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SIGNIFICANCE OF THE CONFORMITY OF IAS/PAS 16 ON FINANCIAL

REPORTS PREPARATION AND PRESENTATION

A Study on the Financial Reports Presentation of a

Hotel and Restaurant Entity

BY

MARIE BERNADETTE M. ARANAS

MASUMAY F. BOOC

CHARLENE A. MIANO

BSA-2 Students

TO

MARY ANN C. AWYONG

Accounting 4 Instructor

COLLEGE OF BUSINESS AND ACCOUNTANCY

UNIVERSITY OF CEBU

LAPU-LAPU- MANDAUE CAMPUS

MARCH, 2017
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ABSTRACT

This research study was conducted to determine the significance of applying the

International/Philippine Accounting Standard (IAS/PAS) 16 on the financial statements of

a hotel and restaurant entity in Cebu. The objectives of the study are to determine the

entity’s financial preparation and presentation and also to pinpoint the lapses therein in

the inconformity of the specific standards. Literature review on the topic is aimed at the

International/Philippine Accounting Standards, Financial Reporting Standards and the

appropriate standard for Property, Plant and Equipment. The results of data analyzed

shows that conforming to the accounting standards uphold a huge role on the value of

financial documents for the various users that view and make critical decisions based on

it and neglecting these standards has an adverse effect on the comparability and

understandability of the financial reports.

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CHAPTER I

INTRODUCTION

The Financial Reporting Standards Council (FRSC) was established by the Professional

Regulatory Commission under the Implementing Rules and Regulations of the Philippine

Accountancy Act of 2004 to assist the Board of Accountancy in carrying out its power and

function to promulgate accounting standards in the Philippines. The FRSC is the successor

of the Accounting Standards Council (ASC). The ASC was created in November 1981 by

the Philippine Institute of Certified Public Accountants (PICPA) to establish generally

accepted accounting principles in the Philippines.

The FRSC carries on the decision made by the ASC to converge Philippine accounting

standards with international accounting standards issued by the International Accounting

Standards Board (IASB). The FRSC monitors the technical activities of the IASB and invites

comments on exposure drafts of proposed International Financial Reporting Standards

(IFRS) as these are issued by the IASB. When finalized, these are adopted as Philippine

Financial Reporting Standards (PFRS/PAS).

The objective of the FRSC is to develop an understandable and enforceable accounting

standard that require high quality, transparent and comparable information in the

Financial Statements that conforms to PAS and PFRS/PAS. PFRS/PAS facilitates the

convergence and transparency of accounting practices. To monitor the revisions and

redrafting of the PFRS/PAS and to ensure that improvements in the PFRS/PAS are being

made effective in the Philippines, the Financial Reporting Standards Council (FRSC) was

established in 2006.
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The IASB established International Accounting Standards (IAS) to provide globally

acceptable financial reporting frameworks. Philippine Accounting Standards (PAS), appear

in the form of the generally accepted accounting principles, a set of standards, guidelines

and procedures that are used when accounting for the affairs of most governmental and

non-governmental bodies. Standards exist to ensure that accounting decisions are made

in a unified and reasonable way. (Gresham, 2017) The interpretation of numbers and the

wherewithal to place them in the proper context are at the heart of accounting.

Furthermore, because the end users of accounting information do not have day-to-

day access to the records of the business, they rely on the integrity and judgment of

management to provide suitable information of a high quality. But will the management

be honest, conscientious, consistently conform to the standards and careful in providing

information? In an ideal world there should be no problem for investors in a company

because, as shareholders, they appoint the directors and may dismiss them if dissatisfied

with the service provided. However, the world is not ideal. Over the years it has been

found that regulation is needed particularly for financial reporting by companies and that

is why accounting standards, rules and regulations exist to ensure that financial

statements are useful to their end users in their financial decision-making. (Pearson, 2004)

The implementation of Philippine Financial Reporting Standards PFRS in monitoring

Philippine Accounting Standards (PAS) in the Philippines from January 2006 marked the

start of an intensely interesting and challenging period for those involved in preparing or

using the annual reports and financial statements of listed Philippine companies. (Pearson,

2006) It also brought a challenge for those involved in accounting education, namely how

to ensure that students understand and can apply the approach represented in PFRS and
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PAS while still being aware that many organizations in the Philippines will continue to

follow the Philippine tradition as set out in company law and Philippine accounting

standards.

