Purpose of the Conceptual Framework

The Conceptual Framework prescribes the concepts for general purpose financial reporting. Its
purpose is to:

• assist the International Accounting Standards Board (IASB) in developing Standards that
are based on consistent concepts;
• assist preparers in developing consistent accounting policies when no Standard applies
to a particular transaction or when a Standard allows a choice of accounting policy; and
• assist all parties in understanding and interpreting the Standards.
Status of the Conceptual Framework

• The Conceptual Framework is not a PFRS. When there is a conflict between the
Conceptual Framework and a PFRS, the PFRS will prevail.
• In the absence of a standard, management shall consider the Conceptual Framework in
making its judgment in developing and applying an accounting policy that results in
useful information.
Scope of the Conceptual Framework

• The Conceptual Framework is concerned with general purpose financial reporting.

General purpose financial reporting involves the preparation of general-purpose financial
statements. The Conceptual Framework provides the concepts regarding the following:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
Objective of general-purpose financial reporting

• The objective of general-purpose financial reporting is to provide financial

information about the reporting entity that is useful to primary users in making decisions
about providing resources to the entity.
• The objective of general-purpose financial reporting forms the foundation of the
Conceptual Framework.
Primary Users

• Primary users – are those who cannot demand information directly from reporting
entities. The primary users are:
(a) Existing and potential investors
(b) Lenders and other creditors.

• Only the common needs of primary users are met by the financial statements.
Qualitative Characteristics
Fundamental qualitative characteristics
(1.) Relevance
(a) Predictive value
(b) Feedback value

• Materiality – entity-specific aspect of relevance

(2) Faithful representation
(a) Completeness
(b) Neutrality
(C) Free from error
Enhancing qualitative characteristics
(1) Comparability
(2) Verifiability
(3) Timeliness
(4) Understandability
Fundamental vs. Enhancing

• The fundamental qualitative characteristics are the characteristics that make

information useful to users.
• The enhancing qualitative characteristics are the characteristics that enhance the
usefulness of information
Relevance

• Information is relevant if it can affect the decisions of users.

• Relevant information has the following:
a. Predictive value – the information can be used in making predictions
b. Confirmatory value – the information can be used in confirming past predictions
➢ Materiality – is an ‘entity-specific’ aspect of relevance.
Faithful Representation

• Faithful representation means the information provides a true, correct and complete
depiction of what it purports to represent.
• Faithfully represented information has the following:
a. Completeness – all information necessary for users to understand the phenomenon
being depicted is provided
b. Neutrality – information is selected or presented without bias.
 c. Free from error – there are no errors in the description and in the process by which the
information is selected and applied.
Enhancing Qualitative Characteristics
1. Comparability – the information helps users in identifying similarities and differences
between different sets of information.
2. Verifiability – different users could reach consensus as to what the information purports
to represent.
3. Timeliness – the information is available to users in time to be able to influence their
decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities; and
b. willingness to analyze the information diligently.
Financial statements and the Reporting entity
Objective and scope of financial statements

• The objective of general-purpose financial statements is to provide financial information

about the reporting entity’s assets, liabilities, equity, income and expenses that is useful
in assessing:
a. the entity’s ability to generate future net cash inflows; and
b. management’s stewardship over economic resources.
Financial statements and the Reporting entity
Reporting period

• Financial statements are prepared for a specific period of time (i.e., the reporting period)
and include comparative information for at least one preceding reporting period.
Going concern

• Financial statements are normally prepared on the assumption that the reporting entity is
a going concern, meaning the entity has neither the intention nor the need to end its
operations in the foreseeable future.
Financial statements and the Reporting entity
Reporting entity

• A reporting entity is one that is required, or chooses, to prepare financial statements, and
is not necessarily a legal entity. It can be a single entity or a group or combination of two
or more entities.
Elements of Financial Statements
1. Asset These relate to the entity ‘s
2. Liabilities
financial position.
3. Equity
4. Income These relate to the entity ‘s
5. Expense financial performance
Asset

• Asset is “a present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.”
Three aspects in the definition of an asset
1. Right – asset refers to a right, and not necessarily to a physical object, e.g., the right to
use, sell, lease or transfer a building.
2. Potential to produce economic benefits – the right has a potential to produce economic
benefits for the entity that are beyond the benefits available to all others. Such potential
need not be certain or even likely – what is important is that the right already exists and
that, in at least one circumstance, it would produce economic benefits for the entity.
3. Control – means the entity has the exclusive right over the benefits of an asset and the
ability to prevent others from accessing those benefits.
Liability

