FAR1
BOA- body authorized by law to promulgate rules and regulations
1. ASC- accounting is a service activity. Its function is to provide
quantitative information primarily financial in nature that is intended to
be useful in making economic decisions.
2. AICPA- accounting is the ART of recording, classifying,
summarizing(RCS--communication process)
3. AAA(statement of basic accounting theory)- PROCESS of identifying,
measuring, communicating(IMC)
4. Identifying as the analytical component
5. Measuring as the technical component
6. Communicating as the formal component
7. In order to be identifiable, a certain event must be quantifiable or
expressed in terms of a unit of measure. It must have an effect on Assets,
Liabilties, OE.
8. External transaction is also known as exchange transaction which
involves 2 entities. Example is payment of salaries to employees.
9. Internal transaction- production and casualty loss(unanticipated losses,
act of god)
10. Accounting is the language of business because of the communication
process.
11. Classifying- is accomplished by posting to the ledger
12. Summarizing- preparation of FS.
13. Accountants primary task is to supply financial information to
statement users so that they could make informed judgment and better
decision.
14. Rep. Act 9298- Philippine accountancy act of 2004 regulates the
practice of accountancy in the Phil.
15.
affecting the practice of the accountancy profession
16. Certificate of registration shall be issued if the registrant has acquired
a minimum of 3 years of meaningful experience in any areas of public
practice including taxation. It will be valid for 3 years, renewable every 3
years upon payment of required fees.
17. Management advisory services- business conduct and operations
18. Controller is the highest accounting officer
19. Accounting is essentially constructive in nature
20. Auditor examines FS to ascertain whether they are in conformity with
GAAP.
21. GAAP is a social process.
22. Development of GAAP is formalized initially through the creation of
ASC. The accounting standards promulgated by the ASC constitute the
GAAP.
23. SFAS is now known as PAS and PFRS
24. Accounting standards-proper accounting practice. It creates common
understanding.
25. FRSC replaces ASC
26. FRSC is the accounting standard setting body created by PRC upon
recommendation of BOA to assist the BOA in carrying out its powers and
functions provided under RA 9298. Main function is to esbalish and
improve accounting standards that will be generally accepted in the Phil.
27. FRSC is composed of 15 members with a chairman who had been or is
presently a senior accounting practitioner. 2 members from Public
practice, commerce and industry, academe, government.
28. The counterpart of PIC is the IFRIC in UK
29. IASC- improvement, harmonization and worldwide acceptance and
observance of accounting standards
30. IASB replaces IASC. It is a global phenomenon intended to bring about
great transparency and a higher degree of comparability in financial
reporting; one uniform and globally accepted financial reporting standard
31. Accounting assumptions- serve as the foundation or bedrock of
accounting to avoid misunderstanding. Known as postulates.
32. Accounting/fiscal period- 12months
33. Fiscal period could either be calendar or natural. If calendar, ends on
dec. 31. if natural, ends on any month when the business is at the lowest
or experiencing slack season.
34. Monetary Unit has 2 aspects, quantifiability and stability of
peso(current replacement cost is ignored). Sometimes, it is not
necessarily valid that peso is stable since there may be instances wherein
there is a considerable gap between historical and current replacement
cost. Entity should therefore choose whether cost model or revaluation
model they will apply to their entire class of PPE.
35. Framework for FS is promulgated by the IASB
36. Framework is the underlying theory for the development of
accounting standards and revision of previously issued accounting
standards. Assists FRSC, preparers of FS, users and auditors
41. Accounting concepts:
a. Entity theory= A=L+C (income statement)
b. Proprietary= A-L=C (statement of FP)
c. Residual equity= A-L-preference/OS=C
d. Fund Theory= Fund= Cash inflows-cash outflows (custody and
administration of funds)
42. Financial reporting= provision of financial information about an entity
to external users. Not just financial statements but also other means of
communicating information. It includes non-financial information.
43. Financial reporting objectives:
a. provide information useful in investment, credit, and similar
decision
b. cash flow prospects
c. resources and claims to those resources and changes in them.
44. Four principal qualitative characteristics:
a. relevance

37. Framework excludes special-purpose report such as prospectuses and b. reliability

tax computation c. understandability
38. FS largely portray the financial effects of past events and do not d. comparability
necessarily provide nonfinancial information. It shows the result of the
stewardship of management or the accountability of management for the 45. relevance and reliability relate to content and are primary qualities.
resources entrusted to it.
46. understandability and comparability relate to presentation and are
39. Management has the primary responsibility for the preparation of FS. secondary characteristics.

40. Capacity for adaption or financial flexibility- using the entitys
available cash for unexpected requirements and investment
opportunities. It is may be accomplished through raising cash at a short
notice through borrowing, sale of securities, disposal of assets without
disrupting normal operations
47. Relevance is affected by its nature and materiality. It helps users form
predictions and confirmations or revision to their expectation.
48. Ingredients of relevance are:
a. Predictive value
 b. feedback value 55. Immediate recognition of expense- reflects conservatism or prudence.
Revenue expenditure
c. Timeliness
56. Financial performance is determined using 2 approaches:
49. Reliability ingredients:
a. capital maintenance- net income occurs if capital is
a. Faithful representation-actual effects of transaction should be
maintained(single entry)
properly accounted for and reported
b. transaction approach- traditional preparation of income
b. Substance over form-
statement
c. Neutrality
57. 2 concepts of capital maintenance:
d. Conservatism or prudence
a. financial capital- based on historical host
e. Completeness- Standard of adequate disclosure(notes to FS)
b. physical capital-current cost
50. Understandability- Users are assumed to have a reasonable
knowledge of the economic activities and accounting and a willingness to
study the information with reasonable diligence Cash and cash equivalents

51. Accounting constraints: 1. Cash not just include currency and coins but also those that are
acceptable by bank for deposit or immediate encashment such as checks,
a. Timeliness
bank drafts and money orders.
b. Cost-benefit
2. Cash is measured at face value. Cash in foreign currency is
c. Materiality measured at current exchange rate

d. Balance between relevance and reliability
52. Materiality- doctrine of convenience. Quantitative threshold
53. An example of trade-off between relevance and reliability is when
entity reports quoted equity instruments at
54. . Information is relevant but not reliable. On the other hand, if
entity reports an instrument at cost, information is reliable but may not
be relevant.
54. Installment method- revenue is recognized at the point of collection.
Revenue is determined by multiplying the gross profit by amount of
collection
3. If the financial institution holding the funds of an entity is in
bankruptcy or financial difficulty, cash should be written down to
estimated realizable value if the amount recoverable is estimated to be
lower than face value
4. excess cash should be invested in revenue-earning investment
5. deposits in foreign investment which are subject to foreign
exchange restriction, if material, should be classified separately among
noncurrent assets and the restriction clearly indicated.
6. Details comprising cash and cash equivalents should be disclosed
in the notes to financial statements
7. the credit balance in the cash in bank account results from the
issuance of checks in excess of the depositsoverdraft
8. Overdraft is not permitted in the Philippines
9. if entity maintains two or more accounts in one bank and one
account results in an overdraft, such overdraft can be offset against the
other bank account with debit balance in order to show, cash, net of bank
overdraft
18. In imprest system, payment of expenses requires no formal
entries. Petty cashier generally requires a signed petty cash voucher for
such payments and prepares memo entry in the petty cash journal.
19. Petty cash disbursement should be replenished only by means of
check and not from undeposited collection

10. An overdraft can also be offset against the other bank account if 20. If not replenished, the entry is to state the correct cash fund is:
the amount is immaterial
expenses
11. if the deposit is legally restricted because of a formal
petty cash fund
compensating balance agreement, the compensating balance is classified
separately as cash held as compensating balance under current assets 21. Under fluctuating fund system, checks drawn to replenish the
if the related loan is short term, otherwise, it is classified as noncurrent fund do not necessarily equal the petty cash disbursement. Expenses are
investment immediately recorded and PCF fluctuates from to time.
12. In banking practice, checks become stale if not encashed within
6months from the time of issuance
Accounts Receivable
13. if stale check is immaterial, it is simply accounted for as a
miscellaneous income. 1. Account receivable is an open account not supported by a
promissory note. Also known as trade debtors
Cash
2. advances to affiliates are usually treated as a long-term
Miscellaneous Income investment
14. If material and liability is expected to continue, cash is restored 3. Creditors accounts with debit balances are classified as current
and liability is again set up assets.
15. Cash short/over Due from cashier Loss from 4. Special deposits on contract bids normally are classified as other
cash shortage noncurrent assets
Cash Cash short/over Cash short/over 5. Financial assets shall be recognized initially at fair value plus
transaction costs that are directly attributable to the acquisition. Fair
16. cash short/over account is a temporary account. When we already
value is usually the transaction price , fair value of the consideration given
know the cause of such shortage or overage, we then cancel d cash
short/over account and replace it with the real cause. 6. AR is subsequently measured at net realizable value or estimated
recoverable amount
17. Imprest system- system of control of cash which requires that all
cash receipts should be deposited intact and all cash disbursement should 7. assets shall not be carried at above their recoverable amount
be made by means of check.
8. freight collect means freight charge on the goods shipped is not
yet paid. Buyer pays for it
9. freight prepaid is already paid by the seller

10. AR 100,000 15. Correction of excessive allowance:

Freight-out 5,000 Allowance for DA 30T

Sales 100,000 Doubtful accounts 20T

Allow.for freight charge 5,000 Miscellaneous income 10T

Cash 93,000 16. if granting of credit and collection of accounts are under the
charge of the sales manager, doubtful accounts shall be considered as
Sales discount 2,000
distribution cost. If under an officer, it is administrative expense. In the
Allowance for freight charge 5,000 absence to the contrary it is admin expense.

Accounts receivable 100,000

Loan receivable

11. Sales return 1. Transaction costs that are directly attributable to the loan
receivable include direct origination cost.
Allowance for sales return
2. direct origination cost is an origination fee not chargeable against
the borrower
12. Net method(beyond the discount period): 3. Loan receivable 5M Cash 331,800
Cash 100,000 Unearned 100T

AR 95,000 Cash 5M Unearned Interest

331,800 Cash 100T
Sales discount forfeited(income) 5,000
Principal amount 5,000,000

Origination fees received ( 331,800)

13. Allowance method conforms with matching principle. AR is
properly measured at NRV Direct origination cost incurred 100,000

14. Reversal in Direct write-off: 4,768,200

AR Cash or if discovered in subsequent year: Cash

Bad debts AR *next step is to find the effective interest that would discount the
Miscellaneous Income principal amount and future interest payment to 4,768,200
* the discount on loan receivable is 231,800 to be amortized using Cash 8,000
effective interest method AR-assigned 1,000,000

Collection (900,000)
Receivable financing
Remittance from the bank:
1. Financial flexibility or capability of an entity to raise money out of its
Balance 100,000
receivables
Cash 85,880
2. Assignment of accounts receivable is transferring some of the rights in
AR to a lender called the assignee in consideration for a loan. It is formal, Interest expense(1%x212T) 2,120
evidenced by a financing agreement and a promissory note both of which
NP 212,000
the assignor assigns.
AR-assigned 300,000
3. Pledging is general because all AR serve as collateral for the loan.

4. in Nonnotification basis, customers are not informed that that their

AR 100,000
accounts have been assigned. As a result, they continue to make
payments to the assignor, who in turn remits collection to the assignee. AR-assigned 100,000
In notification basis, customers are notified to make their payments
directly to the assignee.

5. Assignee lends only a certain percentage of the face value of the 7. entity shall disclose its equity in the assigned accounts
accounts assigned because the assigned accounts may not be fully AR-assigned 1,000,000
realized by reason of such factors as sales discount, sales return, and
allowances and uncollectible accounts.] Less: NP 800,000

6. Notification: Equity 200,000

Note payable 588,000 NP

800,000

Sales discount 12,000 8. factoring is a sale of AR on a without recourse, notification basis.

Cash received (588,000) Factor assumes responsibility for uncollectible factored accounts. In
Accounts receivable assigned 600,000 assignment, assignor retains ownership of the accounts assigned.
Balance 212,000 9. Casual factoring- normal sale of accounts receivable, without other
deductions

Interest expense 8,000 10. Cash 365,000

 Sales disc 10,000 13. Dishonored notes shall be removed from the notes receivable account
and transferred to accounts receivable at an amount to include, if any,
Commission 25,000
interest and other charges.
Receivable from factor 100,000
Accounts receivable
Accounts receivable 500,000
Notes receivable

Interest Income
*Customer is subsequently allowed a credit of 50,000 for
14. When a note is negotiable, the payee may obtain cash before maturity
damaged merchandise:
date by discounting the note at a bank or other financing company. Payee
Sales returns and allowance 50,000 then becomes an endorser and the bank becomes the endorsee

Sales discount(2%x50T)
Receivable from factor
*final settlement:
Cash 51,000
Receivable from factor
1,000 15. Endorsement may be with recourse which means that the endorser
shall pay the endorsee if the maker dishonors the note. This is the
49,000 contingent or secondary liability of the endorser; or it could be without
recourse which means that the endorser avoids future liability even if the
maker refuses to pay the endorsee on the date of maturity. In the
absence to the contrary, endorsement is assumed to be with recourse.
51,000 16. Principal 1,000,000

Interest(1Mx12%x180/360) 60,000
11. if customer buys goods and uses a credit card, the credit card receipt MV(full term of the note) 1,060,000
must be forwarded by the retailer to the card issuer who will then pay the
retailer the appropriate amount minus credit service charge
Term of the note 180

Accounts receivable- Diners club 200T Less: Days expired from july 1 to aug.30 60

Sales 200T Discount period 120days

Cash 194,000

Credit card service charge 6,000 Discount: (1,060,000 x 15% x 120/360) 53,000

AR-diners club 200,000

12. Notes received from officers, employees, shareholders and affiliates Net proceeds: 1,060,000-53,000= 1,007,000
shall be designated separately
 Principal 1,000,000 Note receivable 1,000,000

Accrued interest(1Mx12%x60/360) 20,000

CV 1,020,000 *if the note is dishonored by the maker and the entity pays the
first bank the maturity value, plus protest fee and other bank charges of
40,000
Cash 1,007,000
Accounts receivable 1,100,000 NR discounted
Loss on NR discounting 13,000 1M

Notes receivable 1,000,000 Cash 1,100,000

Note receivable 1M
Interest Income 20,000

18. if the discounting is treated as secured borrowing, NR is not

17. If the discounting is with recourse, the transaction is accounted derecognized but instead an accounting liability is recorded at an amount
for as either conditional sale of note receivable recognizing contingent equal to the face amount of the NR discounted
liability and secured borrowing
Cash 1,007,000

Interest expense 13,000

a. conditional sale:
Liability for NR discounted 1,000,000
Cash 1,007,000
Interest income 20,000
Loss on NR discounting 13,000
no gain or loss because the discounting is borrowing
Note receivable discounted 1,000,000

Interest Income 20,000

19. If the note discounted is made by the party discounting, a primary
liability exists, not a contingent liability since in this case, the maker is the
*the note receivable discounted account is deducted from the total note one originally liable to the bamk for the loan obtained
receivable when preparing the balance sheet with disclosure of Cash 440,000
contingent liability
Discount on NP(500Tx12%) 60,000

Note payable-bank 500,000

*the note is paid by the maker to the first bank
20. Interest-bearing note- interest being included in the face value
NR discounted 1,000,000
21. Interest-bearing note, interest is compounded annually:
Note receivable 1M

Land 800T Face value 1,000,000

Gain on sale of land 200T Interest accrued 254,400

Accrued Interest receivable 120T Total 1,254,400

Interest income(12%x1M) 120T

Interest: 1,254,400x12% 150,528

2nd year:

Accrued IR 134,400 Noninterest bearing note:

Interest income 134,400 Note receivable 400,000

Sales 350,000

Face value 1,000,000 Unearned interest income 50,000

Interest accrued for 1st year 120,000

Total 1,120,000 Gross income: 350,000 cash price-280,000= 70,000

Cash 100,000

Interest: 1,120,000x12% 134,400 NR 100,000

Unearned interest income 20T *bond outstanding

method is used.

Interest income 20T

3rd year
Note receivable-current portion 100,000
Cash 1,404,928
Less: Unearned interest income 15,000
NR 1,000,00
85,000
Accrued IR 254,400

Interest income 150,528

Note receivable-noncurrent portion 200,000

Less: Unearned interest income 15,000 Inventories

CV 185,000 1. Inventories are assets which are held for sale in the ordinary
course of business, in the process of production for such a sale or in the
form of materials or supplies to be consumed in the production process
Noninterest-bearing note with down payment and ordinary annuity. Cash or in the rendering of services
price is not given
2. FOB destination and shipping point determine ownership of
goods and the party who is supposed to pay the freight charge

Cash 100,000 3. freight collect and freight prepaid determine the party who
actually paid the freight charge.
NR 300,000
4. FAS- free alongside. Seller bears all expenses and risk in delivering
Equipment 250,000 the goods to the dock. The nuyer bears the cost of loading and shipment
Gain on sale of equipment 98,690 and thus, title passes to the buyer when the carrier takes possession of
the goods.
Unearned 51,310
5. Consigned goods are recorded by the consignor by means of
memorandum entry
Unearned interest income 24,869 6. Inventories shall be presented as one line item but the details of
Interest income 24,869 the inventories shall be disclosed in the notes to FSfinished goods,
goods in process, raw materials, and manufacturing supplies.

7. Inventory shortage is usually closed to cost of goods sold because

*effective interest is used using the prevailing market interest. this often the result of normal shrinkage. If abnormal and material,
shortage shall be separately classified and presented as other expense.

8. Net method( if the discount period has expired):

Purchase discount lost

AP

9. gross method is more practical than net method. Net method has
theoreticall correct historical cost

10. Cost if inventories:

a. cost of purchase
b. cost of conversion 6. Inventories are usually written down to NRV on an item by item or
individual basis. It is not appropriate to write down inventories based on a
c. other cost in bring the inventories to their present location and
classification of inventory
condition.
7. Direct method- inventory is recorded at the lower of cost or NRV.
11. Cost of purchase includes purchase price, import duties,
Any loss on inventory writedown is not accounted for separately but
irrecoverable taxes, freight, handling and other costs directly attributable
buried in the cost of goods sold
to the acquisition of finished goods, materials and services.
Inventory-NRV 785,000
12. Trade discounts, rebates and other similar items are deducted in
determining the cost of purchase Income summary 785,000

13. When inventories are purchased with deferred settlement terms, * it has the effect of increasing the cost of goods sold due to lower
the difference between the purchase price for normal credit terms and inventory cost
the amount paid is recognized as interest expense over the period of
8. Allowance method:
financing.
Inventory-cost 800,000
14. Storage costs on goods in process are capitalized but storage
costs on finished goods are expensed. Income summary 800,000
15. Abnormal amounts are expensed.

