GOVERNMENT ACCOUNTING

Chapter 1
Overview of Government Accounting

Introduction
“Government accounting encompasses the processes of analyzing, recording, classifying,
summarizing and communicating all transactions involving the receipt and disposition of government funds and
property, and interpreting the results thereof." (State Audit Code of the Philippines, P.D. No. 1445, Sec: 109)

The objectives of government accounting are:

a) To produce information concerning past operations and present conditions;
b) To provide a basis for guidance for future operations;
c)To provide for control of the acts of public bodies and officers in the receipt, disposition and
utilization of funds and property; and
d) To report on the financial position and the results of operations of government agencies tor the
information of all persons concerned.
(PD. No. 1445, Sec. 110)

Like the accounting for business entities, government accounting is also a process of producing
information that is useful in making economic decisions. Government accounting, however, places greater
emphasis on the following:
a. Sources and utilization of government funds; and
b. Responsibility, accountability and liability of entities entrusted with government funds and properties.

 The sources of government funds include receipts from taxes and other fees, borrowings, and grants
from other governments and international bodies.
 The utilization of government funds includes expenditures on programs, projects, unanticipated losses
from calamities and the like.

Responsibility, Accountability and Liability over Government Funds and Property

Responsibility over Government Funds and Property

1. Government resources shall be utilized efficiently and effectively in accordance with the law. The
head of a government agency is directly responsible in implementing this policy and is primarily
responsible for government resources entrusted to his agency. Those who are entrusted with the
possession of government resources are directly responsible to the head of the agency
2. All those who are exercising authority over a government agency shall share fiscal responsibility.
(State Audit Code of the Philippines, P.D. No. 1445)

Accountability over Government Funds and Property

1. A government officer entrusted with the possession of government resources is responsible for the
safekeeping therefor in accordance with the law. Every accountable officer shall be properly bonded.
(P.D. No. 1445 and E.O. No. 292)
2. The transfer of government funds from one officer to another shall, except as allowed by law, be made
only after the authorization of the COA. The transfer shall be properly documented in an invoice and
receipt. (P.D. No. 1445)

Liability over Government Funds and Property

1. The unlawful use of government resources shall be the personal liability of the employee found to be
directly responsible therefor.
 2. Every accountable officer shall be liable for all losses resulting from the unlawful use or negligence in
the safekeeping of government resources.

3. No accountable officer shall be relieved from liability merely because he has acted under the direction
of a superior officer in unlawfully utilizing the government resources entrusted to him, unless before that
act, he has notified the superior officer, in writing, that the utilization is illegal. The superior officer shall
be primarily liable while the accountable officer who fails to serve the required notice shall be
secondarily liable.

4. An accountable officer shall immediately notify the COA for any loss of government funds from
unforeseen events (force majeure) within 30 days. Failure to do so will not relieve the officer of liability.
(P.D. No. 1445)

Main concept:
Government resources must be utilized efficiently and effectively in accordance with the law. Government
officials are responsible in implementing this policy, are accountable for the government resources in their
custody, and are liable for any loss.

Accounting responsibility
The following offices are charged with government accounting responsibility:
a. Commission on Audit (COA)
b. Department of Budget and Management (DBM)
c. Bureau of Treasury (BTr)
d. Government agencies

Commission on Audit (COA)

The Commission on Audit (COA):
a. Has the exclusive authority to promulgate accounting and auditing rules and regulations.
b. Keeps the general accounts of the government, supporting vouchers, and other documents.
c. Submits financial reports to the President and Congress.

Department of Budget and Management (DBM)

The Department of Budget and Management (DBM) is responsible for the formulation and implementation of
the national budget with the goal of attaining the nation's socio-economic objectives.

Bureau of Treasury (BTr)

The Bureau of Treasury (BTr) functions under the Department of Finance and is the cash custodian of the
government. The BTr is authorized to:
a. Receive and keep national funds and manage and control the disbursements thereof; and
b. Maintain accounts of financial transactions of all national government offices, agencies and
instrumentalities.

Government Agencies
Government agency refers to any department, bureau or office of the national government, any of its branches
and instrumentalities, or any political subdivision, as well as any government owned or controlled corporation
(GOCC), including its subsidiaries, or other self-governing board or commission of
the government. (P.D. No. 1445)
The government agencies are responsible in directly implementing the projects of, and performing the
functions delegated by, the government.
Each agency (entity) shall maintain accounting books and budget registries which are reconciled with
the cash records of the BTr and the budget records of the COA and DBM.
Government agencies are required by law to have accounting units/divisions/departments.
Even a barangay (the smallest administrative division in the Philippines) is required to have an accounting
unit, e.g., the barangay's "bookkeeper."

 Entity - refers to a government agency, department or operating/field unit.

 Financial Reporting - is the process of preparation, presentation and submission of general purpose
financial statements and other reports. The objective of financial reporting is to provide information
about the entity that is useful to users for accountability purposes and decision-making.

The GAM for NGAS

An "old" government accounting system had been used for about five decades before it was replaced by the
New Government Accounting System (NGAS) in 2002. However, on January 1, 2016, the NGAS was replaced
by the Government Accounting Manual for National Government Agencies (GAM for NGAs).

The GAM for NGAs was promulgated primarily to harmonize the government accounting standards
with international accounting standards, particularly the International Public Sector Accounting Standards
(IPSAS). The IPSASs are based on the International Financial Reporting Standards (IFRS).

The Philippine Government has adopted the IPSAS through the Philippine Public Sector Accounting
Standards (PPSAS). The provisions of the PPSAS are incorporated in the GAM for NGAs.

Since the PPSAS are based on the IPSAS, which are in turn based on the IFRSs/PFRSs, most of the
concepts that we will be learning in this book would be very familiar to you

Legal basis
The GAM for NGAs is promulgated by the Commission on Audit (COA) based on the authority conferred to it
by the Philippine Constitution:

Relevant provision of law:

 “The Commission (on Audit) shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required therefor,
and promulgate accounting and auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses
of government funds and properties." (Art. IX-D, Sec. 2(2), Philippine Constitution)

Coverage
The GAM for NGAs provides the basic concepts to be used in:
a. Preparing general purpose financial statements in accordance with the Philippine Public Sector
Accounting Standards (PPSAS) and other financial reports as may be required by laws, rules and
regulations; and
b. Reporting of budget, revenue and expenditure in accordance with laws, rules and regulations.

Objective
The GAM for NGAs aims to update the following:
a. Standards, policies, guidelines and procedures in accounting for government funds and property;
b. Coding structure and accounts; and
c. Accounting books, registries, records, forms, reports and financial statements.
(GAM for NGAs; Chapter 1, Sec. 3)

Basic Accounting and Budget reporting Principles

The financial records and reports of government entities shall comply with the following:
1. Philippine Public Sector Accounting Standards (PPSAS) and relevant laws, rules and regulations;
2. Accrual basis of accounting;
Under the accrual basis of accounting, transactions are recognized when they occur (and not only when
cash is received or paid). Therefore, transactions are recognized in the periods to which they relate.

3. Budget basis for presentation of budget information in the financial statements;

4. Revised Chart of Accounts prescribed by COA;

5. Double entry bookkeeping;

6. Financial statements based on accounting and budgetary records; and

7. Fund cluster accounting.

The books of accounts are maintained by fund cluster (i.e., according to the types of funds being
accounted for) as follows:

Code Fund clusters

01 Regular Agency Fund
02 Foreign Assisted Projects Fund
03 Special Account-Locally Funded/Domestic Grants Fund
04 Special Account-Foreign Assisted/Foreign Grants Fund
05 Internally Generated Funds
06 Business Related Funds
07 Trust Receipts

For example, separate accounting books (Journals and Ledgers) and budget registries shall be
maintained for Regular Agency Fund. Another separate accounting books and budget registries shall be
maintained for Foreign Assisted Projects Funds, and so on.

Qualitative Characteristics of Financial Reporting

Information reported shall meet the qualitative characteristics. Qualitative characteristics are the attributes that
make information useful to users.

a. Understandability - information is understandable when users can reasonably be expected to comprehend its
meaning.
Accordingly, users are assumed to have
i. reasonable knowledge of the entity's activities; and
ii. willingness to study the information.

Information about complex matters is not excluded simply because it may be too difficult for certain
users to understand

b. Relevance - Information is relevant if it can assist users in evaluating past, present or future events or in
confirming or correcting past evaluations. In order to be relevant, information must also be timely.

c. Materiality - Materiality affects the relevance of information. Information is material if its omission or
misstatement could influence the decisions of users. Materiality depends on the nature or size of the item or
error, judged in the particular circumstances of its omission or misstatement.

d. Timeliness - Information loses its relevance if there is undue delay in its reporting. The complexity of an
entity's operations is not a sufficient reason for failing to report on a timely basis.
e. Reliability - reliable information is free from material error and bias, and can be depended on by users to
represent faithfully that which it purports to represent or could reasonably be expected to represent.

Trade-offs between Relevance and Reliability

To provide timely information, it may be necessary to report before all aspects of a transaction are known, thus
impairing reliability. Conversely, if reporting is delayed until all aspects are known, the information may be
highly reliable but of little use to users who need to make decision in the interim. To achieve a balance between
relevance and reliability, the overriding consideration is how users' needs are best satisfied.

f. Faithful representation - For information to represent faithfully transactions and other events, it should be
presented in accordance with the substance of the transactions and other events, and not merely their legal form.

g. Substance over form - The substance of transactions or other events is not always consistent with their legal
form. If information is to represent faithfully the transactions and other events that it purports to represent, it is
necessary that they be accounted for and presented in accordance with their substance and economic reality, and
not merely their legal form.

h. Neutrality - Information is neutral if it is free from bias. Information shall not be selected or presented in a
manner that is designed to influence the user's decision in order to achieve a predetermined outcome.

i. Prudence - is the exercise of a degree of caution when making estimates under conditions of uncertainty, such
that assets or revenue are not overstated and liabilities or expenses are not understated. However, prudence does
not allow the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or
revenue, or the deliberate overstatement of liabilities or expenses, because the financial statements would not be
neutral and, therefore, not reliable.

j. Completeness - Information should be complete within the bounds of materiality and cost.

k. Comparability - Information is comparable when users are able to identify similarities and differences
between that information and information in other reports. Comparability applies to the comparison of financial
statements of different entities and comparison of the financial statements of the same entity over different
periods. Comparability requires that users must be informed of the entity's policies, changes to those policies,
and the effects of those changes and that financial statements show corresponding information for preceding
periods.
(PPSAS 1/GAM for NGAs, Chapter 19, Sec. 6)

Components of General Purpose Financial Statements

General Purpose Financial Statements are those intended to meet the needs of users who are not in a position to
demand reports tailored to meet their particular information needs. (PPSAS 1.3)
The complete set of general purpose financial statements consists of:
a. Statement of Financial Position;
b. Statement of Financial Performance;
c. Statement of Changes in Net Assets/Equity;
d. Statement of Cash Flows;
e. Statement of Comparison of Budget and Actual Amounts; and
f. Notes to the Financial Statements, comprising a summary of significant accounting policies and other
explanatory notes.

Notice that the financial statements listed above are similar to those of a business entity. However, the
financial statement unique to a government entity is the "Statement of Comparison of Budget and Actual
Amounts" (letter 'e'). We will elaborate on this later.
Elements of the financial statements

ASSETS
Assets - are resources controlled by an entity as a result of past events, and from which future economic benefits
or service potential are expected to flow to the entity.

The key features of an asset are:

a. The benefits must be controlled by the entity;
b. The benefits must have arisen from a past event; and
c. Future economic benefits or service potential must be expected to flow to the entity.

 Control means the ability to benefit from an asset or prevent others from benefitting from that asset.

Possession or ownership normally evidences control. However, this is not always true. For example, under a
finance lease, the lessor retains legal ownership over the leased asset but control is transferred to the lessee.

 Benefit means the ability to use, exchange, lease, sell, or use the asset to settle liabilities, or distribute it
to owners.

Indicators of future economic benefits:

a. distinguishable from the source of the benefit i.e. the particular physical resource or legal right;
b. does not imply that assets necessarily generate cash flows, the benefits can also be in the form of
'service potential';
c. in determining whether a resource or right needs to be accounted for as an asset, the potential to
contribute to the objectives of the entity should be the prime consideration;
d. capacity to contribute to activities/objectives/programs; and
e. the fact that an asset cannot be sold does not preclude it from providing future economic benefits.

 Past event - A transaction or event giving rise to control of future economic benefits must have occurred.
A mere intention to acquire assets in the future does not result to the recognition of assets in the present.

Recognition of an Asset
An asset is recognized when:
a. it is probable that the future economic benefits will flow to the entity; and
b. the asset has a cost or value (e.g., fair value) that can be measured reliably.

Probable inflow of future economic benefits:

a. The chance of benefits arising is more likely rather than less likely (e.g. greater than 50%).
b. Benefits can be expected on the basis of available evidence or logic.

Reliable measurement:
a. Valuation method is free from material error or bias.
b. Faithful representation of the asset's benefits.
c. Reliable information will, without bias or undue error, faithfully represent those transactions and events.

LIABILITIES
Liabilities - are present obligations of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits or service potential.

EQUITY
Net assets/equity - is the residual interest in the assets of the entity after deducting all its liabilities.
REVENUE
Revenue - is the gross inflow of economic benefits or service potential during the reporting period when those
inflows result in an increase in net assets/equity, other than increases relating to contributions from owners.

 Contributions from owners - are future economic benefits that have been contributed to the entity by
external parties which do not result to liabilities of the entity and for which the contributor obtains
interest in the net assets of the entity (i.e., right to dividends and right to net assets in cases of
liquidation)

Revenue funds - comprise all funds derived from the income of any agency of the government and available for
appropriation or expenditure in accordance with law. (Section 3, P.D. No. 1445)

EXPENSES
Expenses - are decreases in economic benefits or service potential during the reporting period in the form of
outflows or consumption of assets or incurrence of liabilities that result in decreases in net assets/equity, other
than those relating to distributions to owners.

 Distributions to owners - are future economic benefits distributed by the entity to its owners, either as a
return on investment or as a return of investment.

Chapter 2
The Budget Process
The National Budget
Government accounting is primarily budgetary accounting, Government accounting does not only aim to
provide information on past events and transactions but also budget information in accordance with PPSAS 24.
The Philippine Constitution and other laws require government funds to be utilized in accordance with a
national budget that is duly approved by legislation. Government accounting, therefore, is concerned with
providing information useful in assessing the conformance of utilizations of government funds with the
approved budget.
The national budget (government budget) is the government's estimate of the sources and uses of
government funds within a fiscal year. This forms the basis for expenditures and is the government's key
instrument for promoting its socio-economic objectives.
The formulation and eventual utilization of the national budget are summarized in the budget cycle.

The Budget Cycle

The budget cycle has four phases, namely:
1. Budget Preparation
2. Budget Legislation
3. Budget Execution
4. Budget Accountability

Budget Preparation
The budget preparation in the Philippines uses a "bottom-up" approach. Under "bottom-up" budgeting, several
parties participate in the budget preparation, starting from the lowest to the highest levels of the government.
Government agencies are also tasked to increase the participation of citizen-stakeholders in the budget
preparation. The opposite of "bottom-up” budgeting is "top-down" budgeting - wherein the budget preparation
starts agency heads.
In 2011, the Philippine Government attempted to a start a new tradition by shifting from the old
"incremental" system of budgeting to the "zero-based budgeting" approach. (The Philippine Public
Transparency Reporting Project, January 11, 2011)
 Incremental budgeting vs. Zero-based budgeting
 The current year's budget is formulated based  The current year's budget is formulated
on the previous year's budget, which is just without regard to the previous year's budget
adjusted for any variances experienced in the Government agencies are required to justify
past. Presumably, the proposed programs and their current year's proposed programs and
expenditures in the previous year are expenditures, irrespective of whether these are
automatically approved in the current year. new or carried over from the previous year.
 Uses a "roll-over" approach.  Uses "back-to-zero" or "clean slate" approach.
 Prone to abuse.  Promotes efficient and effective utilization of
funds.

1. Budget call - The budget preparation starts when the Department of Budget and Management (DBM) issues
a Budget Call to all government agencies. The budget call contains, among other things, the next fiscal year's
targets, the agency's budget ceiling, and other guidelines in the completion and submission of agency budget
proposals.
.
Relevant terms:
 Balanced budget - prepared in such a way that estimated revenues exceed estimated expenditures. If
actual revenues exceed actual expenditures, the government earns revenues, the a surplus. If
expenditures exceed government incurs a deficit.
 Annual budget - covers a period of one year and forms the basis for the annual appropriation.
 Special budget - provides for items not adequately covered or not included in the general
appropriations act.
 Line item budget - focuses on specific expenditures such as salaries and wages, travel expenses, freight,
supplies, materials and equipment.
 Performance budget - a plan of activities to be undertaken, including their related costs, with the
emphasis on meeting targets and desired results. The main focus is on the work to be done or services to
be rendered.
 Obligations budget - focuses on expenditures incurred in the current year which are to be paid either in
the same year or in the following year.

2. Budget hearings - Budget hearings are conducted after the agencies submit their budget proposals. Each
agency defends its budget proposal before the DBM. The DBM deliberates on the budget proposals, makes
recommendations, and consolidates the deliberated proposals into the National Expenditure Program (NEP) and
Budget of Expenditures and Sources of Financing (BESF). The DBM then submits the proposed budget to the
President.

3. Presentation to the Office of the President - The President and Cabinet members review the proposed
budget. After the President approves the proposed budget, the DBM finalizes the budget documents to be
submitted to the Congress. At this point, the proposed budget is referred to as the "President's Budget."
The "President's Budget" contains the following documents which are intended to assist the Congress in
their review and deliberation of the proposed national budget:

a. President's Budget Message - this contains the President's explanation of the country's fiscal policy
and budget priorities.
b. National Expenditure Program (NEP) - this contains the details of all the government entities'
proposed expenditures in the coming year.
c. Budget of Expenditures and Sources of Financing (BESF) – this contains the estimated expenditures
accompanied by estimates of expected sources of financing.
 d. Other documents aimed to provide further explanation of selected items in the NEP (e.g., details of
key programs and projects and staffing summary).

Relevant provision of law:

 The President shall submit the proposed budget to the Congress within 30 days from the opening of
every regular session. (Art. VII. Sec. 22, Philippine Constitution)

Budget Legislation
Government funds shall only be spent in pursuance of an appropriation made by law. Therefore, due process
must be undertaken to legalize the proposed budget.

4. House Deliberations - Upon receipt of the President's Budget, the House of Representatives conducts
hearings to scrutinize the various agencies' respective proposed programs and expenditures. Thereafter, the
House of Representatives prepares the General Appropriations Bill (GAB).

5. Senate Deliberations - The Senate conducts its own deliberations on the GAB. These normally start after
the Senate receives the GAB from the House of Representatives. However, for expediency, hearings in the
Senate start even as Representatives deliberations are ongoing.

6. Bicameral Deliberations - After deliberations in both houses are finished, a committee called the Bicameral
Conference Committee is formed to harmonize any conflicts between the Representatives and Senate versions
of the GAB.
The harmonized GAB ('Bicam' version) is submitted back to both Houses for ratification. After
ratification, the final GAB is submitted to the President for enactment.

7. President's enactment - The President enacts the budget, which is now known as the General
Appropriations Act (GAA). Before enactment though, the President may exercise his veto power as conferred to
him under the Philippine Constitution.

Relevant provision of law:

 When the proposed budget is not enacted before the fiscal year starts, the last year's GAA is
automatically reenacted. The last year's GAA shall be used in the current year until a new general
appropriations bill is passed by the Congress. (Art. VI, Sec. 25(7), Philippine Constitution)

The Approved Budget

Approved Budget - is the expenditure authority derived from appropriation laws, government ordinances, and
other decisions related to the anticipated revenue or receipts for the budgetary period. The approved budget
consists of the following:

UACS Code
New General Appropriations 01
Continuing Appropriations 02
Supplemental Appropriations 03
Automatic Appropriations 04
Unprogrammed Funds 05
Retained Income/Funds 06
Revolving Funds 07
Trust Receipts 08

*The Unified Accounts Code Structure (UACS) refers to the standard coding system used in financial reporting
of the National Government.
  Appropriation - is the authorization made by a legislative body to allocate funds for purposes specified
by the legislative or similar authority

1. New General Appropriations - are annual authorizations for incurring obligations during a specified
budget year, as listed in the GAA.

2. Continuing Appropriations - are the authorizations to support obligations for a specific purpose or project,
such as multi-year construction projects which require the incurrence of obligations even beyond the budget
year.

3. Supplemental Appropriations - are additional appropriations authorized by law to augment the original
appropriations which proved to be insufficient for their intended purpose due to economic, political or social
conditions supported by Certification of Availability of Funds from the BTr.

4. Automatic Appropriations - are the authorizations programmed annually or for some other period
prescribed by law which do not require periodic action by Congress.

5. Unprogrammed Funds - are standby appropriations authorized by Congress in the annual GAA which
may be availed only when any of the following instances occur:

a. revenue collections exceed the original revenue targets in the Budget of Expenditures and Sources of
Financing (BESF) submitted by the President to the Congress;
b. new revenues are collected or realized from sources not originally considered in the BESF; or
c. newly-approved loans for foreign-assisted projects are secured or when conditions are triggered for other
sources of funds such as perfected loan agreements for foreign assisted projects.

6. Retained Income/Funds - collections which are authorized by law to be used directly by agencies
concerned for their operation or specific purposes.

7. Revolving Funds - receipts derived from business-type activities of departments/agencies which are
authorized by law to be constituted as such and deposited in an authorized government depository bank.
These funds shall be self- liquidating and all obligations and expenditures incurred by virtue of said
business-type activity shall be charged against said fund.

8. Trust Receipts - receipts by any government agency acting as trustee, agent or administrator for the
fulfillment of some obligations or conditions.

Relevant provisions of law:

 A special appropriations bill shall specify the purpose for which it is intended, and shall be supported by
funds actually available as certified by the National Treasurer, or to be raised by a corresponding
revenue proposal therein. (Art. VI. Sec. 25(4), Philippine Constitution)
 No law shall be passed authorizing any transfer of appropriations; however, the President, the President
of the Senate, the Speaker of the House of Representatives, the Chief Justice of the Supreme Court, and
the heads of Constitutional Commissions may, by law, be authorized to augment any item in the general
appropriations law for their respective offices from savings in other items of their respective
appropriations. (Art. VI. Sec. 25(5), Philippine Constitution)

Budget Execution
This is the phase where government funds are spent.
8. Release guidelines and BEDs - The DBM issues guidelines on the release and utilization of funds while the
various agencies submit their Budget Execution Documents (BEDs). A BED summarizes an agency's fiscal year
plans and performance targets. It includes the following:
a. Physical and financial plan,
b. Monthly cash program,
c. Estimate of monthly income, and
d. List of obligations that are not yet due and demandable.