• Liability is “a present obligation of the entity to transfer an economic resource as a result

of past events.”
Three aspects in the definition of a liability
1. Obligation – An obligation is “a duty or responsibility that an entity has no practical ability
to avoid.” An obligation can be either legal obligation or constructive obligation.
2. Transfer of an economic resource – the obligation has the potential to require the
transfer of an economic resource to another party. Such potential need not be certain or
even likely – what is important is that the obligation already exists and that, in at least one
circumstance, it would require the transfer of an economic resource.
3. Present obligation as a result of past events – A present obligation exists as a result
of past events if:
a. the entity has already obtained economic benefits or taken an action; and
b. as a consequence, the entity will or may have to transfer an economic resource that it
would not otherwise have had to transfer.
Executory contracts

• An executory contract “is a contract that is equally unperformed – neither party has fulfilled
any of its obligations, or both parties have partially fulfilled their obligations to an equal
extent.” (CF 4.56)
• An executory contract establishes a combined right and obligation to exchange economic
resources.
• The contract ceases to be executory when one party performs its obligation.
➢ If the entity performs first, the entity’s combined right and obligation changes to an asset.
➢ If the other party performs first, the entity’s combined right and obligation changes to a liability.
Equity

• “Equity is the residual interest in the assets of the entity after deducting all its liabilities.”
(Conceptual Framework 4.63)
• Equity equals Assets minus Liabilities
Income and Expenses

• Income
Income is “increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.”

• Expenses
Expenses are “decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims.”
Recognition & Derecognition
The recognition process

• Recognition is the process of including in the statement of financial position or the

statement(s) of financial performance an item that meets the definition of one of the
financial statement elements (i.e., asset, liability, equity, income or expense). This involves
recording the item in words and in monetary amount and including that amount in the totals
of either of those statements.
Recognition criteria

• An item is recognized if:

a. it meets the definition of an asset, liability, equity, income or expense; and
b. recognizing it would provide useful information, i.e., relevant and faithfully represented
information.
Relevance

• The recognition of an item may not provide relevant information if, for example:
a. it is uncertain whether an asset or liability exists; or
b. an asset or liability exists, but the probability of an inflow or outflow of economic benefits
is low.
However, the presence of one or both of the foregoing does not automatically lead to the non -
recognition of an item. Other factors should also be considered.
Faithful representation

• The level of measurement uncertainty and other factors can affect an item’s faithful
representation, but not necessarily its relevance.
Measurement uncertainty

• Measurement uncertainty exists if the asset or liability needs to be estimated. A high level
of measurement uncertainty does not necessarily lead to the non-recognition of an asset
or liability if the estimate provides relevant information and is clearly and accurately
described and explained.
• However, measurement uncertainty can lead to the non-recognition of an asset or a
liability if making an estimate is exceptionally difficult or exceptionally subjective.
Derecognition

• Derecognition is the removal of a previously recognized asset or liability from the entity’s
statement of financial position.
• Derecognition occurs when the item ceases to meet the definition of an asset or liability.
Unit of account

• Unit of account is “the right or the group of rights, the obligation or the group of obligations,
or the group of rights and obligations, to which recognition criteria and measurement
concepts are applied.
Measurement bases
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost
Historical cost

• The historical cost of:

a. An asset is the consideration paid to acquire the asset plus transaction costs.
b. A liability is the consideration received to incur the liability minus transaction
costs.
• Historical cost is updated over time to depict the following:
• Depreciation, amortization, or impairment of assets
• Collections or payments that extinguish part or all of the asset or liability
• Unwinding of discount or premium when the asset or liability is measured at amortized
cost
Fair value

• Fair value is “the price that would be received to sell an asset, or paid to transfer a liability,
in an orderly transaction between market participants at the measurement date.”
Value in use and fulfilment value

• Value in use is “the present value of the cash flows, or other economic benefits, that an
entity expects to derive from the use of an asset and from its ultimate disposal.”
• Fulfilment value is “the present value of the cash, or other economic resources, that an
entity expects to be obliged to transfer as it fulfils a liability.”
Current cost

• The current cost of:

a. an asset is “the cost of an equivalent asset at the measurement date, comprising
the consideration that would be paid at the measurement date plus the transaction
costs that would be incurred at that date.”
b. a liability is “the consideration that would be received for an equivalent liability at
the measurement date minus the transaction costs that would be incurred at that
date.”
Entry values vs. Exit values