16. Cost of inventories of a service provider consists primarily of the Loss on inventory writedown
labor and other costs of personnel directly engaged in providing the 15,000
service, including supervisory personnel and attributable overhead
Allowance for inventory writedown
15,000
Inventory valuation *the allowance is presented as a deduction from the
inventory
1. Weighted average perpetual or moving average method- new
weighted average unit cost must be computed after every purchase. Inventory, at cost 800,000
2. Inventory valuation in moving average involves early purchases Allow. For inventory writedown (15,000)
3. Lifo perpetual and periodic differ in inventory value NRV 785,000
4. Moving average unit cost changes everytime there is a new
purchase or a purchase return. It is not affected by a sale or a sale return
Cost 1,000,000
5. Net realizable value is the estimated selling price in the ordinary
course of the business less estimated cost of completion and the NRV 900,000
estimated cost necessary to make the sale. Required allowance 10,000
 Less: allowance balance 15,000 Estimated liability for purchase commitment
50,000
Decrease 5,000

Purchase
Allowance for inventory writedown 5,000
420,000
Gain on reversal 5,000
Loss on purchase commitment 30,000

Estimated liability for purchase commitment

*gain on reversal is presented as a deduction from COS 50,000

Accounts payable
500,000
8. Standard costs are predetermined product costs established on
the basis of normal levels of materials and supplies, labor, efficiency and If replacement cost is 600,000:
capacity utilization. It may be used for convenience if the results
Purchases
approximates cost.
500,000

Estimated liability
9. When different commodities are purchased at a lumpsum, the 50,000
single cost is apportioned among the commodities based on their relative
Accounts payable
sales price. Cost is proportionate to selling price.
500,000

Gain on PC
10. Purchase commitments are obligations of the entity to acquire 50,000
certain goods sometime in the future at a fixed price and fixed quantity.
Gain on PC was recognized to offset the previously recorded loss.
Purchase contract has already been made for future delivery of goods
fixed in price and in quantity. If replacement cost is 480,000:

Purchases 480,000
*loss is only 20,000
11. Recognition of loss on purchase commitment is an adaptation of
the measurement at the lower of cost or NRV EPL 50,000

Contract purchase price of 500,000 and replacement cost at year-end of Accounts payable 500,000
450,000
Gain on purchase commitment 30,000
Loss on purchase commitment
50,000
12. Agricultural, forest and mineral products are measured at NRV at
certain stages of production. This occurs when agricultural crops have
been harvested and a sale is assured under a forward contract or a
government guarantee, or when a homogeneous market exists and there
is a negligible risk of failure to sell.
13. Commodities of broker-traders are measured at fair value less
cost to sell.
14. Inventories of broker-traders are principally acquired with the
purpose of selling them in the near future and generating a profit from
fluctuations in price.
15. The amount of inventories recognized as an expense during the
period is disclosed.
Biological Assets
1. Pas 41 shall be applied to account for the biological assets,
agricultural produce, government grant related to a biological asset when
they relate to agricultural activity.
2. PAS41 is applied to agricultural produce at the point of
harvest.Thereafter, PAS2 on inventories shall be applied
3. PAS41 does not deal with the processing of agricultural produce
after harvest. Processing of grapes into wine is covered by PAS2.
4. Biological assets are living animals and plants
5. Agricultural produce is the harvested product of an entitys
biological assets.
6. Measurement of products after harvest is covered by PAS2
7. agricultural activity- management of an entity of the biological
transformation and harvest of biological assets for sale or for conversion
into agricultural produce or into additional biological assets. Includes
raising livestock, annual or perennial cropping, cultivating, floriculture
8. Harvesting from unmanaged sources, such as ocean fishing and
deforestation is not agricultural activity
9. Features of agricultural activity are: management of change
(nutrient levels, moisture) and measurement of change.
10. Biological transformation comprises the processes of growth,
degeneration, agricultural produce and procreation that cause
qualitative or quantitative changes in a biological assets
11. Procreation- creation of additional living animal or plant
12. Biological asset shall be measured on initial recognition and at the
end of each reporting period at fair value less costs to sell
13. Agricultural produce at fair value less costs to sell at the point of
harvest
14. Costs to sell include costs that are necessary for a sale to occur,
such as commissions to brokers and dealers, levies by regulatory
agencies, commodity exchanges, and transfer taxes and duties. Excludes
transportation costs, finance costs, and income taxes.
15. On initial recognition, market determined prices are not available
or estimates of fair value are determined to be clearly unreliable. In such a
case, the biological asset shall be measured at cost less accumulated
depreciation and any accumulated impairment loss. The entity shall
measure the biological asset at fair value less costs to sell once the FV
becomes clearly measurable.
16. In all cases, entity shall measure agricultural produce at the point
of harvest at fair value less cost to sell. Can always be measured reliably.
17. Active market: (a) The items traded within the market are
homogeneous, meaning similar or identical in nature or form (b)willing
buyers and sellers (c)prices are available at the market
18. A loss may arise on initial recognition of a biological asset because
costs to sell are deducted in determining fair value less costs to sell and
any subsequent changes in FV shall be included in profit or loss.
19. A gain may arise on initial recognition when a calf is born
20. A gain/loss may arise on initial recognition of agricultural produce
as a result of harvesting.
* Biological assets undergo physical change at dec.31
21. Entity shall disclose the aggregate gain/ loss arising on initial
27. biological assets are classified as noncurrent assets.
recognition of biological and agricultural and from the change in fair value
less costs to sell of biological assets.

22. Agricultural land is not covered by PAS41. it is covered by Fair value of 3years old cows on dec. 31 18,000
pas16(PPE)
Acquisition cost of 3 years old cow 15,000
23. Fair value of the land may be deducted from the fair value of the
combined assets to arrive at the fair value of the trees in the plantation Price change 3,000
forest

24. An unconditional government grant related to a biological asset Fair value of 4 years old cows on dec. 31 24,000
that has been measured at fair value less costs to sell shall be recognized
as income when the grant becomes receivable. Fair value of 3 years old cow dec. 31 18,000

25. If conditional, the grant shall be recognized as income only when Physical change 6,000
conditions attaching to the grant are met.

26. If a government grant relates to a biological asset measured at Fair value of newborn calf on dec. 31 5,000
cost less any depreciation and impairment, PAS20 on government grant is
applied. Fair value of newborn calf on july 1 4,000

Price change 1,000

1/1 Biological assets(at cost) 1,500,000

Cash Fair value of year old calf on dec.31 7,000

1,500,000
Fair value of newborn calf on dec.31 5,000

Physical change 2,000

7/1 Biological assets 80,000

Gain from change in FV 80,000

4 years old cows

Price change (100x3,000) 300,000

12/31 Biological assets(2,540,000-1,580,000) 960,000
Physical change (100x6,000) 600,000
Gain from change in FV 960,000
 year old cows New sales price 230

Price change (20x1000) 20,000

Physical change (20x2,000) 40,000 Net markup(60-40)=20

Physical change at birth(20x4,000) 80,000 Net markdown(30-20)=10

Total 1,040,000 Maintained markup=230-200=30

5. Departmental transfer in or debit= addition to purchases at cost

and at retail.
Inventory estimation
6. Sales returns and allowances= deducted from sales. Increases
1. there are two methods for approximating inventory: gross profit
ending inventory by decreasing COS.
method and retail
7. Normal shrinkage= deducted from GAS at retail
2. Sales discount and sales allowance are not included in the
computation of net sales as this would create an ending inventory 8. Abnormal= at cost and retail.

3. In sales allowance , there is no physical transfer of goods from 9. Approaches in using retail: conservative, average cost, fifo
the customer but a mere reduction in the sales price. approach

4. Cost 200 Cost Retail

Initial markup 40 Beginning inventory 180,000 250,000

Original retail 240 Net purchases 1,020,000 1,575,000

Additional markup 60 Additional markup 200,000

New sales price 300 Markup cancelation (25,000)

Markup cancellation 40 Gas conservative 1,200,000

2,000,000
New sales price 260
Cost ratio: 60%
Markup cancelation (20)
Markdown
Markdown (30)
(140,000)
New sales price 210
Markdown cancellation
Markdown cancellation 20 15,000
 1,200,000 Net markup
1,875,000 300,000

Cost ratio: 64% Net markdown

(600,000)
Less: Sales 1,450,000
Net purchases 1,800,000
Sales returns (50,000)
3,000,000
Employee discount 40,000
Current year cost ratio: 60 %
Spoilage and breakage 35,000
GAS 2,295,000
1,475,000
3,900,000
Ending inventory at retail 400,000
Less: Sales
2,700,000

Conservative cost (400T x 60%) 240,000 Ending inventory at retail

1,200,000
Average cost (400T x 64%) 256,000
FIFO cost (1,200,000 x 60%) 720,000

10. Conservative cost: lower of average cost or market.

Financial asset at fair value
11. Average cost- historical cost
1. Investment are assets not directly identified with the operating
12. If there is no beginning inventory, inventory value would be the activities of an entity and occupy only an auxiliary relationship to the
same under both average and FIFO method central revenue producing activities of the entity
13. Fifo is based on the assumption that markup and markdown apply 2. Investments are held for (1)accretion of wealth(interest, rentals),
to goods purchased during the year and not to beginning inventory. (2)capital appreciation, (3)ownership control, (4)meeting business
requirement( noncurrent fund), (5)protection( cash surrender value)

Cost Retail 3. characteristics of Financial instrument: (1) contract (2)at least two
parties (3)financial asset of 1 party and a financial liability or equity
Beginning inventory 495,000 instrument of another party
900,000
4. Examples are: cash in the form of notes and coins. Cash in the
Purchases 1,800,000 form of checks
3,300,000
5. Gold is a commodity and therefore not a financial asset
6. Financial asset: (1) cash (2)contractual right to receive cash or
other financial asset from other entity (3) contractual right to exchange
financial instrument with another entity under conditions that are
potentially favorable (4) equity instrument of another eentity
7. stock option is an example of a favorable condition held by the
holder to purchase shares of another entity at less than market price.
17. Financial assets held for trading are derivatives and not an
effective hedging instrument.
18. At initial recognition, an entity shall measure a financial asset at
fair value plus, in the case of financial asset not at fair value, transaction
costs. In subsequent measurement, an entity shall choose between fair
value and amortized cost.

8. Stock option is a financial liability of the issuer. 19. Disclosure of the cost of security is necessary

9. Delivery of goods or services in the future is not a financial 20. Notes to FS shall disclose the individual securities with their
liability. It must involve cash or other financial asset and must be corresponding carrying amount and market value
contractual to qualify so.
21. Cumulative unrealized loss/gain is shown in the statement of
10. Constructive obligations do not arise from contracts. changes in equity

11. equity instruments: (1) OSC (2) PSC (3) Warrants or call options 22. Unrealized loss/gain may be transferred to retained earnings but
not subsequently transferred to profit/loss
12. Mandatory redeemable preference share is a financial liability.
Accordingly, dividends paid to holders is an interest as component of 23. The entity shall disclose the change in business novel as this is a
finance cost significant and demonstrable event.

13. financial assets at fair value include both equity securities and 24. For financial assets measured at fair value, all gains and losses are
debt securities while financial assets at amortized cost include only debt either presented in profit or loss or in other comprehensive income. It is
securities not necessary therefore to assess financial assets measured at fair value
for impairment.
14. Fair value through profit/loss:
25. Only financial assets at amortized cost is tested for impairment.
a. Trading securities
26. IASB rejected totally the tainting provision in PAS 39
b. Financial assets designated on initial recognition as at fair value
through profit/loss 27. PFRS 9 amended PAS 1 to require an entity to present as a
separate line item in the income statement all gains and losses from the
Like investment in bonds and other debt instruments
derecognition of financial assets measured at amortized cost.
c. Investments in quoted equity instruments ( by consequence)

15. In financial assets held for trading, transaction costs are expensed
Investment in Equity securities
outright
1. Equity securities may also represent rights and options to acquire
16. Transaction costs do not include debt premiums or discounts,
ownership shares
financing costs and internal and administrative or holding costs
2. Cash 150,000
 Investment in equity securities 100,000 9. Received 2,000 shares representing 20% stock dividend on 10,000
original shares held. Shares now held, 12,000 shares.
Dividends income 5,000
10. Shareholders may receive a stock dividend which is different from
Gain on sale of investment 45,000
the original shares
3. Property dividends:
11. Investment in preference share 50,000
Investment in equity sec 50,000
Investment in OS 50,000
Dividends income 50,000
the allocated cost to OS is 750,000 based on its relative fair value.
50,000 to preference share. Total cost is 800,000

*recorded at fair value. 11. Shares received in lieu of cash dividend are income at fair value of
the shares received . Such shares are in effect property dividends.
4. Property dividends or dividends in kind are dividends in the form of
property or noncash assets. 12. If there is no market value, dividend income is recorded at cash
dividend
Merchandise inventory
13. The as if approach is used when 150,000 cash is received in lieu
Dividend income of 1,000 stock dividend declared. It is then assumed that the shares are
4. Liquidating dividend may be in the form of cash or noncash assets received and subsequently sold at the cash received. the original cost of
1,100,000 will now apply to 11,000 shares and so, the revised cost per
5. Wasting assets(partly income and return of capital): share would then be 100.
Cash Cash 150,000
Dividend income Investment in ES 100,000
Investment in ES Gain on Investment 50,000
6. When liquidating dividends exceed the cost of investment, the
difference is credited to gain on investment. If the cost of investment is
not fully recovered, the balance is written off as a loss. 14. In BIR, all cash received is income. Thus, the above transaction is
simply recorded as:
7. Stock dividends are in the form of the issuing entitys own shares.
The IAS term for stock dividend is bonus issue. Property dividends are Cash 150,000
shares of another entity declared as dividends Dividend income 150,000
8. Stock dividends- changing the legal capital by capitalizing RE. Not 15, In split up, outstanding shares are called in, and replaced
an income since there is no distribution of assets. by a larger number, with the effect of increasing the no.of shares and
decreasing the par value per share.
 16. Received 20,000 new shares as a result of 2-for-1 split 23. When stock rights are exercised, the cost of the new
of 10,000 original shares. investment includes the subscription price and the cost of the stock rights
exercised.
17. Special assessments are addi.tional capital contribution
of the shareholders. On the part of the shareholders, special assessments IES
are recorded as additional cost of the investment and on the part of the
Cash
entity as share premium
SR
Investment in ES

Cash
24. If expired, Loss on stock rights
17. Stock right is inherent in every share. Its purpose is to give the
shareholders the chance to preserve their equity interest in the Stock rights
corporation

18. If stock rights are accounted for separately, carrying amount of

the original investment in ES is allocated to the stock rights at an amount 25. Right-on: Ex right:
equal to the fair value of the stock rights at the time of acquisition. 210-150 210-150
19. Under PAS 39, embedded derivative shall be separated from the 5+1 5
host contract. While under PFRS 9, if the host contract is a financial asset,
the embedded derivative isnt separated.

20. The shares are selling right-on if it is between the date of Not accounted for separately:
declaration and date of record. Same as in dividend-on. No accounting Received 10,000 stock rights to subscribe for new shares at
problem is encountered because stock rights are not yet received. 100per share for every 5 rights held, or a total of 2,000 new shares
21. If between record date and expiration date, the shares are selling Exercise of rights:
ex-right so it can now be sold separate from the right.
IES
22. Accounted for separately:
Cash
Stock rights(at FV)
if stock rights are not exercised but sold: debit cash and credit the
IES original investment. No gain or loss from the sale. Cost recovery
*if stock rights do not have a fair value, the theoretical or If the stock rights are not exercised but expired, only a memo
parity value of the stock rights is used in measuring the fair value of stock entry is necessary to record the expiration
rights.
Any subsequent transactions affecting the shares shall be
accounted for using either the FIFO or average method.
 12. Investment in associate(20% of reported income)

Investment in Associate Investment income

1. Significant influence is the power to participate in the financial Loss on investment

and operating policy decisions of the investee but not control or joint
Investment in assoc.
control over those policies.
13. Under equity method, cash dividend is not an income but a return
2. Control is the power to govern the financial and operating policies
of investment
of an entity so as to obtain benefits from its activities
14. If the assets are fairly valued, accountants frequently attribute
3. Associate includes unincorporated entity such as partnership. It
the excess of cost over book value to goodwill
must not a subsidiary nor an interest in a joint venture
15. If the excess is attributable to land, it is not amortized because
4. Subsidiary is controlled by a parent
the land is nondepreciable
5. Potential voting right is considered in assessing whether an entity
16. If the excess is attributable to inventory, the amount is expensed
has significant influence. However, the investors share of profit/loss of
when the inventory is already sold.
the investee is determined on the basis of present ownership interest and
does not reflect the possible exercise or conversion of potential voting 17. If it is attributable to goodwill, it is not amortized but the entire
rights investment in associate is tested for impairment at the end of each
reporting period. Goodwill is included in the carrying amount.
6. The loss of significant influence can occur with or without change
in the absolute or relative ownership interest. This is so when an 18. If the fair value of equipment is 2,000,000 greater than its
associate becomes subject to control of a government, court, carrying amount, the investor should decrease its investment income by
administrator, regular, or by contractual agreement 80,000(2M/5 x 20%) since the investees income is overstated by 400,000
by the unrecorded depreciation of 400,000(2M/5). The share in loss of the
7. Equity method is adopted when the investor has a significant
investor is equal 20 percent of 400,000.
influence over the investee

8. Under the equity method, investment is initially recorded at cost

but it is subsequently increased by the net income and decreased by the
net loss and dividend payments of the investee
Undervaluation of depreciable asset(2Mx20%) 400,000(share in FV of 2M)
9. Investment must be in ordinary shares. If it is in preference, equity
method is abandoned because preference share is a nonvoting equity Goodwill remainder 600,000

10. Investment in preference share may be accounted for as fair Excess of cost over net asset acquired 1,000,000
value through profit or loss or at fair value through other comprehensive
income
Investment income 80T
11. Investment in associate is a noncurrent asset
 Investment in assoc
Excess of cost over book value
Excess attributable to eqpt
Excess attributable to inventory
80T 20. The carrying amount of the investment in associate also includes
other-long term interests in an associate, such as long-term receivables,
loans and advances. However, trade receivables and any long-term
3,000,000 receivables for which adequate collateral exists, such as secured loans,
are excluded from the carrying amount of the investment in associate
(2,800,000)
21. If the associate subsequently reports income, the investor
(1,000,000) resumes including its share of such income after its share of income
(800,000) equals the share of losses not recognized.

