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Classroom Notes

DISCONTINUED OPERATION
a) Discontinued operation is a major line of business or geographical area of operations that has been
disposed of or “classified as held for sale” AND a subsidiary acquired with the exclusive intention to
sell.

b) The Income or Loss from Discontinued Operation to be presented as a SINGLE LINE ITEM below
income from continuing operations and NET of TAX shall include the Net Operating Income, Gain
or loss on disposal of assets, Impairment Loss for the remeasurement to FV less Cost of Disposal
and the termination cost to be accrued.

c) The assets and liabilities are also presented separately from the assets and liabilities from con-
tinuing operations and presented as CURRENT ASSETS AND CURRENT LIABILITIES.

NONCURRENT ASSET HELD FOR SALE

a) NCA held for sale are usually PPE that are intended for sale (the carrying amount will be recov-
ered through sale) and the sale is highly probable, simply meaning expected to be sold within one
year for the date of classifying it as held for sale.

b) Remeasured at Lower of CA and FV less Cost to Sell. But always depreciate first if using the cost
model or revaluate if using the revaluation method before reclassifying.

c) If the FV less Cost to sell increases at balance sheet date, recognize the gain but the loss should
not exceed the impairment loss recognized at reclassification.

d) If placed back in operations, and classified again as PPE, remeasure at the lower of Recoverable
Amount (take note: higher of FV-C2S and Value in Use) and CA if the asset was not reclassified as
held for sale, meaning depreciation and impairment losses that would have been recognized from
the time of reclassification shall be deducted.

OPERATING SEGMENTS
a) An operating segment is reportable if it meets at least 10% of one of the QUANTITATIVE
THRESHOLDS.

b) The Revenue Test is based on the total revenue of all the operating segments whether from
intersegment sales or sales to external segments.

c) The Profit or loss Test is based on the greater value whether profit or loss when the total profit is
combined, or the total losses are combined.

d) The Asset Test is based on the total assets of all the operating segment.
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e) The upper limit is 10 reportable segments. Management also has the final decision if a segment is
Reportable even if it does not meet any of the QT.

f) The reportable segments identified using the QT must report at least 75% of the external revenue.
If not, other segments shall become reportable until the 75% requirement is met.

g) A Major customer is an EXTERNAL Customer that provides at least 10% of the external revenue.
The identity of the segment producing the revenue and amount of revenue to the EC shall be
disclosed.

INTERIM REPORTING
a) Interim reports are financial statements prepared for an interim period, meaning shorter than a
full year.

b) A complete set may be prepared or condensed financial statements.

c) Revenues shall be recognized using the same method for a full year.

d) Expenses that generated the revenue shall be matched against the revenues reported.

e) Expenses that are not directly associated are allocated or recognized as incurred.

f) Gains and losses including losses on inventory write-down are not allocated but recognized
immediately.

g) Effects of changes in estimated and tax rates are recognized in the following interim period.

CASH AND CASH EQUIVALENTS

a) Cash on hand includes: Currency and coins, Checks and money orders held, Petty cash fund and
change fund. Postdated, stale and defective checks are receivables and not cash. The petty cash
fund must be fully reimbursed or updated at balance sheet date.

b) Cash in bank includes: Unrestricted bank deposits at their adjusted balance, restricted bank depos-
its for current use (payroll, dividends and taxes) and restricted bank deposits for liabilities due with-
in 12 mos.

c) Funds to be disbursed for the acquisition of noncurrent assets are always classified as long-
term investments.

d) The adjusted cash in bank will be computed by adding DIT and deducting Outstanding Checks that
are net of certified checks from the bank statement balance and adding CMs and deducting DMs
from the balance per book. Errors shall be added or deducted depending on the error or omission
made.

e) Cash equivalents are debt instruments that are short term in nature. Equity instruments shall be
excluded except redeemable preference shares due in 3 months from acquisition.
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f) If silent the following are cash equivalents: T-bill, time deposit and certificate of deposit, commer-
cial paper and money market placements or instruments. Take note other government bonds
payable and short-term debt instruments must be acquired 3 months or less from maturity date.

g) The cash in the Petty Cash Fund shall be the remaining currency and coins plus accommodated
checks unless the checks are NSF or postdated.

Accounts Receivable and Doubtful Accounts

a) Accounts receivables are recognized at the invoice price of the merchandise or services that are
sold on account and classified as current assets if collectible within the normal operating cycle or
12 months whichever is longer.

b) Invoice price is the List selling price less trade discounts and rebates which are not recorded.

c) Accounts receivable recognized from the credit sale shall be reduced by: Collections, Writeoff,
Sales Return and Allowances, Collections plus the cash discount, and Factored AR.

d) Recovery of accounts written off can be ignored and recorded as a debit to cash and a credit to al-
lowance for DA.

e) The Ending Balance of AR shall be presented at NRV or Amortized cost by deducting the following:
Allowance for SR, SD, Freight Charges (FOB destination and Freight Collect terms) and Doubtful
Accounts.

f) The ADA can be computed by (1) Percentage of credit sales, (2) Percentage of ending AR and (3)
Aging. If (2) and (3) is used it will be the ending allowance. If (1) is used it will be the doubtful ac-
counts expense.

g) The balance before adjustment (Beg. + Recovery – writeoff) shall be added to the expense in (1) to
get the ending allowance. If the (2) and (3) is used the difference between the balance before ad-
justment and ending allowance shall be the doubtful accounts expense.

h) The balance before adjustment is the beginning balance minus the write-off and plus the recovery.
However interim provisions shall also be added and any write-off at the end of the period before
preparing an analysis of accounts receivable shall be deducted to get the balance before adjust-
ment.

i) If there is a debit balance before adjustment to the allowance, Expense minus the debit balance
equals ending allowance under (1) and Debit balance plus ending allowance equals expense in (2)
and (3)
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Receivable Financing
• Pledging is a borrowing arrangement where all the accounts receivable is collateralized and
therefore only requires disclosure. Discounted interest is interest computing using simple inter-
est but is deducted in advance.

• Assignment is the same as pledging but only a portion of the AR is collateralized. This will re-
quire the reclassification through a formal journal entry. Also, at yearend, the difference be-
tween the balance of the loan and the AR that is assigned shall be disclosed as “Equity in the
Assigned accounts”.

• Factoring is the outright sale of AR. All the risk of uncollectability is transferred to the factor or
buyer. Under a “casual factoring” agreement, the difference between the selling price and NRV
is recognized as a loss on the factoring or sale. Under a “factoring as a continuing agreement”,
the factor charges a service fee and interest and withholds a portion for sales returns and dis-
counts. The factor only assumes risk of uncollectibility. The factor’s holdback is part of trade
and other receivables.

• Discounting of NR is also a sale. The Selling Price is computed at the Maturity Value less Dis-
count. The discount is MV x Discount rate x the remaining term or discount period. The differ-
ence between the SP and Principal plus Accrued interest at date of discounted is a Loss on Dis-
counting or interest expense if it is a secured borrowing.

• Because discounting is with recourse. A contra receivable account is used for the face value
and deducted from the total notes receivable known as “Notes Receivable Discounted.

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