The following are the major recipients of the budget:

1. National Government Agencies (NGAs) - include all agencies within the executive, legislative and judicial
branches of government, e.g., commissions, departments, Land Bank of the Philippines, Social Security System,
etc.
2. Local Government Units (LGUs) - include (a) autonomous regions, (b) provinces and cities independent from
a province, (c) component cities (cities which are part of a province) and municipalities, and (d) barangays.
3. Government Owned and Controlled Corporations (GOCCs) - corporations that are owned or controlled,
directly or indirectly, by the government and vested with functions relating to public needs.

The members of the Congress (Senators and Congressmen) and the Judiciary
Branch are also recipients of a portion of the budget.
1. The portion received by members of the Congress is referred to as the Priority Development Assistance Fund
(PDAF) a.k.a. "Pork Barrel." This is intended to fund priority development programs of the government.
2. The portion received by members of the Judiciary is referred to as the Judiciary Development Fund (JDF). At
least 80% of the fund is intended for the cost of living allowances of the members and personnel of the
Judiciary, the remainder, not exceeding 20%, is for the acquisition and maintenance of office equipment and
facilities. (PD NO. 1949)

In 2014, the Aquino Administration introduced the Disbursement Acceleration Program (DAP) which
aims to speed-up public spending. The DAP is not a fund but a mechanism of releasing funds, particularly from
savings and unprogrammed funds.

 Savings are available portions or balances of items under the General Appropriations Act (GAA) which
result from: a) the completion or final discontinuance or abandonment of a program, activity, or project;
b) unpaid compensation for vacant or unfilled positions and leaves of absence without pay; or c) the
implementation of efficiency measures that enable agencies to deliver services at lower cost. Such
savings may then be used to augment funds for programs, activities, or projects which are included in
the GAA (i.e. nonexistent budget items cannot be funded).
 Unprogrammed funds (see previous definition).

Both the PDAF and the DAP received various criticisms from the public in 2013 and 2014, following the
Janet Lim Napoles alleged pork scam. The PDAF and DAP was later on thought to have been abolished by the
Supreme Court. However, "The 2015 budget is still filled with pork barrel funds despite the Supreme Court
decision declaring the Disbursement Acceleration Program (DAP) and the Priority Development Assistance
Fund (PDAF) as unconstitutional, according to a budget watchdog." (Source: The Philippine Star, December 21,
2014)

9. Allotment - The DBM formulates the Allotment Release Program (ARP) to set the limit for allotment
releases during the upcoming year. This is used as a control device to ensure that releases conform to the
national budget. Alongside, is a Cash Release Program (CRP), which sets the disbursement limits for
the year, for each quarter and for each month.
  Allotment - is an authorization issued by the DBM to government agencies to incur obligations for
specified amounts contained in a legislative appropriation in the form of budget release documents. It is
also referred to as Obligational Authority.
It is illegal for a government entity to incur obligations without having first received the
"Allotment. Moreover, the type and amount of obligations to be incurred must conform to those that are
specified in the "Allotment."
 Obligation - is an act of a duly authorized official which binds the government to the immediate or
eventual payment of a sum of money. Obligation maybe referred to as a commitment that encompasses
possible future liabilities based on current contractual agreement.

The following are the documents used in releasing allotments to government agencies:
1. General Appropriations Act Release Document (GAARD) - serves as the obligational authority for the
comprehensive release of budgetary items appropriated in the GAA, categorized as For Comprehensive
Release.

2. Special Allotment Release Order (SARO) - covers budgetary items under For Later Release (negative
list) in the entity's submitted Budget Execution Documents (BEDs), subject to compliance of required
documents/clearances. Releases of allotments for Special Purpose Funds (e.g., Calamity Fund, Contingent
Fund, E-Government Fund, Feasibility Studies Fund, International Commitments Fund, Miscellaneous
Personnel Benefits Fund and Pension and Gratuity Fund) are also covered by SAROs.

3. General Allotment Release Order (GARO) - is a comprehensive authority issued all national government
agencies, in general, to incur obligations not exceeding an authorized amount during a specified period for
the purpose indicated therein. It covers automatically appropriated expenditures common to most, if not all,
agencies without need of special clearance or approval from competent authority, i.e. Retirement and Life
Insurance Premium.

10. Incurrence of Obligations - government agencies incur obligations which will be paid by the government,
e.ge entering into contracts, hiring of personnel, purchase of supplies, etc.

11. Disbursement Authority - the DBM issues disbursement authority to the government agencies. This is the
point where government agencies obtain access to the government funds.

The following are the documents used in releasing disbursement authority to government agencies:
1. Notice of Cash Allocation (NCA) - authority issued by the DBM to central, regional and provincial
offices and operating units to cover their cash requirements.
The NCA specifies the maximum amount of cash that can be withdrawn from a government
servicing bank in a certain period. The NCA is based on the agency's submitted Monthly Cash Program.

2. Notice of Transfer of Allocation - authority issued by an agency's Central Office to its regional and
operating units to cover the latter's cash requirements.

3. Non-Cash Availment Authority - authority issued by the DBM to agencies to cover the liquidation of
their actual obligations incurred against available allotments for availment of proceeds from loans/grants
through supplier's credit/constructive cash.

4. Cash Disbursement Ceiling - authority issued by the DBM to agencies with foreign operations (e.g.,
Department of Foreign Affairs 'DFA') allowing them to use the income collected by their Foreign
Service Posts to cover their operating requirements.
 Disbursements are most commonly made through checks that are chargeable against the account
of the Treasurer of the Philippines (i.e., Treasury Single Account). Checks issued under this scheme are
called "Modified Disbursement System (MDS) Checks."
Other modes of disbursements include payments through cash, commercial check, bank
transfer/bank debit, or credit card. We will elaborate on these later in Chapter 5.

Remember the following:

1. Appropriation - authorization by a legislative body to allocate funds for specified purposes.
2. Allotment- authorization to agencies to incur obligations (i.e. Obligational authority).
3. Obligation - amount contracted by an authorized officer for which the government is held liable.
4. Disbursement actual amount paid out of the budgeted amount

Budget Accountability
This phase occurs concurrently with the Budget Execution phase. As the budget is being executed, it is regularly
monitored to determine the conformance of actual results with planned targets.

12. Budget Accountability Reports - government agencies are required to submit the following accountability
reports:
a. Monthly Report of Disbursements - shows the disbursements of the entity during the month, classified
according to the type of disbursement authority. This report is submitted to the COA and DBM within 30
days after the end of each month.

b. Quarterly Physical Report of Operation - shows the agency's physical accomplishments in a given
quarter vis-à-vis its physical targets.

c. Statement of Appropriations, Allotments, Obligations, Disbursements and Balances - shows the

agency's authorized appropriations, allotments received, obligations incurred, disbursements made and
the balances of unreleased appropriations, unobligated allotments, and unpaid obligations.

d. Summary of Appropriations, Allotments, Obligations, Disbursements and Balances by Object of

Expenditures - similar to 'd' above but provides details of expenditures (e.g., salaries and wages,
traveling expenses, etc.).
e. List of Allotments and Sub-Allotments - shows the allotments received by the agency from the DBM
and the sub-allotments issued by the agency's Central Office or Regional Office to lower operating units.

f. Statement of Approved Budget, Utilizations, Disbursements and Balances - this report is prepared by
agencies that have authority to use their revenue. It shows the budgeted revenue, the utilizations and
disbursements thereof, and the unutilized amount.

g. Summary of Approved Budget, Utilizations, Disbursements and Balances by Object of Expenditures -

similar to 't above but provides details of expenditures.

h. Quarterly Report of Revenue and Other Receipts - shows the actual revenues and other receipts
remitted to the BTr and deposited in authorized government depository banks in a given quarter.

 Reports 'b' to 'h' above are prepared on a quarterly basis and are submitted to the COA and DBM within
30 days after the end of each quarter.

i. Aging of Due and Demandable Obligations - shows the names of creditors, the amounts owed to them,
and the number of days these obligations are outstanding. This report is submitted to the COA and DBM
within 30 days after the end of the year.
  A Consolidated Statement of Allotments, Obligations, and Balances per Summary of Appropriations
(based on reports 'd' and 'd above) shall be submitted on or before February 14 of the following year.

13. Performance reviews - The DBM and COA perform periodic reviews of the agencies performance and
budget accountability and report to the President.

14. Audit - the COA audits the agencies,

 The budget reports, together with other budget records, provide information in preparing the Statement
of Comparison of Budget and Actual Amounts, which is one of the components of a complete set of
financial statements of a government entity.

Responsibility Accounting
To better evaluate the budget accountability of an entity, government accounting adheres to the concept of
responsibility accounting.
Responsibility accounting is a system of providing cost and revenue information over which a manager
has direct control of. This enables the evaluation of a manager's performance based only on matters that are
directly under his control. Therefore, budget deviations can be readily attributed to the managers accountable
therefor.
Responsibility accounting requires the identification of responsibility centers and the distinction between
controllable and non-controllable costs.

 Responsibility center - is a part, segment, unit or function of a government agency, headed by a manager,
who is accountable for a specified set of activities.
 Controllable costs - a cost is considered controllable at a given level of managerial responsibility if the
manager has the power to incur it within a given period of time.
 Non-controllable costs - are costs incurred indirectly and allocated to a responsibility level.

Except for some which derive most of their income from collection of taxes and fees, government
agencies are basically cost centers whose primary purpose is to render service to the public at the lowest
possible cost.
Each of the managers of agency that is a cost center is evaluated based on his ability to meet budgeted
goals for controllable costs. All costs are controllable by top management because of the high extent of
its authority. Fewer costs are controllable in lower management levels because of the decreased scope of
authority.
Each government agency is assigned a responsibility center code as follows:

Chapter 3
The Government Accounting Process

Introduction
The government accounting process comprises the activities of analyzing, recording classifying, summarizing
communicating transactions involving the receipt and disposition of government funds and property, and
interpreting the results thereof. This process is similar to that of a business entity, except that it incorporates
budgetary controls, such as recording in the budget registries and preparing periodic budget accountability
reports.

Books of Accounts and Registries

The books of accounts and registries of government entities consist of:
1. Journals
a. General Journal
b. Cash Receipts Journal
 c. Cash Disbursements Journal
d. Check Disbursements Journal
2. Ledgers
a. General Ledgers
b. Subsidiary Ledgers
3. Registries
a. Registries of Revenue and Other Receipts (RROR)
b. Registry of Appropriations and Allotments (RAPAL)
c. Registries of Allotments, Obligations and Disbursements (RAOD)
d. Registries of Budget, Utilization and Disbursements (RBUD)

Technically, only the Journals and Ledgers are considered accounting records. These are similar to the
accounting records of a business entity. The Registries are budget records. These are used to monitor the budget.
You may think of the registries like "logbooks" or something, rather than accounting books with debit and credit
columns. The accounting unit of the agency maintains the Journals and Ledgers while the budget division of the
agency maintains the Registries.
Recall that separate accounting records and budget registries are maintained for each fund cluster (i.e.,
Regular Agency Fund, Foreign Assisted Projects Fund, etc. - see Chapter 1).

Budget Registries
1. Registries of Revenue and Other Receipts (RROR) - used to monitor the budgeted amounts, actual
collections and remittances of revenue and other receipts.
2. Registry of Appropriations and Allotments (RAPAL) - used to monitor appropriations and allotment
This is to ensure that allotments will not exceed appropriations.
3. Registries of Allotments, Obligations and Disbursements (RAOD) – used to monitor the allotments
received, obligations incurred against the corresponding allotment, and the actual disbursements made. This is
to ensure that obligations incurred will not exceed allotments while actual disbursements will not exceed the
obligations incurred.
Separate RAOD shall be maintained for each object of expenditure.

Object of Expenditures
The classifications of expenditures by object are as follows:
a. Personnel Services (PS) - pertain to all types of employee benefits, e.g., salaries, bonuses, allowances, cash
gifts, etc.
b. Maintenance and Other Operating Expenses (MOOE) - pertain to various operating expenses other than
employee benefits and financial expenses, e.g., travel, utilities, supplies, etc.
c. Financial Expenses (FE) - pertain to finance costs, e.g., interest expense, bank charges, etc. Financial
expenses also include losses on foreign exchange transactions.
d. Capital Outlays (CO) - pertain to capitalizable expenditures, e.g., expenditures the construction of public
infrastructures, acquisition costs of equipment, etc.

Accordingly, the following separate RAODs shall be maintained: (a) RAOD-PS; (b) RAOD-MOOE; (c)
RAOD-FE; and (d) RAOD-CO.

4. Registries of Budget, Utilization and Disbursements (RBUD) - used to record the approved special budget
and the corresponding utilizations and disbursements charged to retained income. Separate RBUDs are also
maintained for each object of expenditure, i.e., (a) RBUD-PS; (b) RBUD-MOOE; (c) RBUD-FE; and (d)
RBUD-CO.

Keeping of the General Accounts

The COA shall keep the general accounts of the Government and preserve the vouchers and other supporting
documents.
Incurrence of Obligation
Obligation Request and Status (ORS)
Obligations shall be incurred through the issuance of Obligation Request and Status (ORS). The Requesting
Office shall prepare this document, supported by valid claim documents like disbursement vouchers, payrolls,
purchase/job orders, itinerary of travel, etc.
The Head of the Requesting Office shall certify the necessity and legality of the obligation and the
validity of the supporting documents. The Head of the Budget Division shall certify the availability of the
allotment.

Notice of Obligation Request and Status Adjustment (NORSA)

If the obligations recorded in the RAOD and ORS above need to be adjusted, the subsequent adjustment shall
be made through the use of the Notice of Obligation Request and Status Adjustment (NORSA). The adjustment
shall be effected through a positive entry (addition) or a negative entry (reduction), as appropriate.

Up to this point, nothing is recorded yet in the accounting books. The recordings above are made on the budget
registries. Journal entries shall be made only after:
a. the employees have rendered services;
b. the office supplies are delivered and received; and
c. the office equipment is delivered and received.

Only after these events occur that the entity's financial statement elements are affected, and thus, an
accountable event has occurred that needs to be recognized.
In the meantime, the "obligations" recorded in the registries (but not yet in the accounting books) are
referred to as "Not Yet Due and Demandable”
Notice that government entities and business entities use the term "obligation" or the phrase "incurrence
of obligation" differently.

Government entity Business entity

 Obligation - is an act of a duly authorized  Obligation is another term for liability
official which binds the government to the
immediate or eventual payment of a sum of
money.
Obligation maybe referred to as a commitment
that encompasses possible future liabilities
based on current contractual agreement.

The registries used to monitor the NCA are the following:

a. Registry of Allotments and Notice of Cash Allocation (RANCA) - used to determine the amount of allotments
not covered by NCA and to monitor the available balance of NCA.
b. Registry of Allotment and Notice of Transfer of Allocation (RANTA) - used to determine the amount of
allotments not covered by Notice of Transfer of Allocation (NTA) and to monitor the available balance of NTA.

I. JOURNALS
a. General Journal - used to record transactions not recorded in the Special Journals.

Special Journals:
b. Cash Receipts Journal - used to record the Report of Collection and Deposit and Cash Receipts Register
of collecting officers.

 Report of Collection and Deposit (RCD) - prepared by a collecting officer to report his/her
collections and deposits to an Authorized Government Depository Bank (AGDB).
  Cash Receipts Register (CRReg) - used by field offices without a complete set of books to record
their cash collections and deposits in the books of their mother unit (central/regional/division office).

c. Cash Disbursements Journal - used to record the cash disbursements of the Disbursing Officer.
d. Check Disbursements Journal - used to record the check disbursements of the Disbursing Officer.

II. LEDGERS
a. General Ledger - summarizes all transactions recorded in the journals. Accounts in the general ledger are
arranged according to their sequence in the Revised Chart of Accounts.

b. Subsidiary Ledgers - show details of each control account in the general ledger.

"The NCA specifies the maximum amount of withdrawal that an entity can make from a government
bank for the period indicated. The Collecting Officer shall not issue an official receipt (OR) for the receipt of
NCA." (GAM for NGAs, Chapter 5, Sec. 38) Since the receipt of the NCA does not constitute a collection that
is recordable in the Cash Receipts Journal, it is recorded in the

Tax Remittance Advice (TRA)

The Tax Remittance Advice (TRA) is used to recognize:
a. In the books of government agencies, the constructive remittance of taxes withheld to the Bureau of Internal
Revenue (BIR) or customs duties withheld to the Bureau of Customs (BOC), and the constructive receipt of
NCA for those taxes and customs duties;
b. In the books of the BIR and BOC, the constructive receipt of tax revenue and customs duties; and
c. In the books of the BTr, the constructive receipt of the taxes and customs duties remitted.

Notice that there is actually no physical transfer of cash to the BIR (i.e., debit and credit to 'Cash-TRA'),
thus the term "constructive." The TRA is another form of disbursement authority, thus it is recorded similarly to
the receipt of the regular NCA (i.e., credit to 'Subsidy from National Government'). This means that Entity A has
the authority to use the amount withheld in its operations. Amounts used from the TRA will be reported in
Entity A's Monthly Report of Disbursements.

The use of the account "Cash-Tax Remittance Advice" is as if Entity A remits the cash to the BIR and
BTr, which the latter then remits back to Entity A, without the cash being physically transferred. The use of
TRA is necessary in order for the BIR to record the taxes as its income and for the BTr to record the
withholding agency’s disbursement authority as subsidy.

P.D. No. 1445 requires that all collections must be remitted to the National Treasury, unless another law
specifically allows otherwise.

Common Fund Systemo

To maximize the available NCAs of the agency, the Common Fund System policy shall be adopted
whereby cash allocation balances of agencies under the Regular MDS Account may be used to cover payment
of current year’s accounts payable, i.e., goods and services which have been delivered and accepted during the
year charged against appropriations of prior year/s, after satisfying their regular operating requirements as
reflected in their Monthly Cash Program.

All revenues of an entity must be remitted to the BTr

 Chapter 4
Revenues and Other Receipts
Introduction
Revenue - is the gross inflow of economic benefits or service potential during the reporting period when those
inflows result in an increase in equity, other than increases relating to contributions from owners.
Revenue includes only those that are received or receivable by the entity in its own account. Receipts
refer to actual cash collections from all sources during a period.

Fundamental Principles for Revenue

a. All revenues of an entity shall be remitted to the National Treasury and included in the General Fund of the
National Government, unless another law specifically allows otherwise.
b. All moneys and property received by a public officer, acting in any capacity or upon any occasion, shall be
accounted for as government funds and government property, unless another law specifically states otherwise.
c. Amounts received in trust and from business-type activities of the government may be separately recorded
and disbursed in accordance with relevant rules.
d. Receipts shall be recorded as revenue of Special, Fiduciary or Trust Funds, or Funds other than the General
Fund only when authorized by law.
e. A collecting officer shall immediately issue an official receipt (OR) upon collecting a payment of any nature.
f. Where mechanical devices (e.g. electronic official receipt) are used to acknowledge cash receipts, the COA
may approve, upon request, the exemption from the use of accountable forms.
g. Temporary receipts shall never be used to acknowledge the receipt of public funds.
h. Pre-numbered official receipts (ORs) shall be issued in strict numerical sequence. Duplicate copies shall be
the exact copies of the original.
i. A collecting officer shall accept payments to the government in the form checks, upon proper endorsement
and identification of the payee or endorsee. The collecting officer shall not use government funds to encash
private checks.
j. Receipts of government funds shall be acknowledged in accordance with the law - indicating the date of
receipt, from whom and on what account the fund was received. (P.D. No. 1445 & Chapter 2, Sec. 4 of GAM
for NGAs)

Types of funds
 General fund - a fund which is available for any purpose other than those which other funds have been
designated to.
 Special fund - a fund designated for special purposes.
 Trust fund (Fiduciary fund) - fund held by a government agency or public officer acting as trustee,
agent, or administrator for the fulfillment of a condition.
 Revenue fund - comprises all funds derived from the income of any government agency and available
for appropriation or expenditure in accordance with the law.
 Depository fund - fund held in an authorized depository bank over which the recipient agency retains
control for the lawful purposes for which the fund was received.
 Special Account in the General Fund (SAGF) – established to facilitate the funding of priority
activities of the government. The SAGF is sourced from specific fees, grants and donations, and other
sources identified under the law. The following are relevant legal provisions regarding the SAGF:
a. All income and collections for Special and Fiduciary Funds shall be remitted to the Treasury and treated
as SAGF.
b. The SAGF shall be considered as being automatically appropriated for purposes authorized by law, except
when the General Appropriations Act (GAA) provides otherwise.
c. SAGF shall be released to government agencies subject to the approval of the President.
 Special Purpose Funds (SPFs) - are "funds that the President allocates for special programs and
projects. Unlike for other funds, SPFs are not under the accountability of any particular government
agency/office or unit." (2012 Annual Financial Report of the Republic of the Philippines)
Relevant provision of law:
  All money collected on any tax levied for a special purpose shall be treated as a special fund and paid
out for such purpose only. If the purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds of the Government. (Art. VI.
Sec. 29(3), Philippine Constitution)

Sources of Revenue
Revenues may arise from exchange and non-exchange transactions.
a. Exchange transactions (Reciprocal transfers) - are transactions in which one entity receives assets or
services, or has liabilities extinguished, and directly gives approximately equal value to another entity in
exchange. (PPSAS 9.11)
Examples: sale of goods and rendering of services.

b. Non-exchange transactions (Non-reciprocal transfers) – are transactions in which an entity either receives
value from another entity without directly giving approximately equal value in exchange, or gives value to
another entity without directly receiving approximately equal value in exchange. (PPSAS 9.11)
Examples: tax revenue, fines and penalties and donations.

When the consideration transferred does not approximate the fair value of the resources received, the
entity determines whether the transaction includes a combination of exchange and non-exchange transactions.
Each component shall be recognized separately. (PPSAS 23.10)

If it is not immediately clear whether a transaction is an exchange or non-exchange transaction, the

substance of the transaction shall be examined to determine its type. For example, the sale of goods is normally
an exchange transaction. However, if the transaction price is subsidized, the transaction falls within the
definition of a non-exchange transaction.

The receipt of trade discounts, quantity discounts, or other reductions in price does not necessarily mean
that the transaction is a non-exchange transaction. (PPSAS 23.11)

Exchange Transactions
Revenues from exchange transactions arise from the following:
i. Sale of Goods or Provisions of Services to third parties or other government entities.
Examples:
a. Service Income - Permit Fees, Registration Fees, Franchising Fees, Licensing Fees, Legal Fees,
Passport and Visa Fees Processing Fees, and the like.
b. Business Income - School Fees, Examination Fees, Rent/Lease Income, Communication Network Fee,
Income from Hostels/Dormitories, Sales Revenue, Hospital Fees, Share in the Profit of Joint Venture,
and the like.

ii. Use by other entity of assets yielding interest, royalties and dividends or similar distributions.