Investment income(2.8M/4) 700,000 22. The recoverable amount is measured as the higher between fair
value less costs to sell and value in use
Investment in assoc 700,000
23. The recoverable amount is assessed for each individual associate,
unless an individual associate does not generate cash inflows from
Investment income 1,000,000 continuing use that are largely independent of those from other assets of
the reporting entity
Investment in assoc 1,000,000
24. When an associate has outstanding cumulative preference share,
the investor shall compute its share of earnings or losses after deducting
the preference dividends, whether or not such dividends are declared.
Investment in assoc 800,000
25. When an associate has outstanding noncumulative preference
Investment income 800,000
share , the investor shall compute its share of earnings after deducting
the preference dividends only when declared.
Share in net income 8,000,000 26. when the reporting dates of the investor and the investee are
different, the associate shall prepare for the use of the investor, financial
Amortization 700,000
statements as of the same date as the financial statements of the
Inventory 1,000,000 investor, unless it is impracticable to do so. In any case, the difference
between the reporting date of the associate and that of the investor shall
Excess 800,000 be no more than 3 months
7,100,000 27. If an associate uses accounting policies other than those of the
investor, adjustments shall be made to conform the associate accounting
policies to those of the investor.
19. under equity method, if an investors share of losses of an
associate equals or exceeds the carrying amount of an investment, 28. Profits and losses resulting from upstream and downstream
investor discontinues recognizing its share of further losses. The transactions between an investor and an associate are recognized in the
investment is reported at nil or zero value investors financial statements only to the extent of the unrelated
investors interests in the associate . the investors share in the a. investment is classified as held for sale
associates profits and losses resulting from these transactions is
b. Investors debt and equity instruments are not traded in a public
eliminated.
market, meaning stock exchange or over the counter market
29. Significant influence must be lost before the equity method
c. The investor did not file or it is not in the process of filing its
ceases to be applicable
financial statements with the SEC for the purpose of issuing any class of
30. Sale of 20,000 shares out of 30,000, resulting to a loss of instruments in a public market
significant influence:
d. The ultimate or any intermediate parent of the investor produces
Cash 5,000,000 consolidated financial statements available for the public use that comply
with the PFRS.
Investment in assoc(2/3 x 6M) 4,000,000

Gain on sale of investment 1,000,000

33. Investment in associate is classified as held for sale, it is
To remeasure the retained investment of 10,000 shares or
accounted for in accordance with PFRS 5. Any noncurrent asset classified
10percent interest
as held for sale shall be measured at the lower of carrying amount and
Investment in assoc fair value less costs to sell
600T
34. Investment in unquoted equity does not share in the profit or loss
Gain from remeasurement to fair value of the investee because this method is based on the legal relationship
600T between the investor and the investee. Investor and the investee are
independent of each other. Does not share in income of investee.
Fair value(10,000x260) 2,600,000 Dividends received is recorded as an income. Nonmarketable
CV(6M-4M) 2,000,000 35. If it is marketable, FV is usually used
Gain from remeasurement 600,000 36. If retained earnings is 4,000,000 and the investee paid 4,500,000,
To reclassify: there is no longer a return of investment. The entry is, debit cash credit
dividend income for 4,500,000. No distinction between preacquisition
Investment in equity sec 2,600,000 and postacquisition
Investment in assoc 37. Investment in associate achieved in stages- subsequent
2,600,000 acquisitions increase the ownership interest to 20% or more.

38. The principles for business combination achieved in stages must

31. Investor shall reclassify to profit or loss any gain or loss previously be applied for investment in associate achieved in stages.
recognized in other comprehensive income of investee 39. 2008: 2009:
32. Equity method is not applicable if:
IES 2M Cash (180,000)
100T
160,000
Cash 2M Dividend income
100T
*record the share in 2010 net income: *record the amortization:
Cash 80T

Dividend income 80T

Investment in assoc Investment
2010(becomes 20%after investment): income 320,000

Investment in assoc 4M Investment income

Investment in assoc 320,000
Cash 4M
*record the 2010 cash dividend:

Cash First
*reclassify the 10% interest
acquisition(400T/5)
Investment in assoc 2M
Investment in assoc 2nd acquisition(1.2M/5)
Investment in equity securities 2M

*remeasure the previously held 10% interest:

Financial asset at amortized cost:
Investment in assoc 160T
1. Is classified as noncurrent assets
Gain in remeasurement to equity 160T
2. Bond investments are classified as trading securities and financial
assets at amortized cost

Share in net income: 3. Trading bond investments are measured at fair value through
profit/loss. It is not necessary to amortize any premium or discount.
2008(10% x 2M) 200,000
4. Trading sec 2,180,000
2009(10% x 3M) 300,000
Accrued interest 20,000
Amor. Of excess
Cash 2,200,000
2008(400T/5) (80,000)

2009 (80,000)
Cash 120,000
340,000
 Accrued 20,000 6. Investment in convertible bonds can be classified as financial
assets measured at fair value
Interest Income 100,000
7. Nominal or coupon rate or stated rate.

8. Effective yield or market rate is actual or true rate of interest

*the purchase price of 2,200,000 includes the accrued interest
which the bondholders earns on the investment
5. Cash 630,000

Trading sec 576,000

Investment property
Interest income 24,000
1. Only land and buildings can qualify as investment property. An
Gain on sale 30,000 equipment or any movable property cannot.

2. An investment property is not held:

Sales price( 600Tx101) 606,000 a. For use in the production or supply of goods or services or for
administrative purposes.
Accrued interest(600Tx12%x4/12) 24,000
b. For sale in the ordinary course of the business
Total cash received 630,000
3. If the property is held by the owner or lessee under a finance
lease for administration it is known as owner-occupied property.
Sales price 606,000 4. Investment property generates cash flows that are largely
Less: carrying amount(6/10x960T) 576,000 independent of the other assets of the entity. This is the characteristic
that distinguishes investment property from owner occupied. The
Gain on sale 30,000 generation of profit is not merely due to administration but also to the
5. Investment in bonds(1Mx94) 940,000 other assets used in the production. The owner-occupied indirectly help
or is just necessary to produce profit. Not an independent cash-
Cash 940,000 generating unit.

5. Examples of investment property:

Investment in bonds(60T/5x9/12) 9,000 a. Long-term capital appreciation
Interest income 9,000 b. Land held for a currently undetermined use.
Investment in bonds(1yr) 12,000 c. Bldg owned and leased out under an operating lease.
Interest income 12,000 d. Building that is vacant but is held to be leased out under an
operating lease
e. Property that is being constructed or developed for future use as and owner-occupied. If cannot be sold separately, property is investment
an investment property. property if only an insignificant portion is held for manufacturing or
admin

9. Classification of property whether owner-occupied or investment

Not considered an investment property:
property depends upon the significance of service. Example is an entity
1. Owner-occupied owns and manages hotel. The services provided to guests are a
significant component of the arrangement as a whole. Therefore, it is
2. Property held for future use as owner-occupied owner-occupied.
3. Property held for future development and subsequent use as 10. Property leased to an affiliate- from the perspective of the
owner-occupied individual entity that owns it, the property leased to subsidiary or parent
4. Property occupied by employees, whether or not the employees is considered an investment property. From the perspective of a group as
pay rent at markrt rate a whole and for purposes of consolidated FS, it is owner-occupied

5. Owner-occupied property awaiting disposal 11. Investment property shall be measured initially at its cost.
Transaction costs shall be included in the initial measurement
6. Property held for sale in the ordinary course of business
12. The cost of purchased investment property comprises its
7. Property being constructed or developed on behalf of third purchase price and any directly attributable expenditure
parties
13. The cost of self-constructed investment property is its cost at the
8. Property that is leased to another entity under a finance lease. date when the construction or development is complete

14. If payment is deferred, its cost is the cash price equivalent. The
6. Property interest that is held by a lessee under an operating lease difference between this amount and total absolute payment is
may be classified and accounted for as investment property provided: recognized a interest expense over the credit periodamortized

a. Property meets the definition of investment property
b. Operating lease is accounted for as if it were a finance lease.
c. The lessee uses the fair value model in measuring property
interest
7. where a property held under a lease is classified as an investment
property, the initial cost is the lower amount between fair value and the
present value of the minimum lease payments
8. If in the property, portions could be sold or leased out separately,
an entity shall account the portions separately as investment property
15. The cost of investment property acquired in exchange is
measured at fair value of the asset given up unless the exchange
transaction lacks commercial substance
16. Entity shall choose between fair value and cost. If cost is chosen,
it is carried at cost less any accumulated depreciation and impairment.
Fair value is disclosed. However, when property interest held under
operating lease and classified as an investment property, the fair value
model shall be applied.
17. fair value of investment property shall reflect market conditions
at the end of reporting period. Fair value is time-specific as of a given date
because market conditions change. Valuation shall take place at every
end of reporting period.
18. Equipment such as lift or air-conditioning is often an integral part
of a building and is generally included in the fair value of the investment
property
19. If an office is leased on a furnished basis, the fair value of office
generally includes the fair value of the furniture because the rental
income relates to the furnished office. Fair value excludes prepaid or
accrued operating lease income.
20. The best evidence of fair value of investment property is the
current price in an active market for similar property in the same location
and condition and subject to similar lease and other contract. In the
absence of current price:
a. Current price in an active market for property of different nature,
condition and location adjusted to reflect those changes.
b. Recent price of similar property in less active market with
adjustments to reflect changes in economic conditions
c. Discounted cash flow projection based on reliable estimate of
future cash flows supported by the terms of existing lease and other
contract and by external evidence such as current market rent for similar
property in the same location and condition
21. If the fair value cannot be determined reliably on a continuing
basis, cost method is used and the residual value of the investment
property shall be assumed to be zero
22. Pas40 states that an entity that uses the fair value model shall
continue to measure its other investment property at fair value,
notwithstanding the fact that one investment property is carried using
cost due to exceptional cases
23. If fair value is used, No depreciation is recorded
24. When entity uses the cost model, transfers between investment
property, owner-occupied and inventory shall be made at carrying
amount
25. A transfer from investment property at fair value to owner-
occupied or inventory, shall be accounted for at fair value which becomes
the deemed cost for subsequent accounting
26. If owner-occupied is transferred to investment property that is to
be carried at fair value, the difference between fair value and the carrying
amount of the property shall be accounted for as revaluation of property,
plant and equipment.
27. if an inventory is transferred to investment property that is to be
carried at fair value, the remeasurement to fair value shall be included in
profit or loss.
28. When an investment property under construction is completed
and to be carried at fair value, the difference between fair value and
carrying amount shall be included in profit or loss.
An investment property shall be derecogonizedL
A. On disposal
B. When the investment property is permanently withdrawn from
use.
C. When no future economic benefits are expected from the
investment property
Gain or loss from the disposal of investment property shall be determined
as the difference between the net disposal proceeds and the carrying
amount of the asset and shall be derecognized in profit or loss
Compensation from third parties for investment property that was 2. Detailed reconciliation of the gross cost of the investment
impaired, lost or given up shall be derecognized in profit or loss when the property and the related accumulated depreciation showing all the
compensation becomes receivable. movements during the year

3. fair value of the investment property where possible. If it is not

possible, such fact shall be explained.
General disclosures:

1. Whether the entity uses the cost model or fair value of measuring
the investment property Fund and other investments

2. The amount of rental income for the period along with the related 1. Fund is defined as cash and other assets set aside for a specific
expense. purpose either by reason of the action of management or by virtue of a
contract or legal requirement. It may be form of cash, securities, and
3. Restrictions on the investment property either through rental or
other assets.
sale proceeds.
2. Sinking fund cash 2,120,000
4. Contractual obligations to purchase or construct investment
property Sinking fund securities 2,000,000

Accrued interest receivable 60,000

If the fair value is used: Total sinking fund 4,180,000

1. Detailed reconciliation, showing all the movements between the Less: appropriated 2,000,000
carrying amount of investment property at the beginning and end of the
Additional appropriation 2,180,000
period

2. The method of determining the fair value of investment property

and whether the valuation is carried out by an independent qualified Entries:
valuer.
Sinking fund securities
3. Net gains or losses from fair value adjustments
Sinking fund cash
4. whether significant fixtures, such as lift and office furnitures,
within an investment property, have been separately recognized

When the cost model: Sinking fund cash 120,000

1. The depreciation method or rate and the useful life Sinking fund income 120,000
 Sinking fund cash 2,000,000

Cash 2,000,000 RE-appropriated 6,440,000

RE 6,440,000

Accrued interest receivable 60,000

Sinking fund income 60,000 Under the TRUSTEE:

Retained earnings 2,180,000 Sinking fund-trustee 2,000,000

RE-appropriated for RE 2,180,000 Cash 2,000,000

Entry:

Sinking fund-trustee (net cash) 280,000

Payment of expenses: Sinking fund cash expense 70,000

Sinking fund expense 20,000 Sinking fund income 50,000

Sinking fund cash 20,000 Gain on sale 300,000

Sale:

Sinking fund cash 2,100,000 3. Contingency fund is set aside for the purpose of meeting
obligations that may arise from contingencies like pending lawsuits or
Sinking fund sec 2,000,000
taxes in dispute
Gain on sale 100,000
4. If the beneficiary is other than the entity itself, payment for the
premium is simply charged to insurance expense

Retirement: 5. Life insurance policy has cash surrender value and loan value.

Bonds payable 5,000,000 6. Cash surrender value is the amount which the insurance firm will
pay upon the surrender and cancellation of the life insurance policy. It is a
Interest expense 500,000 noncurrent investment. Prerequisites are that:
Sinking fund 5,500,000 a. Policy is life insurance

b. Premiums for three full years must have been paid

Cash 940,000 c. Policy is surrendered at the end of the third year or anytime
Sinking fund cash 940,000 thereafter
 2013 Life insurance expense 30T

7. Loan value is the amount an insured can borrow from the Cash 30T
insurance firm with the cash surrender value as a collateral security.
Dec.31 CSV 12T
When an amount is borrowed from the insurance entity, it is treated as an
ordinary obligation. It shall not be deducted from the cash surrender Life insurance expense 12T
value for financial statement purposes.

8. The cash surrender value of life insurance policy arises from the
fact that the fixed annual premium is much in excess of the annual risk *to recognize the increase from 30T to 42T
during the earlier years of the policy, such excess made necessary in order 2014 Life insurance expense 30T
to balance the deficiency of the same premium to meet the annual risk
during the later years of the policy. Such excess in the premium paid over Cash 30T
the annual cost of insurance, with accumulated interest constitutes the
cash surrender the value
June 30CSV 8T
9. Policy year coincides with accounting year
Life insurance exp 8T
Jan. 1 Life insurance expense 30T

Cash 30T
*58,000-42,000=16,000 x 6/12=8,000
2011 Life insurance expense 30T

Cash 30T
July 31 cash 2M

Cash surrender value 50T(42T+8T)

2012 Life insurance expense 30T

Cash 30T Life insurance expense 15T(unexpired)

Gain on life insurance settlement 1,935T

Dec.31 Cash surrender value 30T

Life Insurance expense 10T Policy year doesnt coincide with accounting year:
RE 20T April.1 life insurance expense 30,000

Cash 30,000
*cash surrender is applicable for 3years
Dec. 31 Prepaid 7,500 April 1 Cash surrender 30,000

Life insurance exp 7,500 Life insurance 2,500

RE 27,500

2011 Life insurance expense 7,500

Prepaid (reversing) 7,500 April 1 Life insurance 30,000

Cash 30,000

April 1 life insurance expense 30T

Cash 30T June 30 Cash surrender 3,000

Life insurance 3,000

Dec 31 Prepaid life 7,500

Life insurance exp 7,500 To recognize the increase from april 1to june 30

Balance, april 1 2014 42,000

2012 Life insurance exp 7,500 Balance, april 1 2013 30,000

Prepaid 7,500 12,000

12,000 x 3/12 3,000

April 1Life insurance 30,000

Cash 30,000 July 31 Cash 2,000,000

CSV 33,000

Dec 31 Prepaid 7,500 Life insurance 22,500( 30Tx9/12)

Life insurance 7,500 Gain on life 1,944,500

2013 Life insurance exp 7,500 DERIVATIVES

Prepaid 7,500 1. Entity use derivative financial instruments(hedging instrument) to

manage financial risk. They are derived from primary financial instrument.
Financial risk originates from sources such as change in commodity price, 8. Derivatives are measured at fair value. Both the fair value and
change in cash flows and foreign currency exposure notional amount shall be fully dislosed.

2. The reduction of financial loss stemming from the financial risk is
the motivating factor in trading in derivatives. Derivative financial
instruments create rights and obligations that have the effect of
transferring between the parties to the instrument the financial risks
inherent in an underlying primary financial instrument
3. Types of financial risks:
9. Forecast transaction(primary financial instrument) is an
uncommitted but anticipated future transaction
10. Cash flow hedgemeasured at fair value. The changes in fair
value are recognized in OCI to the extent that the hedge is effective. The
ineffective portion is recognized in profit or loss. Hedged item is not
adjusted to conform with fair value

a. Price riskuncertainty about the future price of an asset. Trading 11. Fair value hedgeoffsets in whole or in part the change in fair
securities, purchase commitment, equipment to be imported at a future value of an asset or liability. It is measured at fair value. The hedged item
date. is also measured at fair value. Changes in fair value are recognized in
profit or loss.
b. Credit riskpossibility of nonpayment of loan.
12. Examples of derivatives:
c. Interest rate
a. Interest rate swap
d. Foreign currencyThe peso equivalent of the foreign currency
loan on the date of maturity will differ from the peso equivalent of the b. Forward contract
foreign currency loan when it was obtained.
c. Futures contract
4. A derivative is an executory contract, meaning, it is not a
d. Option
transaction but an exchange of promises about future action.
e. Foreign currency forward contract
5. Parties to the derivative financial instrument are taking bets on
what will happen to the underlying financial instrument in the 13. These derivatives are stand-alone derivatives. They are separate
future.(gambling) from the primary instrument. They are created to solely to hedge against
financial risks created by primary instrument or by transaction that have
6. Derivative characteristics:
yet to occur
a. Underlying variablespecified interest rate, commodity price,
14. Jan 1,2010 Cash 5M
foreign exchange rate, price index. It must have a notional
amount(quantity or volume) Loan Payable 5M
b. Requires either no initial investment or initial net investment Dec31 Interest Expense 500T
c. Readily settled at a future date by a net cash payment. Cash
500T
7. Hedging is a means of protecting a financial loss or the structuring
of a transaction to reduce risk 31 Interest rate swap receivable 89,300
 Unrealized gaininterest rare swap price(option premium). It is a receivable. To be recovered from the
89,300 increases in fair value.