According to Ingait (2009), the use of PFRS enhances the quality of financial reports

because it leaves little room for undermining the objectives of the set standards. This is

unlike country-specific accounting rules that are susceptible to circumventions. Quality

financial reports boost investor confidence in a business. Investors and other stakeholders

find it more convenient to compare their business performance with other international

companies. This makes it easier and cheaper for them to raise business capital from

investors across the globe. Using PFRS and PAS frees a business from the restrictive scope

of national-level accounting standards. Financial reports become automatically acceptable

in IFRS-compliant countries, and companies don't need to prepare alternative sets of

financial statements when pursuing business interests in these countries. This reduces a

business's costs of preparing financial statements destined for international audiences.

It is right of this that this study takes up the challenge to test whether a specific

accounting standard for depreciation of Plant, Property and Equipment (PPE) is properly

applied in the financial statements of a newly opened hotel in Cebu and to evaluate its

conformity with PAS and PFRS. It will enable the researchers in their early stages of

studying the accountancy profession to understand and analyze the published annual

reports and financial statements of the business.

International Accounting Standard 16 Property, Plant and Equipment or PAS 16 is an

international financial reporting standard adopted by the International Accounting

Standards Board (IASB). It concerns accounting for property, plant and equipment (known
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more generally as fixed assets), including recognition, determination of their carrying

amounts, and the depreciation charges and impairment losses to be recognized in relation

to them. IAS 16 applies to property, plant and equipment (PPE). The standard itself

defines PPE as "tangible items that are held for use in the production or supply of goods

or services, for rental to others, or for administrative purposes; and are expected to be

used during more than one accounting period."

The objective of this Standard is to prescribe the accounting treatment for property,

plant and equipment so that users of the financial statements can discern information

about an entity’s investment in its property, plant and equipment and the changes in such

investment. The principal issues in accounting for property, plant and equipment are the

recognition of the assets, the determination of their carrying amounts and the depreciation

charges and impairment losses to be recognized in relation to them.

Depreciation is the systematic allocation of the depreciable amount of an asset over

its useful life. Depreciable amount is the cost of an asset, or other amount substituted for

cost, less its residual value. Each part of an item of property, plant and equipment with a

cost that is significant in relation to the total cost of the item shall be depreciated

separately. The depreciation charge for each period shall be recognized in profit or loss

unless it is included in the carrying amount of another asset. The depreciation method

used shall reflect the pattern in which the asset’s future economic benefits are expected

to be consumed by the entity.

Full disclosure emphasizes the truthful and exhaustive dissemination of all material

facts about the financial position and operating results of a business or organization. These

material facts should be disclosed either within the main body or notes section of financial
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statements. (Cole-Ingait, 2009) This requirement seeks to ensure that financial reports

are transparent, sufficiently informative and capable of facilitating decision-making

processes among stakeholders. It is important to understand that inadequate disclosure

of material facts would ultimately expose a business or organization to costly lawsuits.

According to Cole-Ingait, 2009) the task of conforming to the accounting and financial

reporting standards affects the following:

Relevance

Standards work to help entities provide the most relevant information in the most

reasonable way possible. In this way, an organization guided by accounting standards will

generate the kind of financial information that observers are most interested in examining.

Entities ultimately should provide information in a way that most fairly and clearly

represents the current financial standing of the operation. The standards make it more

difficult for organizations to misdirect observers and to fool them with data that does not

have sufficient relevancy.

Transparency

Accounting standards are designed to enforce transparency in organizations. The

principles, procedures and standards that make up the generally accepted accounting

principles were chosen with the purpose of ensuring that organizations lean in the

direction of openness when deciding how to provide information to observes. This kind of

transparency is especially important in the case of public entities, such as governments or

publicly traded companies. Standards limit the freedom and flexibility of entities to use

clever accounting to move items around or even hide them.

