Professional Documents
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lOMoARPSD2 44 27
lOMoARPD2 44 27
OVERVIEW OF ACCOUTING
- FSby
Valued
•
are mixture of fact and opinion
Opinion – measurement affected by estimates
Valued by Fact – measurement not affected by estimates
•
3. Communicating – transferring economic data into useful accounting information for dissemination
and interpretati
interpretation
on
Three Aspects of Communicating Process in Accounting:
1. Recording – writing the accountable events through journal entry
2. Classifying – grouping of similar items into their respective classes through posting
3. Summarizing – expressing in condensed form which include preparations of accounting reports
NOTE: Interpreting the processed information is computing of financial statement ratios.
ACCOUNTING CONCEPTS - principles upon which the accounting process is based (accounting
assumptions or accounting theory)Downloaded by Wineter pyro25 (winterpyro5@gmail.com)
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• Accounting Research – careful analysis of economic events and other variables to understand
their impact of decisions
Selection of appropriate accounting policies is the entity9s management responsibility. However, the
proper application
application of accounting principles is the accountant 9s responsibility.
International Accounting Standards Board (IASB) – standard setting body of the IFRS Foundation
with the main objectives of developing and promoting global accounting standards. Standards issued:
• International Financial Reporting Standards (IFRS)
• International Accounting Standards (IASs)
• Interpretations Downloaded by Wineter pyro25 (winterpyro5@gmail.com)
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The move to IFRS was primarily brought by the increasing acceptance of IFRSs world-wide and
increasing internalization of business thereby increasing the need for a common financial reporting
standards that minimize, if not eliminate, inconsistencies of financial reporting among nations
Norwalk Agreement – a memorandum of FASB (USA) and IASB to produce a single set of global
accounting standards, in which they agree to make financial reporting standards that are:
a. Fully compatible; and
b. Coordinate future work programs
Changes to reporting standards are primarily made in response to users9 needs and continually provide
useful information.
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Prescribes the concept for general purpose financial reporting to assist IASB in developing standards,
assist prepares in developing consistent accounting policies when no standard applies to a transaction
and assist all parties in understanding and interpreting standards.
CONCEPTUAL FRAMEWORK
• Provide foundation for the development of standards that promote transparency, strengthen
accountability, and contribute to economics efficiency
• Do not provide
provide requirements for specific transactions or events
• Conceptual framework is not a standard. Any conflict between the two, standard will prevail.
• Use the hierarchy of standard for guidance in authoritative status. (See PAS
PAS 2 for reference)
• This can be revised but not automatically result
resul t to change of Standards not until the IASB due
due
process
• Scope of Conceptual Framework:
QUALITATIVE CHARACTERISTICS
Identifies the most useful information to primary users in making decisions using entity9s financial report
Applicable to information in FS and to financial information provided in other ways
1. Fundamental Qualitative Characteristics – information useful to users
Entity-specific
Entity-specific
•
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depiction)
➢ Completeness – must provide all information needed in understanding
➢ Neutrality – not manipulated or without bias
➢ Free from Error – accurate but not precise; supported by prudence (use of caution when
making judgment)
2. Enhancing Qualitative Characteristics – enhance usefulness of information
a. Comparability – to identify similarities and differences of different information through intra-
comparability or inter-comparability
inter-comparability
b. Verifiability – different users should reach a general agreement
i. Direct verification – can be observe directly (e.g., counting of cash)
ii. Indirect verification – redo the methodology used by the entity
c. Timeliness – available to users on time
d. Understandability – presented in clear and concise manner but does not mean excluding
complex matter
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• Assets – present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.
RECOGNITION
• Items are recognized if it meets the two criteria:
➢ Meets the definition o off financial element; and
➢ Provides useful information (relevance and faithfully represented information)
• An asset (liabilit
(liability)
y) can exist even if producing (transferring)
(transferr ing) benefits has low probability, but can
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•
affect the recognition,
Unresolve how itorisliability
dispute of asset measured, what and
will mostly how
affect theinformation
recognitionis provided
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• Existence uncertainty and low probability of an inflow or outflow o off economic benefits may result in
but does not automatically lead to the non-recognition of asset or liability. Other factors should be
considered.