*the 100T receivable on dec2011 is discounted at 12% 18. The option is in the money if the market price is greater than
the option price. We recognize loss equal to the option premium if the
market price is less than the option price
Dec312011 Interest expense(5Mx12%) 600T
19. Under PFRS 9, if the host contract is a financial asset, the
Cash imbedded derivative is not separated. It is measured at fair value or
600T amortized cost. In PFRS 39, it can be separated provided that: (1) The
combined contract is not measured at fair value and the change in fair
Cash 100T value recognized in profit or loss. Thus, if it is measured at fair value,
Interest rate swap receivable there is no need to separate it because the combined contract is already
89,300 accounted for similar to a derivative (2) The embedded and the host are
not closely related.
Unrealized gain
10,700 20. Examples of embedded derivatives: (1) equity conversion option
(2) Redemption option (3) investment in bond whose interest and
Loan payable 5M principal payment is linked to the price of gold or silver.
Cash 5M

Unrealized gain 100T Government Grant

Interest expense
100T
15. Futures contract and forward contract have the same definition .
The only difference is that a futures contract is traded in a futures
exchange market in much the same manner as debt and equity securities
being traded in the stock market. In other words, a forward contract is a
private contract between 2 parties who know each other very well while
a futures contract is a standard contract traded in a futures exchange
market and one party will never know who is on the other side of the
contract. All cash settlements are made through the exchange market.
1. Assistance by the government(monetary or nonmonetary) in
return for past or future compliance with conditions relating to the
operating activities of the entity. It is also known as subsidy, subvention
or premium
2. A forgivable loan from government can be considered as a
government grant when it is certain that the entity will meet the terms
and conditions.
3. Benefit of a government grant loan with a below-market rate of
interest is treated as a government grant

16. Call options gives the holder the right to purchase an asset and
put option gives the holder the right to sell an asset
17. An option must be paid for. This is a derivative that requires an
initial small payment for the protection against unfavorable movement in
4. PAS20 does not deal with the government participation in
ownership of an entity, grant covered by PAS41 on agriculture and
government assistance in the form of tax benefits
5. Classification of Government grant:
a. Grants related to assets-purchase or construct long-term assets. b. Cost directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
b. Grants related to incomeother than those related to asset
intended by mgt.
6. Grants shall be recognized as income over 3 years in
c. Initial estimate of the costs of dismantling and removing the item
proportion to the costs incurred.
and restoring the site on which it is located, the obligation for which the
Property Plant and Equipment entity incurs either when the item is acquired or as a consequence of
having used the item during a particular period for purposes other than to
6. Assets that are held for sale, including land, or held for produce inventories during that period.
investment are not included in PPE

7. Pas16 on PPE does not apply to Biological assets related to

agricultural activity and mineral rights and mineral reserves such as oil, 13. Directly attributable:
natural gas, and similar nonregenerative resources. Such assets are
a. Cost of employee benefits arising directly from the construction
shown as separate line item on the face of the statement of FS.
or acquisition
8. An entity is required to apply PAS 16 to PPE used to develop or
b. Cost of site preparation
maintain biological assets, mineral rights and mineral reserves.
c. Initial delivery and handling cost
9. Spare parts and servicing equipment are usually carried as
inventory and recognized as an expense when consumed. However, d. Installation and assembly cost
major spare parts and stand-by equipment qualify as PPE when the entity
e. Professional fees
expects to use them more than one period.
f. Cost of testing whether the asset is functioning properly, after
10. If the spare parts and servicing equipment can be used only in
deducting the net proceeds from selling any items produced while
connection with an item of PPE, they are accounted for as PPE and are
bringing the asset to that location and condition, such as samples
depreciated over a time period not exceeding the useful life of the
produced when testing eqpt.
related asset.
14. Costs that are expensed immediately:
11. A chemical manufacturer may have to install certain new chemical
handling processes in order to comply with environmental requirements a. Cost of opening a new facility
on the production and storage of dangerous chemicals. Such related
plant enhancements are recognized as assets to the extent that they are b. Costs of introducing a new product or service, including costs of
recoverable because without them, the entity is unable to manufacture advertising and promotion
and sell. c. Costs of conducting business in a new location or with a new class
12. The cost of an item of PPE comprises: of customer, including costs of staff training

a. purchase price, including import duties and nonrefundable d. Administration and other general overhead costs
purchase taxes, after deducting trade discounts and rebates
e. Costs incurred while an item capable of operating in the manner NP 600,000
intended by the management has yet to be brought into use or is
operated at less than full capacity
The present value of installment payment of 200,000 is 497,400. so the
f. Initial operating losses
implied interest is 102, 600. the downpayment of 100,000 is included in
g. Cost of relocating or reorganizing part or all of an entitys the cost of machinery597,400
operations.

19. For equity-settled transaction( issuance of share capital), the

15. After initial recognition, an entity shall choose either the cost proceeds shall be measured by the fair fair value of the consideration
model or revaluation model as its accounting policy and shall apply that received.
policy to an entire class of PPE
a. fair value of property received
16. When carried at revaluation, its cost is the fair value at the date of
b. Fair value of the share capital
revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. c. Par or stated value of share capital
17. If the machinery has cash price:

Machinery 290,000 20. Asset acquired by issuing bonds payable is measured in the
following order:
Discount on NP 60,000
a. Fair value of bonds payable
Note payable 300,000
b. Fair value of asset received
Cash 50,000
c. Fair value of bonds payable

Note outstanding method is used to amortize the

discount 21. A transaction has a commercial substance when the expected
cash flows after the exchange differ significantly relative to the fair value
18. If the asset is acquired by installment and there is no available
of the asset exchanged from the expected cash flows before the
cash price, the asset is recorded at an amount equal to present value of
exchange
all payments using an implied interest
22. If an entity is able to determine reliably the fair value of either the
Machinery 597,400
asset received or the asset given, then the fair value of the asset given is
Discount on NP 102,600 used to measure the cost of the asset received unless the fair value of the
asset received is more clearly evident.
Cash 100,000
23. In an exchange, where there is no cash involved, the order is:
a. fair value of the property given Less:carrying amount 700,000

b. Fair value of property received Loss on exchange 100,000

c. Carrying amount of property given Books of the recipient:

* letter a is preferable since this approximates a cash transaction. The Equipment-new 600,000
acquisition is conceived as a two-way transaction, meaning as if the
Cash 200,000
investment is sold at its fair value and the proceeds is used to acquire
equipment Accumulated depreciation 1,350,000

Equipment old 2,000,000

24. If exchange transaction lacks commercial substance, the cost is Gain on exchange 150,000
measured at the carrying amount of the asset given up.

Fair value of asset given 800,000

Payor:
Less: cash received 200,000
Equipment-new 800,000
Cost of new asset 600,000
Accumulated depreciation 900,000

Loss on exchange 100,000

Fair value of asset given 800,000
Equipment old
1,600,000 Less: carrying amount 650,000

Cash Gain on exchange 150,000

200,000

Fair value of asset given 600,000

Add: cash payment 200,000 25. Trade-in is in a form of exchange. Property is acquired by
Cost of new asset 800,000 exchanging another property as part payment and the balance payable in
cash or any other form of payment. It involves a nondealer acquiring the
Fair value of the asset given 600,000 asset from a dealer. Involves significant amount of cash.
Order of priority: Less: CV 400,000

a. Fair value of the asset given plus cash payment Loss on exchange 50,000

b. Trade in value of asset given plus cash payment(in effect, fair

value of the asset received.

Old equipment:

Cost 1,400,000
Equipment 1,850,000
Accumulated depreciation 1,000,000
Accumulated depreciation 1,000,000
Carrying amount 400,000
Loss on exchange 50,000
Fair value 350,000
Equipment-old 1,400,000
Trade in value 500,000

Cash 1,500,000

New equipment

List price 2,000,000 If the fair value of asset given is not clearly determinable, the new asset is
recorded at the trade in value of the asset given plus cash payment
Trade in value of old equipment 500,000

Cash payment 1,500,000

Equipment-new 2,000,000

Acc.depreciation 1,000,000
Fair value approach:
Equipment-old 1,400,000

Cash 1,500,000
Fair value of asset given 350,000
Gain on exchange 100,000
Cash payment 1,500,000

Cost of new asset 1,850,000

Trade in value of asset given 500,000

Cash payment 1,500,000

Fair value of the asset given 350,000
Cost of new asset 2,000,000

Trade in value of asset given 500,000
Less: carrying amount 400,000
Gain on exchange 100,000
26. The cost of fully depreciated asset remaining in service and the
related accumulated depreciation ordinarily shall not be removed from
the accounts. However, entities are encouraged but not required to
disclose fully depreciated property.
27. PFRS 5 provided that an item of property plant and equipment is
classified as held for sale if the asset is available for immediate sale in
its present condition within 1 year from the date of classification as held
for sale. It is excluded from PPE and classified as current asset
28. Any noncurrent asset classified as held for sale shall be measured
at the lower of carrying amount or fair value less cost to sell. It shall not
be depreciated
29. The writedown to fair value less cost to sell is treated as an
impairment loss
30. Entity shall not classify as held for sale a noncurrent asset that is
to be abandoned. This is because its carrying amount would be recovered
principally through continuing use
31. Temporary idle activity or abandonement does not preclude
depreciating asset as future economic benefits are consumed not only
through usage but also through wear and tear and obsolescence
32. Noncurrent asset to be abandoned includes an item of property
plant and equipment that is to be used until the end of its economic life
33. Cost of self-constructed asset shall include direct cost of material
and labor and indirect cost and incremental overhead
34. If there is clear evidence that the actual cost is materially
excessive and this is due to construction inefficiencies or failures, the
excess shall be treated as a loss chargeable against management. Future
periods shall not be burdened with management inefficiencies and errors.
35. Intervening operations or incidental income and loss gain or
incurred that are not necessary to bring an item to the location and
condition for its intended use are recognized in profit or loss.(e.g. using
the building site as carp park until construction starts)
36. The cost of asset is equal to the invoice price minus the cash
discount, whether taken or not(net method) because this approximates
the cash price equivalent Cash discount is generally considered as
reduction of cost and not as income.
37. Gross or net method, ultimately, an item of PPE is stated at net
amount (this doesnt apply to inventories where gross method reports
inventory at net amount only if a cash discount is availed).If net method is
used and payment is made beyond the discount period, an other expense
account( purchase discounts lost) is debited and a PPE asset is credited.
38. If a fully depreciated property is no longer used, the asset account
and related acc.depreciation are closed and the residual value is set up in
a separate account.
Borrowing Cost
1. Commencement of capitalization:
a. When the entity incurs expenditures for the asset
b. When the entity incurs borrowing costs
c. When the entity undertakes activities necessary to prepare the
asset for the intended use or sale
2. Activities necessary to prepare the asset for the intended use or
sale encompass not just the physical construction but also the technical
and administrative work prior to the commencement of physical
construction such as drawing up plans and obtaining permit for a building
3. borrowing cost incurred during the period in which the asset is d. Cost of relocation or reconstruction of property
idle or there is no development activites undertaken is not capitalizable belonging to others in order to acquire

4. Capitalization is suspended during the period in which active possession

development is interrupted
e. Mortgages,encubrances and interest on such mortgages assumed by
5. If temporary delay is necessary for the intended sale, the buyer
capitalization is not suspended
f. Unpaid taxes up to date of acquisition assumed by the
6. Segregation qualifying assets from other assets is not required buyer

Land, Building and machinery g. Cost of survey

1. Classification of land depends on the nature and purposes of the j. Cost of clearing and demolishing unwanted old
land structures, less proceeds from salvage

2. Land used as a plant site shall be treated as property, plant and value
equipment
k. payments to tenants to induce them to vacate
3. Land held for currently undetermined use is treated as an the land.
investment property
l. Cost of permanent improvements such as cost
4. Land that is held definitely as a future plant site is classified as of grading, leveling and landfill
owner-occupied
m. Cost of option to buy the acquired the land. If
the land is not acquired, the cost of option is expensed outright

5. if Land improvements are additions to cost not subject to

depreciation, they are charged to the land account. Examples are cost of
surveying, cost of clearing, cost of grading, leveling and landfill, cost of
subdividing and other cost of permanent improvement

5. Cost of land includes:
a. Legal fees and other expenditure for
establishing clean title
b. Brokers commission and escrow fees
c. Fees for registration and transfer of title
6. Special assessments are taxes paid by the landowner as a
contribution to the cost of public improvements. It is treated as part of
the cost of land. The reason for this is that public improvements increase
definitely the value of land
7. Real property taxes are treated as outright expense. Unpaid real
taxes assumed by the buyer are capitalized up to date of acquisition
8. Land improvements that are depreciable should be charged to a 11. However, where insurance is not taken, an accounting problem
special accountLand Improvements and be depreciated arises when the company is required to pay claims for the damages for
injuries during the construction. In this regard, it is believed that the
payment for damages should be expensed outright because the damages
Cost of Building when purchased represent management failure or negligence in procuring insurance and
are not reasonable and necessary cost of construction. To charge the
1. Materials used, labor employed,overhead incurred during damages to the building would be tantamount to concealment of the
construction management failure or negligence
2. Building permit and license 12. Expenditures for shelves, cabinets, and partitions may be charged
3. Architect fee to the building or furniture and fixtures depending upon the nature of the
expenditures. If such expenditures are immovable in the sense that they
4. Superintendent fee are attached to the building in such a manner that the removal thereof
5. Cost of excavation may destroy, they are charged to the building account. On the other hand
if such expenditures are movable, they are charged to furniture and
6. Cost of temporary buildings used as a construction offices and fixtures and depreciated over their useful life.
tools or materials used
13. If installed during construction, the ventilating system, lighting
7. Expenditures incurred during th construction period such as system and elevator are charged to the building. Otherwise, they are
interest on construction loans and insurance charged to building improvements and depreciated over their useful life
or remaining life of the building, whichever is shorter.
8. Expenditures for service equipment and fixtures made a
permanent part of the structure 14. It is incorrect to maintain a single account for land and building
because land does not depreciate but building depreciates. Land is not
9. Cost of temporary safety fence around construction site and cost
insurable but building is insurable. Thus if they are acquired at a single
of subsequent removal thereof. However, the construction of a
cost, the single cost is allocated to the land and building on the basis of
permanent fence after the completion of the building is recognized as
their relative fair value.
land improvement
15. If land and an old building which is to be razed are acquired at a
10. Safety inspection fee.
single cost, the single cost is allocated to the land only. The net cost of
razing the building, meaning cost of razing minus salvage, is also charged
to the land account. IF the premises are subject to a lease contract, any
9. Any expenditures not in connection with the construction of a
payments to tenants to induce them to vacate the premises before lease
new building is not part of the building account. Sidewalks, pavements,
expiration are charged to the land account. If the building owned by the
parking lot, driveways are land improvements unless they are part of the
entity is leased to tenants and the building is demolished to make room
blueprint for the construction of a new building.
for the construction of a new one, any payments to induce them to
10. Where insurance is taken during construction of a building, the vacate shall be charged to the cost of new building
cost of insurance is charged to the building because it is necessary and
reasonable cost of bringing into existence.
16. The carrying amount of the old building, if any, and the net cost of 27. Returnable containers are classified as PPE when they are in big
demolishing the building shall be charged to the loss on retirement of the units as in the case of tanks, drums, and barrels. If small amounts,
old building. The cost of demolishing the old building cannot be charged classified as other noncurrent assets
to the cost of new building because this part of the service cost related to
28. If not returnable, expensed outright
the old building when retired from use.
29. Revenue expenditure is an expenditure that benefits only the
17. any safety measures in acquisition of asset is capitalized
current period. Therefore reported as an expense. If it benefits current
18. If machinery is moved to new location, the undepreciated cost of and future periods, it is a capital expenditure and reported as an asset.
the old installation cost is expensed and the new installation cost is
charged to the new asset
30. Subsequent costs is capitalized when:
19. If machinery is removed and retired to make room for the
installation of a new one, the removal cost not previously recognized as a a. Expenditure extends the life of the property
provision is charged to expense on the theory that this is part of the
service cost related to the retirement of the old machinery b. It increases the capacity of the property and quality of
output(upgrading machine parts)
20. VAT on the purchase of machinery is not capitalizable but charged
to input tax to be offset against output tax. Any irrecoverable purchase c. Improves the efficiency and safety of the property by adopting a
tax is capitalized new production processes leading to large reduction in operating cost.

21. Tools should be segregated from the machinery account

22. Patterns and dies used for regular products of the company are 31. The cost of addition which is a new unit is depreciated over its
recorded as assets and depreciated over their useful life. If they are used useful life. But the cost of an expansion should be depreciated over its
for specially order products, they are expensed outright and form part of useful life or remaining life of the asset of which it is part, whichever is
the cost of special product shorter

23. The term equipment includes delivery equipment, store 32. Improvements or betterment may represent replacement of an
equipment, office equipment, F&F, similar assets asset or part with one of a better quality or superior quality

24. Motor registration fees should be expensed and not be included 33. Replacement also involve substitution but the new asset is not
as part of the cost of the delivery equipment better than the old asset when acquired.

25. If assets are identified with the selling function, they are classified 34. Ordinary repairs are expensed. Extraordinary are capitalized
as store equipment, otherwise, charged to office equipment 35. An entity does not include in the carrying amount of PPE the costs
26. Furniture and fixtures include showcases, counters, shelves, of day to day servicing of the property
display fixtures, cabinets, partitions, safes, desks, tables and similar items. 36. Rearrangement cost is capitalized and amortized over the
In broad sense, it includes store and office equipment remaining life of the asset.
37. If the original part of an existing asset is separately identifiable,
the major replacement is debited to the asset account. The cost of the
If it is not practicable:
part eliminated and the related accumulated depreciation are removed
from the accounts and the remaining carrying amount of the old part is Loss on retirement 139,500
treated as a loss. If it not practicable for an entity to determine the
carrying amount of the replaced part, it may use the cost of the Accumulated dep 139,500
replacement cost as an indication of what the cost of the replaced part Building
was at the time it was acquired or constructed. 279,000
38. Total cost of the building constructed is 5,000,000 for 20 years.
After 10 years, the wooden roof is replaced with concrete roofing costing
500,000. The cost of wooden roof is 400T *this requires discounting of the replacement cost with
the appropriate discount rate for 10 periods. 500,000 multiplied by
present value of 1 at 6% for 10periods
Loss on retirement of building 200,000

Accumulated dep 200,000

Building 400,000 Depreciation

1. Omission of depreciation may somehow impair legal capital if and

Building 500,000 when dividends are declared out of earnings before provision for
depreciation
Cash 500,000
2. 2 kinds of depreciation:

a. Physical-related to assets wear and tear and deterioration over a

Depreciation 280,000 period. It is caused by wear and tear due to frequent use, passage of time
due to nonuse, action of elements, accidents and disease
Acc. depreciation 280,000
b. Functional or economic-arises from obsolescence or inadequacy
of the asset to perform efficiently
Building(5M-400T+500T) 5,100,000
3. Obsolescence arises when there is no future demand for the
Accumulated depreciation (2.5M-200T) 2,300,000 product which the depreciable asset produces

CV 2,800,000 4. When a new depreciable asset becomes available and the new
asset can perform the same function for substantially less cost
Divided by 10 years remaining 280,000
5. Inadequacy arises when the asset is no longer useful to the firm
because of an increase in the volume of operations
6. To the extent that an entity depreciates separately some 5. Under successful effort method, only the exploration cost directly
significant parts of an item of PP, it also depreciates separately the related to the discovery of resource is capitalized. Exploration cost
remainder of the item related to dry wells is expensed in the period incurred

7. Factors to be considered in determining the useful life(expected 6. Under full cost, all exploration costs, whether successful or not
utility) of the asset are capitalized. The cost of drilling dry wells is part of the cost of locating
productive wells.
a. expected usage of the assetassets expected capacity
7. Successful effort is popular among large and successful oil
b. expected physical wear and tearoperational factors(repair and
entities. Full cost is for small oil entities
maintenance program)
8. Development cost may be in the form of tangible or intangible.
c. Obsolescencechange in market demand
Intangible is capitalized. It includes drilling, sinking mine shaft and
d. Legal limitsexpiry date of the related lease construction of wells

9. Restoration cost may be added to the cost of resource property

or netted against the expected residual value of the resource property.
8. Methods of depreciation: The estimated cost of restoring property to its original condition is
a. Equal or uniformstraight line, composite, group capitalized only when the entity incurs the obligation when the asset is
acquired.
b. Variable chargeworking hrs, output
10. In essence, depletion is recognized as the cost of the material
c. Decreasing charge or accelerated or diminishing balance used in the production(cost per unit) and thus becomes the finished
SYD,DB DDB product since the wasting asset is conceived as the total cost of the
d. Other methodsInventory appraisal, retirement method, materials available for extraction
replacement 11. Wasting asset doctrine is an exception to the trust fund doctrine.