• Current cost and historical cost are entry values (i.e., they reflect prices in acquiring an
asset or incurring a liability), whereas fair value, value in use and fulfilment value are exit
values (i.e., they reflect prices in selling or using an asset or transferring or fulfilling a
liability).
Considerations when selecting a measurement basis

• When selecting a measurement basis, it is important to consider the following:

a. The nature of information provided by a particular measurement basis (e.g.,
measuring an asset at historical cost may lead to the subsequent recognition of
depreciation or impairment, while measuring that asset at fair value would lead to
the subsequent recognition of gain or loss from changes in fair value).
b. The qualitative characteristics, the cost-constraint, and other factors (e.g., a
particular measurement basis may be more verifiable or more costly to apply than
the other measurement bases).
Measurement of Equity

• Total equity is not measured directly. It is simply equal to difference between the total
assets and total liabilities.
• Because different measurement bases are used for different assets and liabilities, total
equity cannot be expected to be equal to the entity’s market value nor the amount that
can be raised from either selling or liquidating the entity.
• Equity is generally positive, although some of its components can be negative. In some
cases, even total equity can be negative such as when total liabilities exceed total assets.
Presentation and Disclosure

• Information is communicated through presentation and disclosure in the financial

statements.
• Effective communication makes information more useful. Effective communication
requires:
a. focusing on presentation and disclosure objectives and principles rather than on
rules.
b. classifying information by grouping similar items and separating dissimilar items.
c. aggregating information in a manner that it is not obscured either by excessive detail
or by excessive summarization.
Presentation and disclosure objectives and principles

• The objectives are specified in the Standards.

• The principles include:
a. the use of entity-specific information is more useful that standardized descriptions,
and
b. duplication of information is usually unnecessary.
Classification

• Classifying means combining similar items and separating dissimilar items.

• Offsetting of assets and liabilities is generally not appropriate.
Classification of income and expenses

• Income and expenses are classified as recognized either in:

a. profit or loss; or
b. other comprehensive income.
Aggregation

• Aggregation is “the adding together of assets, liabilities, equity, income or expenses that
have shared characteristics and are included in the same classification.”
Concepts of Capital and Capital Maintenance

• Financial concept of capital – capital is regarded as the invested money or invested

purchasing power. Capital is synonymous with equity, net assets, and net worth.
• Physical concept of capital – capital is regarded as the entity’s productive capacity, e.g.,
units of output per day.
PAS 2 INVENTORIES
Inventories
Inventories are assets:
a. Held for sale in the ordinary course of business (Finished Goods);
b. In the process of production for such sale (Work In Process); or
c. In the form of materials or supplies to be consumed in the production process or in the
rendering of services (Raw materials and manufacturing supplies).
Financial statement presentation

• All items that meet the definition of inventory are presented on the statement of financial
position as one line item under the caption “Inventories.” The breakdown of this line item
(as finished goods, WIP and Raw materials) is disclosed in the notes.
• Inventories are normally presented in a classified statement of financial position as current
assets.
Measurement

• Inventories are measured at the lower of cost and net realizable value (NRV).
• The cost of inventories comprises all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location and condition.
• Net realizable value (NRV) is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to
make the sale.
Costs that are EXPENSED when incurred
1. Abnormal amounts of wasted materials, labor or other production costs.
2. Selling costs, for example, advertising and promotion costs and delivery expense or
freight out.
3. Administrative overheads that do not contribute to bringing inventories to their present
location and condition.
4. Storage costs, unless those costs are necessary in the production process before a
further production stage, (e.g., the storage costs of partly finished goods may be
capitalized as cost of inventory, but the storage costs of completed finished goods are
expensed).
Cost Formulas
1. Specific identification – shall be used for inventories that are not ordinarily
interchangeable (i.e., used for inventories that are unique). Cost of sales is the cost of the
specific inventory that was sold.
2. FIFO – cost of sales is based on the cost of inventories that were purchased first.
Consequently, ending inventory represents the cost of the latest purchases.
3. Weighted Average Cost – cost of sales is based on the average cost of all inventories
purchased during the period.
• Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)
Write down of inventories

• Inventories are usually written down to net realizable value on an item by item basis.
• If the cost of an inventory exceeds its NRV, the inventory is written down to NRV, the
lower amount. The excess of cost over NRV represents the amount of write-down.
Reversal of write-downs

• The amount of reversal to be recognized should not exceed the amount of the original
write-down previously recognized.
Recognition as an expense