Examples:
a. Interest income - charges for the use of cash or cash equivalents, or amounts due to the entity;
b. Royalties - fees paid for the use of the entity's assets such as trademarks, patents, software, and copyrights;
and
c. Dividends - share of the National Government from the earnings of its capital/equity investments in
Government- Owned or Controlled Corporations (GOCCs) and other entities.

Recognition of Revenue from Exchange Transactions

Sale of Goods:
Revenue from the sale of goods shall be recognized when all of the following conditions are satisfied:
i. Significant risks and rewards of ownership of the goods are transferred to the buyer;
ii. The entity does not retain continuing managerial involvement or effective control over the goods sold;
iii. It is probable that economic benefits will flow to the entity,
iv. Revenue can be measured reliably; and
v. Costs relating to the transaction can be measured reliably.

Rendering of Services:
Revenue from the supply of services is recognized on a straight line basis over the period the services are
rendered.
However, revenue is recognized by reference to the stage of completion (e.g., percentage of completion
method) if the outcome of the transaction can be estimated reliably, such as when all of the following conditions
are satisfied:
i. The stage of completion of the transaction at the reporting date can be measured reliably,
ii. It is probable that economic benefits will flow to the entity,
iii. Revenue can be measured reliably; and
iv. Costs relating to the transaction can be measured reliably.

For practical purposes, when services are performed by an indeterminate number of acts over a specified
time frame, revenue is recognized on a straight line basis over the specified time frame unless there is evidence
that some other method better represents the stage of completion. (PPSAS 9.24)
When the outcome of the transaction involving the rendering of services cannot be estimated reliably,
revenue is recognized only to the extent of the expenses recognized that are recoverable. (PPSAS 9.25)

Interest, Royalties & Dividends

a. Interest is recognized on a time proportion basis that takes into account the effective yield on the asset;
b. Royalties are recognized as they are earned in accordance with the substance of the relevant agreement; and
C. Dividends are recognized when the entity's right to receive payment is established.

A government entity normally recognizes revenue from service income when the services are rendered,
except when this is collected. Similarly, revenue from business income (except sale of goods) is recognized
when fees are billed, or if not practicable, when fees are collected. (GAM for NGAs, Chapter 5, Sec. 7)

Measurement of Revenue from Exchange Transactions

Revenue from exchange transactions are measured at the fair value of the consideration received or receivable.
Any trade discounts and volume rebates shall be taken into account.

 Fair value- is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction

When cash flows are deferred, the fair value of the consideration may be less than its nominal amount. In
this case, the fair value of the consideration receivable is determined by discounting all future cash flows using
an imputed rate of interest. The difference between the fair value and the nominal amount of the consideration is
recognized as interest revenue.

When the consideration is received in advance, it is initially recognized as a liability and subsequently
recognized as revenue only when the revenue recognition criteria are met.

Exchanges of Goods or Services

Exchanges of goods or services with:
a. Similar nature and value do not give rise to revenue.
b. Dissimilar nature and value give rise to revenue measured using the following order of priority:
i. Fair value of the goods or services received, adjusted by the amount of any cash transferred.
ii. Fair value of the goods or services given up, adjusted by the amount of any cash transferred

Non-exchange Transactions
Revenue from non-exchange transactions are derived mostly from taxes, fines and penalties, gifts, donations
and goods in-kind. These are received without directly providing something of equal value in return.

 Taxes - are compulsory payments intended to provide revenue to the government. Taxes do not include
fines and penalties.
 Fines and penalties - are monetary sanctions received as a consequence of breach of laws.
 Gifts, Donations and Goods/Services In-kind - are voluntary transfers of assets and services that one
entity makes to another, normally free from stipulations.

Recognition of Revenue from Non-exchange Transactions

Revenue from non-exchange transactions are recognized on a cash basis until a reliable measurement model is
developed. Accordingly, the asset and revenue or liability arising from a non- exchange transaction are
recognized when collected or when these are measurable and legally collectible. (GAM for NGAs, Chapter 5,
Sec. 12)

Tar revenue
 Tax revenue is recognized at a gross amount and not reduces for expenses paid through the tax system.
Expenses paid through the tax system are those expenses which should be paid irrespective of
whether the taxpayer pays taxes, or uses a particular mechanism to pay taxes.

 Tax revenue shall not be grossed up for the amount of tax expenditures.
Tax expenditures are preferential provisions of the tax law that provide certain taxpayers with
concessions that are not available to others. Tax expenditures are foregone revenue, not expenses.

Type of tax Taxable event

a. Income tax Earning of taxable income
b. Value added tax Undertaking of a taxable activity
C. Goods and services tax Purchase or sale of taxable goods or services
d. Customs duty Movement of dutiable goods or services across the
customs boundary
e. Death duty Death of the owner of the taxable property
f. Property tax Passage of the time period for which the tax is levied

Transfers
 Transfers are inflows of future economic benefits or service potential from non-exchange transactions,
other than taxes. (PPSAS 23)
Transfers include fines, gifts, donations and goods and services in-kind, debt forgiveness,
bequests, and grants. All of these transactions transfer resources without approximate equal value in
exchange and are not taxes but some are with conditions.

Fines and penalties

Fines and penalties are recognized as income in the year they are collected. (GAM for NGAs, Chapter 2, Sec.
33)
However, fines are recognized as revenue when the receivable meets the recognition criteria for asset
and are measured at the best estimate of inflow of resources to the entity. (GAM for NGAs, Chapter 5, Sec. 24)
An entity collecting fines in the capacity of an agent shall not treat those fines as revenue.

Gifts, Donations and Goods In-kind

Gifts, donations and goods in-kind are recognized as revenue when it is probable that future economic benefits
or service potential will flow to the entity. Those that are received without conditions are recognized
immediately as revenue. Those with conditions are initially recognized as liability and recognized as revenue
only when the conditions are satisfied.

Services In-kind
Services In-kind are not recognized as revenue due to the uncertainties affecting the entity's ability to control
those services and measure them at fair value. Examples of services in-kind include technical assistance from
foreign bodies, community services rendered by persons convicted of offenses, volunteer services, and the like.
Services in-kind received may be disclosed in the notes.

Measurement
Assets, liabilities and revenue arising from a non-exchange transaction are measured as follows:
a. Assets - at the acquisition-date fair value.
b. Liabilities - at present value, when the effect of time value of money is material.
c. Revenue - at the amount of increase in net assets. If the non- exchange transaction is initially recognized as a
liability, the subsequent reduction in that liability (e.g., because the condition is satisfied) is recognized as
revenue.

Debt Forgiveness
When a lender cancels the debt of a government entity, the debtor recognizes revenue equal to the carrying
amount of the debt forgiven
However, when a controlling entity cancels the debt of a wholly owned controlled entity, the cancelled
debt is treated as contribution from owners and not revenue.

Bequests
Bequests are transfers made according to the provisions of a deceased person's will. A bequest that satisfies the
recognition criteria for asset is recognized as revenue, measured at the fair value of the resources received or
receivable.

Grant with Condition

An asset received under a grant with condition is initially recognized as liability and recognized as revenue only
when the condition is satisfied.

Illustration:
The national government (NG) received a foreign grant of P10M conditioned on the construction of a flood
control system which must be completed within the next 2 years, otherwise the grant must be returned to the
grantor. The Department of Public Works and Highways (DPWH) is the implementing entity.

Pledges
Pledges are unenforceable undertakings to transfer assets to the recipient entity.
Pledges are not recognized as revenue because they do not meet the recognition criteria for asset, i.e., at
present, the entity has not yet obtained control over the item pledged.
If the pledged item is subsequently transferred to the recipient entity, it is recognized as a gift or
donation. Pledges may warrant disclosure as contingent assets.
Concessionary Loans
Concessionary loans - are loans received by an market terms.
The entity considers whether the difference between the transaction price (loan proceeds) and the fair
value of the loan on initial recognition is a non-exchange transaction. If it is so, the difference is recognized as
revenue, except if a present obligation exists, in which case the difference is recognized as a liability and
recognized as revenue only when the obligation is satisfied.

Impairment Losses and Allowance for Impairment Losses

When an amount already recognized as revenue becomes uncollectible, it is recognized as expense (impairment
loss) rather than as an adjustment to the revenue originally recognized.
Entities shall evaluate the collectability of accounts receivable on an ongoing basis based on historical
bad debts, customer/recipient credit-worthiness, current economic trends and changes in payment activity. An
allowance is provided for known and estimated bad debts. (GAM for NGAs, Chapter 5, Sec. 9)

Other Receipts
Other receipts include, but not limited to, the following:
a. Receipt of subsidy from the National Government (i.e. disbursement authority), such as receipt of:
i. Notice of Cash Allocation (NCA) (a)
ii. Tax Remittance Advice (a)
iii. Non-Cash Availment Authority (b)
iv. Cash Disbursement Ceiling (b)

b. Receipt of subsidy or assistance from other government agencies including LGUs and GOCCs. The
Collecting Officer shall issue an official receipt (OR) upon receipt of any of these subsidies/assistance.

c. Receipt of excess cash advance granted to officers and employees

d. Receipt of refund of overpayment of expenses.

e. Receipt of performance bond or security deposit. A performance bond is a security deposit required from a
contractor or supplier to guaranty the full and faithful performance of a contract. It may be in the form of cash
or certified check.

f. Collections made on behalf of another entity.

The collecting entity records the collection as a credit to the "Due to NGAs” account. Upon receipt of
remittance, the recipient entity records the collection as a credit to the "Trust Liabilities" account.

g. Intra-agency and Inter-agency fund transfers.

Chapter 5
Disbursements
Introduction
Disbursements constitute all payments in cash, in whatever manner (i.e., through cash, check, or other means).
Disbursements shall be supported by Disbursement Vouchers (including Petty Cash Vouchers) or Payroll.

Fundamental Principles for Disbursement of Public Funds

a. All government resources shall be used only in accordance with the law and only for public purposes.
b. Trust funds shall be used only for their specific purpose.
c. Fiscal responsibility shall be strictly shared by all those exercising authority over a government agency.
d. The use of government resources shall be approved by proper officials.
e. Claims against government funds shall be supported with complete documentation.
f. All laws and regulations applicable to financial transactions shall be faithfully adhered to, including generally
accepted principles and practices of accounting, management and fiscal administration, provided that they do
not contravene existing laws and regulations. (P.D. No. 1445)

Expenditures funded by borrowings are included in the expenditure program of the entity. The loan proceeds
shall not be used without the corresponding release of funds through a Special Budget. (GAM for NGAs,
Chapter 2, Sec. 35)

Authority to Disburse/Pay
An entity can make disbursements only after it has received a disbursement authority, based on the following:
a. Notice of Cash Allocation (NCA)
b. Notice of Transfer of Allocation (NTA)
c. Tax Remittance Advice (TRA) (Items 'a' to 'c' above are discussed in Chapters 2 and 3)
d. Non-Cash Availment Authority (NCAA)
e. Cash Disbursement Ceiling (CDC) - authority issued by the DBM to agencies with foreign operations (i.e.,
Department of Foreign Affairs 'DFA' and Department of Labor and Employment 'DOLE') allowing them to use
the income collected by their Foreign Service Posts (FSPs) to cover their operating requirements.

Basic Requirements & Certifications for Disbursements

The following are required when disbursing funds:
a. The Budget Officer (or Head of Budget Unit) shall certify the availability of allotment;
b. The Chief Accountant (or Head of Accounting Unit) shall charge obligations against available allotment;

 The foregoing are to ensure that no overdraft shall be incurred. An overdraft is incurred if obligations
exceed the allotment. The incurrence of overdraft is prohibited.

C. The Chief Accountant (or Head of the Accounting Unit) shall certify the availability of funds/cash and the
completeness of the supporting documents before the Head of Agency (or his authorized representative) can
enter into any contract involving the expenditure of public funds;

 All disbursements require the certification of the Chief Accountant (or Head of Accounting Unit).
Certifications must be based on valid and properly authorized claims. Any certification for fictitious
obligation is void. The certifying official shall be dismissed from service and shall be held criminally
liable. Others who are involved in the fictitious transaction are also liable. (GAM for NGAs, Chapter 2,
Sec. 37)

d. The requesting and approving officials shall ensure that the disbursements are legal and conform to
applicable rules and legality of disbursements. Payments shall be made through regulations;

e. The Head of the Requesting Unit shall certify the necessity and Disbursement Vouchers (DVs) or Payroll and
supported by the original copies of supporting documents; and

f. The Head of Agency (or his authorized representative) shall approve all DVs or Payrolls. (GAM for NGAs,
Chapter 2, Sec. 36)

Modes of Disbursements
The different modes of disbursements are as follows:
a. Check
b. Cash
c. Cashless payments:
i. Advice to Debit Account (ADA)
ii. Electronic Modified Disbursement System (MDS)
 iii. Cashless Purchase Card System (Credit Card)
iv. Non-Cash Availment Authority (NCAA)
v. Tax Remittance Advice (TRA)
(GAM for NGAs, Chapter 2, Sec. 29 and Chapter 6, Sec. 7)

Disbursements through Check

Checks are used whenever payments cannot conveniently, or are not authorized to be made through cash or
ADA. The following are the two types of checks issued by government entities:
a. Modified Disbursement System Checks - checks chargeable against the account of the Treasurer of the
Philippines, maintained with different Modified Disbursement System Government Servicing Banks (MDS-
GSBs).
b. Commercial Checks - checks chargeable against the Agency Checking Account with GSBs. These are
covered by income/receipts authorized to be deposited with Authorized Government Depository Banks
(AGDBs).

All checks drawn, whether released or unreleased to payees, including cancelled checks, are recorded
chronologically in the Checks/ADA Disbursement Record maintained by the Cash/Treasury Unit.

Disbursements through Cash

Cash disbursements constitute payments through cash advances, including payments out of the petty cash fund.
Cash advances are governed by the following rules:

a. Cash advances shall be made only for a legally authorized specific purpose (i.e., payments for personnel
services, petty expenses, and MOOE for field operating requirements).

b. Cash advances, other than advances for travel, shall be given only to duly appointed Disbursing Officers who
must be properly bonded. The amount of cash advance shall not exceed the maximum cash accountability under
the bond.

c. Only designated Disbursing Officers are allowed to perform disbursing functions and only permanently
appointed officials shall be designated as disbursing officers.

d. A cash advance must be liquidated as soon as the purpose for which it was given has been served.

 Cash advances for payroll shall be liquidated within 5 days after the end of the pay period. Unclaimed
salaries shall be refunded and issued official receipt to close the account

 Cash advances for travel shall be liquidated as follows:

i. Local travel - within 30 days upon return to the personnel's workstation.
ii. Foreign travel - within 60 days upon return to the Philippines. No official or employee is allowed to
go on an official foreign travel if he is due to retire within 1 year after the foreign travel.

e. No additional cash advance shall be given to any official or employee unless the previous cash advance given
to him is first liquidated.

f. Transfer of cash advance from one officer to another is prohibited.

g. A cash advance shall not be used to encash checks or to liquidate a previous cash advance.

Disbursements through Advice to Debit Account (ADA)

The ADA, or more specifically the List of Due and Demandable Accounts Payable - Advice to Debit Account
(LDDAP-ADA), is an accountable form used as an authorization issued by a government agency to the MDS-
GSB instructing the bank to debit a specified amount from its available NCA to pay the creditors/payees listed
in the LDDAP-ADA.
The ADA works like a check, except that one ADA can be drawn to pay various payees, as long as they
all maintain accounts in the same bank where the ADA is drawn. Separate ADAs shall be prepared for payees
using other MDS-GSBs. ADA payments are directly credited to the payees' accounts.
Simply stated, an ADA is an authorization for a fund transfer (between accounts in same bank) or a bank
transfer (between accounts with different banks) from the issuing agency's NCA bank account to the bank
accounts of specified payees.
The following expenditures shall not be paid through
ADA:
a. Payment of Terminal Leave and Retirement Gratuity benefits;
b. Remittance of GSIS, PhilHealth, and Pag-IBIG contributions;
c. Payments to utility companies (e.g., electricity, water, telephone, internet, petroleum, and the like).
d. Other payables which cannot be conveniently nor practicably paid using the ADA.

Disbursements through electronic Modified Disbursement System

The eMDS is like the ADA except that disbursements are made directly from the accounts of the BTr that are
maintained with the Land Bank of the Philippines (LBP), Agencies subscribed under LBP's MDS can make
online disbursements for selected transactions.

Disbursements through Cashless Purchase Card (CPC) System

Disbursements under the CPC System are made through the use of an electronic card (i.e., credit card). The
authorized credit card company is the Citibank. Guidelines in the use of CPC System are as follows:

a. CPC purchases shall be only for specific eligible items and only with specific merchants.
 Merchants - refer to the sellers or suppliers authorized by Citibank.

b. Only authorized individuals shall be allowed to use the CPC, subject to monthly credit limits. Changes in
credit limits or cardholders require the prior approval of the Steering Committee.

c. Agency officials who approved the CPC are jointly accountable with the cardholders.

d. The CPC System shall comply to, and shall not in any way change, the existing disbursement policies and
procedures prescribed under the law.

e. The amount covered by the CPC shall form part of the cash advance levels of the participating agencies. The
CPC shall not be used to justify the increase in cash advance levels of participating agencies.

f. The CPC shall initially be used for purchases of small value, non-common use items which are not available
with the Procurement Service.

g. Unauthorized items purchased using the CPC shall be the personal liability of the cardholder; without
prejudice to the revocation of the cardholder's privileges and other penalties that the participating agencies may
impose.

h. Participating agencies shall immediately inform the Citibank of any discrepancy regarding items which they
dispute as having been procured using the CPC.

i. Participating agencies shall ensure the timely payment of CPC billings. In case of delays, late payment
charges shall be the personal liability of the employee directly responsible for the delay. The NCA shall never
be used to pay late payment charges.
j. The cardholder shall submit all receipts from use of the CPC to the accounting unit. These shall be used in
inspecting actual goods purchased and in paying credit card billings.

k. The accounting unit shall check if the procured items are those allowed by law to be purchased using the CPC
and compare the charge slips with the amounts in the billing statement.

l. In case the CPC is lost or stolen, the cardholder shall immediately notify the Program Administrator and the
Citibank. The Program Administrator shall determine whether the cardholder was negligent and whether the
cardholder's privileges shall be reinstated or permanently suspended. The cardholder shall be liable for any CPC
charges during the period the card was lost or stolen.

Disbursements through Non-Cash Availment Authority (NCAA)

Non-Cash Availment Authority (NCAA) is the authority issued by the DBM to agencies to cover the liquidation
of their actual obligations incurred against available allotments for availment of proceeds from loans/grants
through supplier's credit/constructive cash.

Disbursements through NCAA (also called 'Direct Payment Method' or 'Direct Payment Scheme of
Loan Availment') are made through the Journal Entry Voucher (JEV) issued by the BTr to the agency to record
payment of goods and services made directly by the lending institution to the supplier or contractor. The JEV is
recorded in the General Journal.

Notice that no cash is involved in the acquisition of the equipment, settlement of the accounts payable,
and recognition of the loans payable. The lending institution directly pays the supplier

Disbursements through Tax Remittance Advice (TRA)

TRA is used for the constructive remittance of taxes or customs duties withheld to the BIR or BOC,
respectively.

Accounting for Disallowances

Disallowances refer to expenditures made by an agency that are subsequently invalidated or disallowed by the
COA because they are found to be irregular, unnecessary, excessive, extravagant or unconscionable.
Disallowances are recorded in the books of accounts only when they become final and executory
.
Notice that the accounting for disallowances by a government entity is similar to the accounting for
current and prior period errors by a business entity.

Accounting for Overpayments

"Sometimes overpayments or even double payment of expenditures do happen in agencies. These could be
avoided with the institution of proper controls but some could not be avoided because of built-in procedures.
One example is the payment of payrolls. Payrolls are prepared in advance and some agencies pay their
employees through the banking system. All these are done before reports of attendance are submitted, making it
impossible to know the exact amount to be paid in case there are absences without pay during the pay periods.
In case of overpayments, refunds shall be demanded of the employees concerned." (GAM for NGAs, Chapter 6,
Sec. 48)
Correcting entries for overpayments are similar to the accounting for disallowances.
 Chapter 6
Financial Assets
Introduction
Financial instrument - is any contract that gives rise to both a financial asset of one entity and a financial
liability or equity instrument of another entity. (PPSAS 28.9)

Financial asset - is any asset that is:

a. Cash;
b. An equity instrument of another entity;
C. A contractual right to receive cash or another financial asset from another entity;
d. A contractual right to exchange financial instruments with another entity under conditions that are potentially
favorable: or
e. A contract that will or may be settled in the entity's own equity instruments.

Financial liability - is any liability that is:

a. A contractual obligation to deliver cash or another financial asset to another entity,
b. A contractual obligation to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity's own equity instruments.

Equity instrument - is any contract that evidences a residual interest in the assets of an entity after deducting all
of its liabilities.

The issuer of a financial instrument shall classify the instrument, or its component parts, on initial
recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of
the contractual arrangement and the definitions of a financial asset, a financial liability and an equity
instrument. (GAM for NGAs, Chapter 7, Sec. 23)

Example:
Bank deposit is a financial instrument. It is a contract that gives rise to both a financial asset (i.e., Cash in
bank) on the part of the depositor and a financial liability (i.e., Deposit liability) on the part of the bank. The
depositor has a contractual right to withdraw his cash while the bank has a contractual obligation to deliver cash
when the depositor withdraws.
Cash is the most basic financial instrument because it is the medium of exchange and the basis of
measurement of all financial statement elements.

Initial Recognition
A financial asset is recognized when an entity becomes a party to the contractual provisions of the instrument.
(PPSAS 29.16)

Initial Measurement
Financial assets are initially measured at fair value plus transaction costs, except for financial assets at fair
value through surplus or deficit whose transaction costs are expensed.
Transaction costs are incremental costs that are directly attributable to the acquisition, issue, or disposal
of a financial instrument. An incremental cost is one that would not have been incurred if the entity had not
acquired, issued or disposed the financial instrument Transaction costs include: (a) fees and commissions paid
to agents, advisers, brokers and dealers; (b) levies by regulatory agencies and securities exchanges; and transfer
taxes and duties.

Our succeeding discussions on financial assets are subdivided into the following:
a. Cash and cash equivalents
b. Receivables
c. Investments
d. Derivatives

Cash and Cash Equivalents

Cash - comprises cash on hand, cash in bank and cash treasury accounts.

