ASSOCIATE

ASSOCIATE is an entity over which the investor has significant influence but is
neither a subsidiary nor a joint venture of the investor.
 Significant Influence

is the power to participate in the financial and operating policy decisions of the
associate but is not control or joint control over those policies.
is presumed to exist when the investor holds at least 20% of the investees voting
power.
is presumed not to exist the investors hold less than 20% of the investees voting
power.
 Full PFRS indicates the existence of significant influence beyond the mere 20% the threshold as follows:

a. Representation in the board of directors.

b. Participation in policy making process.
c. Material transactions between the investor and the investee.
d. Interchange of managerial personnel.
e. Provision of essential information.
 Measurement

Cost Model
The investment in associate is initially measured at transaction price including
transaction cost.
The investors shall measure its investment in associate at cost less any accumulated
impairment losses.
 The Investment in associate shall be accounted for using the fair value model if
there is published price quotation.
The investment in associate carried at fair value is not tested for impairment.
All dividends and other distributions received are recognized as income.
 Illustration

On January 1, 2013, an SME acquired 30% of the ordinary

shares of an investee for P 3,000,000 including
transaction cost of P 100,000. On January 15, 2013, the
investee paid dividend of P 1 000,000 . The investee
recognized a net income of P 4, 000, 000 in 2013 and
paid dividend of P 1 500,000 on December 31, 2013. The
fair value of the investment is P 4,250, 000 on December
31, 2013 and the cost of disposal is estimated at P 50,000.
There is no published price quotation for the investment
in associate. The SME has elected to use the cost model in
accounting for the investment.
 Journal Entries

Jan 1 Investment in associate 3,000,000

Cash3,000,000
Jan 15 Cash ( 30%x 1,000,000) 300,000
Dividend Income 300,000
Dec. 31 Cash (30%x 1,500,000) 450,000
Dividend income450,000
 Published price quotation

If there is a published price quotation for the investment, the fair value model
shall be applied to account for the investment.
Jan 1 Investment in associate2,900,000
Transfer cost 100,000
Cash 3,000,000
Jan 15 Cash 300,000
Dividend Income 300,000
Dec 31 Cash 450,000
Dividend Income 450,000
Dec 31 Investment in associate1,350,000
Gain from increase in fair value1,350,000
Equity Method
The investment account is initially recognized at transaction price including
transaction cost.
The investment is adjusted to reflect the investors share in profit or loss and other
comprehensive income of the associate.
The investment in associate carried at equity is tested for impairment.
 Illustration
On January 1,2013, an SME acquired 30% of the ordinary shares of an investee for
P3,000,000 including transaction cost of P100,000. On January 15, 2013, the investee
reported net income of dividend of P1,000,000. The investee reported net income of
P4,000,000 for 2013 and paid dividend of P1,500,000 on December 31,2013. The fair
value less cost of disposal of the investment is P3,400,000 on December 31, 2013. The
SME has elected to use the equity method in accounting for the investment.
Jan 1 Investment in associate 3,000,000
Cash 3,000,000
Jan 15 Cash 300,000
Investment in associate 300,000
Dec 31 Investment in associate 1,200,000
Investment in income 1,200,000
Dec 31 Cash(30%x 1,500,000) 450,000
Investment in associate 450,000
Dec 31 Impairment loss 50,000
Investment in associate 50,000
Fair Value Model
The investment in associate is initially measured at the transaction price, excluding
transaction cost.
The investment is measured at fair value with changes in fair value recognized in
profit or loss.
active market quoted price
No active market valuation technique
 Illustration

On January 1, 2013, an SME acquired 30% of the

ordinary shares of an investee for P3,000,000
including transaction cost of P100,000. The investee
reported net income of P4,000,000 for 2013 and
paid dividend of P1,500,000 on the investment is
P3,400,000. Cost of disposal is estimated at
P200,000. The SME has elected to use the fair value
model in accounting for the investment.
 Jan 1 Investment in associate 2,900,000
Transaction cost 100,000
Cash 3,000,000
Dec 31 Cash 450,000
Dividend Income 450,000
Investment in associate 500,000
Gain from increase in fair value 500,000
 Financial statement presentation

Investment in associates shall be presented as a

separate line item under noncurrent assets.
SHALL DISCLOSE THE FOLLOWING
a. The accounting policy for the investments in
associates.
b. The fair value of investments accounted for the
using equity method for which there is a published
price quotation.
 Comparison with the full PFRS

PFRS for SMEs and full PFRS measurement of the investment in associate
PFRS for SMEs cost model, equity method, fair value model
full PFRS Equity method ONLY
FULL PFRS
a. Guidance on significant influence
b. Consequences
c. Profit and loss.
Investment Property
Izrha Roque
 Definition of PFRS for SMEs