• The carrying amount of an inventory that is sold is charged as expense (i.e., cost of sales)
in the period in which the related revenue is recognized. Likewise, the write-down of
inventories to NRV and all losses of inventories are recognized in the period the write-
down or loss occurs.
 PAS 7 STATEMENT OF CASH FLOWS

Statement of Cash Flows

• The statement of cash flows provides information about the sources and utilization (i.e.,
historical changes) of cash and cash equivalents during the period. The statement of cash
flows presents cash flows according to the following classifications:
1. Operating activities
2. Investing activities
3. Financing activities
Activities
1. Operating activities include transactions that enter into the determination of profit
or loss. These transactions normally affect income statement accounts.
2. Investing activities include transactions that affect long-term assets and other
non-operating assets.
3. Financing activities include transactions that affect equity and non-operating
liabilities.
Examples of cash flows from Operating Activities
a. cash receipts from the sale of goods, rendering of services, or other forms of
income
b. cash payments for purchases of goods and services
c. cash payments for operating expenses, such as employee benefits, insurance, and
the like, and payments or refunds of income taxes
d. cash receipts and payments from contracts held for dealing or trading purposes
Examples of cash flows from Investing Activities
a. cash receipts and cash payments in the acquisition and disposal of property, plant
and equipment, investment property, intangible assets and other noncurrent
assets
b. cash receipts and cash payments in the acquisition and sale of equity or debt
instruments of other entities (other than those that are classified as cash
equivalents or held for trading)
c. cash receipts and cash payments on derivative assets and liabilities (other than
those that are held for trading or classified as financing activities)
d. loans to other parties and collections thereof (other than loans made by a financial
institution)
Examples of cash flows from Financing Activities
a. cash receipts from issuing shares or other equity instruments and cash payments
to redeem them
b. cash receipts from issuing notes, loans, bonds and mortgage payable and other
short-term or long-term borrowings, and their repayments
c. cash payments by a lessee for the reduction of the outstanding liability relating to
a leases
 Remember the following:
1. Operating activities
➢ Affect profit or loss.
2. Investing activities
➢ Affect non current assets and other investments.
3. Financing activities
➢ Affect borrowings and equity.

Core Principle

When preparing statement of cash flows:

➢ Include only the transactions the have affected cash and cash equivalents (e.g.,
purchase of assets by paying cash)
➢ Exclude transactions that have not affected cash and cash equivalents (e.g.,
purchase of assets by issuing note payable or share of stocks).

Interests and Dividends

Cash flow from/for Option 1 Option 2

Interest Income received Operating activity Investing activity

Interest expense paid Operating activity Financing activity

Dividend income received Operating activity Investing activity

Dividend paid to owners Financing activity Operating activity

Reporting cash flow from operating activities

1. Direct method – shows each major class of gross cash receipts and gross cash
payments
2. Indirect method – adjust accrual basis profit or loss for the effects in operating
assets and liabilities and effects of non-cash items.

PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND

ERRORS
PAS 8 prescribed the criteria for selecting, applying, and changing accounting policies and the
accounting and disclosure of changes in accounting, changes in accounting estimates and
correction of prior period errors.
Accounting policies

• Accounting policies are “the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.” (PAS 8.5)
• Accounting policies are the relevant PFRSs adopted by an entity in preparing and
presenting its financial statement.
PFRSs

• Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations

adopted by the Financial Reporting Standards Council (FRSC). They comprise the
following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

Hierarchy of reporting standards

1. PFPRs
2. Judgement
When making the judgment:
➢ Management shall consider the following:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
➢ Management shall consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literatures and industry practices.
 Scope of PAS 8 Description Accounting Effect of adjustment
treatment
Change in Change in Transnational On the beginning
accounting policy measurement basis. provision balance of retained
Retrospective earning, if accounted
application for retrospectively
If (B) is impracticable,
prospective
application
Change in Change in the Prospective In profit or loss of
accounting realization (or application current period or
estimate incurrence) of current and future
expected inflow (or periods if the change
outflow) of economic affects both.
benefits from assets
(or liabilities)
Correction of prior Intentional and Retroactive On the beginning
period error unintentional restatement balance of retained
misapplication of If (B) is impracticable, earning, if accounted
principles, prospective for retrospectively.
misinterpretation of application
facts and
mathematical
mistakes.