• Measurement uncertainty
➢ Exist if the asset or liability needs to be estimated
estimate d
➢ High level of measurement uncertainty does not necessarily lead to non-recognition if it provides
relevant information and is clearly and accurately described and explained
➢ However, it can lead to non-recognition if making estimate is exceptionally difficult or subjective
(can affect faithful representation) or especially if one or more of the circumstances exist:
▪ Exceptionally wide range of possible outcome and is difficult to estimate
▪ Highly sensitive to small changes
▪ Exceptionally subjective allocations of cash flows that do not relate solely to the asset or
liability being measured
DERECOGNITION
• Removal of previously recognized asset or liability when the item no longer meets its definition
• Derecognizes asset or liability that have expired, consumed, collected, fulfilled or transferred and
continues to recognize any assets or liabilities that have retained after derecognizing
Unit of Account is <the right or the group of rights, the obligation or the group of obligations, or the
group of rights and obligations, to which recognition criteria and measurement concept are applied9
MEASUREMENT
• Measurement basis is needed since recognition requires quantifying item in monetary terms.
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➢ Value in Use - present value of economic benefits from the use or ultimate disposal of
asset
➢ Fulfillment Value - present value of economic resources to transfer or fulfilling liability
Both do not include transaction cost from acquiring or incurring, but include transaction cost of
disposal or fulfillment
• Current Cost – cost at the measurement date plus (minus) transaction cost at that date
Entry Values Exit Values
Historical cost and current cost Fair value, value in use and fulfillm
fulfillment
ent value
Reflect prices in acquiring assets or Reflect prices in selling or using an asset or
incurring liability transferring or fulfilling a liability
b. Considerations of other factors rather than only a single isolated factor. Example:
Faithful representation. If measurement of uncertainty is high to a particular measurement
•
Definition Example
➢ Sorting elements of FS with similar
Classification Accounts receivable
nature, function and measurement basis
➢ When asset and liability with separate
units of accounts are combined and only Accounts receivable and accounts
Offsetting the net amount is presented payable are netted and presented in
➢ Combines dissimilar items, hence not an net amount
appropriate practice
➢ Adding together of FS elements that All receivables (e.g., accounts
characteristics and are included in
share characteristics receivable, interest receivables) are
Aggregation
the same classification aggregated and presented under
➢ Summarizes large volume of detail <Trade and other receivables=
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➢ Both capital maintenances exclude the distributions to, contributions from owners during the period.
➢ Capital Maintenance is essential
essential in distinguishing between return on capital and return of capital.
expense, they are not recognized in profit or loss under certain concepts of capital maintenance.
Accordingly, these items are included in equity as capital maintenance adjustments or revaluation
reserves.
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It prescribes the basis for the presentation of general purpose financial statements, its structure
guidelines and content9s minimum requirements to ensure comparability (inter-comparability and intra-
comparability). The terminology of PAS 1 is suitable for profit-oriented entities.
Financial Statements
• Structured presentation of an entity9s financial position and result of its operation
• Pertain only to the entity not the industry
• General purpose financial statements – cater most of the common needs of a wide range of external
users (cannot demand specific reports for their own needs)
Purpose of Financial Statements
• To provide useful information useful to a wide range of users in making economic decision
• To show result of management stewardship over the entity9s resources
Complete Set of General Purpose Financial Reporting Statement
1. Statement of Financial Position (or Balance
Downloaded Sheet)
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2. Statement of Profit or loss and other comprehensive income (not the same as income statement)
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Conceptual
Notes Framework and Accounting Standards
b. Two statements:
1. statement of
of profit or loss (income statement)
2. statement presenting comprehensive income
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Profit or Loss
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NOTES
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PAS 2 INVENTORIES
Determination of costs to recognize as asset to expense is the primary issue in accounting inventories.
Hence, PAS 2 provides guidance in the determination of costs of inventories, including use of cost
formulas, and their subsequent measurement and recognition as asset then expense.
Inventories as assets
• Finished goods
• Work in progress
• Raw materials and manufacturing supplies
MEASUREMENT OF INVENTORIES
Inventory is not always valued at its <cost= price.
Measurement of Inventories
Exception to the measurement:
a. Producers of agricultural, forest products,
minerals and mineral products measured at
NRV of the practices in those industries Lower of Cost Net Realizable Value
b. Commodity if dealers and brokers measured
at fair value less costs of sell LCNRV
Cost of Inventories
• Purchase cost – trade discounts, rebates, and other Excluded in Cost
similar items are deducted to purchase cost •Abnormal waste
• Conversion cost – costs in converting raw materials into •Storage cost (but include those
finished goods (e.g., labor and production, exclude direct necessary in the production
materials because it is already included in purchase cost) process)
• Other cost necessary in bringing inventories to their
•Administrative overheads
present location and condition (e.g., costs of factory
management and maintenance cost of machines)
When a purchase transaction effectively contains a financing element, such as when payment
of the purchase price is deferred, the difference between the purchase price for normal credit terms and
the amount paid is recognized as interest expense over the period of financing
COST FORMULAS
• Deal with the computation of cost of sales or cost of goods sold and the en
ending
ding inventory.