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Comparability

Paramount to the role of accounting standards is the universality that it brings to

financial record keeping. Governmental organizations must follow accounting procedures

that are the same as their counterparts, and non-governmental organizations must do the

same. The result is that it is easy to compare the financial standing of similar entities. All

comparisons within groups are a matter of comparing “apples to apples.” This helps both

external and internal observers weigh the state of an entity in the context of other

comparable entities. For instance, the financial standing of a town can be measured

against a neighboring town with the assumption that the pertinent numbers have reached

in a similar fashion.

Users

Ultimately, the importance of accounting standards lies in the value that it brings to

financial documents for the various users that view and make critical decisions based on

it. The absence of accounting standards would make the work of investors, regulators,

taxpayers, reporters and others more difficult and more risky. For instance, without

standards, an investor who has studied the financial statements of a large publicly traded

company would not know whether to trust the findings on those statements. Standards

mean that taxpayers can see how their tax payments are being spent, and regulators can

ensure that laws are followed.

The purpose of this study is to assess the application of PAS 16 on the financial

statements of the chosen business entity and determine the cause of the short fall in its

application and when applied, the advantages therein.

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Following the completion of work and the result made available to them, the

researchers will be in a position to re-examine their financial reports and its compliance

with the reporting standards and update them so as to enjoy these benefits available to

the entity and also avoid plugging their business into legal and understandability

difficulties from the external end users of the financial reports.

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CHAPTER II

METHODOLOGY

This research relates the assessment of the application of IAS16 (Property, Plant and

Equipment) in a Hotel and Restaurant entity. This is an accounting research which focuses

on investigating the contemporary controversy of entities that are required to follow the

accounting standards. Researchers are to conduct a study in the current standing of the

compliance of published parameters in the field for the purpose of uniformity among

businesses. The problems are identified and solutions are furnished for a client or group

of clients. Research methodology used by the researchers is in accordance with the nature

and scope of investigation and that prompt the researchers to describe procedure adopted

and research technique used to validate the observation and conclusions made from such

facts.

Accounting research is a research into the effect of economic events on the process

of summarizing, analyzing, verifying, and reporting standardized financial information, and

on the effects of reported information on economic events. In order to be effective and

efficient, the study must adopt a practical approach that will ease the treatment of

information and presentation of the analysis. The researchers made reliability in the

degree to which an assessment tool produces stable and consistent results.

Research Design

Analytical Research Design is used in collecting and analyzing measures in the study.

The design enabled researchers to identify the samples of subjects and expose the status

and outcome of the investigation. Quantitative data is gathered and qualitative data is

transcribed verbatim to facilitate data analysis. Procedures must be in place to ensure the
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accuracy of this process. Patterns and relationships in the data are identified and the

research question is answered through the synthesis of numerical and/or narrative data.

The researchers will know the effect of not following the standards. The data gathered

will enable them to effectively present solution to the problem. An analytical research

paper is composed entirely of fact-based evidence. Analytical research is an attempt to

establish why something is in a certain way or how it came to be that way.

Sampling Design and Technique

The study uses non-profitability sampling where the sample is subjectively chosen by

the researches in the study they are interested in studying. It is picked in a process that

does not give all the entities in the population equal chance of being selected. The method

allows the researchers to select the best entity for the study.

The Subject

The subject of the study is in the hospitality industry. As defined by the Council on

Hotel, Restaurant and Institutional Education, businesses under this industry includes the

hotel and motel, or lodging, trade. It also includes food services, recreation services, and

tourism. The hospitality industry provides accommodations, meals, and personal services

for both the traveling public and permanent residents. The researchers decided to discuss

about a specific entity that is engage in Hotel and Restaurant in their research.

Research Instrument

The researchers devised necessary questions after investigating the financial

statements of the entity and record them in a sheet of paper.