• When it is difficult to distinguish a change in accounting policy from a change in

accounting estimate, the change is treated as a change in an accounting estimate.
• An entity shall change an accounting policy only if the change:
1. Is required by a PFRS; or
2. Results to a more relevant and reliable information about an entity’s position,
performance and cash flow
Examples of changes in accounting policy
1. Change from FIFO cost formula for inventories to the Average cost formula.
2. Change in the method of recognizing revenue from long-term construction contracts.
3. Change to a new policy resulting from the requirement of a new PFRS.
4. Change in financial reporting framework, such as from PFRS for SMEs to full PFRSs.
5. Initial adoption of the revaluation model for property, plant, and equipment and intangible
assets.
6. Change from the cost model to the fair value model of measuring investment property.
7. Change in business model for classifying financial assets resulting to reclassification
between financial asset categories.
Examples of changes in accounting estimate
1. Change in depreciation or amortization methods
2. Change in estimated useful lives of depreciable assets
3. Change in estimated residual values of depreciable assets
4. Change in required allowances for impairment losses and uncollectible accounts
5. Changes in fair values less cost to sell of non-current assets held for sale and biological
assets
Errors

• Errors include the effects of:

1. Mathematical mistakes
2. Mistakes in applying accounting policies
3. Oversights or misinterpretations of facts; and
4. Fraud
PAS 10 EVENTS AFTER THE REPORTING PERIOD

Events after the Reporting Period

• Events after the reporting period are “those events, favorable or unfavorable, that occur
between the end of the reporting period and the date that the financial statements are
authorized for issue.”
Two types of events after the reporting period

• Adjusting events after the reporting period – are those that provide evidence of
conditions that existed at the end of the reporting period.
• Non-adjusting events after the reporting period – those that are indicative of conditions
that arose after the reporting period
Date of authorization of the financial statements

• This date is the date when management authorizes the financial statements for issue
regardless of whether such authorization for issue is for further approval or for final
issuance to users.

Examples of adjusting events:

1. The settlement after the reporting period of a court case that confirms that the entity has
a present obligation at the end of reporting period.
2. The receipt of information after the reporting period indicating that an asset was impaired
at the end of reporting period. For example:
i. The bankruptcy of a customer that occurs after the reporting period may
indicate that the carrying amount of a trade receivable at the end of reporting
period is impaired.
ii. The sale of inventories after the reporting period may give evidence to their net
realizable value at the end of reporting period
 3. The determination after the reporting period of the cost of asset purchased, or the
proceeds from asset sold, before the end of reporting period.
4. The discovery of fraud or errors that indicate that the financial statements are incorrect.

Examples of non-adjusting events normally requiring disclosures:

1. Changes in fair values, foreign exchange rates, interest rates or market prices after the
reporting period.
2. Casualty losses (e.g., fire, storm, or earthquake) occurring after the reporting period but
before the financial statements were authorized for issue.
3. Litigation arising solely from events occurring after the reporting period.
4. Major ordinary share transactions and potential ordinary share transactions after the
reporting period.
5. Major business combination after the reporting period.
6. Announcing a plan to discontinue an operation after the reporting period.
7. Declaration of dividends after the reporting period
Disclosures

• Date of authorization for issue

• Adjusting events
• Material Non-adjusting events

PAS 12 INCOME TAXES

Accounting profit vs. Taxable profit

Accounting profit or loss Taxable profit (Tax loss)

Computed using PFRSs Computed using tax laws

Total income less total expense, excluding tax Taxable income less tax-deductible expenses
expense
Other terms: pretax income, financial income and Other term: taxable income
accounting income

• The varying treatments of economic activities between the PFRSs and tax law results to
permanent and temporary differences.
Permanent differences

• Permanent differences are those that do not have future tax consequences.
Examples:
a. Interest Income on government bonds and treasury bills
 b. Interest Income on bank deposits
c. Dividend income
d. Fines, surcharges, and penalties arising from violation of law
e. Life insurance premium on employees where the entity is the irrecoverable beneficiary
Temporary differences

• Temporary differences are those that have future tax consequences. Temporary
differences are either:
a. Taxable temporary differences – arise, for example, when financial income is
greater than taxable income or the carrying amount of an asset is greater than
its tax base.
b. Deductible temporary differences arise in case of the opposites of the foregoing.
• Taxable temporary differences result to deferred tax liabilities while deductible
temporary differences result to deferred tax assets.
Deferred taxes

• If the increase in deferred tax liability exceeds the increase in deferred tax asset, the
difference is deferred tax expense. If it is the opposite, the difference is deferred tax
income or benefit.
• A deferred tax asset is recognized only to the extent that it is realizable.
• Deferred taxes are measured using enacted or substantially enacted tax rates that are
applicable to the periods of their expected reversals.
• Deferred tax assets and liabilities are not discounted.
• Deferred tax asset and liabilities are presented as non-current.