Adjustments for Unreleased Commercial Checks

Unreleased checks are checks drawn but not yet given to the payees as of the end of the period. Unreleased
checks are reverted back to cash as follows:

Cash in Bank, Local Currency-Current XX

Accounts Payable (or other liability account) XX

Unreleased checks are not physically cancelled. At the start of the following year, the adjusting entry
above is reversed to recognize the availability of the checks for release. This procedure does not apply to the
"Cash-Modified Disbursement System (MDS)” account because there is no actual cash with the Government
Servicing Bank. Recall that any unused NCA is reverted back to the National Government, and therefore, the
balance of the "Cash-Modified Disbursement System (MDS)" account is zeroed-out at the end of each period.

Accounting for Cancelled Checks

Checks are cancelled when they become stale, voided or spoiled. A check is considered stale if it has been
outstanding for over 6 months from its date. Replacement checks may be issued for cancelled checks that were
already released to payees, upon submission of the cancelled checks to the Accounting Unit. Cancelled checks
are reverted back to cash as follows:

The cancelled check pertains to:

Current year
Cash-Modified Disbursement System (MDS), Regular XX
Accounts payable XX
To recognize the cancellation of stale/voided/spoiled MDS checks stale/voided/spoiled MDS checks

Prior period
Accumulated Surplus/(Deficit) XX
Accounts payable XX
To recognize the cancellation of stale/voided/spoiled MDS checks stale/voided/spoiled MDS checks in prior yr.

For prior period MDS checks, the "Accumulated Surplus/(Deficit)" account is debited. This is because,
again, the "Cash-Modified Disbursement System (MDS)" account is zeroed- out at the end of each period.
For cancelled commercial checks, the "Cash in Bank-Local Currency, Current" account is debited for
both current year and prior period.
If a replacement check is issued, the replacement check is recorded in the regular manner, i.e., debit to
accounts payable and credit to cash.

Petty Cash Fund

Petty Cash Fund (PCF) refers to the amount granted to duly designated Petty Cash Fund Custodian for payment
of authorized. petty or miscellaneous expenses which cannot be conveniently paid through checks or ADA.
(GAM for NGAs, Chapter 6, Sec. 2)

Guidelines:
a. The Head of Agency shall approve the amount of PCF to be established, which shall be sufficient to defray
recurring petty expenses for 1 month.
b. The PCF Custodian shall be properly bonded) whenever the established amount of PCF exceeds P5,000.
 (a) Bonded" means an insurance shall be taken on the custodian. In the event that the custodian misuses
the funds, the entity can claim from the insurance company, and the insurance company in turn will go after the
custodian,
C. The PCF shall be maintained using the Imprest System. At all times, total cash on hand and unreplenished
expenses shall be equal to the PCF ledger balance.
d. The PCF shall be kept separately from other advances or collections and shall not be used to pay for regular
expenses, such as rentals, electricity, water, and the like.
e. PCF payments shall not exceed P15,000 for each transaction, except when otherwise authorized by law or by
the COA. Splitting of transactions to avoid exceeding the ceiling is prohibited.
f. A canvass from at least 3 suppliers is required for purchases amounting to P1,000 and above, except for
purchases made while on official travel.
g. PCF disbursements shall be supported by properly accomplished and approved Petty Cash Vouchers,
invoices, ORs, or other evidence of disbursements.
h. Replenishment shall be made as soon as disbursements reach at least 75% or as needed.
i. At the end of the year, the PCF Custodian shall submit all unreplenished Petty Cash Vouchers to the
Accounting Unit for recording in the books of accounts.
j. The unused balance of the PCF shall not be closed at year-end. It shall be closed only upon the termination,
separation, retirement or dismissal of the PCF Custodian, who in turn shall refund any balance to close his/her
cash accountability.

Just like the accounting by business entities, no journal entries are made as disbursements are made out of the
PCF. Journal entries will be made when the PCF is (a) replenished or (b) adjusted at the end of the period for
unreplenished expenses.

Accounting for Cash Shortage/Overage of Disbursing Officer

The disbursing officer is liable for any cash shortage while any cash overage that he cannot satisfactorily
explain to the auditor is forfeited in favor of the government.

Relevant provision of law:

"The failure of a public officer to have duly forthcoming any public funds or property with which he is
chargeable, upon demand by any duly authorized officer, shall be prima facie evidence that he has put such
missing funds or property to personal use." (Revised Penal Code, Art. 217)

Dishonored Checks
A dishonored check is a check that is not accepted when presented for payment, e.g, a check returned by the
bank because of lack of sufficient funds - 'bounced' check.
The drawer of the dishonored check is liable for the amount of the check and all penalties resulting from
the dishonor, without prejudice to his criminal liability for a 'bounced check.

Guidelines:
a. When a check is dishonored, the Collecting Officer shall:
i. issue a Notice of Dishonored Checks to the drawer and any endorser; and
ii. cancel the related OR.
b. If the Collecting Officer fails to issue the notice, the dishonored check becomes his personal liability. The
drawer and any endorser not given the notice will be relieved from any liability.
c. A check refused by the drawee bank when presented within 90 days from its date is a prima facie evidence
that the drawer has knowledge about the insufficiency of his funds, unless the drawer pays the check in full or
makes arrangement with the drawee bank for the full payment of the check within 5 banking days after
receiving the notice of the dishonor.
d. A dishonored check shall be settled by payment in cash or certified check. The dishonored check shall not be
returned to the payor unless he returns first the previous OR therefor.
Bank Reconciliation
A bank reconciliation statement is a report that is prepared for the purpose of bringing the balances of cash (a)
per records and (6) per bank statement into agreement.

A bank statement is a report issued by a bank which shows the credits and debits to the depositor’s
account during a period as well as the account's cumulative balance.

Guidelines:
a. Bank reconciliations shall be prepared as internal control to ensure the correctness of cash records and as
deterrent to fraud.
b. The Chief Accountant or designated staff shall separate bank reconciliations for each bank account
maintained by the entity within 10 days from receipt of the monthly bank statement.
c. The Adjusted Balance Method shall be used. Under this method, the unadjusted book and bank balances are
brought to an adjusted balance that is reported on the Statement of Financial Position.
d. Bank reconciliations shall be prepared in 4 copies to be submitted within 20 days from receipt of bank
statement to the following: COA Auditor, Head of Agency, Accounting Division, and Bank, if necessary.
e. A Journal Entry Voucher (JEV) shall be prepared to record any reconciling items

Cash Equivalents
Cash Equivalents - are short-term, highly liquid investments that are readily convertible to known amounts of
cash and which are subject to an insignificant risk of changes in value. (PPSAS 2.8)
Only debt instruments acquired within 3 months before their scheduled maturity date can qualify as
cash equivalents.

Receivables
Receivables represent claims for cash or other assets from other entities. Examples:
a. Accounts receivable - refers to amounts due from customers arising from regular trade and business
transactions..
b. Notes receivable - represents claims, usually with interest, for which a formal instrument of credit is issued as
evidence of debt, such as promissory notes
C. Loans receivable - used in the BTr-NG books to recognize loans extended by the National Government to
Government Financial Institutions 'GFIS' or GOCCs, covered by loan agreements.
d. Other receivables, such as, interest receivable, due from employees/officers/ other NGAs, lease receivables,
dividends receivable, and the like. (GAM for NGAs, Vol. 3)

Receivables are initially measured at fair value plus transaction costs and subsequently measured at amortized
cost.

Investments
Categories of Financial Assets
For purposes of subsequent measurement, financial assets are classified as follows:
a. Financial asset at fair value through surplus or deficit - is one that is either:
a. Held-for-trading, or
b. Designated as at fair value through surplus or deficit on initial recognition. Any financial asset can be
classified in this category if its fair value can be reliably measured.

b. Held-to-maturity investments - are non-derivative financial assets with fixed or determinable payments and
fixed maturity that an entity has the positive intention and ability to hold until maturity.

c. Loans and receivables - are non-derivative financial assets with fixed or determinable payments and are not
quoted in an active market.
d. Available-for-sale financial assets - are non-derivative financial assets that are designated as available for
sale or are not classifiable under the other categories.

Summary of Measurements:
Type of Financial Asset Examples Initial Measurement Subsequent Measurement
a. Financial asset at fair Investments in quoted Fair value Fair value; changes in fair
value through surplus or stocks or bonds. value are recognized in
deficit surplus/deficit
b. Held-to-maturity Investments in bonds and Fair value plus Amortized cost (using the
other debt securities to be transaction costs effective interest method)
held until maturity
C. Loans and receivables Accounts, Notes, Loans Fair value plus Amortized cost (using the
receivable transaction costs effective interest method)
d. Available- for-sale Investments in stocks or Fair value plus Fair value; changes in fair
financial assets bonds not classified under transaction costs value are recognized in
(a) to (C) above. equity

Investments in unquoted equity instruments whose fair value cannot be reliably measured are measured
at cost.

Interest income from debt instruments, other than those which are classified as financial asset at fair
value through surplus or deficit, is recognized using the effective interest method.
Therefore, if the investment in the illustration above in is in the form of bonds and is classified as
available-for-sale financial assets, the unrealized gain (loss) would have been computed as the difference
between the fair value at year-end and the carrying amount adjusted for the amortization of bond discount or
premium
Only debt securities can be classified as held-to-maturity ]investments. Thus, this category is omitted in
Illustration 2 above. Held-to-maturity investments are subsequently measured at amortized cost, and therefore,
changes in fair value are ignored.

Impairment of Financial Assets

An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial
asset or group of financial assets is impaired. If any such evidence exists, the entity shall measure the amount of
loss as the difference between the carrying amount of the asset and the present value of estimated future cash
flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset shall be
reduced either directly or through the use of an allowance account. The amount of the loss shall be recognized
in surplus or deficit.
In case of Accounts Receivable, the Allowance for Impairment shall be provided in an amount based on
collectability of receivable balances and evaluation of such factors as aging of accounts, collection experiences
of the agency, expected loss experiences and identified doubtful accounts. (GAM for NGAs, Chapter 7, Sec. 10)

Derecognition of Financial Assets

Derecognition is the process of removing a previously recognized asset, liability or equity from the statement of
financial position.

A financial asset is derecognized when:

a. The contractual rights to the cash flows from the financial asset expire or are waived; or
b. The financial asset is transferred and the transfer qualifies for derecognition, such as when the risks and
rewards of ownership and control of the financial asset are relinquished.
 The derecognition of financial assets is subject to the provisions of the State Audit Code of the
Philippines (P.D. No. 1445) on the writing off of receivables and other policies issued by the COA. (GAM for
NGAs, Chapter 7, Sec. 10)

Derivatives
A derivative is a financial instrument or other contract that derives its value from the changes in value of some
other underlying asset or other instrument.

Characteristics of a derivative
a. Its value changes in response to the change in an underlying;
b. It requires no initial net investment (or only a very minimal initial net investment); and
c. It is settled at a future date.

An "underlying" is a specified price, rate, or other variable (e.g., interest rate, security or commodity
price, foreign exchange rate, index of prices or rates, etc.), including a scheduled event (e.g., a payment under
contract) that may or may not occur.

Purpose of a derivative
The very purpose of derivatives is risk management. Risk management is the process of identifying the desired
level of risk identifying the actual level of risk and altering the latter to equal the former. (GAM for NGAs,
Chapter 7, Sec. 19)

Hedging
Hedging is a method of offsetting a potential financial loss or the structuring of a transaction to reduce risk
involving financial instruments.
Hedge accounting recognizes the offsetting effects on surplus or deficit of changes in the fair values of
the hedging instrument and the hedged item.

Hedging Relationships
a. Fair value hedge – a hedge of the exposure to changes in fair value of a recognized asset or liability or an
unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is
attributable to a particular risk and could affect surplus or deficit.
b. Cash flow hedge - a hedge of the exposure to variability in cash flows that (i) is attributable to a particular
risk associated with a recognized asset or liability (such as all or some future interest payments on variable rate
debt) or a highly probable forecast transaction and (ii) could affect surplus or deficit.
c. Hedge of a net investment in a foreign operation.

Components of a Hedging Relationship

a. Hedging Instrument - a designated derivative or a designated non-derivative financial asset or non-derivative
financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of
designated hedged item.
b. Hedged Item - an asset, liability, firm commitment, highly probable forecast transaction or net investment in
a foreign operation that (a) exposes that entity to risk of changes in fair value or future cash flows and (b) is
designated as being hedged.
 Chapter 7
Inventories.
Introduction
Inventories are assets:
a. Held for sale or distribution in the ordinary course of operations (Finished goods);
b. In the process of production for sale or distribution (Work in process); or
c. In the form of materials or supplies to be consumed in the production process or distributed in the rendering
of services (Raw materials and supplies).

More specifically, the inventories of a government entity consists of the following:

a. Inventory Held for Sale (e.g., medicines for sale in government pharmacies)
b. Inventory Held for Distribution (e.g., rice and other welfare goods held for distribution)
c. Inventory Held for Manufacturing (e.g., raw materials, work-in-process)
d. Inventory Held for Consumption (e.g., office supplies inventory)
e. Semi-Expendable Property consists of machinery, equipment, furniture and fixtures and similar items that are
not capitalized as PPE because their costs are below the P15,000 capitalization threshold for PPE.

Measurement
Inventories are initially measured at cost and subsequent, measured as follows:

Goods held for sale

 Lower of Cost and Net realizable value

Goods held for distribution

 Lower of Cost and Current replacement cost

Cost comprises the following:

a. Purchase cost, excluding trade discounts, rebates, and other similar deductions in purchase price.
b. Direct costs incurred in bringing the asset to its intended location and condition (e.g., freight costs,
conversion costs - such as costs of labor and production overhead for manufactured items).

Cost excludes the following:

a. Abnormal amounts of wasted materials, labor, and production overhead;
b. Selling costs; and
c. Administrative overheads

Exceptions:
a. Inventories received from non-exchange transactions (e.g., donations) are initially measured at acquisition-
date fair value.
b. Agricultural produce are initially measured at fair value less costs to sell at the point of harvest.
For these items, their initial measurements are deemed their costs for purposes of subsequent
measurement at the lower of cost or NRV/Current replacement cost.

Net Realizable Value (NRV) is estimated selling price less estimated costs of completion and estimated
selling/disposal costs.

Current replacement cost is the cost the entity would incur to acquire the asset on the reporting date.
Cost Formulas
Cost of goods sold and cost of inventories on hand are determined using the following cost formulas:

a. Specific identification - this shall be used for items that are not ordinarily interchangeable (.e., unique) and
those that are segregated for specific projects.
Under this formula, specific costs are attributed to identified items of inventory. Accordingly, cost of
sales represents the actual costs of the specific items sold while ending inventory represents the actual costs of
the specific items on hand.
b. Weighted average cost - this shall be used for large numbers of items of inventory that are ordinarily
interchangeable. This shall be applied under a perpetual inventory system.
Under this formula, a new weighted average unit cost is computed after every purchase. The computed
average costs are used in determining the cost of goods sold and inventory on hand. Accordingly, cost of sales
and ending inventory are stated at average costs, rather than at the actual costs of the inventories sold or on
hand. This method is commonly referred to in traditional accounting by business entities as the "moving
average" cost formula.

Government entities shall use the perpetual inventory system. Under this system, purchases, sales, and
other transactions affecting inventory are recorded in the "inventory" and "cost of sales" accounts, as
appropriate. Moreover, stock cards and stock ledgers are maintained. These enable the retrieval of information
on costs and quantities of inventories sold and on hand at any given point of time. However, purchases of
supplies and materials out of the petty cash fund for immediate use or on emergency cases are charged directly
as expense..
The FIFO cost formula and the periodic inventory system are not used by government entities.

Recognition as an Expense
The carrying amount of an inventory is recognized as expense in the period it is sold, distributed, exchanged, or
consumed. The write-down of inventory to its NRV or Current replacement cost, as appropriate, is also
recognized as expense.

Receipt and Disposition of Inventories

Receipt
1. End users prepare the Purchase Request (PR) form to request for the purchase of items not available on
stock. The PR is the basis in preparing the Purchase Order.
'End users' refer to the individuals who will actually be using the items. For example, the end users of
office supplies are those who are working in the office; the end users for cleaning materials are the janitors. As
an internal control, only the appropriate end users are allowed to make purchase requests for the items they
need. It would be inappropriate for an office clerk to make a purchase request for cleaning materials.

2. The authorized official prepares the Purchase Order (PO). The PO is a document issued to the supplier when
making a purchase. It indicates the specifications, quantities, and agreed prices of the items being purchased.
The PO serves as the contract between the entity and the supplier.
Recall that a canvass from at least 3 suppliers is required for purchases amounting to P1,000 and above.

3. When the purchased items are delivered, the Property/Supply Division signs the "received" portion of the
Delivery Receipt (DR) and prepares the Inspection and Acceptance Report (IAR). The IAR will be used by the
Property Inspector in inspecting and accepting the delivered items.
The Property/Supply Division forwards the DR, IAR and PO to the Property Inspector.

4. The Property Inspector inspects the conformance of the delivered items with the specifications in both the PO
and DR and indicates the result of the inspection (i.e., acceptance or rejection) in the IAR. Rejected deliveries
will be returned to the supplier.
 The Property Inspector forwards the copies of DR, IAR and PO to both the Property/ Supply Division
and Accounting Division for recording.

5. The Property/Supply Division, through the Stock Card Keeper, records the accepted deliveries in the Stock
Card (SC). The SC shows the quantities of all receipts and issuances of inventory, as well as the available
balance at any given point of time.

6. The Accounting Division records the accepted deliveries in the books of accounts and in the Supplies Ledger
Card (SLC). The SLC shows both the quantities and monetary amounts balance at any given point of time. of
all receipts and issuances of inventory, as well as the available
As an internal control, the SC (maintained by the Property/Supply Division) and SLC (maintained by the
Accounting Division) are periodically reconciled.

7. The Property/Supply Division prepares the Disbursement Voucher (DV) then forwards it, together with
supporting documents, to the Accounting Division for processing of payment

Disposition
8. End users prepare the Requisition and Issue Slip (RIS) to request for the issuance of items available on
stock. The Head of the requesting individual shall approve the RIS. The approved RIS is then forwarded to the
Property/Supply Division.

9. The Property/Supply Division prepares the Report of Supplies and Materials Issued (RSMI). The RSMI will
be used by the Stock Card Keeper in updating the SC and the Accounting Division in journalizing the items
issued.

10. The Accounting Division records the items issued in the books of accounts and updates the SLC.

11. The following are other documents used in the disposition of inventories:
a. Waste Materials Report - prepared by the Property or Supply Custodian to report wasted materials, such as
destroyed spare parts and other spoilages.
b. Report on the Physical Count of Inventories - used in reporting the results of physical counts. It shows the
balance of inventory, as well as any shortages or overages.
c. Report of Accountability for Accountable Forms - used to report the movement and status of accountable
forms in the possession of an officer.
d. Inventory Custodian Slip – prepared when issuing semi-expendable property.

Chapter 8
Agriculture
Introduction
Agriculture means farming or the process of producing crops and raising livestock. In this chapter, we will learn
the accounting principles used for assets, liabilities, income and expenses resulting from agricultural activities.

Agricultural Activity - is the management by an entity of the biological transformation and harvest of biological
assets for sale, including exchange or non-exchange transactions, or for conversion into agricultural produce, or
into additional biological assets.
Examples of agricultural activities include: raising livestock, forestry, annual or perennial cropping,
cultivating orchards and plantations, floriculture, and aquaculture (including fish farming).
The following are the common features of agricultural activities:
a. Capability to change - living animals and plants are capable of biological transformation;
b. Management of change- management facilitates biological transformation by enhancing, or at least
stabilizing, conditions necessary for the process to take place. Such management distinguishes agricultural
activity from other activities. For example, harvesting from unmanaged sources (such as ocean fishing and
deforestation) is not agricultural activity; and
C. Measurement of change - the change in quality or brought about by biological transformation or harvest is
measured and monitored as a routine management function.

Biological Transformation - comprises the following processes that cause qualitative or quantitative changes in
a biological asset:
I. Asset changes through:
a. Growth - is an increase in quantity or improvement in quality of an animal or plant.
b. Procreation - is the creation of additional living animals or plants.
C. Degeneration - is a decrease in the quantity or deterioration in quality of an animal or plant.
II. Production of agricultural produce.

Biological Asset - is a living animal or plant

Agricultural Produce - is the harvested product of the entity's biological assets. "Harvest" is the detachment of
produce from a biological asset or the cessation of a biological asset's life processes.

Recognition
A biological asset or agricultural produce is recognized when it meets the asset recognition criteria, including
the reliable measurement of its fair value or cost.

Measurement
Biological assets are initially and subsequently measured at fair value less costs to sell. The gain or loss arising
from initial measurement and subsequent changes in fair value less costs to sell are recognized in surplus or
deficit.
Biological assets whose fair value cannot be reliably determined on initial recognition are initially
measured at cost and subsequently measured at cost less accumulated depreciation and accumulated
impairment losses.

Agricultural produce is initially measured at fair value less costs to sell at the point of harvest. This will be the
deemed cost when subsequently measuring the agricultural produce using the measurement basis for inventories
or other basis.
The gain arising from the initial measurement is recognized in surplus or deficit.

 Costs to Sell - are the incremental costs directly attributable to the disposal of an asset, excluding finance
following
.
Determination of Fair value
a. Fair value is determined as follows:
Quoted price in an active market XX
Less: Transport costs XX
Fair value XX

 Active Market - is a market in which all the conditions exist:

a. the items traded in the market are homogeneous;
b. willing buyers and sellers can normally be found at any time; and
C. prices are available to the public.

 If there are more than one active markets, the entity shall use the price in the market expected to be used.

 If there is no active market, the entity shall estimate the market price based on one of the following:
i. The most recent market transaction price, provided that there is no significant change in economic
circumstances between the date of that transaction and the reporting date;
ii. Market prices for similar assets with adjustment to reflect differences;
iii. Sector benchmarks, such as the value of an orchard expressed per export tray, bushel, or hectare, and the
value of cattle expressed per kilogram of meat; and
iv. Present value of expected net cash flows from the asset discounted at a current market-determined rate, in
circumstances where market-determined prices or values are not available for a biological asset in its present
condition.
Estimates of cash flows exclude finance costs, taxes and costs of reestablishing biological assets after
harvest (e.g., the cost of replanting trees in a plantation forest after harvest).

 Contract prices are irrelevant when determining fair value.

 Transport costs refer to all costs necessary in getting the asset to the market for the sale.

b. The determination of fair value may be facilitated by grouping biological assets or agricultural produce
according to significant attributes, e.g., by age or quality.

c. Cost may sometimes approximate fair value, particularly when:

i Little biological transformation has taken place since initial cost incurrence (e.g., seedlings planted
immediately prior to reporting date); or
ii. The impact of the biological transformation on price is not expected to be material (e.g., the initial growth in
a 30-year pine tree plantation production cycle).

d. Biological assets attached to land (e.g., trees in a plantation forest) may not have a separate market but an
active market may exist for the combined assets (i.e., biological assets, raw land, and land improvements) as a
package. In such case, the fair value of the raw land and land improvements may be deducted from the fair
value of the combined assets to arrive at the fair value of the biological assets.

e. A biological asset that is previously measured at fair value less costs to sell shall be measured at fair value
less costs to sell until it is disposed.