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Sources of data

In a research of this nature, attempts are made at disclosing the sources of the

researchers’ information. These sources are principally the primary and secondary sources

from which data are recovered. The disclosure of the sources is below:

1.0 Primary Source of Data

The data needed for the study are gathered through oral interviews with the

management and from the original documents of the firm being studied. The researchers

secured the entity’s financial statements which are given by the management with the

assurance of full confidentiality of the business’ name. The income statement for the year

ended December 31, 2015, Balance Sheet as of December 31, 2015 and notes to financial

statement provided the data needed in order to have a full grasp of the firm’s current

state that facilitated the study. The researchers also used the standard that deals with the

property, plant and equipment (PPE) under International Accounting Standard (IAS) 16

published by International Accounting Standards Board (IASB) for the inspection of

compliance of the entity.

2.0 Secondary Source of Data

The secondary data were gathered through reading of Accounting books and

interpretations of IAS 16. The other sources were journals and online articles regarding

PPE, its depreciation and importance of proper treatment of such assets.

Data Gathering Procedure and Method

The researchers begin with an observation of the current situation of the businesses

and develop an idea for a case to study. The initial research helped them to pick the best

entity for the study since they will be looking at the disclosures. Researchers went to the
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location of the hotel they’ve chosen as the subject and talked with the management about

the matter. The entity gave a copy of their financial statements to the researchers. After

examining the financial reports, the researcher asked questions regarding the information

embedded there. The income statement, balance sheet and notes to financial statements

were investigated and necessary data were extracted, tabulated and processed by the

researchers. The evidence has been brought forth and tests are performed and the

gathered data were organized and analyzed.

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CHAPTER III

DATA PRESENTATION AND ANALYSIS

This study aims to evaluate the application of IAS 16 in a business entity’s financial

statements, the setbacks of non-compliance and benefits as to proper application. The

following data are extracted from the entity’s financial statements. It is rest assured that

the entity’s identity stays unbeknownst to the extent of this study.

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A presentation of the entity’s extracted statement of income and related notes are

necessary for this study for comparability matters as analysis succeeds.

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Accounting Policy Adopted

(Notes to Financial Statements – Basis of Preparation)

Property and Equipment

Property and equipment are initially measured at its cost and subsequently measured at
cost less any accumulated depreciation and any accumulated impairment losses, if any.

The initial cost of property and equipment comprise of its purchases price and any costs
directly attributable to bringing the asset to the location and any condition necessary for
it to be capable of operating in the manner intended by the management.

Expenditures incurred after the property and equipment have been put into operations,
such as repairs and maintenance and overhaul costs, are normally charged to operations
in the period the costs are incurred. In situation where it can be clearly demonstrated that
the expenditures have resulted in an increase in the future economic benefits expected
to be obtained from the use of an item of property, and equipment beyond its originally
assessed standard of performance, the expenditures are capitalized as additional costs of
property and equipment. When assets are sold or retired, their cost and accumulated
depreciation, and impairment losses, if any, are eliminated from the accounts and any
gain or loss resulting from their disposal is included in the statement of operations of such
period.

Section 17. “Property and Equipment”, prescribes the accounting treatment of property
equipment so that users of the financial statements can discern information about an
entity’s investment in its property and equipment and the changes in such investment.
The principal issues in accounting for property and equipment are the recognitions of the
assets, the determination of their carrying amounts and the depreciation charges and
impairment losses to be recognized in relation to them. An entity shall measures an item
of property and equipment is the cash prize equivalent at the recognition date. If payment
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is deferred beyond normal credit terms, the cost is the present value of all future
payments.

Fully depreciated assets are retained in the accounts until they are no longer in use and
no further charge for depreciation is made in respect to those assets.

Recognition of Related Expense for PPE

Depreciation for cleaning equipment, kitchen equipment, room furniture, fixtures &

equipment and other equipment are recognized as cost of services while depreciation for

office equipment & furniture is recognized as an operating expense.

Accounting for Depreciation

In the entity’s notes (note 8 – Property and Equipment), notice a misappropriation of

accumulated depreciation for year 2015. The entity started operations in the year 2014 of

which 2 years of depreciation should’ve been accumulated. A table below shows corrected

accumulated depreciation as of 2015.