PAS 16 PROPERTY, PLANT AND EQUIPMENT

Characteristics of PPE
a. Tangible assets – items of PPE have physical substance
b. Used in normal operations – items of PPE are used in the production or supply of
goods or services, for rental, or for administrative purposes
c. Long-term in nature – items of PPE are expected to be used from more than a year
Examples of items of PPE
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants
Recognition

• The cost of an item of property, plant and equipment shall be recognized as an asset
only if:
a. It is probable that future economic benefits associated with the item will flow to the
entity; and
b. The cost of the item can be measured reliably.
Initial measurement

• An item of PPE is initially measured at its cost.

Elements of Cost
1. Purchase price, including non-refundable purchase taxes, after deducting trade
discounts and rebates.
2. Costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by the management.
3. Present value of decommissioning and restoration costs to the extent that they are
recognized as obligation
Examples of directly attributable costs

• Costs of employee benefits arising directly from the construction or acquisition of PPE;
• Costs of site preparation;
• Initial delivery and handling costs (e.g., freight costs);
• Installation and assembly costs;
• Testing costs, net of disposal proceeds of samples generated during testing; and
• Professional fees.
Cessation of capitalizing costs to PPE

• Recognition of 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.
Measurement of Cost

• The cost of an item of PPE is the cash price equivalent at the recognition date. If
payment is deferred beyond normal credit terms, the difference between the cash price
equivalent and the total payment is recognized as interest over the period of credit
unless such interest is capitalized in accordance with PAS 23 Borrowing Costs.
Acquisition through exchange

• If the exchange has commercial substance, the asset received from the exchange is
measured using the following order of priority:
a. Fair value of asset Given up
b. Fair value of asset Received
c. Carrying amount of asset Given up
 • If the exchange lacks commercial substance, the asset received from the exchange is
measured at (C) above.
Subsequent measurement

• Subsequent to initial recognition, an entity shall choose either:

(a) the cost model or
(b) the revaluation models
• As its accounting policy and shall apply that policy to an entire class of PPE.
Cost Model

• After recognition, an item of PPE is measured at its cost less any accumulated
depreciation and any accumulated impairment losses.
Depreciation

• Depreciation is the systematic allocation of the depreciable amount of an asset over its
estimated useful life.
• When computing for depreciation, each part of an item of PPE with a cost that is
significant in relation to the total cost of the item shall be depreciated separately.
• Depreciation begins when the asset is available for use, i.e., when it is in the location
and condition necessary for it to be capable of operating in the manner intended by
management.
• Depreciation ceases when the asset is derecognized or when it is classified as “held for
sale” under PFRS 5, whichever comes earlier.
Selection of depreciation method

• There are various methods of depreciation. The entity shall select the method that most
closely reflects the expected pattern of consumption of the future economic
benefits embodied in the asset.
• However, a depreciation method that is based on revenue that is generated by an
activity that includes the use of an asset is not appropriate.
The Straight-line method of Depreciation
Straight line method – depreciation is recognized evenly over the life of the asset by dividing
the depreciable amount by the estimated useful life.
Depreciation = (Historical cost – Residual value) ÷
Estimated useful life
Changes in depreciation method, useful life, and residual value

• A change in depreciation method, useful life, or residual value is a change in accounting

estimate accounted for prospectively.
• Prospective accounting means the change affects only the current period and/or future
periods. The change does not affect past periods.
Revaluation Model

• After recognition as an asset, an item of PPE whose fair value can be measured reliably
shall be carried at a revalued amount, being its fair value at the date of the revaluation
less any subsequent accumulated depreciation and subsequent accumulated
impairment losses.
Revaluation surplus
Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx
The fair value is determined using an appropriate valuation technique, taking into account the
principles set forth under PFRS 13.
Frequency of revaluation

• For items with significant and volatile changes in fair value, annual revaluation is
necessary. For items with insignificant changes in fair value, revaluation may be made
every 3 or 5 years.
Revaluation applied to all assets in a class

• If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall
be revalued.
• The items within a class of PPE are revalued simultaneously to avoid selective
revaluation of assets and the reporting of amounts in the financial statements that are a
mixture of costs and values as at different dates.