12. The accumulated depletion balance is used only for purposes of

Depletion determining how much capital can be legally returned to shareholders

1. Wasting assets are physically consumed and irreplaceable by man
2. Exploration and evaluation asset is classified either as tangible or
intangible.
3. Residual land value is the residual value in wasting asset. It is
deducted from the acquisition cost to get the depletable amount
4. Exploration may result in either success or failure. It may be
accounted for as successful effort and full cost method
13. Wasting asset doctrine is based on the philosophy that to limit
dividend declaration to the retained earnings balance would have the
effect of retaining in the business funds which are not needed because
the wasting assets are irreplaceable. Not going concern anymore.
Revaluation
1. The frequency of revaluation depends upon the movement in the
fair value of the items of PPE being revalued. When a fair value of a
revalued asset differs materially from its carrying amount a further
revaluation is necessary. Some items of PPE may experience significant
Impairment
and volatile movements in fair value thus necessitating annual revaluation
1. Impairment is the fall in the market value of an asset so that its
2. Revaluation every 3-5 years may be sufficient for items of PPE
recoverable amount is now less than it carrying amount
with only insignificant movements in fair value
2. The events and changes in circumstances that lead to an
3. A class of PPE is a grouping of assets of a similar nature and use in
impairment of asset may be classified as external or internal sources of
an enterprise operation. Examples of separate classes are land, buildings,
information
machinery, ships, motor vehicles, furniture and fixtures and office
equipment. 3. External sources: (1)decline in market value or a new competitor
in the industry(2) Significant change in the technological, market, legal or
4. Items within a class of PPE are revalued simultaneously in order to
economic environment of the business or change in customer taste(3)
avoid selective revaluation and the reporting of amounts which are a
Decrease in value in use due to increase in interest or discount rate.
mixture of costs and values at different dates.
4. Internal: (1) Obsolescence or physical damage (2)restructuring,
5. In the absence of fair value, depreciated replacement cost(sound
held for sale or idle. (3) economic performance of an asset will be worse
value) is used
than expected.
6. revaluation increment is equal to fair value or depreciated RC
5. Recoverable amount is the higher between fair value less cost to
minus the carrying amount of the asset
sell and value in use.
7. Replacement cost is the current purchase price of a particular
6. If there is binding sale agreement, fair value less cost to sell is the
asset
sales price less costs to sell. If there is no binding sale agreement but is
8. Appreciation or revaluation increase is the excess of the revalued traded in an active market, fair value less cost to sell is equal to the
amount over the historical cost. Appreciation minus the corresponding market price(current bid price, sales price of recent transaction) less
Acc depreciation equals net appreciation or revaluation surplus costs to sell. If there is no binding sale agreement and the asset is not
traded in an active market, it is equal to the best estimate of
9. 2 approaches in recording revaluation: proportional and
knowledgeable and willing parties in an arms length transaction.
elimination
7. Cash flow projections shall be based on the most recent budgets
10. Revaluation surplus is a component of OCI. It is transferred to RE
on financial forecasts, usually up to a maximum of 5 years, unless a longer
when realized over the remaining life of the asset or fully realized on
period can be justified
disposal of asset.
8. Estimate of cash flows include inflows and outflows from
11. The historical cost and the related accumulated depreciation shall
continuing use of the asset and net cash flows received or paid on the
be disclosed in the notes
disposal of the asset at the end of useful life in an arms length
12. Proportional approach is the preferable method because it transaction. It excludes restructuring to which the entity is not yet
preserves the gross and net amounts after revaluation committed, inflows and outflows from enhancement of asset, financing
and income tax.
9. Foreign currency future cash flows shall be forecast in the
currency in which they will be generated and will be discounted using a
rate appropriate to that currency and the resulting figure shall then be
translated into the reporting currency at the spot exchange rate at the
date of value in use calculation.
10. Discount rate is the current pretax rate that reflects the current
assessment of the time value of money and the risks specific to the asset.
It shall not reflect risk for which the future cash flow estimates have
already been adjusted.
17. PAS36 does not specify whether the impairment shall be credited
to the asset directly or use accumulated depreciation or accumulated
impairment loss.
18. If aggregation of assets for the purpose of determining the cash
generating unit is done at the entity level, there would be no
impairment to be recognized since those unprofitable assets would be
concealed. Instead, it should be done at the department or product line
level so that those loss-producing assets would be written down to
recoverable amount

11. As a basic rule, the recoverable amount of an asset shall be 19. Corporate assets are assets other than goodwill that contribute
determined for the asset individually. If it is not possible, the recoverable to the future cash flows of both the cash generating unit under review
amount of the CGU to which the asset belongs is determined and other cash generating unti

12. CGU should be the smallest aggregation of assets for which cash Intangible Assets
flows can be identified and which are independent of cash flows from
1. Essential criteria for intangible assets: (1) Identifiability(separable,
other assets or group of assets. If aggregation is done at the entity
contractual) (2) Control(competitive advantage) (3)future economic
level, there would be no impairment to be recognized. But if it is done at
benefits( max revnue and min.cost)
the department or product line level, we could easily identify those loss-
producing unit from cash generating ones. Thus, impairment can be 2. The capacity of an entity to control future economic benefit
recognized. would stem from legal rights
13. Carrying amount of CGU does not include the carrying amount of 3. Skill of employees arising from training costs, market share, and
any recognized liability customer loyalty are not intangible assets since entity cannot control
those.
14. Corporate assets other than goodwill contribute to future cash
flows of CGU. It is divisional assets such as head office building, EDP, 4. Cost of intangible assets are initially measured at cost and it
research center. It does not generate independent cash flows thus depends on the ff:
recoverable amount of an individual corporate asset cannot be
determined unless management has decided to dispose of the asset( fair a. Separate acquisition
value less cost to sell) b. Acquisition as part of business combinationFair value at the
15. The increased carrying amount of an asset due to reversal of an date of acquisition
impairment loss shall not exceed the carrying amount that would have c. Government grantfair value or nominal amount or zero plus
been recognized for the asset in prior years direct costs
16. Impairment Loss shall be recognized immediately in profit or loss d. Exchangefair value of the asset given up. If it has no
and presented separately commercial substance, at carrying amount of the asset given up.
5. Intangible asset can only be carried at revalued amount if there is
an active market for the asset because usually, fair value or residual value
of intangibles is presumed to be zero.
Specific Intangible assets
1. Legal life of patent is 20 years. It cannot be renewed but its life
can be extended beyond the legal life by a new patent for improvements
and changes
2. If patent is internally developed, it cost includes licensing and
other related legal fees in securing the patent rights
3. Legal fees of successfully prosecuting or defending the patent
shall be expensed because the effect is maintenance. If it is unsuccessful,
legal costs and the remaining cost of the patent is written off as a loss.
4. Competitive patent protect the original patent and thus
amortized over the remaining life of the old patent
5. Related patent extends the life of the old patent. The patents
shall then be amortized over the extended life
6. If there is no extension, they shall be amortized over their own
life.
7. In practice, cost of copyright is written off against the revenue of
the first printing instead of theoretically amortizing it over the useful life.
8. The term of protection for copyright is during the life of the
author and for 50 years after his death.
9. Franchise may be granted for a definite or indefinite period.
10. Periodic franchise fee which is usually based on the gross sales is
normally expensed, while initial franchise fee is capitalizedFRANCHISE
11. Leasehold improvements are classified as PPE and legally revert
to the lessor upon termination of the lease.
12. If renewal option is highly probable, cost of the leasehold
improvements is spread over the extended period, assuming it is shorter
than the life of the improvement. If it us uncertain, it is generally
amortized over the life of the lease, assuming it is shorter than the life of
the improvements.
13. Legal life of trademark is 10 years and may be renewed for
periods of 10years each. Considering the almost automatic renewal of
trademark, it may properly be classified as an intangible asset with
indefinite life and thus, tested for impairment annually.
14. Goodwill has indeterminate life, inherent in a continuing business
and relates to the entity as a whole. It is created by a good relationship
between an entity and its customers.
15. Internally developed goodwill is not recognized because there is
no cash or objective transaction involved.
16. Measurement of goodwill acquired in business purchase may be
accounted for in residual or direct approach.
17. Negative goodwill term is abandoned and replaced as Gain on
bargain purchase
18. In computing for impairment of intangible asset with indefinite
life, future cash flows is divided by the discount rate to get the present
value
19. Acquired in process R and D project separately or in business
combination is recognized as an asset at cost, even if a component is
research
20. USA GAAP says that expenditures for research and development
which have future alternative uses can be capitalized. Subsequent
expenditures, depreciation, amortization are charged to R and D
expense.
21. Capitalizable software costs include the cost of coding and testing
and the cost to produce the product masters. Costs to actually produce
the software from masters and package the software for sale shall be
charged as inventory.
22. A computer software purchased as an integral part of machine
that cannot operate without the specific software shall be treated as PPE.
If it is not an integral part of a related hardware, it is classified as
intangible asset.
23. Web site development costs are expensed
24. Service concession is an arrangement between concession
operator and grantor public sector whereby private sector shall provide
services to the public for some consideration. The scheme is to build,
operate and transfer (BOT).
25. The infrastructure asset is not recognized as PPE because the
grantor controls the asset. It is either treated as financial asset if there is a
contractual right to receive payment from the grantor. It is intangible
asset if the entity has no right to receive cash but has the right to charge
users toll fee as revenue
FAR2
*Conceptually, all liabilities are measured at present value
1. The essence of provision is that there is an uncertainty about the timing
or amount of the future expenditure.
2. Recognition of provision
a. present obligation- legal or constructive
b. probable outflow of benefit
hc. amount of obligation can be measure reliably
3. Constructive obligation is derived from entitys actions. Creates a valid
expectation
4. An accounting provision cannot be created in anticipation of future
event.
5. An entity shall determine whether a present obligation exists at the
end of reporting period by taking into account all available evidence,
including the opinion of experts. Evidence considered includes any
additional evidence provided by events after the end of the reporting
period
6. The estimates of outcome are determined by the judgement of
management of the entity supplemented by the experience of similar
transactions and reports from independent experts
7. Midpoint of the range is used
8. Other measurement considerations:
a. Risks and uncertaintiesdescribes the variability of outcome.
May increase or decrease the amount of liability. Prudence is required
b. present value
c. Future eventsthere must be sufficient evidence that they will
occur (new legislation, changes in technology)
d. Cash inflows from disposal are treated separately from
provision
e. Reimbursement shall be treated as a separate asset and not
netted against estimated liability
f. Change in provisionshould be reversed if it is no longer
probable
g. Expectation of future operating losses is an indication that
certain assets may be impaired. An impairment test is necessary.
9. Restructuring is a program that is planned and controlled by
management and materially changes either the scope of a business of an
entity or the manner in which that business is conducted
a. Sale or termination of a line of business
b. closure of business location or relocation
c. Change in management structure
d. fundamental reorganization of an entity
10. In Provision for restructuring there must be a detailed plan and valid
expectation
11. It shall include only direct expenditures that are necessarily incurred
for the restructuring and not associated with the ongoing activities of the
entity. Example: salaries and benefits of employees to be incurred after
operations cease and that are associated with the closure of operation. It
excludes:
a. cost of retraining and relocating continuing staff
b. Mktg and admin
c. Investment in new system and distribution network.
*These are considered to be expenses relating to the future conduct of
business.
12. Onerous contract is measured at the least net cost of exiting from the
contract or the lower of cost between to pay for the penalty of not
fulfilling it or for the lease payments.
Bonds payable
1. Bond indenture or deed of trust is the document which shows in
detail the terms of the loan and the rights and duties of the borrower and
other parties to the contract.
2. If property is pledged as security for the loan, a trustee is named
to hold title to the property serving as security. Trustee acts as the
representative of the bondholders and is usually a bank or trust entity
3. First mortgage bondsbonds with senior claims on entity assets.
4. Second mortgagebonds with subordinated claims on entity
assets
5. Collateral trust bondsbonds secured by stocks and bonds of
other corporation
6. Debenturewithout collateral. Unsecured and therefore rank as
general creditors in the preference of credit.
7. Coupon or bearer bonds- interest is paid to the person submitting
a detachable interest coupon.
8. Registered bondsinterest is paid to bondholders of record.
9. Journal entry:
Unissued
Authorized
10. Bond issue costs or transaction costs include printing and
engraving cost, legal and accounting fee, registration fee, commission
paid to agents and underwriters. It is amortized over the life of the bond
issue. It is conceived as cost of borrowing and therefore will increase
interest expense. It shall be included in the initial measurement of a
financial liability. It shall be presented as a deduction from bonds payable.
Under effective interest method, bond issue cost must be lumped with
the discount on bonds payable and netted against premium
(if not effective)Interest expense
Bond issue cost
11. If bonds are sold between interest dates, an accrued interest is
involved and it is paid by the buyer. The unexpired life is computed from
the date of sale to the maturity date. Monthly amortization would be the
best approach.
12. In premature retirement, the discount and bond issue cost are
updated up to the date of retirement. Total cash payment is equal to
retirement price + accrued interest from the last payment date up to the
retirement date.
Operating lease
1. Operating lease is the rental approach
2. Lease bonus is treated as a prepaid rent expense to be amortized over
the lease term on the part of the lessee. On the part of the lessor, it is
unearned income.
3. Lessor may pass to the lessee the payment insurance and maintenance Cash 500,000
cost.
Rent receivable 500,000
4. Initial direct cost shall be added to the CV of the leased asset
Rent income 1,000,000
5. Security deposit refundable should be accounted for as a liability by the
lessor
2011
Rent deposit-lessee
Cash 1,250,000
Cash
Rent income 1,000,000

Rent receivable 250,000

Prepaid rent(lease bonus) deferred initial direct cost

Cash Cash
2012
Cash-lessor
Cash 1,250,000
Rent deposit Amortization of initial
direct cost Rent income 1,000,000
Cash-lessor deferred initial Rent receivable 250,000
Unearned

6. Idle property is subject to depreciation as long as it is available for its
intended use.
7.The balance of deferred shall be presented as an addition to the CV of
machinery.
8. Unequal rental payments(rent free of 6months):
9. If the sale and leaseback transaction is an operating lease, any gain or
loss shall be recognized immediately. If it is a finance lease, any gain on
sale is deferred and amortized over the lease term but any loss is
recognized immediately. In finance lease, depreciation is based on the life
of asset because ultimately, the asset would become the property of the
lease by reason of bargain purchase option that is certain.

2010(1Mx6/12) 500,000 10. Leaseback as an operating:

2011 1,250,000 Cash 2,000,000

2012 1,250,000 Acc. Dep. 1,200,000

3,000,000/3= 1,000,000 Machinery 3,000,000

Gain 200,000

2010 Rent Exp. 100,000

 Cash 100,000 1. Commencement is the date which the lessee is entitled to use the
leased asset. Date of which recognition of assets, liabilities, income and
expenses.
Leaseback as a finance lease:
2. A land lease with a lease term of several decades or longer may be
Seller-lessee classified as a finance lease even if title will not pass to the lessee at the
end of lease term
Cash 4,520,000
3. The minimum lease payments are allocated between the land and
Accumulated depreciation 1,250,000 building elements in proportion to the relative fair value of the leasehold
Equipment interests in the land and building elements at the inception of the lease. If
5,000,000 the lease payments cannot be allocated reliably between the 2 elements,
entire lease is classified as a finance lease or operating
Deferred gain on sale and leaseback
770,000 4. Fair value or present value of lease payments, whichever is lower.

Equipment 4,520,000 5. Minimum lease payments:

Lease liability a. rental payments

4,520,000 b. Bargain purchase option
*depreciation is based on useful life c. Guaranteed residual value
*amortization is based on lease term 6. Exercise of bargain purchase option:

Lease liability
Purchaser-lessor: Cash
Equipment Lease receivable Cash 7. If not exercised:
Unearned
Acc depreciation
Cash equipment Lease
receivable. Income Lease liability

Unearned Loss on finance lease

Machinery

Finance lease-lessee
8. Criteria for finance lease:

a. Transfer of ownership 4. Cost of machinery 1,518,650

b. Bargain purchase Initial direct cost 66,300

c.75% of the economic life of the asset even if title is not transferred Net investment 1,584,950

d. Leased asset is of such specialized nature that only the lessee can use it
without major modification
*this requires computation of new effective rate. This reduces the
e. The lessee can cancel the lease; the lessors losses associated with the interest income because the initial cost is effective spread over the lease
cancellation are borne by the lessee. term. In direct financing, initial direct cost is added to the cost of the
leased asset while in sales type, it is expensed immediately
f. Gains or losses from the fluctuation in the fair value of the residual
accrue to the lessee in the form of a rent rebate equaling most of the sale
proceeds at the end of the lease.
Machinery(initial direct cost) 66,300 66,300
g. The lessee has the ability to continue the lease for a secondary period
Cash
at a rent that is substantially lower than the market rent.

9. In general, if there is an option to cancel the lease and the lessee likely
to exercise such an option, then the lease is likely to be an operating Lease receivable 2,000,000
lease.
Machinery 1,584,950

Unearned interest income 415,050

Finance lease-Lessor

1. On the part of the lessor, a finance lease is either the following:

5. Direct financing lease-with residual value
a. Direct financing lease
Cost of machinery 3,194,410
b. Sales type lease
Present value of residual value(500Tx.683) (341,500)
2. In direct financing lease, the net investment in the lease is the present
value of rental payments so that there would be no gross profit to be Net investment to be recovered from rental 2,852,910
realizedonly interest income Divide by PV of ordinary annuity 3.1699
3. Lease receivable 2,000,000

Machinery 1,518,650 Annual rental 900,000

Unearned interest income 481,350

 Gross rentals(900Tx4) 3,600,000 Sales 1,440,000

Residual value 500,000 Unearned interest 560,000

Gross investment 4,100,000

Cost of machinery (3,194,410) Cost of sales 1,000,000

Unearned 905,590 Inventory 1,000,000

Machinery 500T 1,440,000

Lease receivable 500T (1,000,000)

Gross profit: 440,000

Under guaranteed scenario (fair value is 400T): 7. With guaranteed residual value:

Cash 100T Lease receivable 4,200,000(800Tx5+residual value,

200T)
Machinery 400T
Cost of sales 2,000,000
LR 500T
Sales 3,156,820

Unearned 1,043,180
Unguaranteed:
Inventory 2,000,000
Machinery 400T

Loss on finance lease 100T

Initial direct cost 100T
LR 500T
Cash 100T

8. Unguaranteed residual:

LR 4,200,000
6. In sales type lease, present value of lease payments does not
Initial 100T
necessarily equal to the cost of the leased asset; so that, there would be a
gross profit or loss to be realized. Cost of Sales 1,875,820
Cash 100T
(no residual value):
Sales 3,032,640
Lease receivable 2,000,000
 Unearned 1,043,180 Note Payable and Debt Restructuring

Inventory 2,000,000

*The present value of residual value is deducted from cost of sales and
revenue because the asset is conceived as not sold. But the same method
of accounting for LR and unearned is applied. Gross income is the same in
both guaranteed and unguaranteed.
Inventory 200T
1. Note Payable is initially measured at fair value which is equal to the
present value and subsequently measured at amortized cost
2. When the note is issued solely for cash, the cash proceed is the present
value using a discount rate. Straight line method of depreciation is used.
Using 12%, the entry is:

Lease receivable 200T * If it is Cash 880,000

guaranteed, lessee pays for the excess of residual
Discount on N/P 120,000

Note payable 1,000,000

Cash 50T value over fair value of

3. If a promissory note is interest-bearing, the purchase price is the
the asset. If unguaranteed, it is
present value. Example: an entity acquired equipment for 1,000,000
Inventory 150T accounted payable in 5 annual equal installments every dec.31 of each year. Interest
for as a loss is 10percent on the unpaid balance.