Table 1 Accumulated Depreciation

Accumulated
Cost
Depreciation
Cleaning Equipment P 37,014.00 P 14,805.60

Kitchen Equipment 144,428.00 57,771.20

Office Equipment &

1,523,448.00 609,379.20
Furniture
Other Equipment 325,630.00 130,252.00

Room Furniture,
3,998,623.00 1,599,449.20
Fixtures & Equipment
TOTAL P 6,029,143.00 P 2,411,657.60
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Cost – Residual Value

Depreciation =
Estimated Useful Life

37,014 - 0
=
5

= 7,402.8 x 2 years

= P 14,805.60

Entity’s notes to Property and Equipment exhibits nondisclosure of the reconciliation

of the carrying amount at the beginning and end of period in accordance with IAS 16

showing:

a) additions;

b) assets classified as held for sale or included in a disposal group classified as held

for sale in accordance with IFRS 5 and other disposals;

c) acquisitions through business combination;

d) increases or decreases resulting from revaluations under paragraph 31, 39 and 40

and from impairment losses recognized or reversed in other comprehensive

income in accordance with IAS 36;

e) impairment losses recognized or reversed in profit or loss in accordance with IAS

36;

f) other changes.

From the point of view of the financial statement’s end users, without proper

disclosures, data may be interpreted disparately.

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Table 2 Property Plant and Equipment breakdown with a Nil Residual Value

Depreciable Accumulated Depreciation

Cost
Amount Depreciation Expense
Cleaning Equipment P 37,014.00 P 37,014.00 P 14,805.60 P 7,402.80

Kitchen Equipment 144,428.00 144,428.00 57,771.20 28,885.60

Office Equipment &

1,523,448.00 1,523,448.00 609,379.20 304,689.60
Furniture
Other Equipment 325,630.00 325,630.00 130,252.00 65,126.00

Room Furniture,
3,998,623.00 3,998,623.00 1,599,449.20 799,724.60
Fixtures & Equipment
TOTAL P 6,029,143.00 P 6,029,143.00 P 2,411,657.60 P 1,205,828.60

The table in the preceding page is an example of an external user’s misapprehension

arising from entity’s failure to disclose depreciation rates used. This also led to a

presumption of a nil residual value.

The estimated useful life of the asset or depreciation rate used is a required disclosure

under IAS 16. The note is silent as to depreciation rate used for depreciating PPE.

However, by computation, a 10% depreciation rate is obtained.

Depreciation Expense
Depreciation Rate =
Cost

3,701
=
37,014

= 10% of cost

Computing for depreciation rate used by using the estimated useful life given, we

arrive at a different rate. If residual value has a nil amount, depreciation expense is equal

to:
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Cost – Residual Value

Depreciation =
Estimated Useful Life

37,014 - 0
=
5

= 7,402.80

Depreciation Expense
Depreciation Rate =
Cost

7,402.80
=
37,014

= 20% of cost

Table 3 Cleaning Equipment Depreciation Schedule

Depreciation Accumulated
Net Book Value
Expense Depreciation

1/1/2014 P 37,014.00

12/31/2014 P 7,402.80 P 7,402.80 29,611.20

12/31/2015 7,402.80 14,805.60 22,288.40

12/31/2016 7,402.80 22,288.40 14,805.60

12/31/2017 7,402.80 29,611.20 7,402.80

12/31/2018 7,402.80 37,014.00 -0-

Table 3 shows a schedule of depreciation for cleaning equipment, its annual

depreciation, accumulated depreciation and value at end of useful life.