Disclosures
The following are the peculiar disclosures related to agriculture:
a. The aggregate gain or loss on initial recognition of biological assets and agricultural produce and from the
change in fair value less costs to sell of biological assets.

b. Consumable and Bearer biological assets and biological assets held for sale and held for distribution at no
charge or for a nominal charge.

 Consumable Biological Assets - are those that are to be harvested as agricultural produce or to be sold or
distributed as biological assets. Examples: livestock intended for production of meat, annual crops like
maize and rice, and trees being grown for lumber.

 Bearer Biological Assets - are those that are self-generating and are used repeatedly for more than one
year. Examples: dairy cattle held for the production of milk, fruit trees, and trees from which firewood is
harvested while the tree remains.

C. Mature and immature biological assets

 Mature Biological Assets - are those that have attained harvestable specifications (for consumable
biological assets) or are able to sustain regular harvests (for bearer biological assets).
d. The amount of change in fair value less costs to sell due to physical changes and due to price changes.

Chapter 9
Investment Property

Introduction
Investment Property - is land and/or building held for rentals capital appreciation. It is not held for use in the
production or supply of goods or services, for administrative purposes, or sale in the ordinary course of
business.

Examples of investment property:

a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of
operations;
b. Land held for a currently undetermined future use;
c. A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more
operating leases on a commercial basis;
d. A building that is vacant but is held to be leased out under one or more operating leases on a commercial
basis to external parties;
e. Property that is being constructed or developed for future use as investment property; and
f. Significant portion of a property that is held to earn rentals of for capital appreciation rather than to provide
services, and insignificant portion that is held for use in the production or supply of goods or services or for
administrative purposes. (GAM for NGAs, Chapter 9, Sec. 3)

The following are items not considered as investment property:

a. Biological assets related to agricultural activity;
b. Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources;
c. Property held for sale in the ordinary course of operations or in the process of construction or development
for such sale;
d Property being constructed or developed on behalf of third parties;
e. Owner-occupied property, including:
i. Property held for future use as owner-occupied property;
ii. Property held for future development and subsequent use as owner-occupied property,
iii. Property occupied by employees; or
iv. Owner-occupied property awaiting disposal.
f. Property that is leased to another entity under a finance lease;
g. Property held to provide a social service and which also generates cash inflows;
h. Property held for strategic purposes; and,
i. Property held for use in the production or supply of goods or services or for administrative purposes.
(GAM for NGAs, Chapter 9, Sec. 4)

Initial Measurement
An investment property is initially measured at cost. The measurement of cost depends on the mode of
acquisition.

Modes of Acquisition
1. Cash purchase - the cost of an investment property acquired through cash purchase comprises the purchase
price and any direct costs necessary in bringing the asset to its intended condition, e.g., professional fees for
legal services and property transfer taxes.
2. Installment purchase - the cost of an investment property acquired through installment purchase is the cash
price equivalent. The difference between this amount and the total payments is recognized as interest expense
over the period of credit
3. Non-exchange transaction - the cost of an investment property acquired through a non-exchange transaction
is the fair value at the acquisition date.

4. Self-construction the cost of a self-constructed investment property includes the costs of direct materials,
labor, and construction overhead. The cost of wasted materials, laborer other resources incurred in constructing
the property are recognized as expense.
Construction costs incurred are initially recorded the "Construction in Progress" account pending the
completion of the investment property Upon completion the construction costs are reclassified to the
"Investment Property" account

The cost of an investment property does not include the following:

a Start-up costs, unless they are necessary to bring the property to the condition necessary for it to be capable of
operating in the manner intended by management;
b. Operating losses incurred before the investment property achieves the planned level of occupancy; or
c. Abnormal amounts of wasted materials, labor or other resources incurred in constructing or developing the
property,

Subsequent Measurement
Investment properties are subsequently measured under the cost model. Under this model, investment properties
are measured at cost less accumulated depreciation and accumulated impairment losses.
The fair value model, which is available to business entities, is not allowed for government entities.

Transfers To or From Investment Property

Transfers to or from investment property shall be made only when there is a change in use, as evidenced by the
following:
a Commencement of owner-occupation, for a transfer from investment property to owner-occupied property,
b. End of owner-occupation, for a transfer from owner-occupied property to investment property;
c. Commencement of an operating lease (on a commercial basis) to another party, for a transfer from inventories
to investment property; or
d. Commencement of development with a view to sale, for a transfer from investment property to inventories.

A government entity accounts for transfers to or from investment property at cost. Accordingly, no gain
or loss shall arise from the transfer, except when the transferred asset is impaired, in which case, impairment
loss shall be recognized first before making the reclassification.

Derecognition
An investment property is derecognized when it is disposed or when it is permanently withdrawn from use and
no future economic benefits or service potential is expected from its disposal.
When an investment property is derecognized, the difference between the net disposal proceeds (if any)
and its carrying amount is recognized as gain or loss in surplus or deficit.

Impairment
An asset is impaired if its carrying amount exceeds its recoverable amount. The excess represents impairment
loss which shall be recognized in surplus or deficit.
 Recoverable amount is the higher of an asset's fair value less costs to sell and value in use.
 Value in use is the present value of the estimated future cash flows expected to be derived from the
continuing use of an asset and from its disposal at the end of its useful life.

At each reporting date, an entity shall assess whether there is an indication that an asset may be impaired. If
such indication exists, the entity shall estimate the recoverable amount of the asset. An entity shall consider the
following indications impairment
I. External sources of information:
a. Significant decline in the asset's market value.
b. Significant changes in technological, market, economic, or legal environment that adversely affect the
recoverable amount of an asset.
c. Increase in market interest rates that adversely affect the discount rate used in calculating an asset's
value in use, and consequently, its recoverable amount.

II. Internal sources of information

a. Obsolescence or physical damage of an asset.
b. Significant changes in the expected use of an asset that adversely affect its recoverable amount (e.g.,
the asset becomes idle, plan to discontinue or restructure the operation to which an asset belongs, plan to
dispose of the asset earlier than expected, and reassessment of an asset's useful life from indefinite to
finite).
c Cessation of the construction of an asset before it is completed
d. Indications that the economic performance of an asset is, or will be, worse than expected (e.g., the
maintenance costs of the asset are significantly higher than expected, cash inflows from the asset are
significantly lower than expected)

After impairment, depreciation charges on an asset will be based on its recoverable amount.

Cash Generating Unit

If there is an indication for impairment, recoverable amount is determined for an individual asset, except when
this is not possible, in which case the recoverable amount of the cash generating unit where the individual asset
belongs is determined.

 Cash Generating Unit (CGU) is the smallest identifiable group of assets held with the primary objective
of generating a commercial return that generates cash inflows from continuing use that are largely
independent of the cash inflows from other assets or groups of assets.

An impairment loss is recognized if the CGU's carrying amount exceeds its recoverable amount. The
impairment loss is allocated to the individual assets in the CGU on a pro rata basis, based on their carrying
amounts.
In allocating an impairment loss, the carrying amount of an individual asset shall not be reduced below the
highest of:
a. Its fair value less costs to sell (if determinable);
b. Its value in use (if determinable); and
C Zero.

Reversal of Impairment
An entity shall assess whether there is any indication that an impairment loss recognized in prior periods for an
asset may no longer exist or may have decreased. If such indication exists, the entity shall estimate the
recoverable amount of that asset.
In making the assessment, the entity shall consider the exact opposites of the indications of impairment
provided earlier (e.g., significant increase in the asset's market value - rather than
etc.). decline, significant changes in technological.......that favorably affect the recoverable amount of an asset -
rather than adversely, etc)
The reversal of impairment shall not result to a carrying amount in excess of the asset's carrying amount had no
impairment loss been recognized in prior periods.
The reversal of impairment is recognized in surplus or deficit in the period of reversal.

Chapter 10
Property, Plant and Equipment

Introduction
Property, Plant and Equipment are
a. tangible assets;
b. be held for use in the production or supply of goods, services or program outputs, for rental to others, or for
administrative purposes, and not intended for resale in the ordinary course of operations and
c expected to be used for more than one reporting period

Recognition
An item of PPE is recognized if it meets the definition of a PPE and the recognition criteria for assets, as well as
the capitalization threshold of P15,000.
The 15,000 capitalization threshold is the minimum cost an item should have before it is capitalized as
PPE. This threshold is applied on a per item basis, except as follows:
a. Individual items with values below the threshold but work together as a group of assets are recognized as PPE
if the total cost of the assets as a group is P15,000 or more (e.g., the costs of web servers, routers, modems, and
other hardware comprising a communications network are capitalized as PPE under the communications
network' account).
b. Bulk acquisitions of small items of PPE like library books, computer peripherals, and small items of
equipment are recognized as PPE if their aggregate cost is P15,000 or more.
Items below the capitalization threshold are recognized as inventories (i.e., Semi-Expendable Property).

Initial Measurement
PPE are initially measured at cost. The initial cost comprises the following
a. Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts
and rebates;
b. Direct costs of bringing the asset to the location and condition necessary for it to be capable of operating in
the manner intended by management; and
c. Present value of Decommissioning and Restoration costs - Decommissioning costs refer to the costs of
dismantling or uninstalling a PPE at the end of its useful life. Restoration costs refer to the cost of restoring the
site where the PPE is previously installed. The present value of these estimated costs are capitalized as cost of
the PPE, with a corresponding credit to a liability account (i.e., 'Other Provisions').

Examples of directly attributable costs:

a. Costs of employee benefits arising directly from the construction or acquisition of PPE;
b. Costs of site preparation;
c. Initial delivery and handling costs (e.g., freight costs);
d. Installation and assembly costs;
e. Testing costs, net of disposal proceeds of samples generated during testing; and
f. Professional fees.

Examples of costs that are expensed outright:

a. Costs of opening a new a new facility
b. Costs of introducing a new product or service (including costs of advertising and promotional activities).
c. Costs of conducting business in a new location or with a new class of customers (including costs of staff
training).
d. Administration and other general overhead costs.

Modes of Acquisition
a. Acquisition by Purchase - acquisitions of PPE through purchase are classified as Capital Outlays (CO) in the
budget registries.
 Cash discounts, whether taken or not, are excluded from the initial measurement of an item of PPE. A
cash discount not taken is recognized as "Other Losses."
 A PPE purchased under installment basis is initially measured at the cash price equivalent. The
difference between the cash price and the installment price is amortized as interest expense over the
credit term.
 Promotional items acquired in conjunction with the purchase of PPE are accounted for as follows:
a. If the promotional item is the same as those purchased, the total acquisition cost is allocated to
all the items acquired including the promotional item.
b. If the promotional item is different from the other items acquired, the initial cost of the
promotional item is its fair value. The purchase price, net of the fair value of the promotional
item, is allocated to the other
.
 The individual costs items of PPE acquired at a "lump sum price" are determined by allocating the
"lump sum price” based on the relative fair values of the items acquired.
 If the individual costs of items of PPE acquired at a sum price” are indicated in the invoice, the items
shall be recognized at their individual costs as indicated in the invoice.

b. Acquisition by Construction - acquisitions of PPE through construction are also classified as Capital Outlays
(CO) in the budget registries.
Construction costs incurred are initially recorded in the "Construction in Progress” account pending the
completion of the asset. Upon completion, the construction costs are reclassified to the appropriate PPE
account.

a. Acquisition through Construction Contracts awarded to contractors the cost of PPE acquired
through a construction contract is the contract price.
b. Construction by Administration (Self-construction) – the costs of direct materials, labor and
other construction overheads. The cost of wasted materials, labor or other resources incurred in
constructing the property are recognized as expense
c. Acquisition through Exchange - the measurement of the acquired depends on whether the
exchange transaction has commercial substance or not.

i.. With Commercial Substance - an exchange has a commercial substance if the

subsequent cash flows of the entity change as a result of the exchange. The asset received
is measured using the following order of priority:
1. Fair value of asset Given up (plus any cash paid or minus any cash received);
2. Fair value of asset Received; or
3. Carrying amount of asset Given up (plus any cash paid or minus any cash
received)

ii. Lacks Commercial Substance - The asset received is measured at the

1. Carrying amount of asset Given up (plus any cash paid or minus any cash
received)

No gain or loss shall arise if the asset received is measured at the carrying amount of the asset given up
(plus any cash paid or minus any cash received).
 d. Acquisition through Non-Exchange Transaction - -/ acquired in a non-exchange transaction
(e.g., donation, grant) is initially measured at its fair value at the acquisition date.
Those received without condition are recognized immediately as income (i.e., Income
from Grants and Donations in Kind').
Those with condition are initially recognized as liability (i.e., 'Other Deferred Credits')
and subsequently recognized as income when the condition is met
e. Acquisition through Intra-agency or Inter-agency Transfers – The asset acquired from either
intra or inter-agency transfer is measured at the carrying amount of the asset received.
Intra-agency transfers are transfers within the same agency (e.g., from Central Office to
a Regional Office or Operating Unit, and vice versa.
Inter-agency transfers are transfers between different agencies (e.g., from BIR to
DPWH).

 If the transfer is made in the year the equipment is purchased, the "Subsidy from Central Office" and
"Subsidy to Regional Offices" accounts are used in lieu of the "Accumulated Surplus (Deficit)" account

Similar entries are made for inter-agency transfers.

f. Acquisition through Finance Lease - we will discuss this later in Chapter 13.

Subsequent Expenditures on recognized PPE

Capitalization of costs ceases when the PPE is in the location and condition necessary for it to be capable of
operating in the manner intended by management. Therefore, costs incurred in using or redeploying a PPE are
not capitalized.
The following subsequent expenditures on PPE are recognized as expenses:
A Costs incurred while an item capable of operating in the manner intended by management has yet to be
brought into use or is operated at less than full capacity.
b. Initial operating losses, such as those incurred while demand for the item's output builds up.
c. Costs of relocating or reorganizing part or all of the entity's operations.

As a general rule, subsequent expenditures on recognized PPE are expensed. Subsequent expenditures
are capitalized only when it is clear that they meet the recognition criteria for PPE including the P15,000
capitalization threshold.
The GAM for NGAs provides the following guidelines when accounting for subsequent expenditures on
recognized PPE:

a. Repairs and Maintenance - these are classified into:

1. Minor repairs - costs of day-to-day servicing of an item of PPE, necessary to maintain its operating
capability. These are charged as expenses.
2. Major repairs - are considered 'betterments and are capitalized. See discussion in 'd' below.

If it is not clear that a cost is a major repair, it shall be treated as expense.

b. Replacement costs - the cost of replacing a part of an item of PPE is capitalized. The carrying amount of the
replaced part is derecognized and recognized as loss on derecognition.
If the carrying amount of the replaced part cannot be determined, the cost of the replacement part is used as an
indication of what the cost of the replaced part was at the time it was acquired or constructed.

c. Spare parts and servicing equipment - Minor spare parts are recognized as inventory and charged as expense
when consumed
Major spare parts and stand-by equipment are recognized as PPE when they meet the recognition as PPE when
they meet the recognition criteria, e.g., they are expected to be used over more than one period.
 Spare parts and servicing equipment that can only be used in conjunction with an item of PPE are
accounted for as PPE

d Betterments - are enhancements to the future economic benefits or service potential of a PPE, such as:
a. an increase in the previously assessed physical output or service capacity;
b. a reduction in associated operating costs;
c. an extension of the estimated useful life; or
d. an improvement in the quality of output.
.
Costs of betterments are capitalized (if they meet the recognition criteria for PPE) and are subsequently
depreciated as follows:
i. Over the remaining useful life, if the betterment increases the service potential of the asset without
extending its useful life; or
ii. Over the extended useful life, if the betterment extends the useful life of the asset. The extended
period shall not exceed the original estimate of useful life of the asset.

If the betterment involves the replacement of an asset, the replacement is accounted for under 'b' above.
If it is not clear that a cost is a betterment, it shall be treated as expense.

e. Additions and Rearrangements

Additions are modifications which increase the physical size or function of the PPE. An addition can be:
i. a new unit that is physically distinct from the old unit (e.g., a wing of a building); or
ii. an expansion, extension or enlargement of the old unit (e.g., a new floor to a building).

The cost of an addition that is a new unit is depreciated over its own useful life while an expansion cost
is depreciated over the shorter of its useful life and the remaining life of the PPE of which it is part.

Rearrangement is the relocation or reinstallation of an asset which proves to be less efficient in its
original location. Rearrangement costs are capitalized and depreciated over the remaining life of the related
asset. The carrying amount of the original installation cost is derecognized and charged as loss. (GAM for
NGAs, Chapter 10, Sec. 26)
An entity should be very careful when assessing if rearrangement costs qualify for capitalization as
GAM for NGAS, Chapter 10, Sec. 9 states the following: "Recognition of costs in the carrying amount of an
item of PPE ceases when the item is in the location and condition necessary for it to be capable of operating in
the manner intended by management. Therefore, costs incurred in using or redeploying an item are not included
in the carrying amount of that item."

Subsequent Measurement
PPE are subsequently measured using the cost model. Under this model, an item of PPE is measured at its cost
less any accumulated depreciation and any accumulated impairment losses.

 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.
 Residual Value - is the amount the entity would currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset were already of the age and in the condition
expected at the end of its useful life

Depreciation is recognized as expense unless it forms part of the carrying amount of another asset (e.g.,
depreciation of a factory equipment is included in the carrying amount of inventory)

Guidelines in depreciating items of PPE:

a. The three factors considered when determining depreciation are: initial cost, useful life, and residual value.
b. All items of PPE shall be depreciated, except land and heritage assets.
c. Depreciation begins when the asset is available for its intended use. For simplicity, if a PPE becomes
available for its intended use:
i. On or before the 15th of the month - depreciation is computed at the beginning of that month.
ii. After the 15th of the month - depreciation is computed at the beginning of the following month.

d. Depreciation ceases when the asset is derecognized or fully depreciated. Depreciation does not cease when
the asset becomes idle or retired from active use and held for disposal.

e. The straight line method of depreciation shall be used unless another method is more appropriate. That
method is applied consistently from period to period unless there is a change in the expected pattern of
consumption of those future economic benefits or service potential.

f. The estimation of the useful life of an asset is a matter of judgment, based on the entity's experience with
similar assets As a guideline, PPE shall be depreciated over the following life spans.

Property, Plant and Equipment Estimated Useful Life

Infrastructure Assets  20 to 50 years
Buildings and Other Structures  30 to 50 years
Machinery and Equipment  5 to 15 years
Transportation Equipment:
Motor Vehicles  5 to 15 years
Military Vehicles  3 to 20 years
Trains  10 to 20 years
Aircrafts and Ground Equipt.  10 to 20 years
Watercrafts  10 to 25 years
Furniture, Fixtures and Books  2 to 15 years
Leased assets, excluding land  Shorter of the asset's useful life and
lease term, including extension period
if renewal is expected
Leased Assets Improvements  Shorter of the asset's useful life and
lease term, including extension period
if renewal is expected.
Service Concession Assets  Shorter of the asset's useful life and
term of service concession
arrangement, extension period if
renewal is expected.
Land Improvements  Over the useful life of the asset to
which the improvement was made or
the useful life of the improvement if
significantly shorter
Others  2 to 15 years

g. Residual value shall be at least 5% of cost, unless an entity determines a more appropriate estimate, subject to
the approval of COA
h. The residual value and the useful life of an asset shall be reviewed at least at each annual reporting date and,
if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting
estimate
i. Depreciation shall be recognized on a monthly basis.

j. Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be
recorded and depreciated separately.
For example, each part of an aircraft (i.e., its engines, passenger seats, and other parts) shall be
depreciated separately. Each part shall also be assigned a 5% residual value based on the cost of each part.

Impairment
A PPE is impaired if its carrying amount exceeds its recoverable service amount or recoverable amount.
Recoverable service amount - is the higher of a non cash- generating asset's fair value less costs to sell
and its value in use.
At each reporting date, an entity shall assess whether there is an indication that an asset may be
impaired. If such indication exists, the entity shall estimate the recoverable amount of the asset. An entity shall
consider the following indications of impairment:

1. External sources of information:

a. Cessation, or near cessation, of the demand for services provided by the asset.
b. Significant long-term changes with an adverse effect on the entity have taken place during the period, or will
take place in the near future, in the technological, legal, or government policy environment in which the entity
operates.

2 Internal sources of information:

a. Physical damage of an asset.
b. Significant changes in the expected use of an asset that adversely affect its recoverable amount (e.g., the asset
becomes idle, plan to discontinue or restructure the operation to which an asset belongs, plan to dispose of the
asset earlier than expected, and reassessment of an asset's useful life from indefinite to finite).
c. Cessation of the construction of an asset before it is completed
d. Indications that the service performance of an asset is, or will be, significantly worse than expected.

Computation of Value in Use

 Value in use of a cash generating asset - the present value of the estimated future cash flows expected to
be derived from the continuing use of an asset and from its disposal at the end of its useful life.
 Value in use of a non-cash generating asset - the present value of the asset's remaining service potential.

Value in use can be computed using one of the following methods:

2. Depreciated Replacement Cost Approach

Under this approach, value in use is equal to the asset's replacement cost adjusted for depreciation to
reflect the asset's used condition.
Replacement cost is the cost of replacing or reproducing the asset, whichever is lower.

When determining the replacement cost of an asset, any overdesign or overcapacity of that asset is ignored.
Overdesign refers to features that are unnecessary for the goods or services the asset provides. Overcapacity
refers to excess capacity over what is needed to meet the demand for the goods or services the asset provides.

b. Restoration Cost Approach

Under this approach, value in use is equal to the assets depreciated replacement cost or depreciated
reproduction cost (whichever is lower) minus estimated restoration cost.
Restoration cost is the cost of restoring the service potential of an asset to its pre-impaired level.

c. Service Units Approach

 Under this approach, value in use is equal to the asset's depreciated replacement cost or depreciated
reproduction cost (whichever is lower) minus a proportionate reduction to reflect the reduced number of service
units expected from the asset in its impaired state.

The choice of the most appropriate approach to measuring value in use depends on the availability of
data and the nature of the impairment:

Indication of impairment Method

a. Significant long-term changes in the  Depreciated replacement cost approach
technological, legal, or government policy or Service units approach, whichever is
environment more appropriate
b. Significant long-term change in the extent or  Depreciated replacement cost approach
manner of use, including cessation or near or Service units approach, whichever is
cessation of demand more appropriate
c. Physical damage Restoration cost approach or Depreciated
replacement cost approach, whichever is more
appropriate

Reversal of Impairment
The principles used in recognizing reversals of impairment loss items of PPE are the same as those used for
investment property. See discussions in Chapter 9.