Investment Property is a

property (land, building or part of a building, or both)

held by an owner or by the lessee under a finance
lease
to earn rentals or for capital appreciation or both

Rather than
Use in production or supply of goods
Inventories
or services for administration purposes
Sale in the ordinary course of the business
 Initial Measurement

Initially at cost

Cost of purchase = purchased price + any directly attributable

expenditure

Attributable expenditurelegal fees

brokerage fees
property taxes
other transaction cost

Borrowing costs directly attributable to the construction of an

investment property recognized as expense immediately
 Subsequent Measurement

Measured at FAIR VALUE MODEL at each reporting date

it can be measured reliably without undue cost or effort

Measured at COST-DEPRECIATION-IMPAIRMENT MODEL

it cannot be measured reliably (accounted & presented as separate PPE
cost less depreciation and impairment losses

Changes in FV shall be recognized in P&L

Circumstance rather than accounting policy

 Examples of Investment Property

Building rented out to independent parties under an

operating lease

Tract of land acquired as long-term investment

Building rented out under operating lease that

provides cleaning, security and maintenance security
Itshould be insignificant to the lease to the lease agreement
Significant part like hotel and building is PPE

Tract of land held for undetermined future use

 Mixed Use Property

Presented as separate between IP and PPE

Accounted as PPE
If FV of an investment property cannot be measured
reliably without undue cost or effort
 Illustration on mixed use property

An entity owns a building that is rented out to

independent parties under an operating lease. The
entitys administration employees are located in offices
that occupy 25% of the floor area. The entity occupies a
significant portion.

*if the entity could be sold separately and leased-out separately it

should be account as IP and PPE

*if the FV of IP cannot be measured reliably classified as PPE

 Treatment of Property Interest
held by a lessee under an operating lease

Accounted as IPmeet the definition of IP

lessee can measure the FV of Property Interest without undue
cost or effort on an ongoing basis
The classification is a Property-by-property basis
account for the operating lease as finance lease

ASSET & LIABILITY

recognized at the lower of the fair value of the property interest
and the PV of minimum lease payments
 Illustration of Property Interest
held by a lessee under an operating lease

An entity rents a building under an operating lease from an

independent third party. Furthermore the entity subleases such
building under operating lease to various independent third
parties.
The entity profits from the leasehold interest in the building by
charging higher rent to the tenants than it is charged by the
lessor.

*if the entity can measured it reliably without undue cost or effort, it may or not
required to classify the leasehold interest in the building as IP

*In this case it shall be recognized the asset as IP and a finance lease liability
which is the obligation to make lease payment
 Transfer of Property to or from IP

SME shall transfers property when:

it meets or ceases the definition of IP
if the reliable measure of FV is no longer available for IP using FV model,
it shall be account for that IP as PPE using cost model until a reliable
measure of FV becomes available

MEASUREMENT
Carrying amount of IP on the date of transfer
becomes the initial cost as an item of PPE
 The difference between PFRS for SMEs and Full PRFS

PFRS for SMEs Full PFRS

Measured at FV if it Accounting policy is

can be measured either FV or Cost
reliable without undue model
cost and effort

IP held as lessee under an If cost model is used, FV of

operating lease, the entity must property is disclosed
follow the FV model only
 SMEs- PROPERTY PLANT AND
EQUIPMENT
DEPRICIATION METHODS:

STRAIGHT LINE

DIMINSHING BALANCE PRODUCTION METHOD

 SMEs- PROPERTY PLANT AND EQUIPMENT

PFRS FOR SMEs does not address Non Current

asset held for Sale.
Item of PPE held for sale is not separately presented
While full PFRS Non Current assets held for sale is
measured at lower of carrying amount and fair value
less cost of disposal and presented separately as
current asset and no longer depriciated
SMEs- PROPERTY PLANT AND EQUIPMENT

COMPARISON OF FULL PFRS AND PFRS

FULL PFRS
FOR SMEs
PROVIDES PFRS FOR
THAT AN
ENTITY MAY SMEs
CHOOSE COST
BETWEEN
REVALUATION MODEL
MODEL OR ONLY
COST MODEL
 SMEs- PROPERTY PLANT AND EQUIPMENT

GOVERNMENT GRANT assistance by the

government in form of transfer of resources to an
entity in return for past or future compliance with
specific conditions
 SMEs- PROPERTY PLANT AND EQUIPMENT

Recognition and measurement of

government grant:

1. A grant does not impose any restriction on the recipient is

recognized in Income when proceeds are receivable.
2. A grant does impose any restriction on the recipient is
recognized in Income when condition are met.
3. A grant does received before the revenue recognition
criteria are met is recognized as liability
 SMEs- PROPERTY PLANT AND EQUIPMENT