LR 200T

Inventory 150T 1/1/11:

Loss 50T Equipment 1M

LR 200T
Note payable 1M

12/31 Interest Expense 100T

9. Actual sale:
Note payable 200T
Cash 3,500,000
Cash 300T
Unearned 1,200,000

Loss on sale 300,000

12/31/12:
Lease receivable 5,000,000
Interest Expense 80T
 Note Payable 200T 1/1 equipment 758,160 12/31 NP
200T
Cash 280T
Discount on N/P 241,840 Cash
200T
4. When a noninterest-bearing note is issued for a property with cash
Note payable 1,000,000 Interest exp
price, the cash price is assumed to be the present value of the note
75,816
issued. Entity acquired an equipment with a cash price of 350T for 500T,
100T down and the balance payable in 4 equal annual installments: Disc.on NP
75,816

*Effective interest method is used.

1/1 Equipment 350T 12/31 NP
100T

Discount on N/P 150T Cash

100T

Cash 100T

N/P 400T Interest Exp

6. Note Payable Lumpsum using a present value factor of .7513:
60T
Equipment 776,170
Disc. On
NP 60T Discount on NP 223,830
* Bond outstanding method is used to amortize discount. Cash 100,000
* the cash paid is not added to the cost of equipment since the 350T Note payable 900,000
cash value includes already the 100T cash paid. So the 400T note payable
applies to the 250T portion of the equipment. Thus, 400-250=150T
discount on note payable. *Since the equipment has no established fair value, we shall discount the
5. If there is no cash price in a noninterest bearing note, present 900T payable + 100T cash paid to get the cash value of the equipment.
value/cash price is determined by multiplying the annual installment by The discount is 900T minus the PV. Interest Method is used.
the present value factor. Entity acquired an equipment for 1M payable in 5
annual installments on every dec.31 of each year. Using 10percent
prevailing market interest, the entry is: 7. In Dacion en pago accounting, mortgage properties are being given to
extinguish a liability. Book value is used.

Mortgage Payable 3M
 Accrued interest 200T

Bank service 50T b. Equity Swap:

Loss on extinguishment 450T Bonds payable 5M

*fair value of SC is 4.5M. 2-way transaction
Acc. Depreciation 800T
Accrued interest 500T
Land 500T
Share capital 2M
Building 4M
Share premium 2.5M

Gain on extinguishment 1M
8. Debt restructuring- granting of concession to the debtor to maximize
investment recovery.

a. Asset swap(PAS39): Bonds payable 5M

*fair value of Bonds is 4.7M
Note payable 2M
Accrued 500T
Accrued interest 400T
Share capital 2M
Land 1.5M
Share premium 2.7M
Gain on extinguishment 900T
Gain 800T

USA GAAP:
Bonds payable 5M
Note Payable 2M
*carrying amount of bonds is used
*fair value is 2.2M. To recognized the
Accrued 500T *no
Accrued interest 400T
gain is recognized(PAS32)
increase in value, gain on exchange is
Share capital 2M
Land 1.5M
credited. 2-way transaction. It is as if Share premium 3.5M

Gain on exchange 700T the land was sold and the

proceeds is used

Gain on debt restructuring 200T to

9. Modification of terms
extinguish the obligation
 a. Interest concession-reduction of interest rate or forgiveness of Note payable-restructured 5.6M
unpaid interest
Gain 400T
b. Maturity value-extension of maturity date or reduction of the
maturity value.
12. If the gain/loss is not atleast 10percent of the old liability, there would
10. There is a substantial modification if the gain/loss is at least 10perecent
be no gain or loss to be recognized. The carrying amount of the old
of the old liability. Accordingly, it shall be accounted for as an
liability shall be the aggregate present value of the principal liability and
extinguishment of the old liability and the recognition of a new liability.
future interest payments of the new liability using a NEW EFFECTIVE
Any costs or fees incurred are recognized as part of gain or loss.
RATE. Thus, there would be no gain or loss to be recognized upon
Illustration: modification. Any costs incurred in modifying the terms are adjusted to
the carrying amount of the old liability and amortized over the remaining
Note payable-due now-14% 5M Note payable old
term of the modified liability
5M

Accrued 1M Accrued interest

1M

Discount
466,120
Note payable-old 5M PV
-accrued interest is forgiven Note payable-new
Accrued 1M
4M
NP-new 5M
-principal is reduced to 4M Gain
2,466,120 Premium on NP 1M
-new interest is 10percent payable very dec.31

-new date of maturity is dec.31,2013 Accounting for Income Tax:

1. Public entity is an entity whose equity and debt securities are traded in
stock exchange or over-the-counter market or whose equity or debt
11. Under USA GAAP, old liability minus the absolute amount of
securities are registered with SEC in preparation for the sale of it.
restructured liability (total cash to be paid) is gain or loss on debt
restructuring. 2. Accounting income-financial income or the net income for the period
before income tax expense. It is income seen in the income statement
computed in accordance with accounting standards.
Note payable-old 5M
3. Taxable income- the income for the period determined by the rules of
Accrued interest 1M taxation authorities. Income tax return.
4. Permanent differences- items of revenue and expenses which are
included in either accounting income or taxable but will never be
included/recognized in the other. It pertains to nontaxable revenue and
nondeductible expenses. It doesnt give rise to deferred tax asset and
liability because they have no future tax consequences.
Nontaxable: Interest income on deposits and dividends received.
Nondeductible: Life insurance premium, tax penalties, surcharges, fines
5. Accounting income after permanent differences is equal to accounting
income subject to tax. Accounting income subject to tax after temporary
difference is equal to taxable income
6. Timing differences are items of income and expenses which are
included in both accounting and taxable income but at different time
periods (what is recognized in accounting income now may not be
recognized yet in taxable until future periods), resulting to a temporary
difference. It is temporary because eventually a certain items treatment
will be the same in accounting and taxable income.
7. Taxable temporary difference-will result in future taxable amount in
determining taxable income of future periods when the asset or liability is
recovered or settled.
8. Deductible temporary difference- will result to a future deductible
amount
9. Deferred tax liability- amount of income tax payable in future periods
with respect to taxable temporary diff.
10. Tax base- amount of asset or liability that is recognized or allowed for
tax purposes.
11. Other taxable temporary differences:
A. When asset is revalued upward and no equivalent adjustment is
made for tax purposes
B. Subsidiaries, associates or joint venture has not distributed its
entire income to the parent or investor resulting to higher
carrying amount of investment in subsidiary, associate or joint venture
C. Cost of a business combination that is accounted for as purchase is
allocated to the identifiable assets and liabilities acquired at fair value and
no equivalent adjustment is made for tax purposes.
12. Deferred tax liability is not recognized when the taxable temporary
difference arises from:
A. goodwill resulting from a business combination and which is
nondeductible for tax purposes
B. Initial recognition of an asset or liability in a transaction that is not a
business combination and affects neither accounting or taxable income.
C. When the parent,investor, or venturer is able to control the timing
of the reversal of undistributed profit or temporary difference or the
temporary difference is not probable to reverse in the future.
13. Standard prohibits a deferred tax liability for goodwill on initial
recognition or where any reduction in the value of goodwill is not allowed
for tax purposes.
14. deferred tax liability for goodwill could be recognized to the extent
that it does not arise from initial recognition.
15. If the goodwill arises from business combination and the goodwill is
not deductible for tax purposes, deferred tax liability shall not be
recognized. If it deductible, deferred tax liability exists.
16. In deferred tax asset, entity is at first at loss but will receive benefit in
the future in the form of reduced taxable income (future deductible
amount). Just a reversal. While in deferred tax liability, entity benefits but
later suffer from an increase in future taxable income.
17. Income statement approach focuses in timing differences only while
statement of financial approach considers all temporary differences(asset
revaluation)
18. Interperiod tax allocation- recognition of a deferred tax asset or
liability
19. Current tax expense- taxable income times tax rate. It is the amount
of income tax paid or payable for a year
20. Total income tax expense- accounting income subject to tax multiply Employee Benefits:
by the tax rate.
1. Employees include directors and other management personnel
21. It is deferred asset if the items are on the disadvantage of the entity at under PAS 19
the first year (accrual of expenses) and deferred tax liability if it is on the
2. Short-term benefits include:
advantage of the entity (excess tax depreciation or installment sale).
a. Salaries, wages, and SSS contributions
22. Acctg income per book 6,000,000
b. Short-term compensated absences such as paid annual leave and
Permanent differences:
sick leave
Nondeductible 500,000
c. Profit sharing and bonuses payable
Nontaxable (300,000)
d. Nonmonetary benefits ( medical care, housing, car, free or
Accounting subject to tax 6,200,000 subsidized goods)

Deductible temporary: 3. Short-term employee benefits require no actuarial assumptions

because they are all payable no later than 12 months and thus are not
Doubtful 200,000
discounted.
Est.Warranty cost 400,000
4. Entitlement to compensated absences may be accumulating and
Taxable temporary: nonaccumulating. Accumulating are those that are carried forward and
can be used in future periods if current periods entitlement is not used in
Excess tax depreciation (200,000) full. Non-accumulating is common for sick pay, maternity or paternity
Installment sale (100,000) leave, military service.

Taxable Income 6,500,000 5. Postemployment benefits include retirement benefits(pension),

23. Deferred tax and liability shall be classified as noncurrent regardless of
the reversal period.
24. deferred tax asset and liability shall be presented separately on
balance sheet as line items.
25. Intraperiod tax allocation- allocation of income tax expense to the
various revenues that brought about the tax.
26. Current tax liability or asset is measured at the current tax rate but
deferred liability and asset shall be measured at the newly enacted tax
rate at the end of the period which is expected to apply next periods
life insurance, medical care.
6. Postemployment benefit plans are informal if evidenced only by
an entitys practice to pay postemployment benefits and formal if
required by law whereby entities are required to contribute to national
benefit plans(SSS) or to provide postemployment benefits to qualified
public sectors.
7. Postemployment benefit plan may be
contributory/noncontributory or funded and unfunded. In contributory,
employer and employee contribute to the fund but they do not
necessarily contribute equal amounts. In noncontributory, only the
employer makes contributions. Under funded plan. Entity sets aside funds
for future retirement benefits by making payments to a funding agency,
such as trustee, bank or insurance company. Under unfunded, the entity 15. Plan assets exclude unpaid contributions due from the reporting
retains the obligation for the payment of retirement benefits without the entity to the fund, as well as any nontransferable financial instruments
establishment of a separate fund. held by the fund.

8. Under Defined contribution plan, contribution is definite but the 16. The expected return on plan assets is based on the market
benefit is indefinite. Employee therefore bears the investment risk. Once expectations at the beginning of the period, for returns over the entire
the defined contribution is paid, employer has no more obligation under life of the related obligation. It reflects changes in the fair value of plan
the plan. Benefit expense is equal to the contribution assets as a result of contribution and benefits paid. In determining the
expected and actual, an entity deducts expected administration costs
9. Under Defined benefit plan, the benefit is definite but the
contribution is indefinite. If the plan is poor, entity must make additional 17. Accumulated benefit obligation is based on current salary while
contributions for any expected shortfall in order to satisfy the promised projected is based on future salary
future benefits
18. Corridor approach is the deferral approach required by the
10. SSS is classified as defined contribution plan because entitys standard
obligation is limited to specified contributions to the plan as a percentage
19. Full recognition approach is an option available when fluctuations
of salary.
are so great that deferral is not deemed to be wise.
11. RA 7641 is a defined benefit plan because the entitys obligation is
20. The 10percent corridor represents materiality threshold in
to provide specific level of benefit for every year of service.
determining whether actuarial gains and losses are included in the
12. PAS19 encourages but does not require an entity to involve an computation of total benefit expense
actuary in measuring benefit obligation under defined benefit plan. It also
21. Only unrecognized gains and losses from prior years or at the
requires that the projected unit credit method(accrued benefit method)
beginning of the year are subject to amortization. Actuarial gains and
shall be used in determining the present value of the defined benefit
losses in the current year are amortized starting next year
obligation
22. Under full recognition approach, actuarial gains and losses
13. Plan assets include assets held by a long-term benefit fund and
occurring in the current year are recognized immediately in the current
qualifying insurance policies. The conditions are: (1)The fund is legally
year as component of OCI rather than as part of total benefit expense.
separate from the reporting entity (2)assets are available only to pay only
Thus, the reported benefit expense is not saddled with the amortization
employee benefits(3)assets are not available to the reporting entitys
of deferred gains and losses that may have occurred years before. In
own creditors even in bankruptcy (4) assets cannot be returned or can be
corridor approach, benefit expense or accrued or deferred benefit cost is
returned only if there is surplus funds or to reimburse it for employee
yet to be adjusted next year or the following year
benefits already paid.
23. Unamortized past service cost and actuarial losses are added to
14. Qualifying insurance policy is an insurance policy issued by an
the fair value of plan assets and unamortized actuarial gain is added to
insurer that is not a related party of a reporting entity and the proceeds
the benefit obligation in reconciliation to get the prepaid/accrued benefit
of the policy can be used only to pay employee benefits and are not
cost per book. This is to conform with the expected balance or actuarial
available to the reporting entitys own creditors even in bankruptcy
assumption
24. Unamortized past service cost is already included in the benefit
obligation. Expense is deferred. As it is amortized, benefit expense for
the current year increases and prepaid/accrued decreases/increases.
25. Actuarial assumptions are mutually compatible if they reflect the
economic relationships between factors such as inflation, rates of salary
increase, return on plan assets and discount rates. It is unbiased if they
are neither imprudent nor excessively prudent.
26. Actuarial assumptions comprise of demographic and financial
assumptions. Demographic deal with mortality, rate of employee
turnover, early retirement, claim rates under medical plans. Financial
deals with discount rate, future salary and benefit levels, future medical
costs and expected return.
27. Discount rate shall be determined by reference to market yields at
the balance sheet date on high quality bonds. If there is no such bonds,
market yields on government bonds is used.
28. Settlement occurs with a curtailment if a plan is terminated
29. The measurement of other long-term employee benefits expense
includes actuarial gains and losses and past service cost recognized
immediately.
30. Termination is the event which gives rise to an obligation rather
than the employee service.
31. If transitional liability is more than the liability that would have
been recognized at the same date under the entitys previous accounting
policy, it shall recognize the transition loss as expense immediately to be
included in the total benefit expense or amortize it over a maximum of
5years(the choice is irrevocable. Transition gain is recognized
immediately.
32. Hybrid plan is deemed to be a defined benefit plan
33. Plan assets shall be carried at fair value. In many cases, plan assets
will have determinable fair value because in discharge of their fiduciary
responsibility, plan trustees will mandate that retirement plans hold only
marketable investments
34. In many countries, actuarial valuations are every 3 years. The
standard does not make it incumbent upon the plan to use annual
actuarial valuation. If an actuarial valuation has not been prepared on the
date of report, the most recent valuation is used and the date of actuarial
valuation is disclosed.
35. Unamortized actuarial losses and past service cost are shown as
debit in the memorandum records.
Shareholders Equity:
1. Certificate of incorporation- right to do business. Juridical personality
and legal existence commences.
2. Organization cost shall be expensed immediately. However, share
issuance cost shall be debited to share premium arising from the issuance
of share capital. The excess is charged to expense.
3. Ordinary shareholders have no fixed or specific return on investment.
Their financial reward is dependent on the operations of the entity.
4. In case of par value share, legal capital is the aggregate par value of the
shares issued and subscribed.
5. Articles of incorporation- corporations right to do business, juridical
personality and legal existence commences.
6. Corporation must formally organize and commence operations within 2
years from the date of incorporation
7. Formal organization -adoption of by laws and election of officers by the
board of directors.
8. By-laws-rules of action adopted by the corporation for its internal
government and for the government of its officers, shareholders, or
members.
9. Place of shareholders meeting must be the principal place of business.
10. 25 percent of authorized shall be subscribed and at least 25% of the
subscription has been paid.
11. Artificial person- corporation
12. Natural- incorporators/corporators SC 1M no discount is
recorded. Debited all to land account
13. Share issuance cost- shall be debited to share premium arising from
issuance of share capital. If SP is not sufficient to absorb the issuance 25. Secret reserve-opposite of watered share. Asset is understated or
cost, excess is charged to expense. liability is overstated

14. Contributed capital includes SP, aggregate par value of issued and 26. Call-official declaration of due and payable unpaid subscription
subscribed
27. Mae failed to pay the remaining balance of 400,000. Delinquency sale
15. Par value- minimum issue price; no indication of market price. followed with an offer price of 450,000, including interest and other costs

16. Ordinary shareholders have no fixed or specific return on investment. A- 4,500 shares
Financial reward is dependent on the operation of the entity
B- 5,000 shares
17. No par shares contributed capital is the total consideration received
C- 6,000 shares
18. Corporation can pay dividends to shareholders limited only to the
* the 10,000 are deemed fully paid, A gets 4,500 while Mae gets 5,500
retained earnings balance. But in wasting asset entity, it is up to the
accumulated depletion balance Advances on delinquency sale 30,000
19. It is illegal to pay dividends if the entity has a deficit. Cash 30,000
20. Normal balance of unissued share capital is debit.