Subsequent accounting for revaluation surplus

• Revaluation is initially recognized in other comprehensive income unless the

revaluation represents impairment loss or reversal of impairment loss, in which case it is
recognized in profit or loss.
• Subsequently, the revaluation surplus is accounted for as follows:
1. If the revalued asset is non-depreciable, the revaluation surplus accumulated
in equity is transferred directly to retained earnings when the asset is
derecognized.
2. If the revalued asset is depreciable, a portion of the revaluation surplus may
be transferred periodically to retained earnings as the asset is being used.
Derecognition

• The carrying amount of an item or PPE shall be derecognized:

a. On disposal; or
b. When no future economic benefits are expected from its use or disposal
 PAS 19 EMPLOYEE BENEFITS
Employee benefits

• Employee benefits are “all forms of consideration given by an entity in exchange for
service rendered by employees.”
Four categories of employee benefits under PAS 19
1. Short-term employee benefits
2. Post-employment benefits
3. Other long-term employee benefits
4. Termination benefits.
Short-term employee benefits

• Short-term employee benefits are employee benefits (other than termination benefits)
that are due to be settled within 12 months after the end of the period in which the
employees render the related service.
Recognition and measurement

• When an employee has rendered service to an entity during an accounting period, the
entity shall recognize the undiscounted amount of short-term employee benefits
expected to be paid in exchange for that service:
1. As a liability (accrued expense), after deducting any amount already paid.
2. As an asset (prepaid expense) if the amount paid is in excess of the
undiscounted amount of the benefits incurred; provided, the prepayment will lead
to a reduction in future payments or a cash refund; and
3. As an expense, unless the employee benefit forms part of the cost of an asset,
e.g., as part of the cost of inventories or property, plant and equipment.
Short-term compensated absences

• Accumulating compensated absences are those that are carried forward and can be
used in future periods if the current period’s entitlement is not used in full. Accumulating
compensated absences may either be
1. Vesting – wherein employees are entitled to a cash payment for unused
entitlement on leaving the entity; or
2. Non-vesting – wherein employees are not entitled to a cash payment for
unused entitlement on leaving the entity
• Non-accumulating compensated absences are those that are not carried forward. No
liability or expense is recognized until the absences occur, because employee service
does not increase the amount of the benefit.
The expected cost of compensation absence is recognized as follows:
Accumulating
➢ When the employees render service that increases their entitlement to future
compensated absences.
Non-accumulating
➢ When the absences occur.
Post-employment benefits

• Post-employment benefits are employee benefits (other than termination benefits) that
are payable after the completion of employment. Post-employment benefit plans are
classified as either:
1. Defined contribution plans
2. Defined benefit plans
Defined contribution vs. Defined benefit

Defined contribution plan Define benefit plan

The employer commits to contribute to a fund
which will be used to pay for the retirement
benefits of the employees
Risk that retirement benefit may be insufficient
rests with the employee
The employer commits to pay retiring
employees a definite amount
Risk that the retirement benefit may be
insufficient with the employer

Other relevant terms

Contributory Non-contributory

Both the employee and employer contribute for Only the employer contributes for the
the retirement benefits of the employee. retirement benefits of the employee.

Funded Unfunded

A fund is transferred to a trustee who will No fund is transferred to a trustee

manage the fund. The employer retains the obligation of paying
The trustee assumes obligation of paying retirement benefits to employees.
retirement benefits out from the fund and
directly to retiring employees.

Accounting for defined contribution plan

• The accounting for defined contribution plans is straightforward because the reporting
entity’s obligation for each period is determined by the amounts to be contributed for that
period. Consequently, no actuarial assumptions are required to measure the
obligation or the expense and there is no possibility of any actuarial gain or loss.
Accounting for Defined benefit plan

• The accounting for defined benefit plans is complex because actuarial assumptions
are required to measure the obligation and the expense and there is a possibility of
actuarial gains and losses.
• Obligations are measured on a discounted basis.
Accounting procedures for defined benefit plans
Step #1: Determine the deficit or surplus
(Deficit) Surplus = FVPA – PV of DBO
Step #2: Determine the Net defined benefit liability (asset)
➢ If there is a deficit, the deficit is the Net defined benefit liability.
➢ If there is a surplus, the Net defined benefit asset is the lower of the surplus and the
asset ceiling.
The asset ceiling is the present value of any economic benefits available in the form of refunds
from the plan or reductions in future contributions to the plan.
Step #3: Determine the defined benefit cost