Disclosures:
1. Nature and amount of government grant
recognized in the financial statement.
2. Unfulfilled condition and other contingencies
attaching to government that has not been
recognized in income.
3. indication of other forms of government
assistance from which the entity has directly
benefited
 SMEs- PROPERTY PLANT AND EQUIPMENT

COMPARISON OF FULL PFRS AND PFRS

FOR PFRS FOR SMEs,
SMEs:
Full PFRS, Gov.Grant
Gov.Grant is
is recognized when
recognized when
there is reasonable
condition are actually
assurance
satisfied
Gov. Grant is recognized as
income over the period Gov.Grant does not allow an
necessary to match grant entitiy to match the grant
related cost for which is with the Expense.
intended to compensate

Grant related to assets may

Grant related assets only
be treated either as deferred
deferred income until
income or reduction in the
condition are met.
carrying amount of the assets
 SMEs- PROPERTY PLANT AND EQUIPMENT

Illustration :
When condition are received:
Cash xxx
Deferred grant income xxx
When condition are satisfied:
Deferred grant income xxx
Grant income xxx
When condition are not satisfied:
Deferred grant income xxx
Cash xxx
 SMEs- PROPERTY PLANT AND EQUIPMENT

BORROWING COSTS
Borrowing cost are interest and other cost that an entity
incurs in connection with the borrowing of funds.
Borrowing cost includes:
a.Interest expense calculated using effective interest method
b.Finance charges in respect of finance leases recognized
c.Exchange differences arising from foreign currency
borrowings
 SMEs- PROPERTY PLANT AND EQUIPMENT

Recognition of Borrowing Costs

PFRS for SMEs: shall Full PFRS: borrowing costs

recognize all borrowing costs as
expense
PFRS for SMEs: does not
permit capitalization of interest
are directly attributable to the
acquisition, construction or
production of a qualifying
asset
Full PFRS: assets that are not
directly attributable= expense
 SMEs- PROPERTY PLANT AND EQUIPMENT

Disclosures

a. Finance costs

b. Total interest expense using the effective interest

method for financial liabilities that are not measured
at fair value through profit or loss.
 What is Intangible Asset?

The intangible asset is identifiable when:

It is separable.
It arises from contractual or other legal rights.

Recognition of Intangible Asset:

It is probable that the expected future
economic benefits that are attributable to
the asset will flow to the entity.
The cost or value of the asset can be
measured reliably.
 What is the initial measurement for Intangible
Asset?

The cost of separately acquired intangible asset

comprises:
The purchase price.
Any directly attributable cost of preparing the asset
for the intended use.

Business combination = Fair Value on the

acquisition date.
Government Grant = Fair Value at the date
the grant is received or receivable.
Internally generated intangible asset

The following items shall be recognized as expense when incurred:

Start-up cost
Training cost
Advertising and promotion
Relocation cost
Expenditures on internally generated brands, logos, mastheads, publishing titles, customer
list and others similar in substance.
Expenditures on internally generated goodwill.
All research and development costs.

Subsequent measurement
An SME shall measure intangible assets
after initial recognition at cost less
accumulated amortization and any
 Useful life of Intangible Assets

Amortization period and amortization method:

Begins when it is available for use.
Ceases when derecognized.
The amortization method shall reflect the pattern of
consumption of the assets future economic benefits.
Straight line method.

The residual value of intangible

asset is presumed to be zero, except:
When there is a commitment by third
party to purchase the asset at the end of its
useful life.
 Differences between PFRS for SMEs and Full PFRS
PFRS for SMEs
Research and Development
expenses when incurred
Measurement
Cost model only
Useful life
Finite
Amortization
All intangible assets, including
goodwill.
Impairment
Tested for impairment when
there is an indication that the
asset may be impaired when
there is an indication that the
asset may be impaired.
Full PFRS
Research and Development
expensed when incurred
Measurement
Cost model or Revaluation Model
Useful life
finite or indefinite
Amortization
Finite useful life amortized
Indefinite useful life not
amortized
Impairment
Finite useful life tested when
there is an indication that the
asset may be impaired
Indefinite useful life- tested for
impairment annually.
 CHAPTER 33:
SMEs Impairment of Assets
 What is impairment loss?

An asset is impaired when its carrying amount exceeds its

recoverable amount.
 General Principle on Impairment

If, and only if, the recoverable amount of an asset is

less than its carrying amount, Then the entity shall:
Recoverable Amount (RA)- Carrying Amount (CA) =
Impairment Loss recognized immediately in;
P&L if cost model is used.