21. Authorized share capital 4,000,000-beg

Unissued share capital (2,900,000)-end

Issued 1,100,000

22. Corporation code prohibits the issue of share at a discount. Cash 450,000
Cash 800T
Subscription receivable 400,000
Disc.in SC 200T
Interest Income 20,000
Share capital 1M
Advances 30,000
23. Discount is a deduction from total SHE

24. Watered Share: lands FV is 800T

28. Callable preference- can be called in for redemption at a specified
price at the option of the corporation.
Land 1M
29. Redeemable- at the option of the holder. Mandatory. Classified as a OS xx
financial liability
Donated capital xx
30. Right of preemption- legal right of stockholders

31. Rights issue-accounting term for preemptive right (stock right)

Subterfuge
32. No entry is required when share warrants are issued to existing
Lands value is 800T
shareholders because these warrants are issued usually without
consideration. Just indicate the no. of rights issued to shareholders and Land xx
the number of shares that can be purchased through the exercise of
rights OSC xx

33. If rights are exercised, memorandum is made for the decrease in the
no. of shares claimable through the exercise of rights Correcting entry upon reissuance:
34. If bonds payable is issued with warrants, the value of the warrants is Cash xx
the residual after deducting the market price of the bonds.
Land xx
Reissuance of TS below cost:
Donated capital xx
a. SP-TS
* the should-have-been payment has been recovered upon reissuance of
b. RE donated shares
Retirement:

a. SP- original issuance Share split: Issued 50,000 new shares with par value of 20, as a result of 5-
b. SP-treasury for-1 split of 10,000 old shares with par value of 100.

c. RE

35.Donated shares are treasury shares. Share-based compensation

Received from shareholders as donation 10,000 OS with par 1. Equity settledshare option
value of 100 2. Cash settledincurs liability and the liability is based on the
Reissuance: entitys equity instruments(share appreciation rights)

Cash xx 3. Share option- at the option of a shareholder, therefore not a

liability
Donated capital xx
4. 2 methods for measuring compensation:
Canceled:
a. Fair valuecompensation is equal to the fair value of SO on the Dec.31,2010:
date of grant. Mandated by PFRS 2
SalariesSO 750,000
b. Intrinsicexcess of market price over option price
SWO 750,000

2011:
Rules:
SalariesSO 750,000
1. If SO vest immediately, employee is not required to complete a
SWO 750,000
specified period of service before unconditionally entitled to SO. On grant
date, entity shall recognize the compensation expense in full with 2012:
corresponding increase in equity
Cash 6,000,000
2. If it doesnt vest immediately, compensation is recognized as
expense over the service period (matching) SWO 1,500,000

SalariesSO (100Tx20fair value) 2,000,000 OS 5,000,000

SOO 2,000,000 SP 2,500,000

Exercise: *So outstanding account is reported as component of share premium. IF

not subsequently exercised, SO shall be adjusted and credited to SP
Cash 6,000,000

SOO 2,000,000
2010:
OSC 5,000,000
No of employees 500
SP 3,000,000
Employees who left 2010 (30)
*In effect, it is capitalization of RE. From RE (salaries) to SWO or SP. It is
like the entity pays cash and the same was subsequently invested. Expected (30)

Employees entitled to SO 440

3. With vesting period: SO X100

Total fair value/compensation(100Tx15) Total SO 4,000

1,500,000/2=750,000 Fair value 30

Total compensation 1,320,000/3=440,000

 2011 (180)

2011: Increase in intrinsic 20x10,000=200,000(additional compensation)

No of employees 500 2010 salaries-SO 125,000

2010 (30) SO 125,000

2011 (28) 2011 Salaries-SO 425,000

Expected (25) SOO 425,000

2012 Salaries 200,000

417x100=41,700x30=1,251,000/3x2=834,000-440,000=394,000
SOO 200,000
2012:

No of employees 500
Execise:
2010 (30)
Cash 1,250,000
2011 (28)
SOO 750,000
2012 (22)
OS 1,000,000
420x100=42,000x30=1,260,000-
SP 1,000,000
834,000=426,000

5. If SO are canceled or settled during the vesting period, it is as if

4. Intrinsic value:
the vesting date had been brought forward and the balance of the fair
MV(OS). dec.31,2010 150 value not yet expensed is recognized immediately

Option price (125) Total compensation 4,000,000

25x10,000=250,000/2=125,000 Cumulative 2010 and 2011 2,050,000

Compensation expense 2012 1,950,000

2011 180

(125) Exercise in 2012

55x10,000=550,000-125,000=425,000(end of vesting period) Cash 3,000,000

Dec 31,2012(exercise date) 200 SOO 4,000,000

 SC 2,500,000 Equity component
66,000
SP 4,500,000
12. Cash alternative:

Accrued salaries payable

6. If it is settled in cash:
650,000(65x10,000)
SOO 2,050,000
Share options outstanding 66,000
Salaries (expense) 450,000
Cash
Cash 2,500,000 650,000

7. Share appreciation creates liability. Share premium 66,000

8. During the vesting period from the date of grant to the exercise date, if
there are increases or decreases in the market value of share over a
Share alternative:
predetermined price for a given number of shares, the liability for the
compensation shall be adjusted. The predetermined price is the beginning 13. Accrued salaries payable 650,000
of the earliest period.
Share options outstanding 66,000
9. Market value of shares at the end of the period less the predetermined
Share capital 300,000
price times the no. of shares equals the total compensation to be
distributed equally over the service period. If there is no increase at the Share premium 416,000
end of the service period, the entry is:

Accrued salaries payable

Gain on reversal of SAR

14. Fair value of the equipment purchased 5,000,000
10. If the entity has the choice of settlement, entity shall account for the
instrument either as a liability or equity. If the employee has the right to Fair value of the liability(40Tx110) 4,400,000
choose the settlement, entity is deemed to have issued a compound Equity component 600,000
financial instrument. It shall be accounted for as partly liability (cash
alternative) and partly equity (share alternative)

11. Fair value of share alternative(12,000x48) Equipment 5,000,000

576,000 Accounts payable
Fair value of liability on grant date,jan1(10,000x51) 4,400,000
510,000 Share options outstanding
600,000
 4. Wasting asset doctrine states that entity can declare dividends
not only to the extent of the retained earnings balance but also to the
Cash alternative(market price is 130,dec.31)
extent of the accumulated depreciation balance
Accounts payable 4,400,000
Retained earnings 3,000,000
Share options outstanding 600,000
Capital liquidated-acc. Depletion 2,000,000
Interest expense 800,000
Dividends payable 5,000,000
Cash
5. Distribution to holders of an equity instrument classified as
5,200,000
financial liability are recognized in the same way as interest expense on a
Share premium 600,000 bond. Dividends paid to holders of mandatorily redeemable preference
share shall be accounted for as interest expense as component of finance
cost
Share alternative: 6. Appropriation may be legal, contractual, or voluntary.
Accounts payable 4,400,000 7. Quasi-reorganization is a permissive but not a mandatory
Share options outstanding 600,000 procedure under which a financially troubled entity restates its accounts
and establishes a fresh start in accounting sense. It is called corporate
SC readjustment. It may be accomplished through recapitalization or
2,500,000 revaluation of PPE.
Share premium 2,500,000 (PPEs fair value is 6,000,000)

Accumulated dep 1,000,000

Retained earnings and Book value per share RE 500,000
1. Property dividends is distribution of noncash assets or shares of PPe 1,500,000
another entity to owners

2. Entity shall measure a noncurrent asset classified for distribution

at the lower of carrying amount and fair value less cost to distribute. If
fair value is lower, there is impairment loss. Revaluation:
3. In closely held entities, if stock dividends are declared, retained PPE 4,000,000
earnings shall be capitalized only to the extent of par value or stated
value of the shares. Acc. Dep 1,200,000

Revaluation surplus 2,800,000

 17. When dividends has preference as to assets, it shall be given
dividends even when there is a deficit. Total deficit is charged to Ordinary
shareholders.
Cost Replacement cost
18. Preference as to dividends means that preference holders will
PPE 5,000,000 9,000,000 4,000,000 receive first dividends if and when dividends are declared. No dividends
can be declared when there is deficit. Preference and ordinary share on
Acc. Dep(30%) (1,500,000) 2,700,000 1,200,000 the deficit on a pro rata basis.
3,500,000 6,300,000 2,800,000 19. Subscribed shares are entitled to dividends.
8. The result of revaluation of PPE must be made by an independent Issued 2,500,000
expert or specialist
Subscribed 1,000,000
9. The resulting deficit from the reorganization is offset against the
revaluation surplus Total 3,500,000

10. Retained earnings subsequent to the quasi-reorg shall be restricted Treasury at par (500,000)
to the extent of the deficit wiped out during the reorganization and
Outstanding 3,000,000
therefore cannot be declared as a dividend
treasury shares are treated as retired for book value purposes.
11. The quasi-reorg shall be disclosed for at least 3 yearsdate,
mechanics, purpose and effect of quasi-reorg on the entitys statement 1. Preference share capital 500T

12. Quasi-reorganization must be approved by SEC. Treasury 400T

13. When preference as to assets, the preference shareholders are SP 100T

entitled to payment not only for the liquidation value but also for
20. Subscription receivable is not deducted for book value purposes.
dividends in arrears.

14. Dividends in arrears usually include current dividends

Earnings per share:
15. In case where there are two classes of preference share with
different dividend rates and both are participating, the lower rate shall be 1. EPS pertains only to ordinary shareholders.
the basis for allocation to the ordinary share.
2. 2 computations of earnings per share is covered by PAS 33 which
16. Participating up to 16% means that the preference share shall requires two presentations of earnings per share: basic earnings per
receive for the current year a maximum of 16 percent on the par value. share and diluted
Since the preference share already receives 12% as basic dividend for the
current year, then it participates only to the extent of 4% on the par of 3. Public entities are required to present earnings per share
2,500,000 or 100,000.
4. An entity shall present basic and diluted earnings per share on the
face of income statement with equal prominence for all periods
presented
5. When an entity presents both consolidated and separate,
disclosures required by the standard need be presented only on the basis
of the consolidated info.
6. An entity that chooses to disclose earnings per share on its
separate financial statements shall present such earnings per share info
on the face of its separate income statement. An entity shall not present
such earnings per share on the consolidated financial statements.
7. Net income is equal to the amount after deducting dividends on
preference share
8. If the preference share is cumulative, preference dividend for the
current year only is deducted from the net income whether such dividend
is declared or not. If the preference share is noncumulative, preference
dividend for the current year is deducted from net income only if there is
declaration
9. If there is a significant change in the ordinary share capital during
the year, weighted average no. of ordinary shares outstanding during the
period should be used.
10. Where stock dividends or share splits create a change in the
capital structure, the increase and decrease in the number of shares shall
be recognized retroactively, meaning the stock dividends or split shall be
treated as a change from the date the original shares were issued.
FAR3
1 When an entity departs from a standard, entity should disclose
the ff:
a Management has concluded that FS is fairly presented
b It has complied with applicable standards and interpretation,
except that it has departed from a particular requirement to achieve fair
presentation.
c The title of the standard or interpretation from which entity has
departed. The treatment adopted
d Financial impact of the departure on each item that would have
been reported in complying with the requirement
2 Going concern is relevant when mgt shall make an estimate of the
expected outcome of future events, such as recoverability of AR and
useful life of noncurrent assets
3 Uncertainties regarding the ability of the entity to continue as a
going concern shall be fully disclosed
4 Investment income is presented separately in the income
statement
5 Materiality is relativity and nature of an item(bribe)
6 Expenditure related to a provision and any reimbursement from a
third party can be offset and only the net expenditure is presented as
expense in the income statement
7 Offsetting can be displayed when gains and losses from trading
securities are netted against each other
8 Entity shall disclose comparative information in respect of the
previous period for all the amounts reported in the current periods
financial statements
9 The outcome of uncertain events at the end of the preceding
period and is yet to be resolved, are disclosed in the current period ( legal
dispute). Users shall benefit from information that an uncertainty existed
at the end of the immediately preceding period, and steps have been
taken during the current period to resolve the uncertainty.
10 When entity makes retrospective restatement, 3 statement of FS b Long-term investments
shall be presented: end of the current period, previous period, beginning
c Intangible assets
of the earliest comparative period.
d Other noncurrent assets
11 Financial structure-source of financing for assets. Indicates how
profits and cash flows will be distributed between creditors and owners 20 Exploration, evaluation asset, mineral rights and resources held
for sale and biological assets are separate line items. PAS16 on PPE
12 Financial flexibility- use its available cash for unexpected
doesnt apply to them
requirements and investment opportunities or raise cash through
borrowing and sale of securities or sale of assets without disrupting 21 Examples of long-term investments:
normal operations.
a. Investment in equity and bond securities
13 Cash equivalents are held for the purpose of meeting short-term
cash rather than for investment purposes b. Joint venture

14 In cash equivalents, what is important is the date of purchase c. Subsidiaries

which should be 3 months or less before maturity
15 Financial asset held for trading or trading securities
16 Nontrade receivable should be classified as current asset if
collectible within 1 year, operating cycle notwithstanding
22. Financial liabilities held for trading are financial liabilities that are
incurred with an intention to repurchase them in the near term(quoted
debt instrument).
23. Sound value or depreciated replacement cost

1 General features of financial statements:

17 Current assets: a fair presentation

a Cash and cash equivalents b going concern

b Held for trading c accrual basis

c Expected to be realized within 12months(nontrade receivables) d materiality and aggregation

d Realized, sold, or consumed(trade receivable, inventory, e offsetting

prepayments) f frequency of reporting
18 Operating cycle- between processing of assets and their g Comparative information
realization in cash
h Consistency of preparation
19 Noncurrent assets:

a PPE
2 An entity whose financial statements comply with PFRS shall
make an explicit and unreserved statement of such compliance in the
notes.
3 An entity cannot rectify inappropriate accounting policies either
by disclosure of the accounting policies used or by notes or explanatory
information
9 Covenants are attached to borrowing arrangements which
represents undertakings by the borrower. These are restrictions on the
borrower as to undertaking further borrowings, paying dividends,
maintaining specified working capital. If breached, the liability becomes
payable on demand.
10 Grace period is a period within which the borrower can rectify
breach and during which the lender cannot demand immediate payment

11 Current liabilities:
4 Reasons for investment:
a Trade and other payables
a Accretion of wealth(royalties, dividends, rentals, interest)
b Current provisions
b Capital appreciation( fair value changes)
c Short-term borrowing(loans)
c Ownership control
d Current portion of a long-term debt
d Store of surplus funds
e Current tax liability
5 Long-term investments include:

a Investment property
12 Noncurrent liabilities:
b Investment in securities and bonds
a Noncurrent portion of a long-term debt
c Cash surrender value
b Finance lease liability
d preference share redemption fund
c Deferred tax liability

d Long-term obligations to entity officers

6 Intangible asset is identifiable if:
e Long-term deferred revenue\
a separable, capable of being transferred, licensed, rented or
exchanged

b Arising from legal or contractual right 13 Range of outcome may be described as:

a Probable

7 Noncurrent receivables fall into other noncurrent assets b Reasonably possible

8 Abandoned property and long-term refundable deposits are other c Remote

noncurrent assets
14 Contingent asset is only disclosed when it is probable. If it is only 24 Affiliates- parent, subsidiaries, fellow subsidiaries
possible or remote, no disclosure is required.
25 Key management personnel-POSDICON
15 International term for Surplus is reserve
26 Close family members of individual are related parties
16 Relationships between parties and subsidiaries shall be disclosed
27 Related party transactions and outstanding balances are
regardless of whether there have been transactions between those
eliminated in the preparation of Consolidated FS
related parties
28 Accounting recognition of a transfer of resources is normally
17 If there have been transactions between those related parties, an
based on the price agreed upon between the parties. Between unrelated
entity shall disclose the nature of the related party relationship as well as
parties, there may be a degree of flexibility in the price setting process
information about the amount of transactions, outstanding balances,
provision for doubtful accounts, and expense recognized in the current 29 Close family members of an individual includes the spouse,
year necessary for an understanding of the potential effect of the children and dependents.
relationship on the FS.
30 Adjusting events:
18 Notes to FS shall be highly detailed, precise, complete and easily
understood a Bankruptcy of customers

19 An entity shall not describe FS as complying with PFRS unless they b Sale of inventories gives evidence about NRV
comply with all the requirements of each applicable PFRS 31 Nonadjusting:
20 Accounting standards set out the required recognition and a Business combination after the reporting period
measurement principles that an entity shall follow in preparing its FS
b Plan to discontinue an operation
21 Disclosure of judgements that management has made in the
process of applying accounting policies and that have a significant effect c Abnormally large changes in asset price and foreign exchange
on the amounts recognized( whether asset should be measured at FV or rates
amortized cost, finance lease or operating lease) d Change in tax rate enacted
22 Disclosures(Nonfinancial): 32 An entity shall disclose the date when the FS are authorized for
a Legal form/country of incorporation/address of principal place of issue and who gave the authorization
business 33 If the entitys owners or others have the power to amend the FS
b Nature of entitys operations after issue, entity shall disclose such fact

c Parent name or ultimate controlling entity 34 Development stage entity shall disclose cumulative net losses
with a descriptive title, deficit accumulated during the development
stage in SHE
23 Control is the power to govern the financial and operating policies 35 Comprehensive income includes:
of an entity
a profit/loss 41 Information about entitys profitability is useful in predicting the
capacity of the entity to generate cash flows from its existing resources.
b other comprehensive income
42 Two approaches for capital maintenance:
36 Profit or loss is the bottom line in the traditional income
statement a financial capital-monetary value of net assets. Historical cost

37 Other comprehensive income comprises items of income and b Physical capital-quantitative measure. Current cost\
expenses including reclassification adjustments that are not recognized in
43 Productive assets include inventories and PPE
profit/loss
44 Transaction approach is the conventional or traditional
a Unrealized gains/loss on investment in equity instruments
preparation of FS in conformity with PFRS. It is the matching approach.
measured at fair value through other comprehensive income
Offers detailed presentation of all income and expenses.
b Gain/loss from translating the FS of a foreign operation
45 Sources of income:
c Change in revaluation surplus
a Sale of merchandise
d Unrealized gain/loss from derivative contracts designated as cash
b Rendering of services
flow hedge
c Use of entitys resources
e Actuarial gains or loss on defined benefit plan in accordance with
the full recognition approach d Disposal of resources other than products
38 Reclassification adjustments are amounts reclassified to 46 Other income represents the revenue and gains from peripheral
profit/loss in the current period that were recognized in other or incidental transactions of the entity. Still part of the operating activities
comprehensive income in the current or previous periods. of the entity
39 Two options for presenting comprehensive income: 47 Unusual and infrequent items of income and expenses are
considered component of income from continuing operations.
1 Two statements
48 separate disclosure of items of income and expense include:
a Income statement-components of profit or loss
a Writedowns
b Statement of comprehensive income-begins with profit or
loss(separate statement) b Reversals
2 Singe statement of comprehensive incomecombined statement c Disposals
showing components of profit/loss and components of other
comprehensive income in a single statement d Discontinued operations