Heritage Assets
Heritage assets are those which have historical, cultural and environmental significance, and are intended to be
preserved for future generations.
Examples include: historical buildings and monuments, statues, museum and gallery collections,
archeological sites, national archives, ruins, conservation areas, nature reserves, and works of art.

The characteristics of heritage assets are:

a. Their value in cultural, environmental, educational, and historical terms is unlikely to be fully reflected in a
financial value based purely on market price;
b. The law may impose restrictions on their disposal by sale;
c. They are often irreplaceable and their value may increase over time, even if their physical condition
deteriorates; and
d. It may be difficult to estimate their useful lives, which in some cases could be several hundred years (GAM
for NGAs, Chapter 10, Sec. 30)

Heritage assets are measured at cost. If acquired through non-exchange transaction, the cost is the fair
value at the acquisition date.
Heritage assets are not depreciated, but subject to impairment. If determinable, a heritage asset's fair
value is disclosed.
However, heritage assets that have future economic benefits or service potential other than their heritage
value are depreciated similar to the other items of PPE, e.g., a historic building being used as office
Heritage assets not recognized in the books of accounts are recorded in the Registry of Heritage Assets.

Infrastructure Assets
Infrastructure assets include road networks (including facilities, such as traffic lights and road signage), flood
control, sewer, water and power supply systems, communications networks, railways, seaports, airports, and the
like.
Infrastructure assets have the following additional characteristics:
a. Part of a system or network;
b. Specialized in nature and do not have alternative uses;
c Immovable; and
d. May be subject to constraints on disposal.

Infrastructure assets are accounted for similar to the other items of PPE, i.e., they are initially measured
at cost and subsequently depreciated.

However, generally, infrastructure assets have no residual value. In cases where a part of an infrastructure asset
has a residual value, it shall be at least 5% of the cost of that part.

Reforestation Projects
Reforestation refers to the renewal of a forest cover by planting seeds or young trees.
Reforestation projects are recorded as land improvements in the books of accounts of the Department of
Environment and Natural Resources (DENR) or other entity concerned.
The initial costs of reforestation projects include the following
a. Survey, mapping and planning
b. Nursery operation and seedling production or procurement
c. Plantation establishment (site preparation, hauling of seedlings and planting)

Initial costs are recorded in the "Construction in Progress- Land Improvements" account pending the
completion of the project, which normally takes 3 years. Upon completion and tum- over of the project, the
costs are reclassified to the "Land Improvements, Reforestation Projects" account
Subsequent costs on reforestation projects are accounted for as follows:
a. Maintenance and protection costs incurred within the duration of the project, such as construction of fire
lines, strip brushing, replanting, pest control, and patrolling, are capitalized.
b. Maintenance and protection costs incurred after the turn-over of the project are charged as repairs and
maintenance expense.
c. The cost of replacing trees are expensed where small numbers of trees are being replaced in any one
particular area.

Reforestation projects are not depreciated but subject to impairment. Impairment loss is recognized
when a reforestation project is destroyed by a force majeure or fortuitous event beyond the control of man (e.g.,
typhoon, flood, landslide, earthquake, etc.).

Derecognition
The carrying amount of a PPE is derecognized when it is disposed or when no future economic benefits or
service potential is expected from the asset.
On derecognition, the difference between the carrying amount of the derecognized PPE and the net
disposal proceeds, if any, is recognized as gain or loss in surplus or deficit.
Disposals of PPE shall be in accordance with the Supply and Property Management Manual and Sec. 79
of P.D. No. 1445.

Idle, Fully Depreciated. Unserviceable and Lost PPE

 Idle PPE refers to assets that are temporarily taken out of active use or temporarily abandoned. Idle PPE
are not derecognized but continued to be depreciated because future benefits are consumed not only
through usage but also through obsolescence and wear and tear.
 A PPE is fully depreciated when its carrying amount is equal to zero or its residual value. Fully
depreciated PPE are not derecognized, meaning the historical cost and accumulated depreciation are not
removed from the books of accounts
 Unserviceable property are those which do not have future economic benefits or service potential.
Unserviceable property is derecognized. The carrying amount is recognized impairment loss.
Unserviceable properties are reported in the Inventory and Inspection Report of Unserviceable Property.
  When a PPE is lost, either through theft, fire or other force majeure, the officer having custody of the
PPE shall immediately notify the COA within 30 days and shall submit an application for relief, together
with supporting evidence. If warranted by the evidence, a credit for loss shall be allowed. Failure to do
the requirements will not relieve the officer of liability. (P.D. No. 1445, Sec. 73)
The carrying amount of the lost PPE is derecognized and charged as loss, upon receipt of the Report of
Lost, Stolen Damaged, or Destroyed Property together with the Notice of Loss by the Accountable Officer.
Pending the result of the investigation, the accountability of the officer shall be established, equal to the
depreciated replacement cost of the lost PPE. If a credit for loss is subsequently allowed to the officer, the entry
to establish the accountability is simply reversed. If not, the officer shall per cash to settle his accountability.
 In case of a partial loss of PPE, the loss recognized is equal to the asset's carrying amount less the fair
value of the remaining serviceable portion.

Receipt and Disposition of PPE

The procedures in the receipt and disposition of PPE are similar to those of inventories (see discussion in
Chapter 7). Only those that are peculiar to PPE are discussed below:

a. Property Card - used by the Supply/Property Division to record all movements in items of PPE. It is
maintained for each class of PPE. This is the equivalent of the Stock Card used for inventories.

b. Property, Plant and Equipment Ledger Card - used by the Accounting Division to record all movements in
items of PPE, both in quantity and monetary amount. It also shows the estimated life, depreciation, impairment
and other information on the PPE. This is the equivalent of the Stock Ledger Card used for inventories.
As an internal control, the PC and PPELC are periodically reconciled.

c. Property Acknowledgement Receipt – used by the Supply/Property Division to record the issuance of PPE to
the end user. This is based on the approved Requisition and Issue Slip (RIS) submitted by the requesting
individual. The PAR is renewed every after 3 years or whenever there is a change in custodianship. This is the
equivalent of the Report of Supplies and Materials Issued used for inventories.

d. Report on the Physical Count of Property, Plant and Equipment - At the end of each year, the entity shall
perform a physical count of PPE and prepare this report. This report shall be submitted to the COA not later
than January 31 of the following year.

e. Inventory and Inspection Report for Unserviceable Property – used to account for all unserviceable property
subject to disposal. It is the basis for derecognizing the unserviceable properties in the books of accounts.

f. Report of Lost, Stolen, Damaged or Destroyed Property - used by the accountable officer to notify the
concerned officials of the lost, stolen, damaged or destroyed property.
Items 'e' and 'f' above are the equivalent of the Waste Materials Report used for inventories.

g. Property Transfer Report - used to record transfers of property from one accountable officer to another.

Borrowing Costs
Borrowing costs - are interest and other expenses incurred by an entity in connection with the borrowing of
funds. (PPSAS 5.5)

Examples:
a. Interests on notes, loans, bonds and finance lease payables,
b. Amortization of discount, premium, issue costs and other ancillary costs relating to payables
C. Exchange differences arising from foreign currency borrowings, to the extent that they are regarded as an
adjustment to interest costs.
Recognition of Borrowing costs
1. Benchmark Treatment - expensed in the period incurred.

2. Allowed Alternative Treatment- capitalized if the borrowing costs are directly attributable to the acquisition
of a qualifying asset.

 Qualifying asset - is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale (PPSAS 5.5)
.
Applications:
The borrowing costs on loans borrowed by:
1 National Government (recorded by BTr) are expensed (i.e., Benchmark Treatment).
2. Government agencies are capitalized, if they relate to the acquisition of a qualifying asset (i.e., Allowed
Alternative Treatment).

Commencement, Suspension and Cessation of Capitalization

The capitalization of borrowing costs as part of the cost of a qualifying asset shall (be):
a. Commence when outlays for the asset are being incurred, borrowing costs are being incurred, and activities
that are necessary to prepare the asset for its intended use or sale are in progress.
b. Suspended during extended periods in which active development is interrupted, and expensed.
c. Cease when the qualifying asset is substantially complete. If completed in parts, capitalization of borrowing
costs ceases as each part is completed; capitalization continues for the uncompleted parts.

Specific Borrowings
For specific borrowings, the borrowing costs eligible for capitalization are computed using the following
formula:

Capitalizable BC = Actual borrowing costs - Investment income

General Borrowings
For general borrowings, the borrowing costs eligible for capitalization are computed using the following
formula:

Capitalizable BC = Ave. Expenditure x Capitalization Rate

The borrowing costs capitalized shall not exceed the actual borrowing costs incurred.

Chapter 11
Intangible Assets

Introduction
Intangible Assets are identifiable non-monetary assets without physical substance.

Essential elements of an intangible asset

1. Identifiability - an intangible asset is identifiable when it
a. is separable, i.e., capable of being separated and divided from the entity and sold, transferred,
licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset
or liability, regardless of whether the entity intends to do so; or
b. arises from binding arrangements including contractual or other legal rights, regardless of whether
those rights are transferable or separable from the entity or from other rights and obligations.
2. Control - the entity has the ability to benefit from the intangible asset or prevent others from benefitting from
it.
Control of an intangible asset normally arises from legal rights that are enforceable in a court of law.
However, legal enforceability of a right is not a necessary condition for control because an entity may be able to
control the future economic benefits or service potential in some other way.

3. Future economic benefits or service potential- the future economic benefits or service potential flowing from
an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits
resulting from the use of the asset by the entity. For example, the use of intellectual property in a production or
service process may reduce future production or service costs or improve service delivery rather than increase
future revenues (e.g., an on-line system that allows citizens to apply or renew licenses more quickly on-line,
resulting in a reduction in office staff required to perform this function while increasing the speed of
processing).

Common examples of intangible assets are computer software, patents, copyrights, franchise, motion
picture films, trademarks or brand names, licenses, acquired import quotas, lists of users of a service, and
relationships with users of a service.

Recognition
An intangible asset is recognized if it meets the definition of an intangible asset and the recognition criteria for
assets.

Initial Measurement
An intangible asset is initially measured at cost.
The measurement of cost depends on the mode of acquisition, which is similar to those of PPE and
investment property. A summary is provided below:

Mode of Acquisition Measurement of Initial Cost

a. Purchase  Purchase price plus Direct costs
(including non-refundable taxes but
excluding trade discounts and rebates).
 If payment is deferred, the cost is the
cash price equivalent.
b. Non-exchange transaction  fair value at the acquisition date
c. Exchange  With commercial substance (order of
priority):
a. FV of asset given up (plus cash paid/minus
cash received).
b. FV of asset received.
c. CA of asset given up (plus cash paid/minus
cash received).
 Without commercial substance: CA of
asset given up (plus cash paid/minus
cash received).
d. Entity Combination  fair value at the acquisition date

Peculiar measurement is made when the intangible asset is internally generated (self-generated).
e. Internal Generation - to assess whether an internally generated intangible asset meets the criteria for
recognition, an entity classifies the generation of the asset into: (a) research phase; and (b) development phase.

1. Research - is original and planned investigation undertaken with the prospect of gaining new scientific and
technical knowledge and understanding.
Expenditures during the research phase are recognized as expense.

Examples of research activities:

i. Activities aimed at obtaining new knowledge;
ii. The search for, evaluation and final selection of applications of research findings or other knowledge;
iii. The search for alternatives for materials, devices, products, processes, systems or services; and
iv. The formulation, design, evaluation, and final selection of possible alternatives for new or improved
materials, devices, products, processes, systems, or services.

2. Development - is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems, or services
before the start of commercial production or use.

Expenditures during the development phase are capitalized if the entity can demonstrate all of the
following:
a. Technical feasibility of completing the intangible asset;
b. Intention to complete the intangible asset;
c. Ability to use or sell the intangible asset;
d. Probable future economic benefits or service potential;
e. Availability of adequate resources needed to complete the development and to use or sell the intangible asset;
and
f. Reliable measurement of the cost of the intangible asset.

 If it is not clear whether an expenditure is a research or a development cost, it shall be treated as

research cost.
 Expenditures already charged as expenses cannot be subsequently capitalized, i.e., reinstatement of
expenditure previously recognized as an expense is prohibited.
 Internally generated brands, mastheads, publishing titles, customer lists, and similar items shall not be
recognized as intangible assets.
 Selling, administrative and other general overhead, costs of inefficiencies, initial operating losses, and
training costs are expensed and shall not form part of the cost of an intangible asset.
 Subsequent expenditures on recognized intangible assets are generally expensed, unless they meet the
definition of an intangible asset and the asset recognition criteria.
 The accounting for replacement of a part of an intangible asset is the same as those of PPE and
investment property.

Subsequent Measurement
An intangible asset is subsequently measured at cost less any accumulated amortization and any accumulated
impairment losses
.
Amortization
Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life.
For purposes of amortization, intangible assets are classified according to their assessed useful life as
follows:
a. Indefinite life - an intangible asset is considered to have an indefinite life if there is no foreseeable limit to the
period over which it is expected to provide economic benefits or service potential to the entity.
Intangible assets with indefinite life are not amortized but tested for impairment at least annually.
b. Finite life - an intangible asset is considered to have a finite life if it has a limited period of benefit to the
entity.
Intangible assets with finite useful life are amortized using the straight line method over a period of 2 to
10 years. Amortization starts when the intangible asset is available for use and ceases when the asset is
derecognized or classified as held for sale, whichever comes earlier. Amortization does not cease when the asset
is no longer used, except when it is fully depreciated or classified as held for sale.
The residual value is assumed to be zero except when there is a third party commitment to purchase the
asset at the end of its useful life or there is an active market where the entity expects to sell the asset at the end
of its useful life.
The amortization period and amortization method shall be reviewed at each reporting date. Changes in
useful life or amortization method shall be accounted for as changes in accounting estimates.

Impairment
An entity is required to test for impairment an intangible asset with indefinite useful life or an intangible asset
not yet available for use at least annually or whenever there is an indication of impairment.
An entity shall test for impairment an intangible asset with definite useful life only when an indication of
impairment exists. Indications of impairment shall be assessed at each reporting date.
The accounting for impairment of intangible assets, and reversal thereof, is the same as those of
investment property and PPE (see discussions in Chapters 9 and 10, respectively).

Derecognition
An intangible asset is derecognized when it is disposed or when no future economic benefits or service potential
is expected from the asset.
On derecognition, the difference between the carrying amount and the net disposal proceeds, if any, is
recognized as gain or loss in surplus or deficit.

Chapter 12
Liabilities

Introduction
Liability - is a present obligation arising from past event, the settlement of which is expected to result in an
outflow of resources embodying economic benefits or service potential.
Present obligation means that as of the reporting date, an obligating event must have already occurred.
An obligating event is an event that creates either (a) a legal obligation or (b) a constructive obligation.

 Legal Obligation - is an obligation that results from a contract, legislation, or other operation of law.
 Constructive Obligation - is an obligation that results from an entity's actions (e.g., past practice,
published policies) that create a valid expectation from others that the entity will accept and discharge
certain responsibilities.

Liability Recognition Criteria

A liability is recognized only when all of the following are met:
a. The item meets the definition of a liability (i.e., present obligation);
b. It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
c. The obligation has a cost or value (e.g. fair value) that can be measured reliably.

Scope of this Chapter

The following are discussed in this Chapter:
a. Financial liabilities; and
b. Provisions, Contingent liabilities and Contingent assets

Financial Liabilities
A financial liability is any liability that is:
a. A contractual obligation to deliver cash or another financial asset to another entity;
b. A contractual obligation to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity's own equity instruments.

Examples of financial liabilities: Accounts Payable, Notes Payable, Interest Payable, Loans Payable,
Bonds Payable, and Bail Bonds Payable.

Initial Recognition
A financial liability is recognized when an entity becomes a party to the contractual provisions of the
instrument. (PPSAS 29.16)

Initial Measurement
Financial liabilities are initially measured at fair value minus transaction costs, except for financial liabilities at
fair value through surplus or deficit (e.g., designated financial liabilities and derivative liabilities) whose
transaction costs are expensed. (PPSAS 29.45)
Transaction costs are incremental costs that are directly attributable to the acquisition, issue, or disposal
of a financial instrument

Subsequent Measurement
Financial liabilities are subsequently measured at amortized cost, except for financial liabilities at fair value
through surplus or deficit which are subsequently measured at fair value.

Bond issue costs are not expensed outright, but rather a deduction when determining the carrying
amount of the bonds (similar to the bonds discount). Bond issue costs are amortized to interest expense over the
term of the bonds (together with any bond discount or premium). The amortization of bond issue costs increases
interest expense.

Derecognition of Financial Liability

A financial liability is derecognized when it is extinguished, such as when it is discharged, waived, cancelled, or
it expires.

Provisions, Contingent liabilities and Contingent assets

Provision - is a liability of uncertain timing or amount.

A provision is recognized if all the recognition criteria for a liability are met (i.e., present obligation,
probable outflow, and reliable measurement). If one or more of the criteria are not met, the item is a contingent
liability, not a provision, and therefore not recognized as liability.

Contingent Liability is:

1. A possible obligation that arises from past events, and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity;
or
2. A present obligation that arises from past events, but is not recognized because:
i. It is not probable that an outflow of resources embodying economic benefits or service potential will be
required to settle the obligation; or
ii. The amount of the obligation cannot be measured with sufficient reliability. (PPSAS 19.18)
Contingent Asset - is a possible asset that arises from past events, and whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the
entity. (PPSAS 19.18)

Summary
Contingent Probable Possible Remote
 Liability Recognize and Disclose only Ignore
Disclose
 Asset Disclose only Ignore Ignore

Measurement
A provision is measured at the entity's best estimate of the amount needed to settle the liability at the reporting
date. Risks and uncertainties shall be taken into account in reaching this best estimate.
If the effect of time value of money is material, the provision is measured at the present value of the
settlement amount discounted at a pre-tax rate.
Gains from the expected disposal of assets shall not be taken into account in measuring a provision.
(PPSAS 19.61)
Provisions shall be reviewed at each reporting date, and adjusted to reflect the current best estimate. If it
is no longer probable that an outflow of resources embodying economic benefits or service potential will be
required to settle the obligation, the provision shall be reversed. (PPSAS 19.69)
A provision shall be used only for expenditures for which the provision was originally recognized.
(PPSAS 19.71)

Reimbursements
If another party is expected to reimburse the settlement amount of a provision, a reimbursement asset is
recognized and presented in the statement of financial position separately from the provision. However, in the
statement of financial performance, the expense related to the provision may be presented net of the
reimbursement
The amount recognized for the reimbursement shall not exceed the amount of the provision.

Application of the Recognition and Measurement Rules

a. Future Operating Net Deficits - No provision shall be recognized for expected net deficits from future
operating activities. Such expectation indicates that certain assets used in these activities may be impaired.
These assets shall be tested for impairment.

b. Onerous Contracts - A contract is deemed onerous (i.e., burdensome) if the unavoidable costs of settling the
obligations under the contract exceed the economic benefits expected to be received from it.
The obligation under an onerous contract is recognized as a provision

c. Restructuring - is a program that is planned and controlled by management, and materially changes either:
a. The scope of an entity's activities; or
b. The manner in which those activities are carried out. (PPSAS 19.18)

A legal obligation to restructure exists if, at the reporting date, the entity has entered into a binding
agreement to sell or transfer an operation.

A constructive obligation to restructure exists if, at the reporting date, both the following are present:
a. Detailed formal plan for the restructuring; and
b. The plan is announced to those affected by it.
A restructuring provision includes only the direct costs resulting from the restructuring. It does not include costs
associated with the ongoing activities of the entity, retraining or relocating continuing staff, marketing, or
investment in new systems and distribution networks.

Chapter 13
Leases

Introduction
Lease is an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments,
the right to use an asset for an agreed period of time.
Leases include hire purchase contracts (i.e., contracts for the hire of an asset which contain a provision
giving the hirer an option to acquire title to the asset upon the fulfillment of agreed conditions).

Classification of Leases
1. Finance lease - is a lease that transfers substantially all the risks and rewards incidental to ownership of an
asset.
2. Operating lease - is a lease that does not that transfer substantially all the risks and rewards incidental to
ownership of an asset.

The classification of a lease depends on the substance of the transaction rather than the form of the
contract.

Finance lease
Any of the following would lead to a finance lease classification:
a. The lease transfers ownership of the asset to the lessee by the end of the lease term.
b. The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair
value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that
the option will be exercised ('bargain purchase option').
c. The lease term is for the major part of the economic life of the asset even if title is not transferred. A lease
qualifies to be accounted for as finance lease if the contract is a non- cancellable contract.
d. At the inception of the lease, the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset.
e. The leased assets are of such a specialized nature that only the lessee can use them without major
modifications.
f. The leased assets cannot easily be replaced by another asset.
g. If the lessee can cancel the lease, the lessor's losses associated with the cancellation are borne by the lessee.
h. Gains or losses from the fluctuation in the fair value of the residual (leased asset) accrue to the lessee (for
example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease).
i The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than
market rent. (GAM for NGAs, Chapter 13, Sec. 5)

Lease of Land and Building

When a lease includes both land and buildings elements, each element shall be classified separately as either
operating or finance lease.
The minimum lease payments are allocated based on the relative fair values of the leasehold interests in
the land and buildings elements at the inception of the lease.
If the lease payments cannot be allocated reliably, the entire lease is classified as a finance lease, unless it is
clear that both elements are operating leases, in which case the entire lease classified as an operating lease.
If the land element is immaterial, the land and buildings may be treated as a single unit and classified as finance
or operating lease. In such case, the economic life of the building is regarded as the economic life of the entire
leased asset.
  Inception of the lease- is the earlier of the date of the lease agreement and the date of commitment by the
parties to the principal provisions of the lease. It is on this date that:
a. A lease is classified as either an operating or a finance lease; and
b. In the case of a finance lease, the amounts to be recognized at the commencement of the lease term are
determined

 Commencement of the lease term - is the date from which the lessee is entitled to exercise its right to use
the leased asset. It is on this date that any asset or liability resulting from the lease is initially
recognized.