• Applies matching concept
• Considered cost flow assumptions. Therefore, not necessarily the actual flow of inventory.
12 | P a g e
lOMoARPD2 44 27
yes no
Formula:
ÿĉĊ = ăý
ý ÿĉĊ Ćĉĉ
ăý ċĊĉ
NOTE:
➢ Use the same cost formula for inventories with simi
similar
lar nature and use, unless it9s different.
➢ Last-In-First-Out not permitted.
➢ TGAS – Total Goods Available on Sale
Written in an item-by-item basis; some circumstances may be appropriate to group similar item
•
Reversal of write-down shall not exceed original write-down. Therefore, the inventory shown in
•
Note: Total inventory shown in FS must be the lowest cost (lower of cost or NRV)
Presented in cash basis – income (expense) is recognized only when collected (paid). Hence, only
transaction that affected cash and cash equivalent are reported; non-cash are excluded.
13 | P a g e
Presented either:
1. Direct Method – classifying
Presented in gross amount,
amount, Presented in gross amount,
amount,
gross cash receipts and gross
cash payments unless they qualify for net unless they qualify for net
2. Indirect Method – accrual presentation: presentation
presentation::
method of P/L before tax is On behalf of customers
• On behalf of customers
•
non-cash items and operating amounts, short maturity amounts, short maturity
assets and liabilities changes
PAS 7 does not require any particular method. But it encourages direct method because it
provides information that may be useful in estimating cash flows. In practice, indirect method is
commonly used because it is easier to apply.
INDIRECT METHOD
Asset other than cash Liabilities
➢ Increase Asset → Deduct ➢ Increase Liabilities → Add
➢ Decrease Asset → Add ➢ Decrease Liabilities → Deduct
•
Financing Activities – do not result to loss or obtaining control
Entities except financial institutions may classify Interest and Dividends as follows:
Cash Flows Option 1 Option 2 • Only those were received or paid are
Interest income received Operating Investing included.
Interest expense paid Operating Financing • Only option 1 is for financial institutions
Dividend income received Operating Investing • In CPABE, when problem is silent, use
Dividend paid to owners Financing Operating option 1
beginning
and the end of the period. But, separate from
activities section.
Additional Term:
•Treasury Bill – short term
financial instrument that 14 | P a g e
investors are lending money
to the government and interest
is acquired on maturity date
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lOMoARPD2 44 27
PAS 8 prescribes criteria for selecting, applying, and changing accounting policies and the
accounting and disclosure of changes in accounting policies, changes in accounting estimates, and
correction of prior period errors. Intended to enhance relevance, reliability and comparability of FS.
Retrospective Prospective
Adjusting the opening balance of the prior period Recognizing the effects of change in profit or
that is used for comparison to the current period as loss in the period of change and/or future
if new accounting policy has always been applied period; not the beginning balance
Only from this day onward and does not
Going back to prior periods to restate FS
restate the previous FS
• Retrospective application – applying new policy • Prospective application – applying new
to prior period policy in current
• Retrospective restatement – correcting error of • Prospective restatement – correcting error in
prior period current
It is impracticable if the prior period effects:
•Cannot be determined in the current period
•Requires significant estimates and
assumptions
Impracticable – cannot be done after making reasonable efforts
1. Transitional provision in a
g t PFRS; if any 1. Retrospective
n
it n
e 2. Retrospective restatement
n m
u t application; in the Prospective application 2. Prospective
o a
c e
r absence of 1 restatement ; if 1 is
c T 3. Prospective application; if
A impractical
2 is impractical Downloaded by Wineter pyro25 (winterpyro5@gmail.com)
➢ If a change is difficult to distinguish
distinguis h between accounting policies and accounting estimates, the
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Accounting Policies
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PAS 8 requires consistent selecting and application of accounting policies. When selecting and
applying, an entity shall refer to hierarchy of reporting standards.