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Table 4 Income Statement

Hotel Revenue
Room Accommodation P 7,428,610.64
Food and Beverage 1,950,252.00
Other Revenues 41,065.00 P 9,419.927.64
Cost of Services
Salaries & Wages 2,099,387.00
Utilities 1,2843,144.00
Depreciation 901,139.00
Cable & Internet 117,238.00
Security and Services 552,000.00
Laundry 163,042.00
Repairs & Maintenance 309,986.00
Food & Beverage Cost 1,838,962.00 (7,2655,898.00)
Gross Profit 2,154,029.64
Operating Expenses
Salaries, Wages & Benefits 567,887.00
Trainings & Seminars 74,105.00
Transportation 62,687.00
Insurance 116,067.00
Freight & Handling Postage 358,788.00
Depreciation Expense 304,689.60
Community Outreach 10,723.00
Dues and Subscriptions 6,438.00
Computerized Expense 70,250.00
Taxes & Licenses 188,363.00
Advertising & Promotion 250,853.00
Repairs & Maintenance 37,071.00
Printing & Production 14,267.00
SSS, PHIC, HOMF Contribution 105,991.00
Office & Marketing Supplies 119,416.00
Miscellaneous Expense 47,414.00 (2,539,452.60)
Net Loss (before tax) P (385,422.00)

Comparing the table above from the entity’s statement of income, amount computed

is significantly lower and resulted to a loss. This suggests that income is overstated

without adequate application of accounting standards.

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CHAPTER IV

RECOMMENDATION

It can be observed that the people tasked to prepare and present the financial

statements fathom that preparation of standard-based reports is an essential yet complex

process. Anyhow, the entity concedes appropriate application of published accounting

standards as indispensable and would continue to assess their financial statements’

conformity with accounting standards.

Findings

The researches reviewed the income statement, balance sheet and notes to financial

statements and found out that the entity did not follow the published standard for

Property, Plant and Equipment. Through the examination of the financial statements of

the entity, the researchers found out that the entity’s failure to cohere with a number of

required disclosures resulted to overstatement of net income and overstatement of

property and equipment carrying amounts. Appropriate and absolute disclosure of

amounts and rates used would hinder external end user’s misinterpretation and aid

understandability of the reports.

Recommendations

The importance of the accounting standards in preparing and presenting financial reports

should be highly regarded. Howbeit, certain business entities utilize distinguished,

customized and traditional accounting criterion, conformity with published accounting

standards is ground for comparability and understandability of financial statements to its

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end external and internal users. It is based on this that the researchers recommend the

following:

(a) The entity is encouraged to disclose all material facts about the amounts appearing in

their financial reports and must have to meet with the requirements of the standards.

(b) The management should gain knowledge about all the accounting and financial

reporting standards and recognize its relevance in advocating practical accounting with

the economic activities and financial operations.

(c) The entity’s accountant should always adhere to the standards as the foundation of all

accounting records and financial reports.

(d) The researchers are challenged to conduct further studies to test the depth of their

comprehension about the relevance of the application of the IAS/PAS 16 in a business

entity and the impact of the implementation of all the accounting and financial reporting

standards to the entire Philippine business setting.

Conclusion

This overriding purpose of this study is to evaluate the present setting of the chosen

subject of this research on the treatment of Property, Plant and Equipment and the

presentation of that line item in the financial statements. Professional accountants,

management and academics are faced with the challenge of instigating the exertion of a

more standard-based annual report inasmuch as this implies prevalent comprehension. It

is apparent that that inappropriate treatment of each item and inadequate disclosure for

such can mislead the external users of the financial statements. The relevance of the

accounting standards should always be taken into consideration by registered businesses

in any industry in the preparation and presentation of the financial statements and
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necessary information should always be made known for the understandability of the

users. This requirements seek to ensure that financial reports are transparent, sufficiently

informative and capable of facilitating decision-making processes among shareholders.

Hence, firms in the Philippines will have a high level of comparability among other business

in the same industry if they follow all the appropriate standards.

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Ballada, W. (2015): Basic Accounting. Conceptual Framework Chapter 2

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http://smallbusiness.chron.com/importance-accounting-standards-44927.html

Ingait, P. (2009). Basic Accounting Principles and Full Disclosure. Retrieved from

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67682.html

Ingait, P. (2009). What Are the Benefits of International Accounting Standards?

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standards-74934.html

International Accounting Standards Boards. (2011). “IAS 16 Property, Plant and

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PICPA. (2011) Philippine Financial Reporting Standards. Retrieved from

http://www.picpa.com.ph/frsc.html

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