40 Correction of errors and the effect of changes in accounting e Litigation settlement

policies are accounted for as adjustment of the beginning balance of 49 Statement of RE is now a part of statement of changes in equity
retained earnings.
50 Income statement and statement of comprehensive income
include:
a Gains or loss from derecognition of FS measured at amortized
cost
b Profit or loss
51 Forms of income statement:
a Functional presentationtraditional and common form of
income statement. Cost of sales method (distribution and admin). It
provides more relevant information to users.
b Nature of expense presentationgroup all the expenses and
income
52 Purpose of comprehensive statement is to provide a more
comprehensive income information on financial performance measured
more broadly than the income as traditionally computed
53 Net income is included in the determination of RE
unappropriated. The Net Other comprehensive income is carried to
reserves or shown separately in the statement of changes in equity
54 Associate and joint venture income accounted for using the
equity method and Gain or loss from derecognition of financial asset at
amortized cost are line items-separately shown.
55 A noncurrent asset or disposal group is classified as held for sale if
its carrying amount will be recovered principally through a sale
transaction rather than continuing use.
56 The group includes goodwill acquired in a business combination if
the group is a CGU to which the goodwill belongs.
57 An extension of the 1 year period does not preclude the asset or
disposal group from being classified as held for sale if the delay is caused
by events or circumstances beyond the entitys control and there is
sufficient evidence that the entity remains committed to its plan to sell
the asset.
58 Any cost to sell at classification date should be recognized as
impairment loss for the period and deducted from the asset held for sale
59 A plant is temporarily abandoned if a plant is maintained in
workable condition and it is expected that it will be brought back into use
if demand picks up.
60 An entity shall measure a noncurrent asset that ceases to be
classified as held for sale at the lower of carrying amount that would have
been recognized if the asset had not been classified as held for sale and
recoverable amount at the date of subsequent decision not to sell.
61 The assets and liabilities of the group shall be presented
separately and cannot be offset as a single amount (e.g. noncurrent asset
classified as held for sale and liabilities directly associated with
noncurrent assets held for sale)
62 A discontinued operation is defined as a component of an entity
that either has been disposed of or is classified as held for sale and: (1)
represents a separate major line of business (2) Is part of single
coordinated plan to dispose assets (3) Is a subsidiary acquired exclusively
with a view to resale.
63 A component of an entity may be subsidiary, a major line of
business or geographical segment whose operations and cash flows can
be clearly distinguished operationally from the rest of the entity. It can be
clearly distinguished if its assets, liabilities, etc are directly attributable to
the component and it is directly attributable if they would be eliminated
when the component is disposed of.
64 A discontinued operation occurs when the operations and cash
flows of that component have been or will be eliminated from the
ongoing operations of the entity and the entity will have no significant
continuing involvement in that component after its disposal
65 PFRS 5 prohibits the retroactive classification as a discontinued
operation when the discontinued criteria are met after the end of the
reporting period.
66 Discontinued operation is accounted for as a disposal group a Requirements of current standards dealing with similar matters
classified as held for sale
b Framework for the preparation and presentation of financial
67 The results of discontinued operation, net of tax including statements
impairment loss, gain or loss from actual disposal and termination cost
c Most recent pronouncements of other standard-setting bodies
shall be presented as a single amount in the income statement below the
that use similar framework, other accounting literature and accepted
income from continuing operations.
industry practices.
68 If a disposal group is classified as held for sale in the current year,
1 Interim financial reporting means the preparation and
the results of the disposal group fro prior period shall be represented as
presentation of financial information for a period of less than one year. It
relating to discontinued operation in the comparative income statement
may be presented monthly, quarterly or semi-annually.
69 If a disposal group is classified as held for sale in the current year,
2 Quarterly interim reports are the most common although public
an entity shall not reclassify or represent the assets and liabilities of the
traded entities are encouraged to provide interim financial reports at
disposal group for the prior period. Presentation of the assets and
least semiannually and such reports are to be made available not later
liabilities of the disposal group in the prior period is not changed.
than 60 days after the end of interim period
70 The net cash flows attributable to the activities of the
100. PAS34 does not mandate which entities are required to publish
discontinued operation shall be separately presented in the statement of
interim financial reports, how frequently, or how soon after the end of an
cash flows or disclosed in the notes.
interim period
71 If the assets to be abandoned constitute a major line of business
111. SEC and PSC require entities covered by the reportorial requirements
or geographical area of operations, they are reported in discontinued
of Revised Securities Act and Rules on Commercial Papers and Financing
operations at the date on which they are actually abandoned.
Act to file quarterly interim financial reports within 45 days after the end
72 Examples of not changes in accounting policy: of each of the first three quarters

A Changes in accounting policy for transactions or events that differ 112. Two views in financial reporting:
in substance
a. Integral vieweach interim period is an integral part of the
B Application of new accounting policy for transactions that did not annual accounting period. Annual expenses are estimated and then
occur previously or that were immaterial allocated to the interim periods based on forecasted revenue or sales
volume. Cost incurred which clearly benefit the entire year are allocated
73 A change in reporting entity is a change whereby entities change
to the interim periods benefited. The results of subsequent interim
their nature and report their operations in such a way that the financial
periods must be adjusted to reflect prior estimation errors. Estimation
statements are in effect those of a different reporting entity. It is actually
and allocation are necessary to avoid creating misleading fluctuations in
a change in accounting policy and shall be treated retrospectively to
interim period income. It would result to interim income which would be
disclose what the statements would have looked like if the current entity
more indicative of the annual income and thus useful in predicting future
had been in existence in the prior year
operations and making informed decisions.
74 Hierarchy of guidance:
 b. Independent viewEach interim period is considered a
separate accounting period with status equal to a fiscal year. The same
expense recognition rules shall apply as under annual reporting and no
special interim accruals or deferrals are permitted. No estimations or
allocations are made for interim purposes unless such estimations or
allocations are allowed for annual reporting.
113. Independent view argued that estimation and allocation may have
undesirable effects like a significant drop in an earnings trend during the
year may be obscured.
114. Essentially, the standard adopts a mix of the integral and
independent views.
115. The method of accounting for income tax and the recognition of
commission and warranty cost based on sales is an application of the
integral view.
116. Direct cost and revenue are best accounted for as incurred and
earned which equates an independent view. On the other hand, Indirect
costs are more likely to require an allocation process which is suggestive
of integral view.
117. PAS34 allows an entity to publish a set of condensed financial
statements or complete set of financial statements
118. Condensed means that each of the headings and subtotals presented
in the entity's most recent annual financial statement is required but
there is no requirement to include greater detail unless this is specifically
required by PAS34
119. PAS 34 assumes that financial statement users have an access to the
entity's most recent annual report so it is a superfluity to provide the
same notes in the interim financial report.
120. At interim date, it would be meaningful to provide only an
explanation of the events and transactions that are significant to the
understanding of the changes in financial position and financial
performance since the last annual reporting.
121. Presentation of comparative interim statements for income and
comprehensive statement is current and cumulatively (6 months ending
and 3 months ending). Presentation for changes in equity and cash flows
is cumulatively only.
122. Major repairs, year-end bonuses, insurance, property taxes and
depreciation are allocated. The essence is that, an expense should be
allocated to the four quarters if it clearly benefits the interim periods.
123. Depreciation and amortization for an interim period shall be based
only on assets owned during the interim period
124. Paid vacation and holiday leave shall be accrued for interim purposes
because these are enforceable as legal commitments.
125. Gains or losses shall not be allocated.
126. Many entities diversified their operations to spread the risks of
investment over a number of industries and product lines to reduce
dependence on any one set of suppliers and customers.
127. The different industry segments in effect operate as separate entities
within an overall corporate umbrella.
128. Segment reporting is the disclosure of certain financial information
about the products and services an entity produces and the geographical
areas in which an entity operates. This is to enable investors and users
make better assessment of each business activity leading to the
understanding of the performance of the entity as a whole.
129. One segment may be performing well and others may not. It
becomes then necessary to not only report total performance but also
the individual performance.
130. Segment information is only required in the consolidated financial
statements.
131. To be classified as operating segment(distinguishable component),
separate financial information must be available about the segment and
its operating results shall be regularly reviewed by a chief decision maker.
132. Chief operating decision maker is the one responsible for the
allocation of resources and assessing the performance of operating
segments. It may be the CEO, COO or a group of executive officers.
133. Operating segments are identitfied using the management approach.
It means that operating segments are identified based on the
components of the entity that are considered to be important for internal
management reporting.
134. Reportable segment should meet any of the two quantitative
thresholds: (1) segment revenue should be atleast 10percent of the
combined revenue of all operating segments (2) absolute amount of
profit or loss should be atleast 10percent of the greater between the
combined profit of all operating segments that reported a profit and
combined loss of all operating segment that reported a loss. (3) the
assets of the segment are 10 percent or more of the combined assets of
all operating segments.
135. Even if a segment does not meet any of the quantitative thresholds,
it can still be reported or separately disclosed if management believes
that information about the segment would be useful to the users of the
financial statements.
136. The total external revenue of the reportable operating segments
should constitute 75 percent of the total external revenue of the
segments. If the reportable segments do not meet the 75 percent criteria,
additional segments which have majority common characteristics should
be lumped into one reportable segment and included in the reportable
segments to satisfy the 75 percent criteria.
137. PFRS 8 suggests that if the number of reportable segments exceeds
ten, it is likely that the information may become too detailed and
consequently lose its usefulnes, thus, an entity shall consider whether a
practical limit has been reached in the number of segments reported.
138. Whenever a reportable segment no longer meets the 10percent
quantitative threshold, it will still be continued to be reported separately
if management considers the segment of continuing significance.
139. If an operating segment becomes reportable in the current period,
the segment data in the prior period shall be restated to reflect the newly
reportable segment for comparative purposes.
140. Prior period segment information shall not be restated if the
necessary information is not available and the cost to develop it would be
excessive.
141. An entity shall disclose the general information, information about
profit/loss, segment assets and liabilities, and reconciliations for each
reportable operating segment.
142. An entity shall disclose a measure of profit/loss under all
circumstances while the measure of segment assets and liabilities shall
only be disclosed if such amount is regularly provided to the chief
operating decision maker.
143. The amount of segment revenue and expense, and segment assets
and liabilities disclosed for a reportable segment shall be the measure
reported to the chief operating decision maker.
144. The items to be disclosed must be specified in PFRS 8 and are
included in the measurement or regularly reported to the chief operating
decision maker.
145. Entity-wide disclosures or additional information that should be
disclosed if it is not provided as part of the reportable segment
information: (1) products and services (2) geographical areas (3) major
customers
146. A major customer is defined as a single external customer accounting
for 10 percent or more of an entitys external revenue
147. The entity shall disclose only its reliance on major customers, the
total amount of revenue from major customers and the identity of the
segment(s) reporting the revenue.
Conceptual Framework
Summary of the Conceptual Framework issued by the Accounting
Standards Council (ASC)
FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF
FINANCIAL STATEMENTS
PURPOSE AND STATUS OF THE FRAMEWORK
The FRSC Framework for the Preparation and Presentation of Financial
Statements describes the basic concepts by which financial statements
are prepared. The Framework serves as a guide to the Board in
developing accounting standards and as a guide to resolving accounting
issues that are not addressed directly in Philippine Accounting Standards
or Philippine Financial Reporting Standards or Interpretations. The
purpose of the framework as outlined is to:
a. Assist the Financial Reporting Standards Council (FRSC) in developing
accounting standards that represent generally accepted accounting
principle;
b. Assist the FRSC in its review and adoption of existing International
Accounting Standards;
c. Assist preparers of the financial statements in applying FRSC
Statements of Financial Accounting Standards and in dealing with topics
that have yet to form the subject of an FRSC statement;
d. Assist auditors in forming an opinion as to whether financial
statements conform with Philippine GAAP;
e. Assist users of financial statements in interpreting information
contained in the financial statements prepared in conformity with
Philippine GAAP;
f. Provide those who are interested in the work of the FRSC with
information about its approach to the formulation of Statements of
Financial Accounting Standards
Scope of the Framework:
Defines the objective of financial statements;
Identifies the qualitative characteristics that make information in
financial statements useful; and
Defines the basic elements of financial statements and the concepts for
recognizing and measuring them in financial statements.
Concepts of capital and capital maintenance.
General Purpose Financial Statements
The Framework addresses general purpose financial statements including
consolidated financial statements that a business enterprise prepares and
presents at least annually to meet the common information needs of a
wide range of users external to the enterprise. Therefore, the Framework
does not necessarily apply to special purpose financial reports such as
reports to tax authorities, reports to governmental regulatory
authorities, prospectuses prepared in connection with securities
offerings, and reports prepared in connection with business
combinations.
Users and their Information Needs
The principal classes of users of financial statements are present and
potential investors, employees, lenders, suppliers and other trade
creditors, customers, governments and their agencies and the general
public. All of these categories of users rely on financial statements to help
them in decision making.
While financial statements cannot meet all of the information needs of
these user groups, there are information needs that are common to all
users, and general-purpose financial statements focus on meeting these
needs.
Responsibility for Financial Statements
The management of an enterprise has the primary responsibility for
preparing and presenting the enterprise's financial statements.
Changes in Financial Position or Cash Flows
Users of financial statements seek information about the investing,
financing and operating activities that an enterprise has undertaken
during the reporting period. This information helps in assessing how well
the enterprise is able to generate cash and cash equivalents and how it
uses those cash flows. The cash flow statement provides this kind of
information.

The Objective of Financial Statements

The objective of financial statements is to provide information about the

financial position, performance and changes in financial position of an
enterprise that is useful to a wide range of users in making economic
decisions.
Underlying Assumptions (Postulates)

Financial Position
The financial position of an enterprise is affected by the economic
resources it controls, its financial structure, its liquidity and solvency, and
its capacity to adapt to changes in the environment in which it operates.
The balance sheet presents this kind of information.
Performance
Performance is the ability of an enterprise to earn a profit on the
resources that have been invested in it. Information about the amounts
and variability of profits helps in forecasting future cash flows from the
enterprise's existing resources and in forecasting potential additional
cash flows from additional resources that might be invested in the
enterprise. The Framework states that information about performance is
primarily provided in an income statement.
The Framework sets out the underlying assumptions of financial
statements:
Accrual Basis. The effects of transactions and other events are
recognized when they occur, rather than when cash or its equivalent is
received or paid, and they are reported in the financial statements of the
periods to which they relate.
Going Concern. The financial statements presume that an enterprise
will continue in operation indefinitely or, if that presumption is not valid,
disclosure and a different basis of reporting are required.
The FRSC conceptual framework mentions two assumptions only.
However, it is widely believed that an inherent trait of the financial
statements are the basic assumptions of:
 Accounting Entity. The business is separate from the owners, Ingredients of relevance:
managers, and employees who constitute the business. Therefore,
Predictive Value Information can help users increase the likelihood
transactions of the said individuals should not be included as transactions
of correctly predicting or forecasting the outcome of certain events.
of the business.
Feedback Value Information can help users confirm or correct
Time Period. Financial reports are to be prepared for one year or a
earlier expectations. Note that the predictive and confirmatory roles of
period of twelve months.
information are interrelated.
Monetary unit. There are two aspects under this assumption. First
Timeliness- Information loses its relevance if it is not timely
is the quantifiability of the peso, meaning that the elements of the
financial statements should be stated under one unit of measure which is
the Philippine Peso. Second is the stability of the peso, means that there
is still an assumption that the purchasing power of the peso is stable or Reliability - Information in financial statements is reliable if it is free from
constant and that instability is insignificant and therefore ignored. material error and bias and can be depended upon by users to represent
events and transactions faithfully. Information is not reliable when it is
purposely designed to influence users' decisions in a particular direction.
Qualitative Characteristics of Financial Statements

These characteristics are the attributes that make the information in Factors of reliability
financial statements useful to investors, creditors, and others. The
Framework identifies four principal qualitative characteristics: Faithful Representation Information must represent faithfully the
transactions and events it either purports to represent or could
a. Understandability reasonably purport to represent.
b. Relevance Substance over form Transactions are to be accounted for and
presented according to their substance and economic reality and not
c. Reliability
merely their legal form.
d. Comparability
Neutrality - Information contained in the financial statements must be
free from bias and error.

Primary Characteristics Prudence (Conservatism) The inclusion of a degree of caution in the

exercise of judgments needed in making estimates or choosing
Relevance - Information in financial statements is relevant when it
alternatives so that the outcome will have the least effect on equity.
influences the economic decisions of users. It can do that both by (a)
helping them evaluate past, present, or future events relating to an Completeness to be reliable, the information in the financial
enterprise and by (b) confirming or correcting past evaluations they have statements must be complete within the bounds of materiality and cost.
made.
Constraints to Relevant and Reliable Information
Timeliness Undue delay in reporting of information may lead to the
loss of relevance even though enhancing it reliability. While providing
information before all aspects of a transaction or other events are known
may increase the relevance of information, thus impairing its reliability.
Balance between Benefit and Cost - The benefits derived from relevant
and reliable information should exceed the cost of providing it.
Secondary Characteristics
Understandability - Information should be presented in a way that is
readily understandable by users who have a reasonable knowledge of
business and economic activities and accounting and who are willing to
study the information diligently.
Comparability - Users must be able to compare the financial statements
of an enterprise over time so that they can identify trends in its financial
position and performance. Users must also be able to compare the
financial statements of different enterprises. Disclosure of accounting
policies is essential for comparability especially when the enterprise
adopts a new or changes its accounting policies.
The Elements of Financial Statements
Financial statements portray the financial effects of transactions and
other events by grouping them into broad classes according to their
economic characteristics. These broad classes are termed the elements of
financial statements.
The elements directly related to financial position and their definition
according to the framework are:
Asset- An asset is a resource controlled by the enterprise as a result
of past events and from which future economic benefits are expected to
flow to the enterprise.
Liability- A liability is a present obligation of the enterprise arising from
past events, the settlement of which is expected to result in an outflow
from the enterprise of resources embodying economic benefits.
Equity- Equity is the residual interest in the assets of the enterprise
after deducting all its liabilities.
The elements directly related to performance and their definition
according to the framework are:
Income- Income is increases in economic benefits during the
accounting period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants.
Expense- Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets or
incurrence of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
Recognition of the Elements of Financial Statements
Recognition is the process of incorporating in the balance sheet or
income statement an item that meets the definition of an element and
satisfies the following criteria for recognition:
It is probable that any future economic benefit associated with the
item will flow to or from the enterprise; and
The item's cost or value can be measured with reliability.
Based on these general criteria:
An asset is recognized in the balance sheet when it is probable that
the future economic benefits will flow to the enterprise and the asset has
a cost or value that can be measured reliably.
 A liability is recognized in the balance sheet when it is probable that Concepts of Capital
an outflow of resources embodying economic benefits will result from
Financial concept of capital - capital is synonymous with net assets of the
the settlement of a present obligation and the amount at which the
enterprise. This is the concept of capital adopted by most enterprises.
settlement will take place can be measured reliably.
Physical concept of capital capital is regarded as the productive capacity
Income is recognized in the income statement when an increase in
of the enterprise based on, for example, units of output per day.
future economic benefits related to an increase in an asset or a decrease
of a liability has arisen that can be measured reliably. This means, in
effect, that recognition of income occurs simultaneously with the
recognition of increases in assets or decreases in liabilities Concepts of Capital Maintenance

Expenses are recognized when a decrease in future economic
benefits related to a decrease in an asset or an increase of a liability has
arisen that can be measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously with the recognition of an
increase in liabilities or a decrease in assets.
Financial capital maintenance Under this concept, a profit is earned only
if the financial (or money) amount of the net assets at the end of the of
the period exceeds the financial (or money) amount of the net assets at
the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period.

Physical capital maintenance Under this concept, a profit is earned only

if the physical productive capacity (or operating capability) of the
Measurement of the Elements of Financial Statements enterprise (or the resources need to achieve that capacity) at the end of
the period exceeds the physical productive capacity at the beginning of
Measurement involves assigning monetary amounts at which the
the period, after excluding any distributions to, and contributions from,
elements of the financial statements are to be recognized and reported.
owners during the period.
The Framework acknowledges that a variety of measurement bases are
used today to different degrees and in varying combinations in financial
statements, including:

Historical cost

Current cost

Net realizable (settlement) value

Present value (discounted)

Historical cost is the measurement basis most commonly used today, but
it is usually combined with other measurement bases. The Framework
does not include concepts or principles for selecting which measurement
basis should be used for particular elements of financial statements or in
particular circumstances. The qualitative characteristics do provide some
guidance in this matter.