1. PFRSs
2. Judgment
When making the judgment the management:
➢ shall consider:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
➢ may consider:
a. Pronouncement issued by other standard-setting bodies
b. Other accounting literature and industry practices
Errors
An FS do not comply to PFRS if they contain either material (can cause FS misstated) or immaterial
errors made intentionally to achieve a particular presentation. This is considered fraud. Errors can be:
• Errors of commission – doing something wrong
• Errors of omission – not doing something that should have been done
Type of errors according to period occurrence
• Current period errors – errors of current period; corrected by correcting entries
• Prior period errors – errors of one or more prior period; corrected by retrospective
restatement, if impracticable, prospective application is allowed
Both are discovered either during the current period or after but before FS are authorized for issue.
PAS 10 prescribes the accounting for, and disclosures of, events after the reporting period,
including disclosures regarding the date when the FS were authorized for issue.
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➢ Assets9 carrying amount > tax base; or ➢ Assets9 carrying amount < tax base; or
➢ Financial Income > Taxable income ➢ Financial Income < Taxable Income
If multiplied to tax rate, results to deferred If multiplied to tax rrate,
ate, results to deferred
tax liability tax asset
➢ Deferred tax is the difference of assets (income) and tax base (income tax). PAS 12 requires
use of asset-liability method
➢ Deferred taxes are presented separately as non-current in a classified FS.
➢ PAS 12 prohibits the discounting of deferred taxes.
➢ Temporary differences include timing differences – the timing or period of income and
expenses recognition differs between financial reporting and taxation
If DT liability > DT assets, their difference is deferred tax expense
expense..
If DT liab
liabilit
ilit < DT aasset
ssets s their
their di
differe
fference
nce is deferred tax income
17 | P a g e
PAS 12 permits offsetting of current tax assets and liabilities only if:
➢ Legally enforceable right;
Characteristics of PPE
Recognition
a. Tangible assets;
1. Future economic benefits will flow to the entity; and
b. Used in normal operation; and
2. Cost can be measured reliably
c. Long-term in use (>1 yr.)
• Spare-parts, stand-by equipment and servicing equipment are PPE if it meets its definition. If not,
then recognized as inventory.
• Safety and environmental equipment are PPE. It does not increase the future benefits, but it is
necessary in obtaining future benefits of other assets.
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Initial Measureme
Measurement nt
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Measured at cost
a. Purchase price
b. Direct costs of bringing the asset to the location and condition
c. Initial estimate of dismantlement, removal and site restoration costs
Except cost of opening new facility, introducing new product or service, new business location or new
class customers, and administration and general overheads.
• Recognition of initial cost stops when the item is in the location and condition necessary
• Cost of PPE is the cash equivalent at the recognition date. If deferred payment (installment), the
excess amount is interest.
• Acquisition through exchange:
Additional
1. Cost Cost
Replacement
➢ Replaced parts carrying amount is derecognized as loss
➢ If replaced part cannot be determined, replacement part is used as indication
2. Major Inspections
➢ Ma or ins ection
ection cost
cost is ca italiz
italized
ed wh
while
ile reviou
revious
s in
ins
s ect
ection
ion cos
costt is de
derec
reco
o nized
nized
18 | P a g e
a. Cost Model
b. Revaluation Model
Entity can choose either the two, and then applies the accounting policy to an entire class of PPE
COST MODEL - cost less any accumulated depreciation and any accumulated impairment losses
Depreciation
•Each significant part of item of PPE is depreciated separately.
•Depreciation is recognized as expense, unless it is included in the cost of producing another asset.
•Depreciation starts when used.
•Depreciation stops when:
a. Derecognized (sold or disposed); or
b. Classified as held for sale; or
c. Fully depreciated; however, if the residual value decreases below the carrying amount, the
decrease is recognized as an additional depreciation
•Carrying amount (Book Value) – recognized asset amount after deducting accumulated depreciation
and impairment loss
• Depreciation does not cease when the asset becomes idle or is retired from active use.
• Land and building are accounted separately. Land is not depreciated while building is depreciated.
Depreciation Methods ➢ Does not prescribe any method. It depends on the
• Straight-line
Straight-l ine Method management9s judgment, but the choice must be the method
ÿĉĊČ ċ that best reflects the expected pattern of consumption.
ĉċ ➢ Prohibits the use of depreciation based on revenue
• Diminishing
Diminishin g Balance Method ➢ Requires annual review of depreciation method, useful life
• Units of Production Method and
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accounting estimates
REVALUATION MODEL
•Fair value less any subsequent accumulated depreciation and impairment losses
•
Frequency of revaluation:
➢ If fair value fluctuates significantly, annually
➢ If fair value does not fluctuate significantly, every 3-5 years.