Accounting for Finance lease by Lessees

At the commencement date, a lessee recognizes the asset acquired under a finance lease and the related lease
liability measured at the lower of the
a. fair value of the leased property at inception date; and
b. present value of the minimum lease payments at inception date

Minimum lease payments include the following:

a. Rentals, excluding contingent rent, costs for services and taxes reimbursable to the lessor;
b. Bargain purchase option; and
C. Guaranteed residual value

 Contingent rent - is lease payment that is not fixed in amount but rather based on the future amount of a
factor that changes other than with the passage of time (e.g., percentage of future sales, amount of future
use, future price indices, future market rates of interest). Contingent rent is recognized as expense in the
period incurred

The minimum lease payments are discounted using the interest rate implicit in the lease, if this is
determinable; if not, the lessee's incremental borrowing rate is used
Initial direct costs, such as costs incurred in negotiating and securing leasing arrangements, are capitalized
as part of the asset recognized
The lease liability is subsequently measured similar to an amortized cost financial liability. Accordingly, the
minimum lease payments are apportioned between interest expense and a reduction of the outstanding liability.
Interest expense in each period reflects a constant periodic rate of interest on the remaining balance of the
liability.
The leased asset is accounted for similar to an owned asset, e.g., as PPE or investment property.
Accordingly, the leased asset is depreciated using the entity's existing depreciation policies. If there is no
reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be
depreciated over the shorter of its useful life and the lease term

Accounting for Finance lease by Lessors

A lessor recognizes the lease payments receivable under a finance lease at an amount equal to the net
investment in the lease
Initial direct costs are included in the initial measurement of the finance lease receivable and reduce the
amount of revenue recognized over the lease term. The interest rate implicit in the lease is defined in such a way
that the initial direct costs are included automatically in the finance lease receivable. Therefore, there is no need
to add the initial direct costs separately

 Interest rate implicit in the lease - is the discount rate that, at the Inception of the lease, causes the
aggregate present value of
1. The minimum lease payments, and
2. The unguaranteed residual value,
to be equal to the sum of (a) the fair value of the leased asset and (b) any initial direct costs of the lessor.

The lease receivable (net investment in the lease) is subsequently measured similar to an amortized cost
financial asset. Accordingly, the lease payments are applied against the gross investment in the lease to reduce
both the principal and the unearned finance revenue.
Operating lease
A lessee (lessor) under an operating lease recognizes the lease payments as expense (income) on a straight line
basis over the lease term, unless another systematic basis is more representative of the time pattern of the user's
benefit.
Initial direct costs incurred by lessors are added to the carrying amount of the leased asset and
recognized as expense over the lease term on the same basis as the lease income. Initial direct costs incurred by
lessees (such as lease bonus paid to the lessor) are treated as prepaid rent and recognized as expense on the
same basis as the lease expense.

Chapter 14
Financial Statements
Introduction
General Purpose Financial Statements are those intended to meet the needs of users who are not in a position to
demand reports tailored to meet their particular information needs. (PPSAS 1.3)

Objectives of General Purpose Financial Statements

The objectives of general purpose financial statements of a public sector entity are:
a. To provide information about the entity's financial position, financial performance, and cash flows that
is useful to a wide range of users in making economic decisions, and
b. To demonstrate the accountability of the entity for the resources entrusted to it.

Responsibility for Financial Statements

The responsibility over financial statements rests with the entity's management, particularly the Head of the
Entity jointly with the Head of Finance/Accounting.

Components of General Purpose Financial Statements

A complete set of financial statements consists of:
a. Statement of Financial Position;
b. Statement of Financial Performance;
c. Statement of Changes in Net Assets/Equity;
d. Statement of Cash Flows;
e. Statement of Comparison of Budget and Actual Amounts; and
f. Notes to the Financial Statements, comprising a summary of significant accounting policies and other
explanatory notes.

General Principles

Fair Presentation
Fair presentation means the faithful representation of the effects of transactions and other events in accordance
with the definitions and recognition criteria for assets, liabilities, revenue, and expenses in the PPSAS. The
application of PPSAS, with appropriate disclosures, if necessary, would result in the fair presentation of the
financial statements.

Fair presentation also requires the proper selection and application of accounting policies in accordance
with the PPSAS Additional disclosures shall be made whenever relevant to the understanding of the information
contained in the financial statements.
Compliance with PPSASS
An entity whose financial statements comply with the PPSASs shall make an explicit and unreserved statement
of such compliance in the notes. Financial statements shall not be described as complying with the PPSASs
unless they comply with all the requirements of PPSASs. Inappropriate accounting policies are not rectified
either by disclosure of the accounting policies used, or by notes or explanatory material.

Departure from PPSAS

In the event that Management strongly believes that compliance with the requirement of PPSAS would result in
misleading presentation that it would contradict the objective of the financial statements, the entity may depart
from that requirement if the relevant regulatory framework allows, or otherwise does not prohibit, such a
departure.

Going Concern
The financial statements shall be prepared on a going concern basis unless there is an intention to discontinue
the entity operation or there is no realistic alternative but to do so.

Consistency of Presentation
The presentation and classification of items in the financial statements shall be retained from one period to the
next unless laws, rules and regulations, and PPSAS require a
change in presentation

Materiality and Aggregation

Each material class of similar items shall be presented separately in the financial statements. Items of a
dissimilar nature or shall be presented separately unless they are immaterial. If a line item is not material, it is
aggregated with other items either on the face of the financial statements or in the Notes. A specific disclosure
requirement in a PPSAS need not be satisfied if the information is not material.

Offsetting
Assets and liabilities, and revenue and expenses shall not be offset unless (a) required or permitted by a PPSAS,
or (b) when offsetting reflects the substance of the transaction or other event

Comparative Information
Comparative information shall be disclosed with respect to the previous period for all amounts reported in the
financial statements. Comparative information shall be included for narrative and descriptive information when
it is relevant to an understanding of the current period's financial statements. (GAM for NGAs, Chapter 2, Sec.
15-22)

Identification of the Financial Statements

The financial statements shall be identified clearly, and distinguished from other information in the same
document.
The following information shall be displayed prominently
a. Name of the reporting entity;
b. Whether the financial statements cover the individual entity of a group of entity;
c. The reporting date or the period covered by the financial statements, whichever is appropriate to that
component of the financial statements,
d. Name of fund cluster,
e. The reporting currency, and
f. The level of rounding-off of amounts.
(PPSAS 161)

Reporting Period
Financial statements shall be presented at least annually
When an entity changes its reporting date such that its annual financial statements are presented for a period
longer or shorter than one year, the following shall be disclosed:
a. The period covered by the financial statements,
b. The reason for using a longer or shorter period, and
The fact that comparative amount are not entirely comparable
Statement of Financial Position
The statement of financial position shows the entity's financial condition as at a certain date. It is presented in
comparative, condensed and detailed formats.

1 Condensed Statement of Financial Position - presents only the line items shown below. The
breakdowns and other relevant information are disclosed in the Notes.
a. Cash and cash equivalents,
b. Receivables from exchange transactions,
c Recoverable from non-exchange transactions (taxes and transfers);
d Financial assets (excluding amounts shown under (a), (b) and (c));
e Inventories,
f. Investment Property:
g. Property, Plant and Equipment,
h. Intangible assets;
i. Taxes and Transfers Payable;
j. Payables under exchange transactions;
k. Provisions;
1. Financial liabilities (excluding amounts shown under (h), (i) and (i)); and
m. Net assets/equity.

Additional line items, headings, and sub-totals shall be presented whenever relevant to the
understanding of the entity's financial position.

2. Detailed Statement of Financial Position - presents all the asset, liability and equity accounts in the
Revised Chart of Accounts

Both the condensed and detailed statement of financial position form part of the entity's annual financial
statements.
The statement of financial position shall show distinctions between current and noncurrent assets and
liabilities.
Any of the following would lead to the current classification of an asset or liability.

Current Assets Current Liabilities

a. Expected to be realized in, or is held for sale or a. Expected to be settled in the entity's normal
consumption in, the entity's normal operating cycle. operating cycle
b. Held primarily for trading. b. Held primarily for trading.
c. Expected to be realized within 12 months after the C. Due to be settled within 12 months after the
reporting date reporting date.
d. It is cash equivalent, unless it is restricted from d. The entity does not have an unconditional right to
being exchanged or used to settle a liability for at defer settlement of the liability for at least twelve
least twelve months after the reporting date. months after the reporting date.

All other assets and liabilities are classified as noncurrent.

An illustrative statement of financial position, presented using the condensed format, is shown below:
Statement of Financial Performance
The statement of financial performance shows the revenue, expenses and surplus or deficit for the period. It is
presented in comparative, condensed and detailed formats.

Generally, revenue and expenses are recognized in surplus or deficit, except for the following which are
recognized directly in equity:
a. Correction of prior period errors;
b. Effect of changes in accounting policies; and
c Gains or losses on remeasuring available-for-sale financial

The following are the minimum line items to be presented on the face of the statement of financial
performance:
a. Revenue;
b. Finance costs;
c. Share in the surplus or deficit of associates and joint ventures;
d. Gain or loss attributable to discontinuing operations; and
e. Surplus or deficit.

Additional line items, headings, and sub-totals shall be presented whenever relevant to the
understanding of the entity's financial performance.
The nature and amount of material items of revenue and expense are disclosed separately. Examples of
items to be disclosed separately include the following:
a. Write-downs of assets (e.g., inventory, PPE) and reversals thereof;
b. Restructuring provisions and reversals thereof;
c. Disposals of items of property, plant, and equipment;
d. Privatizations or other disposals of investments;
e. Discontinuing operations;
f. Litigation settlements; and
g. Other reversals of provisions.

Expenses may be presented according to their function or nature, whichever is more relevant. If
expenses are classified by function, additional disclosures shall be made on the nature of expenses, including
depreciation, amortization and employee benefits expenses.
An illustrative statement of financial performance, presented using the condensed format, is shown
below:

Statement of Changes in Net Assets/Equity

The statement of changes in net assets/equity shows the increase or decrease in the entity's net assets during the
period resulting from the following:
a. Surplus or deficit for the period;
b. Items of revenue and expense that are recognized directly in equity;
c. Effects of changes in accounting policies and corrections of errors; and
d. The balance of accumulated surpluses or deficits at the beginning of the period and at the reporting
date, and the changes during the period.

Statement of Cash Flows

The statement of cash flows shows the sources and utilizations of cash and cash equivalents during the period
according to the following activities
a. Operating Activities- cash flows from operating activities are primarily derived from the principal cash-
generating activities of the entity. They normally include cash flows on items of revenue and expenses.
Examples include:
 i Receipt of NCA and reversion of unused NCA
ii. Receipt or provision of assistance and subsidy to other entities
iii Collection of income and receivables
iv. Payments of expenses, cash advances and payables
v. Inter or intra-entity transfers of funds
b. Investing Activities - involve the acquisition and disposal of noncurrent assets and other investments.
Examples include:
i Acquisition and disposal of PPE, investment property. intangible assets and other noncurrent assets
ii. Acquisition and disposal of investment securities and derivatives
iii Collection and provision of long-term loans

c Financing Activities - are activities that affect the entity's equity capital and borrowings. Examples include:
i Issuing of notes, loans, and bonds payable, and their repayments
ii. Finance lease payments pertaining to the reduction of the outstanding finance lease liability

Cash flow information provides a basis for assessing an entity's ability to generate cash and cash
equivalents and its utilization of funds.
Cash flows exclude movements between 'cash' and 'cash equivalents' (eg, investment of excess cash in cash
equivalents) because these are part of the entity's cash management rather than operating, investing or financing
activities.

Presentation of Cash flows

Operating activities
Cash flows from (used in) operating activities are presented using the Direct Method. Under this method, major
classes of gross cash receipts and gross cash payments are presented. The indirect method, which is available to
business entities, is not allowed for government entities.
Information about major classes of gross cash receipts a nd gross cash payments may be obtained either:
a. From the accounting records of the entity; or
b. By adjusting relevant accounts for changes during the period, non-cash items, and other items whose effects
are investing or financing cash flows. This can be done through T-account analyses.

A reconciliation of the accrual basis surplus or deficit with the net cash flow from operating activities
shall be provided in the notes to financial statements.

Investing & Financing activities

Cash flows from (used in) investing and financing activities are also presented according to major classes of
gross cash receipts and gross cash payments.

 Cash flows may be reported on a net basis for:

a. Receipts and payments made on behalf of customers, taxpayers or beneficiaries that reflect the activities
of the other party rather than those of the entity; and
b. Receipts and payments for items with quick turnover, large amount, and short maturities.
 Cash flows denominated in a foreign currency are translated using the spot exchange rate at the date of
the cash flow. Exchange differences are not cash flows but a reconciliation of the cash and cash
equivalents at the beginning and end of the period. Exchange differences are reported in the statement of
cash flows separately from the operating, investing and financing activities. (See illustrative statement of
cash flows below.)
 Any significant amount of cash and cash equivalents held that is not available for the entity's use shall be
disclosed in the notes.

An illustrative statement of cash flows is shown below:

Statement of Comparison of Budget and Actual Amounts
The statement of comparison of budget and actual amounts shows the differences (variances) between budgeted
amounts and actual results for a given reporting period. This enhances the transparency of financial reporting of
the government
The statement of comparison of budget and amounts shows the following:
a. Budget information - consists of, among others, data on appropriations, allotments, obligations, revenues and
other receipts, and disbursements. This is based on the budget registries and includes the following:
i Original Budget - is the initially approved budget for the period, usually the General Appropriations
Act. The original budget may include residual appropriated amounts automatically carried over from prior years
by law such as prior year commitments or possible future liabilities based on a current contractual agreement
(eg., prior year's not yet due and demandable obligations),
ii. Final Budget is the original budget adjusted for all reserves, carry-over amounts, realignments,
transfers, allocations and other authorized legislative or similar authority changes applicable to the period.
(GAM for NGAs, Chapter 3, Sec 2)

Explanations regarding changes from original to final budget (.e., whether they are a consequence of
reallocations within the budget) are disclosed in the notes.
Moreover, the budgetary basis (cash, accrual or some modification thereof) used in preparing the budget
information vis-à-vis the accounting basis used in preparing the financial statements shall be disclosed in the
notes

b. Actual amounts on a comparable basis- These represent actual disbursements made during the period.
Since the actual amounts on a comparable basis' to the budgeted amounts are on a 'cash basis', they may not
always be equal to the amounts presented in the other financial statements, which are on 'accrual basis These,
therefore, are reconciled in the notes. The differences are classified as follows:
i. Basis Differences - occur when the approved budget is prepared on a basis other than the accounting basis;
ii. Timing Differences - occur when the budget period differs from the reporting period reflected in the financial
statements, and
iii. Entity Differences - occur when the budget omits program or entities that are part of the entity for which the
financial statements are prepared (GAM tor NGAs, Chapter 3, Sec 28)

c Differences between (a) and (b) above - Explanations of material differences shall be made in the notes.

Example
Entity A's appropriation for Capital Outlays for the current year amounts to P1M. The original budget is PIM
During the year, P50,000 is realigned to personnel services. The final budget is P950,000 (1M - 50K).
Actual disbursements during the period totaled P870,000 The actual amounts on a comparable basis is
P870,000. The additions to capital assets reflected in the financial statements is $930,000. This is calculated on
the accrual basis. The 'basis difference' of P60,000 is disclosed in the notes.
The difference between the 'final budget' and 'actual amount on comparable basis' is P80,000 (950,000 -
870,000). This difference is reconciled with, among others, the unreleased appropriations, unobligated
allotments, and unpaid obligations, as shown in the budget registries.
The statement of comparison of budget and actual amounts will show the following information

The statement of comparison of budget and actual amounts is peculiar to government entities. Business
entities are not required to prepare this statement for their external reporting, although they may prepare a
similar statement for their internal reporting.
An illustrative statement of comparison of budget and actual amounts is shown below:

Notes to Financial Statements

The notes to financial statements provides information in addition to those presented in the other financial
statements. It is an integral part of a complete set of financial statements. All the other financial statements are
intended to be read in conjunction with the notes. Accordingly, information in the other financial statements
shall be cross-referenced to the notes.
The notes shall be structured in a systematic and logical manner to show the following:
1. General information on the reporting entity.
2. Statement of compliance with the PPSAS and Basis of preparation of financial statements.
3. Summary of significant accounting policies.
This includes narrative descriptions of the line items in the other financial statements, measurement
bases, transitional provisions, and other relevant information.
4. Disaggregation (breakdowns) and other supporting information for the line items in the other financial
statements.
5. Other disclosures required by PPSAS, such as:
a. Explanations for the differences between budgeted and actual amounts;
b. Events after the reporting date, if material;
c. Changes in accounting policies and accounting estimates and prior period errors;
d. Contingent liabilities, contingent assets, and unrecognized contractual commitments;
e. Related party disclosure; and
f. Non-financial disclosures, e.g., the entity's financial risk management objectives and policies.
6. Other disclosures not required by PPSAS but the management deems relevant to the understanding of the
financial statements.

Events After the Reporting Date

Events after the reporting date are those events, both favorable and unfavorable, that occur between the
reporting date and the date when the financial statements are authorized for issue. These include the following:
a. Adjusting events - those that provide evidence of conditions that existed at the reporting date; and
b. Non-adjusting events those that are indicative of conditions that arose after the reporting date. (PPSAS 14.5)

 Reporting date - end of the calendar year (i.e., December 31).

 Date of authorization of financial statements for issue - date of signing of the Statement of
Management's Responsibility for Financial Statements by the Head of Agency and Head of Finance
Department.

Adjusting events after the reporting date

The financial statements are adjusted to reflect adjusting events after the reporting date. Examples:
a. Settlement of a court case that evidences a present obligation at the reporting date.
b. Bankruptcy of a debtor that evidences an impairment of a receivable at the reporting date.
c. Sale of inventories that evidences the correct NRV of inventories at the reporting date.
d. Determination of the amount of revenue pursuant to a revenue sharing agreement with another entity.
e. Determination of employee bonuses, if the entity has a present obligation to make payments as of the
reporting date
f. Discovery of fraud or errors that show that the financial statements were incorrect.

Non-adjusting events after the reporting date

Non-adjusting events are disclosed only, if they are material
Examples
a. Acquisition or disposal of a major controlled entity
b. Announcement of a plan to discontinue an operation or a major program
c. Major purchases and disposal of asset
d. Destruction of a building by a fire after the reporting date (GAM for NGAs Chapter 19 sec 35)

Changes in Accounting Policies

Accounting Policies - are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements. (PPSAS 3.7)
 An entity shall select accounting policies using the guidance in the PPSAS as well as the guidance
issued by COA and shall apply them consistently to similar transactions.
An entity may change an accounting policy if the change
a. is required by PPSAS, or
b. results to a reliable and more relevant information
The following are considered changes in accounting policies
a Change from one basis of accounting to another basis of accounting, and
b. Change in the accounting treatment, recognition or measurement of a transaction, event or condition within a
basis of accounting. (GAM for NGAs, Chapter 19 sec 377

A change in accounting policy is accounted for as follows

a. Using the transitional provision, if any
b. In the absence of a transitional provision, by retrospective application, or
c. If retrospective application is impracticable, by prospective application

Retrospective application involves adjusting the opening balance of each affected account for the
earliest period presented as if the new accounting policy had always been applied. The net effect of the
adjustments is adjusted to the opening balance of equity for the earliest period presented.
When it is difficult to distinguish a change in an accounting policy from a change in an accounting
estimate, the change is treated as a change in an accounting estimate. (PPSAS 3 40)

Changes in Accounting Estimates

Changes in accounting estimates result from new information or new developments and, accordingly, are not
correction of errors. (PPAS 3.7)
Examples include changes in estimates of: bad debts, provisions, useful life of an asset, residual value,
and the like.
A change in accounting estimate is accounted for by prospective application. Prospective application
involves recognizing the effect of the change in surplus or deficit either in the (a) period of change or (b) period
of change and future periods, if the change affects both.

Errors
Errors include mathematical mistakes, incorrect application of accounting policies, oversights or
misinterpretations of facts, and fraud. Errors can arise in respect of recognition, measurement, presentation or
disclosure of items in the financial statements, Financial statements do not comply with the PPSAS if they
contain material errors or immaterial errors made intentionally.
Errors can be classified as follows:
a. Current period errors - errors committed, and discovered in the current year. These are corrected by correcting
entries within the same year.
b. Prior period errors - errors committed in prior years that are discovered in the current year. These arise from
failure to use information that:

i. was available when the prior year's financial statements were authorized for issue and
ii. could reasonably be expected to have been obtained and taken into account when preparing those financial
statements.

Material prior period errors are corrected by retrospective restatement Retrospective restatement
involves correcting the prior period errors as if they have never occurred. The procedures are similar to the
retrospective application for a change in accounting policy

Retrospective restatement shall be applied as far back as practicable. If this is not practicable, prior
period errors are corrected prospectively.
Consolidated and Separate Financial Statements
A controlling entity is required to present consolidated financial statements, except in cases where the
controlling entity is a controlled entity itself and its securities are not being traded
 Consolidated Financial Statements - are the financial statements of an economic entity (controlling
entity and controlled entities) presented as those of a single entity
 Controlling Entity - is an entity that has one or more controlled entities.
 Controlled Entity- is an entity, including an unincorporated entity such as a partnership, which is under
the control of another entity (known as the controlling entity). (GAM for NGAS Chapter 20, Sec 2)

All controlled entities shall be consolidated, except for one that is held to be sold within 12 months from
acquisition A controlled entity is not excluded from consolidation simply because its activities are dissimilar to
those of the other entities in the group

Control exists if the entity has both the power to govern the financial and operating policies of another entity
and the ability to benefit from the activities of the other entity. Examples of indicators of control are shown
below:
Power Condition Benefit Condition

a. Ownership of majority voting interest (whether a. Ability to dissolve the other entity and obtain
directly or indirectly). significant residual economic benefits or bear
significant obligations,

b. Power to appoint majority of the members of board b. Ability to extract distributions of assets from the
of directors. other entity and exposure to certain obligations of the
other entity.
C. Power to cast majority votes during board of
directors or general meetings.

Consolidation Procedures
1. Similar items of assets, liabilities, revenue and expenses are added line by line.
2 The carrying amount of the controlling entity's investment in the controlled entity is eliminated. The resulting
goodwill is recognized
3. The minority interests in the surplus or deficit and net assets of the controlled entity are recognized and
presented separately.
The minority interest in the net assets is presented within equity but separately from the equity of the
controlling entity. This consists of:
a. the minority interest in the net assets as at the combination date; and
b. the minority's share in the subsequent changes in the controlled entity's equity since the combination date.
4. The effects of inter-entity transactions are eliminated in full.

Separate Financial Statements - are those presented by a controlling entity, an investor in an associate or venture
in a jointly controlled entity, in which the investments are accounted for on the basis of the direct net
assets/equity interest rather than on the basis of the reported results and net assets of the investees. (PPSAS 6.7)

In the separate financial statements, investments in controlled entities, jointly controlled entities, and
associates are accounted for:
a. Using the equity method; or
b. As a financial instrument (i.e., at fair value).

Interim Financial Statements

Government entities prepare interim financial statements on a quarterly basis using the same accounting policies
used in annual reports.