Definition of terms
1. Current service cost – is the increase in the present value of a defined benefit
obligation resulting from employee service in the current period.
2. Past service cost – is the change in the present value of the defined benefit obligation
resulting from a plan amendment or curtailment.
3. Gain or loss on settlement – the difference between the present value of the defined
benefit obligation and the settlement price.
4. Interest cost on the defined benefit obligation – is the increase during a period in the
present value of a defined benefit obligation which arises because the benefits are one
period closer to settlement.
5. Actuarial gains and losses – are changes in the present value of the defined benefit
obligation resulting from experience adjustments and the effects of changes in actuarial
assumptions.
Actuarial assumption – Discount rate

• Actuarial assumptions are an entity’s best estimates of the variables that will determine
the ultimate cost of providing post-employment benefits.
1. Demographic assumptions about the future characteristics of employees who are
eligible for benefits. Demographic assumptions deal with matters such as:
a. Mortality, both during and after employment
b. Rates of employee turnover, disability and early retirement
c. The proportion of plan members with dependents who will be eligible for benefits
d. Claim rates under medical plans
 2 Financial assumptions, dealing with items such as:
a. The discount rates
b. Future salary and benefit levels
c. Future medical costs, if any, including cost of administering claims and payments
d. The expected rate of return on plan assets
Other long-term employee benefits

• Other long-term employee benefits are employee benefits (other than post-employment
benefits and termination benefits) that are due to be settled beyond 12 months after the
end of the period in which the employees render the related service.
• Other long-term employee benefits are accounted for using the procedures applicable
for a defined benefit plan. However, all of the components of the net benefit cost are
recognized in profit or loss.
Termination benefits

• Termination benefits are employee benefits provided in exchange for the termination of
an employee’s employment as a result of either:
a. An entity’s decision to terminate an employee’s employment before the normal
retirement date; or
b. An employee’s decision to accept an entity’s offer of benefits in exchange for the
termination of employment.
Measurement

• Termination benefits are initially and subsequently recognized in accordance with the
nature of the employee benefit.
a. If the termination benefits are payable within 12 months, the entity shall account
for the termination benefits similarly with short-term employee benefits.
b. If the termination benefits are payable beyond 12 months, the entity shall
account for the termination benefits similarly with other long-term benefits.
c. If the termination benefits are, in substance, enhancement to post-employment
benefits, the entity shall account for the benefits as post-employment benefits.

PAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF

GOVERNMENT ASSISTANCE

Definition

• Government grants are assistance received from the government in the form of
transfers of resources in exchange for compliance with certain conditions.
• Government grants exclude government assistance whose value cannot be reasonably
measured or cannot be distinguished from the entity’s normal trading transactions.
Examples of Government Grants
a. Receipt of cash, land, or other non-cash assets from the government subject to
compliance with certain conditions
b. Receipt of financial aid in case of loss from a calamity
c. Forgiveness of an existing loan from the government
d. Benefit of a government loan with below-market rate of interest
• The following are not government grants:
a. Tax benefits,
b. Free technical or marketing advice,
c. Provision of guarantees,
d. Government procurement policy that is responsible for a portion of the entity’s sales, and
e. Public improvements that benefit the entire community.
Recognition

• Government grants are recognized if there is reasonable assurance that:

The attached conditions will be complied with; and
The grants will be received.
Classifications of government grants according to attached condition
a. Grants related to assets – grants whose primary condition is that an entity qualifying
for them should purchase, construct or otherwise acquire long-term assets.
b. Grants related to income – grants other than those related to assets.
Initial measurement

• Monetary grants are measured at the

a. amount of cash received; or
b. the fair value of amount receivable; or
c. carrying amount of loan payable to government for which repayment is
forgiven; or
d. discount on loan payable to government at a below-market rate of interest.
• Non-monetary grants (e.g., land and other resources) are measured at the
a. fair value of non-monetary asset received.
b. Alternatively, at nominal amount or zero, plus direct costs incurred in preparing
the asset for its intended use.
Accounting for Gov’t. Grants

• The main concept in accounting for gov’t. grants are the MATCHING CONCEPT.
• This means that the gov’t. grant is recognized as income as the entity recognizes as
expense the related cost for which the grant is intended to compensate.
Presentation of Government grants related to assets

• Government grants related to assets are presented in the statement of financial position
either by:
a. Gross presentation –the grant is presented as deferred income (liability); or
b. Net presentation – the grant is deducted when computing for the carrying amount
of the asset.

Repayment of Gov’t. Grants

• A government grant that becomes repayable is accounted for as a change in accounting

estimate that is treated prospectively under PAS 8.