• Revaluation applied to entire class of PPE
• Revalued simultaneously. If not possible, use rolling basis (i.e., one asset after another)
Impairment Impairment
Gain
After revaluation, depreciation will be based on its fair value Loss
Fair Value xx
Divided by: Remaining useful life (xx)
Annual Depreciation
Depreciati on xx
Subsequent accounting for revaluation surplus
➢ Non-depreciabl
Non-depreciable e revalued asset, transferred directly to retained earning when derecognized
➢ If depreciable, a portion is transferred periodically
periodical ly to retained earning when used
or
Depreciation
Depreciati on based on revalued carrying amount
Less: Depreciation based on original cost
xx
(xx) ČċĊ ċĈĆċĉ
Revaluation surplus transferred each year xx
ĉċ
19 | P a g e
Derecognition of PPE
a. It is disposal; or
b. No future economic benefits expected from the asset9s use or d isposal
Employee benefits are all forms of considerations given by an entity in exchange for service rendered
by employees.
Recognition
➢ Expense, when employees have rendered service unless it forms part of an asset
➢ Liabilities, if unpaid
➢ Asset, if payment exceeds the benefits
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POST-EMPLOYEE BENEFITS
•Payable after the completion of employment (e.g., retirement plans and pension plans)
Contributory Non-contributory
Both employee and employer contribute Only the employer contributes
Funded Non-funded
fund is transferred to a trustee to No fund is transferred to a trustee thus,
manage the fund and obliged to pay the the employer has obligations of paying
benefits; have third-party the benefits
20 | P a g e
If deficit,
➢deficit , then net defined benefit liability
➢ If surplus
surplus,, then net defined benefit asset is the lower of the surplus and asset ceiling
Presented in statement of financial position under non-current item.
Net interest on the net defined benefit liability (asset): (recognized in P/L)
(a) Interest cost on the DBO (
(
Āþ Ď %) xx
(b) Interest income on plan assets (
( Ăý Ď %) xx
(c) Interest on the effect of the asset ceiling
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Definition of Terms
1. Current Service Cost – increase in the PV of DBO resulting from employee service in current
period
2. Past Service Cost – change in the PV of DBO resulting from a plan amendment or curtailment
3. Gain or loss on settlement – difference between PV of DBO and the settlement price
4. Interest cost on the defined benefit liability (asset) – change in the net defined benefit liability
(asset) during the period that arises from the passage of time
5. Actuarial gain or loss – changes in PV of DBO resulting from changes in actuarial assumptions
Actuarial Assumption – give value or best estimate of the variables that will determine the
ultimate cost of providing post-employment benefits
1. Demographic assumptions – e.g., mortality, health condition
2. Financial assumptions – i.e., discount rate and future salary levels
Discount rate used to discount post-employment benefits obligation is based on high quality
corporate bonds. If no deep market, use government bonds.
6. Return on plan of assets – investment income earned by the plan assets during the year after
deducting the cost of managing the fund
TERMINATION BENEFITS
•Employer9s act of terminating an employee as a result, either:
➢Entity9s decision to terminate an employee before the normal retirement date; or
➢Employee9s decision to accept the benefits in exchange of termination
21 | P a g e
Conceptual
Notes Framework and Accounting Standards
Government grants are assistance received from the government in the form of transfers of
resources in exchange for compliance with certain conditions.
Recognition
a. Conditions will be complied; and
b. Grants will be received
Measurement
Monetary Grants Non-monet ary Grants
Non-monetary
➢ Amount of cash received; or ➢ Fair value of the non-monetary asset
➢ Fair value of a
amount
mount receivable received
➢ Alternatively, at nominal amount
Grants in the form of loan, such as:
➢ Forgivable loan measured the carrying amount of the loan forgiven
➢ Loan at below-market
below-marke t rate of interest or zero interest measured a
att the discounted amount
Accounting
➢ PAS 20 uses income approach in which grant is recognized in P/L.
➢ Not automatically that when you received the grant, it is recognized in P/L.j
➢ Uses matching concept
➢ Recognized in P/L in systematic basis as related condition expenses are recognized. Analyze the
recognition of income in the following cases:
a. Grants related to depreciable assets
b. Grants related to non-depreciable assets
c. Grants received as financial aid for expenses or losses
The depreciation method used for computing related must also be the same for computing grants.
