gross CA of any fully depreciated PPE
still in use
 CA of PPE retired from active use and
classified as held for sale
 When cost model is used, the FV of
PPE when this is materially different
from the CA
CHAPTER 24- GOVERNMENT GRANT
 Assistance by government in the form
of transfer of resources to an entity in
return for part of future compliance
 with certain conditions relating to the
operating activities of entity.
 Subsidy, subvention or premium
Recognition and measurement
 Shall be recognized at FV
 Shall not recognized on cash basis as
this is not consistent with GAAP
 Shall be recognized on the accrual basis
Classification of government grant
a. Grant related to asset- acquire long
term asset
b. Grant related to income
Accounting for government grant
 Shall be recognized as income on a
systematic basis
 Taken to income over one or more
periods in which the related cost is
incurred.
Presentation of government grant
1. Related to asset
a. By setting the grant as
deferred income
b. By deducting the grant from
the cost of the asset
2. Related to income presented in
income statement heading “other
income”
Repayment of government grant
 Becomes repayable because of non
compliance (change in accounting
estimates)
 Repayment of a grant related to income
shall be applied first against any
unamortized deferred income and any
excess shall be recognized immediately
as an expense
 Repayment of a grant related to asset
recorded by increasing the CA of the
asset
 Cumulative additional depreciation in
the absence of grant shall be recognized
immediately as an expense.
Grant of interest-free loan
 Forgivable loan from government
treated as government grant
 NIL or below- market rate of interest
treated as GG
Government assistance
 Government action designed to
provide an economic benefit
 No value can reasonably be placed
upon it
CHAPTER 25- BORROWING COSTS
 Defined as interest and other costs that
an entity incurs in connection with
borrowing funds
Borrowing cost specifically includes:
a. Interest expense calculated using the
effective interest method.
b. Finance charge with respect to a finance
lease.
c. Exchange difference arising from
foreign currency borrowing to the
extent that it is regarded as an
adjustment to interest cost.
Qualifying asset
 Takes a substantial period of time to get
ready for the intended use or sale
Examples:
1. Manufacturing plant
2. Power generation facility
3. Intangible asset
4. Investment property
Excluded from capitalization
a. Measured at FV, such as biological
assets
b. Manufactured or produced in large
quantity on a repetitive basis
c. Assets that are ready for their intended
use or sale when acquired
Accounting for borrowing cost
1. If the borrowing is directly attributable
to the acquisition, construction or
production of QA, the BC is required to
be capitalized as cost of asset
 Capitalization of BC is mandatory for QA
 BC that would have been avoided if the
expenditure on QA had not been made
2. BC shall be expensed as incurred
 Not directly attributable to QA
Asset financed by specific borrowing
 The amount capitalizable BC is the
actual BC incurred during the period
less any investment income
Asset financed by general borrowing
 If funds are borrowed generally and
used for acquiring a qualifying asset, the
amount of capitalizable BC is equal to
the average CA of the assets during the
period multiply by a capitalization rate
or average interest rate
 CBC shall not exceed the actual interest
incurred.
 The capitalization rate or average
interest rate is equal to the total annual
BC divided by the total general
borrowings outstanding during the
period.
 No specific guidance is provided for
general BC with respect to investment
income.
 Not deducted from capitalizable BC.
Specific borrowing for asset used for general
purposes
 Financed by specific borrowing but a
portion is used for working capital
purposes, the borrowing shall be
treated as a GB in determining
capitalizable BC
Commencement of Capitalization
a. Entity incurs expenditures for the asset
b. Entity incurs borrowing costs
c. Entity undertakes activities that are
necessary to prepare the asset for the
intended use for sale.
CHAPTER 26- LAND AND BUILDING
Land Account
 Used as plant site shall be treated as
PPE
 Held for a currently undetermined use
is treated as an investment property
 If held definitely as a future plant site, it
is classified as owner-occupied property
 and not investment property (included
in PPE)
 Held for long term capital appreciation
treated as an investment property
 Held for current sale by a real estate
developer as in the case of subdivided
lots is treated as current asset as part of
inventory
 If the land is not acquired, the cost of
option is expensed outright
Land Improvements
 Not subject to depreciation charged to
land account
 Depreciable land improvements are
charged to special account “land
improvement”
 Depreciated over their useful life
Special Assessments
 Taxes paid by landowner as a
contribution to the cost of public
improvements
 Treated as part of the cost of the land
 Capitalized increased the value of land
Real property taxes
 Treated as outright expense
 Taxes are capitalized but only up to the
date of acquisition
 Subsequent to the date of acquisition
treated as expense
Sidewalks, pavements, parking lot, driveways
a. Expenditures are part of the blueprint
for the construction of a new building,
these are charged to building account
b. Occasionally made or incurred not in
connection with the construction of a
new building are charged to land
improvements
Claims for damages
 Insurance taken during the construction
of building charged to building
 Insurance is not taken charged to
expensed outright
 To charge the damages to the building
account would be tantamount to
concealment of management failure or
negligence
Building fixtures
 Immovable charged to building account
 Movable charged to furniture and
fixtures
Machinery
 If a machinery is removed and retired to
make room for installation of a new
one, the removal cost not previously
recognized as a provision is charged to
expense
 VAT not capitalizable charged to input
tax to be offset against output tax
 Irrevocable or non-refundable purchase
tax is capitalized
Tools
 Segregated from the machine account
Patterns and dies
 Recorded as asset used for the regular
product
Capital Expenditures- benefits only the
current period and reported as an expense
Revenue Expenditures- benefits the current
period and future period and reported as an
asset