Other Reports
In addition to the financial statements, government entities are also required to prepare and submit the following
reports:
1. Trial balances (Pre-closing and Post-closing)
2. Other schedules:
a. Regional Breakdown of Income
b. Regional Breakdown of Expenses

Deadlines on Submission of Reports

a. Provincial offices and Operating units:
Report Deadline Submit to:
Monthly TBs & SSs 10 days after end of month Auditor
Quarterly FSs, TBs & SSs 10 days after end of quarter Regional
Yearend FSs, TBs & SSs On or before Jan. 20 of the following year Accountant

b. Regional/Branch Offices

Report Deadline Submit to:

Monthly TBs & SSs 10 days after end of month Regional
Quarterly FSs, TBs & SSs 10 days after end of quarter Auditor, Central
Yearend FSs, TBs & SSs On or before Jan. 31 of the following year Office Chief
Accountant

c. Central/Head/Main Office
Report Deadline Submit to:
Monthly TBs & SSs 10 days after end of month Regional
Quarterly FSs, TBs & SSs 10 days after end of quarter Auditor, Central
Office Chief
Accountant
Yearend FSs, TBs & SSs Feb 14 of the following year COA Auditors, DBM,
(combined CO, COA-GAS
Ros & OUs)

Chapter 16
Non-profit Organizations

Introduction
Although the IFRSs/PFRSs are designed to apply to business entities, they can also be applied to non-profit
organizations. This is evidenced by the following excerpts from the IFRSs/PFRSS:

 IFRSs are designed to apply to the general purpose financial statements and other financial reporting of
profit-oriented entities. Although the IFRSs are not designed to apply to not for-profit activities, entities
with such activities may find them appropriate." (Preface to IFRSs.9)
 PAS 1 Presentation of Financial Statements uses terminology that is suitable for profit-oriented entities.
If entities with not-for- profit activities apply PAS 1, they may need to amend the descriptions used for
particular line items in the financial statements and for the financial statements themselves. (PAS 15)
  IFRSs generally do not have scope limitations for not-for- profit activities. Although IFRSs are
developed for profit-oriented entities, a not-for-profit entity might be required, or choose, to apply
IFRSs. (IFRS 3 Business Combinations. BC63)

As can be inferred from the foregoing statements, the PFRSs can be applied to all reporting entities regardless
of their form (i.e., sole proprietorship, partnership, corporation or cooperative) and purpose (i.e., for-profit or
not-for-profit). Accordingly, most of the concepts that we will be learning in this Chapter would be very familiar
to you
However, just like in the case of accounting for sole proprietorships, partnerships, corporations and
cooperatives, the accounting for non-profit organizations differs in respect of accounting for equity. familiar to
you

Current trend in practice

In practice, the accounting for non-profit organizations is essentially similar to the accounting for businesses.
The notable differences are the terminologies used in the financial statements, which are modified to suit the
non-profit organization's purpose, and the presentation and disclosure of equity.
Non-profit organizations in the private sector are normally organized as non-stock, non-profit
corporations. As such, they are required to file audited annual financial statements to the Securities and
Exchange Commission (SEC). In most cases, the auditors' reports in these financial statements state an opinion
on the organization's compliance with the PFRSs (or IFRSs, for international organizations).

Since the PFRSs do not provide specific guidance on the accounting for non-profit organizations, many
non-profit organizations resort to the exemptions provided under PAS Accounting Policies, Changes in
Accounting Estimates and Errors (i.e., 'hierarchy of financial reporting standards'). For example, in cases where
the PFRSs are silent regarding the accounting treatment for, or financial statement presentation of, a transaction
peculiar to non-profit organizations, the organization may refer to the general guidelines set forth under the
Conceptual Framework.

Characteristics of a non-profit organization

Non-profit organization (NPO) - (also called not-for-profit entity NFP or noncommercial organization 'NCO) is
one that carries out some socially desirable needs of the community or its members and whose activities are not
directed towards making profit
The main objective of NPOs may be educational, religious, social, cultural or charitable. NPOs may be
in the form of educational institutions, hospitals and other health care providers, religious institutions,
professional bodies, sports, social or literary clubs, and other forms of charitable institutions.
NPOs earn revenues sufficient to cover their expenses. A major portion of these revenues are derived
from charitable donations and other fundraising activities. Surplus revenues do not inure to the benefit of a
particular individual or group of individuals but rather retained in furtherance of the organization's mission.
Accordingly, none of the surplus revenues distributed as dividends.
Because NPOs carry out their activities in the interest of the society and without the intention of making
profit, NPOs are usually exempt from income taxation

PFRS principles applicable to NPOs

As stated earlier, the recognition, measurement, derecognition, presentation and disclosure requirements of the
PFRSs can be applied to NPOs. Examples are provided below:
 Recognition criteria for assets and liabilities:
a. Meets the definition of an asset or liability:
b Probable inflow or outflow of resources, and
c. Reliable measurement of cost or other value (e.g., fair value).

Measurement of Asset or Liability:

a. Initial measurement at cost except when a relevant PFRS requires measurement at fair value or some other
value
b. Subsequent measurement at amortized cost, under the cost model, or some other measurement model
required by a relevant PFRS

 Derecognition of Asset or Liability

An asset (or liability) is derecognized when it ceases to provide inflow (or require outflow) of resources
embodying economic benefits. The difference between the carrying amount and net (or net settlement), if any, is
proceeds recognized in change in net assets
.
 Presentation of Financial Statements:
General features Fair presentation and compliance with PFRSS Going concern, Accrual basis, Materiality and
aggregation, Offsetting, Frequency of reporting, Comparative information, and Consistency of presentation

Our succeeding discussions on the accounting for NPOs are based in part on the accounting principles
specifically provided under U.S. GAAP Statement of Financial Accounting Standards (SFAS or FAS) No. 116
Accounting for Contributions Received and Contributions Made and SFAS No. 117 Financial Statements of
Not-for-Profit Organizations
Although these principles do not have the same authority as those of the PFRSs, they may be adopted
and used in conjunction with the PFRSs (to the extent that they not contravene the provisions of the PFRSs) in
order to provide more useful financial information to users of NPO financial statements. Moreover, CPA board
exam questions on accounting for NPOs have traditionally been based on these principles.
Various illustrative financial statements are provided in the next chapter I encourage you to notice later
on how the U.S. GAAP principles are incorporated into PFRS-based financial statements
All throughout our discussions in this chapter, we will use the term "non-profit organization (NPO)" to
refer only to non-profit organizations in the private sector. Those belonging to the public sector (e.g.,
government entities) are outside the scope of this chapter. They are discussed in the Government Accounting
part of this book

Accounting for non-profit organizations

Fund theory vs. Fund accounting

The financial statements of most NPOs are based on the fund theory. The fund theory stresses great importance
on the custody and administration of funds. Accordingly, the source, nature and purpose of the funds held by the
NPO are disclosed in order to give information necessary for users to assess the organization's stewardship over
those funds.
Although fund accounting is an off-shoot of the fund theory, SFAS 117 and the PFRSs do not require the
use of fund accounting. However, entities are not prohibited from using it.
Under fund accounting, the main accounting unit is the fund. Accordingly, transactions are accounted for
in the books and presented in the financial statements strictly based on their fund classifications as either (1)
Unrestricted, (2) Temporarily restricted, or (3) Permanently restricted.

Fund theory-based financial statements Fund accounting-based financial statements

 Focuses on the reporting entity concept; thus  Views the entity as being made up of
the accounting unit is the organization as a component parts; thus the accounting units are
whole the various funds held
 Adheres to the accounting point-of-view of  Adheres to the bookkeeping point-of-view of
providing useful information to external users providing useful information to managers
 The term “funds” is more commonly used to  The term “funds” is used to refer to specific
refer to the net assets funds consisting of cash and other non-cash
assets
  Provides disclosures on the types of  Focuses on classifying assets, net assets, and
restrictions on net assets and revenues (i.e, changes in them strictly in. accordance with
unrestricted, temporarily, restricted, or their fund classifications (i.e unrestricted,
permanently restricted) temporarily restricted, or permanently
restricted)
 Current trend  Traditional

Contributions
A majority of the revenues of NPOs come from charitable contributions or donations
Contributions refer to resources received in non-reciprocal transactions. Contributions exclude those
that result from exchange transactions (i.e resources received in exchange for other resources or obligations)
SFAS 116 classifies contributions based on donor’s restrictions as follows:
1. Unrestricted – available for immediate use and for any purpose.
2. temporarily restricted – restricted by the donor in such a way that the availability of the contribution for the
NPO’s use is dependent upon:
a. the performance of a specific task
b. the happening of a future event or
c. the passage of time

The temporarily restricted contribution is available to the organization when the task is performed, the
event occurred, or the time restraint passes. At that time, the support is reclassified from temporarily restricted
to unrestricted.

3. permanently restricted – restricted by the donor in such a way that the organization will never be able to use
the contribution itself; however, the organization may be able to use the income therefrom.

Recognition and measurement

Cash and other Non-cash assets
Cash and other non-cash assets received as contributions are recognized as revenues in the period received and
as assets, decreases of liabilities, or expenses depending on the form of the benefits received.
Contributions are measured at fair value at the date of contribution, and are reported as either:
a. Unrestricted support revenue from unrestricted contributions; or
b. Restricted support - revenue from temporarily restricted or permanently restricted contributions.

Temporarily restricted contributions whose restrictions are met in the same reporting period may be
reported as unrestricted support provided that the NPO discloses this accounting policy and applies it
consistently from period to period.
Unrestricted support increases unrestricted net assets while restricted support increases either (a)
temporarily restricted net assets or (b) permanently restricted net assets.

Unconditional promises
Unconditional promise to give cash or other non-cash assets in a future period is recognized when the
unconditional promise to give is received from the donor. Generally, such unconditional promise is classified as
a temporarily restricted contribution because of the time restriction (i.e., to be received in the future). In the
event that the promised contribution becomes doubtful of collection, an allowance for uncollectability is
recognized.

Conditional promises
Conditional promises to give, which depend on the occurrence of a specified future and uncertain event to bind
the promisor, are recognized only when the attached conditions are substantially met (i.e., when the conditional
promise becomes unconditional). A conditional promise to give is considered unconditional if the possibility
that the condition will not be met is remote (that is, the possibility that the conditions will be met is reasonably
certain).
A transfer of assets with a conditional promise tocontribute them shall be accounted for as a refundable
advance (i.e., liability) until the conditions have been substantially met. (SFAS No. 116.22)

When the effect of time value of money is material receives shall be measured at present value.

The conditional promise will be recorded when the attached condition is substantially met.

Services
Contributions of services are recognized if the services received
a. create or enhance nonfinancial assets; or
b. require specialized skills, are provided by individuals possessing those skills, and would typically
need to be purchased if not provided by donation.

Services requiring specialized skills are provided by accountants, architects, carpenters, doctors,
electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen.
Contributed services and promises to give services that do not meet the above criteria are not
recognized. (SFAS No. 116.9)

Works of art and similar items

An entity need not recognize contributions of works of art, historical treasures, and similar assets if the donated
items are added to collections that meet all of the following conditions:
a. Held for public exhibition, education, or research in furtherance of public service rather than financial
gain;
b. Protected, kept unencumbered, cared for, and preserved; and
c Proceeds from sales of collection items are to be used to acquire other items for collections. (SFAS No.
116.11)

The reason for the non-recognition as an asset or revenue is that, when all of the conditions above are
met, the work of art (or similar item) does not meet the PFRS asset recognition criterion of "probable economic
benefits." Moreover, the financial value of some works of art may be difficult to measure reliably.
In cases, however, where a work of art (or similar item) meets all of the recognition criteria for an asset,
the work of art is recognized as asset and revenue measured at fair value.

Under find accounting, transactions are recorded in a manner that as if the organization is divided into its
component parts, i.e., the funds. Accordingly, transfers between the funds are viewed as accountable events that
are recorded through journal entries.

The net assets released from restrictions is shown in the statement of activities (prepared using SFAS No
117 format) as a decrease in temporarily restricted net assets and an increase in unrestricted net assets. The
balances of net assets are determined as follows:

Other funds held by NPOs

 Endowment fund - classified into the following:
a. Term endowment fund - under the donor's restrictions, the NPO can use a portion of the principal each
period. This is classified as temporarily restricted
b. Regular endowment fund - under the donor's restrictions, the NPO cannot spend any of the principal. This
is classified as permanently restricted.

Income from either term or regular endowment fund is used according to the donor's instruction
.
  Agency fund - funds held by the NPO acting as a custodian. Agency funds are recognized as liabilities.
For example, an educational institution may receive funds from the Commission on Higher Education
(CHED) to be disbursed as student loans.

 Plant fund - consists of the following:

a. unexpended funds for the acquisition of plant assets,
b. funds for the renewal and replacement of plant assets,
c. funds for the retirement of indebtedness; andd. investment in plant assets.

 Board-designated fund (quasi-endowment') funds which, are restricted at the sole discretion of the
NPO's governing board (i.e., Board of Trustees). Funds that are internally restricted are classified as
unrestricted. Only contributions with donor-imposed restrictions are classified as restricted

Treating the various funds held by an NPO as separate accounting units can make accounting cumbersome.
Thus, SFAS No. 117 and the PFRSs do not require fund accounting. NPOs normally use fund accounting as a
managerial tool rather than a system for providing general-purpose financial statements.

Note: The transaction is partly an exchange transaction and a contribution. The exchange component is
recognized as liability (annuities payable). This is subsequently measured at amortized cost. The contribution
component is recognized as temporarily restricted support because of the 'time restriction.'

Deferral method of recognizing contributions

In its publication titled "A Guide to Financial Statements of Not-For- Profit Organizations - Questions For
Directors to Ask," the Chartered Accountants of Canada suggest a "Deferral Method" in accounting for
restricted contributions received by NPOs.

The "deferral method" is similar to the provisions of PAS 20 Accounting for Government Grants and
Disclosure of Government Assistance, in such a way that income from donations is recognized based on the
"matching concept."
Under the "deferral method," restricted contributions are initially recognized as liability (i.e., as deferred
revenue) and recognized as revenue in the same period where the related expenditures, for which the
contributions were intended to reimburse, are incurred.

The "deferral method" parallels more the principles under the PFRSs. However, we will be using the principles
of SFAS 116 and 117, unless otherwise indicated, because Philippine CPA board exam questions on NPOs have
traditionally been based on these principles.

Financial statements
A complete set of general-purpose financial statements of an NPO consists of the following
PFRSs
(based on IASCF's published audited financial statements) SFAS No. 117
Statement of financial position Statement of financial position
Statement of activities Statement of activities
Statement of cash flows Statement of cash flows
Notes Notes

Statement of financial position

The statement of financial position shows information on assets, liabilities, and net assets.

Classification of Net assets

SFAS No. 117 requires reporting of net assets in the statement of financial position according to the following
classifications
1 Unrestricted net assets
2 Temporarily restricted net assets
3 Permanently restricted net assets

PFRS-based financial statements may present net assets using the classifications above either on the
statement of financial position or in the notes

Statement of activities
The statement of activities shows information on revenues expenses, and changes in net assets for a period. This
statement takes the place of the income statement and statement of changes in equity for a business entity.
However, NPOs may opt to present a separate statement of changes in net assets (or statement of changes in
reserves). This separate statement takes the place of a statement of changes in equity.

SFAS No. 117 requires that the statement of activities report the changes in net assets for each of the
three categories of support separately (i.e., unrestricted, temporarily restricted and permanently restricted)
PFRS-based financial statements may present changes in net assets using the classifications above either
on the statement of activities or in the notes.
In a statement of activities, the term "profit" or "net income" is replaced by the term "change in net
assets."
NPOs adopting the PFRSs shall apply PFRS 15 Revenue from Contracts with Customers for revenues
arising from transactions other than charitable contributions.

Expenses
A statement of activities shall report expenses as decreases in unrestricted net assets.
SFAS No. 117 requires expenses to be presented in the statement of activities or in the notes according
to their function. The functional classifications are as follows:
1. Program services - are the activities that result in goods and services being distributed to beneficiaries,
customers, or members that fulfill the purposes or mission for which the organization exists. Those services are
the major purpose for and the major output of the organization and often relate to several major programs
2. Supporting activities - are all activities other than program services. Generally, these include management
and general, fund-raising, and membership-development activities (SFAS No. 117 26 to 28)

Statement of cash flows

The statement of cash flows of an NPO is similar to that of a business entity and can also be prepared using the
direct or indirect method.
Restricted assets acquired during the period that are used for long-term purposes because of donor
restrictions are classified as financing activities.

Accounting procedures peculiar to specific types of NPOs

The principles that we have discussed so far apply to all types of NPOs. In this section, we will discuss
accounting procedures unique to specific types of NPOs. For this purpose, we will subdivide NPOs into the
following:
1. Health Care Organizations
2. Private, non-profit, Colleges and Universities
3. Voluntary Health and Welfare Organizations
4. Other non-profit organizations

Health Care Organizations

Health Care Organizations include hospitals, clinics, medical group practices, individual practice associations,
individual practitioners, emergency care facilities, laboratories, surgery centers, other ambulatory care
organizations, continuing care retirement communities, health maintenance organizations, home health
agencies, nursing homes, and rehabilitation centers.

In accordance with the "AICPA Audit and Accounting Guide, Health Care Organizations," the following
are the accounting requirements unique to health care organizations:

1. Components of a complete set of financial statements

2. Presentation of revenues in the statement of operations
3. Presentation of contributions in the statement of operations
4. Disclosure of performance indicator

Financial statements of a health care organization

According to the "AICPA Audit and Accounting Guide, Health Care Organizations," health care organizations
shall prepare the following statements:
a. Statement of financial position
b. Statement of operations in lieu of a statement of activities)
c. Statement of changes in net assets
d. Statement of cash flows, and
e. Notes to the financial statements.

Presentation of revenues in the statement of operations

Revenues in the statement of operations are classified into the following:
a. Net patient revenue gross patient service revenue less contractual adjustments, employee discounts and billed
charity care.
b. Premium revenue - results from capitation agreements
c. Other revenues all other revenues not classifiable as net patient revenue or premium revenue

Contractual adjustments
A portion of a hospital's revenues is collectible from third-party payors, such as the Philippine Health Insurance
Corporation (PhilHealth) and other health insurance providers. In this regard, a contractual adjustment may
arise from the reimbursement agreement.
A contractual adjustment is the difference between what the hospital considers a fair price for a service
rendered versus an agreed upon amount for the service with the insurance company.
For example, the hospital may consider P60,000 a fair price for a service but agrees with PhilHealth to
accept only $58,000. The difference of P2,000 represents the contractual adjustment which is written off as a
direct reduction to patient service revenue.

Employee discounts
These are special discounts available only to the NPO's employees, (and their immediate family members) in
the form of reduction in the price of patient services. Employee discounts are accounted for as direct reduction
to patient service revenue.

Charity care
Charity care pertains to free services rendered to patients. Charity care is not recognized but rather disclosed
only in the notes.

Capitation agreements
Capitation agreements are agreements with third parties based on the number of employees instead of services
rendered. SFAS No. 117 requires revenues from capitation agreements to be shown separately on the statement
of operations under the caption "Premium revenue," which is a line item below net patient revenue.

Other revenues
Other revenues consist of revenues other than patient service revenues and premium revenues. Examples are the
revenues from the hospital's pharmacy, parking deck, flower and gift shop, educational programs, donated
materials and services

Presentation of contributions in the statement of operations

Unlike for other NPOs, health care organizations do not present restricted contributions on the statement of
operations as part of revenues. The revenues discussed above (i.e., net patient service revenues, premium
revenues, and other revenues) pertain only to unrestricted revenues and may include revenues from unrestricted
contributions Revenues from unrestricted contributions may be separately indicated as such or included in the
other revenues classification
Revenues from restricted contributions are presented separately at the bottom part of the statement of
operations, after unrestricted revenues and expenses.

.
Disclosure of performance indicator
According to the AICPA Guide, the statement of operations shall provide a performance indicator, such as
operating income revenue over expenses, etc. The policy used in determining performance indicator shall be
disclosed in the notes.
Unrealized gains and losses on investments in securities are not a part of the performance indicator, but
shall be reported on the statement of operations after the performance indicator.

Private, non-profit, Colleges and Universities

The accounting procedure that is unique to private, non-profit, colleges and universities is the accounting for
scholarships and fellowships. The concepts are provided below:
a. Scholarships and fellowships granted freely are treated as direct reduction of revenues from tuition and fees,
e.g., academic scholarship.
b. Scholarships and fellowships granted as compensation for services rendered by the grantee are treated as
expenses, e.g., scholarships provided to student assistants and faculty members or their dependents.
c. Refunds of tuition fees from class cancellations and other withdrawal of enrolment are treated as direct
reduction of revenues from tuition and fees.

Voluntary Health and Welfare Organizations

Voluntary Health and Welfare Organizations (VHWO) are non- profit entities that derive their revenues
primarily from donations from the general public to be used for purposes connected with health, welfare, or
community services. Examples include: women and children's health and welfare societies, human rights
advocates, environmental protection organizations, religious organizations, museums and other cultural and arts
societies, libraries, research and scientific foundations, professional associations, private elementary schools,
social clubs, and fraternal organizations.
What distinguishes a VHWO providing health care services from a Health Care Organization is the
source of revenue rather than the type of services provided. A VHWO derives its revenues from donations from
the general public while a Health Care Organization derives its revenues from patients.
The accounting requirement unique to VHWOs is the provision of a statement of functional expenses
that reports expenses by both functional (i.e., program and supporting) and natural classifications (salaries
expense, depreciation expense, etc.). According to SFAS No. 117, the statement of functional expenses is useful
in associating expenses with service efforts and accomplishments of the organization.

.
Other non-profit organizations
The general accounting requirements for NPOs apply to other non-profit organizations. Thus, there are actually
no accounting requirements peculiar to these organizations.
Accounting for other assets held by NPOs
As mentioned earlier, the general principles of PFRSs apply to NPOS. Accordingly, an NPO shall:
 Use the accrual basis of accounting, in addition to the other general features' provided under PAS 1
 Apply PFRS 9 Financial Instruments (or PFRS for SMEs, as appropriate) for financial assets and
financial liabilities. Usually, NPOs account for marketable securities at fair value with changes in fair
values recognized in the statement of activities - similar to FVPL securities (the FVOCI classification is
not applicable to NPOs adopting the PFRS for SMEs).
Under SFAS 124 Accounting for Certain Investments Held by Not-for-Profit Organizations, the
marketable securities of an NPO, consisting of either equity or debt instruments, are measured at fair
value. Changes in fair values are recognized in the statement of activities. Also, marketable securities
can be classified as either current or non-current assets. SFAS 124 does not apply to investments which
result to significant influence or control. Accounting Principles Board (APB) Opinion No. 18, also a
U.S. GAAP, requires the use of the equity method for investments held by NPOs that result to significant
influence.
 Depreciate its depreciable assets in accordance with PAS 16, Property, Plant and Equipment
 Recognize impairment loss in accordance with PAS 36 Impairment of Assets when an asset's carrying
amount exceeds its recoverable amount.
 Account for leases (other than those qualifying as contributions) in accordance with PFRS 16 Leases.