Presentation of Grants related to assets
In statement of cash flows, the cash flows from the receipt of the grant and the purchase of the
related asset are presented separately, even if the entity uses the net presentation
Presentation of grants related to income
22 | P a g e
Repayment of Grants
Treated as change in accounting estimate
There are government assistances that are not recognized as government grants. These are whose:
1. Value cannot be reasonably measured; or
2. Cannot be distinguished from the entity9s normal trading transactions
Examples are:
a. Tax benefits
b. Free technical or marketing advice
c. Provision of guarantees
d. Government procurement policy that is responsible for a portion of the entity9s sales
If significant, only disclosed.
Functional Currency
•The currency of the primary economic environment in which the entity operates.
•The currency that is mostly used by the entity9s operation and not necessary the country9s currency
•Factors to consider:
➢ Currency of sales and cost
➢ Currency of cash flows from financing and operating activities
•Cannot be changed once determined, unless necessary. The changes are then treated prospectively.
•All currencies other than the entity9s functional currency are foreign currencies.
Presentation Currency – currency used in presenting FS
Monetary items - amount received or paid in fixed or determinable (e.g., cash, receivables, payables)
Non-monetary items - do not give rise to monetary items (e.g., inventories, prepaid assets, PPEs)
Exchange Differences – the difference of translating one currency into another currency at different
exchange rates
Recognition of exchange difference:
a. Monetary items – recognized in P/L
23 | P a g e
b. Nonmonetary items – recognition of exchange component is the same as how gain or loss are
identified, whether in OCI or P/L
• When foreign currency transaction occurred in one period and settles in another:
➢ Exchange difference between the transaction date and end of reporting period
➢ Then, exchange difference between the previous reporting period and settlement date.
FOREIGN OPERATIONS
A subsidiary, associated, joint venture or branch that is based in foreign country and using foreign
currency.
Before financial statements of the branch is incorporated to the FS of main branch or other necessary
translations (e.g., gov9t requirements) , it is translated using the procedures below.
Borrowing cost is capitalized to qualifying asset – long term to get ready for use or sale
Types of borrowing cost:
1. Interest expense
2. Finance charge on finance leases
3. Exchange differences on borrowings in foreign currencies
Other borrowing cost not used for qualifying asset is expense.
=
General borrowing – funds borrowed for multiple purposes
= .
.
24 | P a g e
lOMoARPD2 44 27
Related parties have the ability to affect the financial and operating decision of the other party through
control..
control, significance influence or joint control
DISCLOSURES
➢ Close Family Members
➢ Parent-subsidiary relationship
➢ Subsidiary discloses the parent name, even if no transaction happened in the period.
➢ Key management personnel – CEO, CFO, COO
➢ Discloses his compensation by breaking down respectivel
respectivelyy into: short-term, post-employment,
post-employment ,
other long-term, termination; and share-based payment
➢ Related party transaction
➢ Discloses:
a. Nature or related party relationship
b. Nature terms and amount of the transaction and outstanding balances
c. Doubtful debts on the outstanding balances
➢ Outstanding balances are disclosed in individual FS, and eliminated in consolidated FS.
➢ Government-related entities – entity that is controlled, jointly controlled or significantly influenced by
a government
➢ Discloses if there is related party transaction
a. Name of the gov9t and the nature of the relationship
b. Nature and amount of each individually
individuall y significant transaction
c. Other transactions that are collectively significant but are individually insignificant.
Questions:
1. What makes parties related and not related?
2. Elaborate significanc
significancee of related parties9 disclosures.
➢ Preparation of FS of retirement benefits plans to account and report all participants of the plan,
instead of individual. Hence, PAS 26 views retirement benefits plan as a reporting entity.
➢ Applies to all retirement benefits plan , except gov9t social security type arrangements and
employee benefits other than retirement benefits.
➢ Hybrid plans are considered defined
defined benefit plans.
FS of Defined Contribu
Contribution
tion Plan contains the ff.:
a. a statement of net asset available for benefits
b. a statement of changes in net asset available for benefits; and
c. accompanying notes to the FS
FS of Defined Benefit Plan contains either of the ff.: (actuarial report is needed)
1. a. net asset available for benefits
b. actuarial PV of promised retirement benefits, distinguishing vested and non-vested; and
c. resulting excess or deficit
2. statement of net asset aavailable
vailable for benefits including either:
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a. note disclosing the APV of PRV, distinguishi
distinguishing
ng vested or non vested benefits; or
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25 | P a g e
Questions:
1. Why defined contribution plan contains that info in FS, as well as the de
defined
fined benefit plan?
2. What makes defined benefit plan FS different from defined contribution plan FS?
• Accounting and disclosure requirements for investments in subsidiaries, associates and joint
ventures, when entity prepares separate FS
• No entity is mandated to produce
• Applicable if entity
entity chooses to prepare or is required by law
Entity shall apply the same accounting for each category of investment.