OCI if revaluation model

Recoverable Amount
 Recoverable Amount

Perform an impairment test, ie measure the

recoverable amount of an asset, ie the higher of:
(a) the assets fair value less costs to sell;
(b) and its value in use.
 Fair Value

Fair Value quoted price

Cost of Disposal - the incremental cost directly

attributable to the disposal of an asset.

Net selling price = FV - Cost of Disposal

Value in Use
 Value in Use

Value in use is the present value of the future cash flows

expected to be derived from an asset. This present value
calculation involves the following steps:
(a) estimate the future cash inflows
(b) appropriate discount rate.
(c) possible variations in the amount or timing of future
cash flows
(d) the time value of money, represented by the current
market risk-free rate of interest
(e) the price for bearing the uncertainty inherent in the
asset
(f ) other factors
 Estimates of future cash flows
Must include:
projections of cash inflows from the continuing
use of the asset.
projections of cash outflows that are necessarily
incurred to generate the cash
the net cash flows, if any, expected to be received
(or paid) for the disposal at the end of its useful life in
an arms length transactions.
 Estimates of future
56
cash flows
Do not include:
Cash inflows from receivables.
Cash outflows from payables.
Cash outflows expected to arise from future
restructurings to which an entity is not yet committed.
Cash outflows expected to arise from improving or
enhancing the assets performance.
Cash inflows and cash outflows from financing
activities.
Income tax receipts and payments.
 Appropriate Discount Rate

The discount rate shall be a pre-tax rate that

reflects current market assessment of both the
(a) time value of money and (b) the risks specific to
the asset for which the future cash flow estimates
have not been adjusted.
8/20/2017
 Indicators of Impairment

An entity shall assess at each reporting date

whether there is any indication that an asset may
be impaired.

If any such indication exists, the entity shall

estimate the recoverable amount of the asset.

If it is not possible to estimate the recoverable

amount of the individual asset, an entity shall
estimate the recoverable amount of the cash-
generating unit to which the asset belongs.
Decline in market value Obsolence / physical damage
Significant changes Significant changes
(technology, market, legal, (restrucring, discontinuing)
economic)
Internal reporting evidence
Increase in interest rates

CA > market capitalization

8/20/2017
 External Sources

Observable indications that the assets value has declined during the
period significantly more than would be expected as a result of the passage of
time or normal use.

Significant changes with an adverse effect on the entity in the

technological, market, economic or legal environment in which the entity
operates or in the market to which an asset is dedicated.

Market interest rates or other market rates of return on investments

have increased during the period, and those increases are likely to affect the
discount rate used in calculating an assets value in use and decrease the assets
recoverable amount materially.

The carrying amount of the net assets of the entity is higher than its
market capitalization.
 Internal Sources

Obsolescence or physical damage of an

asset.

Significant changes with an adverse

effect on the entity related to the use of an asset

Evidence is available from internal

reporting that indicates that the economic
performance of an asset is, or will be, worse
than expected.
 Cash-generating units

A cash-generating unit is the smallest

identifiable group of assets that generates cash
inflows that are largely independent of the cash
inflows from other assets or groups of assets.
 Impairment loss of cash-generating unit

If the recoverable amount of CGU is lower

than its carrying amount, then an entity shall
recognize the impairment loss.
Impairment loss shall be allocated to the assets of the unit
in the following order:

First, to the goodwill, if any.

Then, to all other non-cash assets of the unit prorata base on

their carrying amount.

In allocating an impairment loss you must make sure that you

dont reduce the carrying amount of an asset below the
highest of:

Its fair value less cost of disposal;

Its value in use;
Zero.
 Reversal of impairment loss

Reversal when the prior impairment loss was based on the recoverable
amount of an individual impaired asset:

(a) Entities must estimate the recoverable amount of the asset at the
current reporting date.

(b) If the estimated recoverable amount of the asset exceeds its carrying
amount, entities must increase the carrying amount to its recoverable
amount. That increase is a reversal of an impairment loss. The entity
should recognize the reversal immediately in profit or loss.

(c) The reversal of an impairment loss must not increase the carrying
amount of the asset above the carrying amount that would have been
determined had no impairment loss occurred in prior years.

(d) An impairment loss recognized for goodwill shall not be reversed in a

subsequent period
 Comparison with Full PFRS

Full PFRS and PFRS for SMEs are practically the same
with respect to the following:

Recognition and measurement of impairment loss

Definition of fair value less cost of disposal and value in use
Internal and external indicator of impairment
Reversal of impairment
 Comparison with Full PFRS

Notable difference is as follows:

PFRS for SMEs

Assets including goodwill are tested for impairment

FULL PFRS

Assets with a finite useful life are tested for impairment

 Tested for impairment annually;

Goodwill

Intangible assets with indefinite useful life or

not yet available for use.