The measurement used for investment in separate FS is the same to non-separate FS.
Nature of relationship
Type of Investment Percentage of ownership interest with investee
Financial asset at FV <20% Regular investor
Investment in associate 20% - 50% Significant influence
Investment in subsidiary 51% - 100% Control
Investment in joint venture Contractually agreed sharing of control Joint control
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➢ Subsequent adjustment – share in the investee9s changes in equity (e.g. P/L, dividends, OCI)
On acquisition, investment cost and share of net fair value of are accounted as follows:
➢ If cost > FV, the excess is included in the carrying amount of the investment
➢ If cost < FV, dedeficiency
ficiency is included in income
If FS reporting period and accounting policies of the investee and investor do not coincide, investee
adjust his accounting policies before investor uses, and prepare FS that coincide to the investor
reporting period (difference should not exceed 3 months).
Question:
1. Why is investment in associate initially recognized as cost?
2. Explain the effect of P/L, dividends and OCI to investment in associate.
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Core principle
➢ Restate FS using the measuring unit current at the end of the period or General Price Index (GPI)
➢ Restate also the comparative FS, whether monetary or non-monetary items
➢ Prohibits the presentation of this information as a supplement to unrestated FS
Gain or loss on the net monetary position due to restatement (historical amount – restated amount) is
recognized in P/L.
Retained earnings – balancing figure after restatement
Question:
1. Why is FS restated in hyperinflation economy? Understatement of assets and overstatement of
income will happen and it can distort the comparison
2. How will you compute gain or loss on net monetary position?
Financial Instruments – any contract that give rise to a financial asset of one entity and a financial
liability or equity instrument of another entity
PAS 32 complement PFRS 9 Financial Instruments and PFRS 7 Financial Instruments: Disclosure
Presentation
Classifies financial instrument based on the substance of the contract and not its legal form.
Classification of Financial Instruments
Financial Assets Financial Liabilities Equity Instrument
Instrumentss
potentially favorable potentially
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OTHER
Puttable Instrument – holder9s right to return the instrument in exchange for financial asset or
automatically returned because of specified future event
- Classified as financial liabilities, except when it meets definition of equity instrument
Treasury Shares (Treasury Stocks) – entity9s own shares; reflect transactions to equity
Interest, Dividends, Losses and Gains that relate to:
➢ Financial liability are recognized as income or expenses in P/L
➢
Equity instruments are recognized directly in equity
Transaction cost from issuing:
➢ Financial liability are included in financial liabilities and subsequently amortized as P/L
➢ Equity instrument are deduction from equity
➢ Publicly-li
Publicly-listed
sted entities are required to present
Earnings Per Share – how much profit (loss) each ordinary shares (OS) earned
Ordinary share – subordinate to all other equity instrument
Preference share – prioritize over other classes of shares
Types of EPS
Basic EPS Dilutive EPS
➢ Actual outstanding OS ➢ Includes potential outstanding OS
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• Net Income is after tax Potential OS
• Preferred Shares 1. Convertible Preference Share
➢ Cumulative – deduct 1 yr., declared or not 2. Convertible Bonds Payable
➢ Non-cumulative – deduct declared 3. Options/Warrants
• Ave. Outstanding OS 4. Contingent Ordinary Shares
1. Shares issued
2. Subscribed shares Dilutive decreases EPS
3. Treasury shares Dilutive →included in DEPS computation
➢ Reacquired – deduct Antidilutive →ignored
➢ Reissued (sold) – add
Below are adjusted retrospectively until Test for Dilution:
issuance date: 1. PS/BP → convertible
4. Share-split – ex. 2-for-1 2.
−
ĉĊ=
5. Bonus issue – or stock dividend BEPS > Test dilutive
➢ →
6. Preemptive stock rights –or right issue BEPS≤ Test anti-dilutive
➢ →
- issuer is obliged to offer it to the existing Test for options/warrants
shareholder before offering it to the public ➢ MV of shares>option price →dilutive
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ĉĈĉ Ĉ
Ĉ Ď.ĈĊĉ
Ď. ĈĊĉ 1. Options/Warrants
+ ĆĈĉ
ĆĈĉ ĊĈ Ď.
Ď. ĈĊĉ 2. PS
ĎĈĊ= ċĊĉĊ
ċĊĉĊ
ĉĈ
ĉĈĉ
ĉ ĊĈ Ď.
Ď.
ĈĊĉ 3. BP
Adj. factor is multiplied to Ave. outs. OS
Entity with dilutive potential shares presents DEPS in addition to BEPS. If no dilutive, a BEPS is okay.
Question: Why are outstanding shares computed using no. of outstanding OS divided by 12 months?
Condensed FS
• Minimum
• Focus on providing info on significant events and transactions occurred since the latest annual
period
• Discloses compliance with PFRS, and other information that is relevant for the interim period
• If highly seasonal, discloses latest and comparatives 12-month period in addition to interim financial
report
• Presented in cumulative basis (year-to-end)
• Comparatives
➢ Statement of financial position – latest annual financial report
➢ Other FS – year-to-date period
Ex. Current Comparative
SFP June 30, 2021 Dec. 31, 2020
Other FS Sept. 30, 2021 Sept, 30, 2020
Materiality
Interim measurements may rely on estimates to greater extent than measurement of annual financial
data.
Recognition and measurement
• Same accounting policies as annual, except if there is changes
• Measurement is on year-to-date basis
• Two views of interim period:
1. Integral view – a part of annual report is included
2. Discrete view – only for the period
• Gains and losses are recognized immediately (discrete view) ex. write-downs, gov9t grants, dividends
• Cost and expenses (income) needs allocation (integral view) ex. depreciation, taxes
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CORE PRINCIPLE
• If CA of asset > recoverable amount, impaired
Recoverable amount (higher of FVLCD or VIN) xx
Less: Carrying Amount xx
Impairment Loss xx
• Assets are tested for impairment individually
Indications of Impairment
• Assess at the end of each reporting period, whether there is indication of impairment
• Indications:
External sources:
1. Significant decline in asset value
2. Significant change factors that affectbyrecoverable
Downloaded amount (ex. increase in market interest rates)
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3. CA of net asset > market capitalization
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Internal sources:
1. Obsolescence or physical damage for an asset
2. Significant change in use of assets that affect recoverable amount (ex. discontinuance)
discontin uance)
3. Evidence that asset9s economic performance is worse than expected
• If there is indication, it signify to review and adjusted remaining useful life, depreciation or
amortization method, or the residual value even if no impairment loss is recognized
Exercise: What is your generalization for indications of impairment?
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GOODWILL
• Goodwill = Purchase price – net assets FV
• Does not generate cash flow but contributes to cash flows of multiple CGUs
• Hence, tested for impairment only once allocated to the CGU expected to benefit from combination
• Goodwill from business combination is allocated to each of the acquirer9s CGU
Corporate Assets
• Assets other than good
goodwill
will contributing to future cash flows of both CGU under review and other
CGU
• Testing for impairment is same to goodwill
Exercise: Differentiate corporate asset from goodwill.
REVERSAL OF IMPAIRMENT
d. recoverable amount
• Recoverable amount of impaired asset > CA
• Indication of reversal is opposite of impairment
c. CA if no impairment loss
• Limitations of reversal: has been recognized
1. Increase of CA shall not n ot exceed ttoo CA after
regular depreciation b. CA on date of
of reversal
2. Never reserve impairment loss of goodwill ➢ d – c = reversal recognized in OCI, of revalued amount
➢ c – b = reversal recognized in P/L
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Exemption:
➢ Executory contracts, unless onerous
➢ Those covered by other standards
PROVISIONS
• a liabilit
liabilityy of uncertain timing or amount
• Estimated
• Ex. Warranty, restructuring cost, environmental damages (define restructuring)
• Presented in balance sheet separately from otherother types of liabilities (tr
(trade
ade payables, accruals,
contingent liabilities
• Reviewed at end of each reporting period
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• Recognition: lOMoARcPSD|33262263
EXERCISE: Why is asset disclosed when probable unlike liabilities that only disclosed when possible?
MEASUREMENT
Nature of the outflow Measurement Basis
General rule Best estimate
Involves a large population of items Expected value → probability weighted ave.
Each possible outcome in a range is
as likely as any other Mid-point of the range
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Conceptual
Notes Framework and Accounting Standards
RECOGNITION
a. Meets definition;
b. Probable future economic benefits; and
c. Cost can be measured reliably
NOTE:
•Prohibits reinstatement of cost
•Capitalization of cost stops when ready for its intended use
•Internally generated brands, mastheads, publishing titles, customer lists, goodwill and similar items
are not recognized as intangible assets
SUBSEQUENT MEASUREMENT
Either cost model or revaluation model and applies to entire class of intangible assets
Cost model – cost less accumulated amortization and impairment loss
•
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