Exam Notes

Chapter 9: INVESTMENTS
• Financial asset is cash, equity instrument of another entity, contractual right to receive cash or
to exchange financial instrument under favorable conditions.
• Financial instrument is recognized only when the entity becomes a party to the contractual
provisions of the instrument.
• Financial assets are classified based on both:
(a) the entity's business model for managing financial assets; and
(b) the entity's contractual cash flow characteristics of the financial asset.
• The classifications of financial assets are:
1. FVPL
2. FVOCI (election)
3. FVOCI (mandatory)
4. Amortized cost.
• A financial asset that is held under a "hold to collect" business model and qualifies under the
"SPPI" test is classified as subsequently measured at amortized cost.
• A financial asset that is held under a "hold to collect and sell" business model and qualifies
under the "SPPI" test is classified as subsequently measured at FVOCI (mandatory). A financial
asset that is not held under a "hold to collect" or "hold to collect and sell" business model is
classified as subsequently measured at FVPL.
• Exceptions:
1. Option to designate financial assets to be measured at FVPL if doing so significantly reduces or
eliminates "accounting mismatch."
2. Election to measure investments in equity securities that are not held for trading at FVOCI.
• Fair value is measured based on the market price in the principal market (if one exists) or in the
most advantageous market (in the absence of a principal market).
• The market price used in measuring fair value is not adjusted for any transaction costs, but is
adjusted for any transport costs.
• Hierarchy of fair value inputs:
(a) Level 1 inputs - quoted prices in active input “most reliable”
(b) Level 2 inputs - prices derived from observable data
(c) Level 3 inputs - unobservable inputs

Chapter 10: INVESTMENTS IN DEBT SECURITIES

• Amortized cost and FVOCI debt securities are initially measured at fair value plus transaction
costs.
Discount Carrying amt. is less than Face amt.; EIR> NIR
Premium Carrying amt. is more than Face amt.; EIR <NIR
• The interest income on debt securities measured at amortized cost or FVOCI is calculated using
the effective interest method.
Interest income = Present value x Effective interest rate (EIR)
Interest receivable = Face amount x Nominal interest rate (NIR)
• Any accrued interest that is:
included in the purchase price of bonds is excluded from the initial measurement of the
investment.
included in the sale price of bonds is excluded from the measurement of the gain or loss on the
sale of investment.
• The periodic cash flows of serial bonds include collections of both interest and principal.
• The cash flows of zero coupon bonds are due only at maturity.
These include both principal and compounded interest.

Fair value of FVOCI debt securities at reporting date xx

Amortized cost of FVOCI at reporting date xx
Cumulative balance of gain (loss) at reporting date xx

Cumulative balance of gain (loss) at reporting date xx

Cumulative bal. of gain (loss) at previous reporting date xx
Unrealized gain (loss) recognized in OCI for the year xx

Net selling price of FVOCI debt securities xx

Amortized cost of FVOCI at date of sale xx
Gain (loss) on sale/ Reclassification adjustment to P/L xx

Chapter 11: ADDITIONAL CONCEPTS

• Under the trade date accounting, a financial asset that is purchased is recognized (and financial
asset that is sold is derecognized) on the trade date, i.e., the date of commitment to purchase or
to sell.
• An entity accounts for the fair value change between the trade date and the settlement date for
a purchased financial asset but not for a financial asset sold.
• Reclassification of financial assets is permitted only when the entity changes its business model
for managing financial assets. Reclassification is applied prospectively on reclassification date,
which is the first day of the first reporting period following the change in business model.
• Only debt-type financial assets can be reclassified. Equity instruments cannot be reclassified.
• Reclassifications are accounted for at the reclassification date Fair value, except for a
reclassification from EVOCI to AC Whereby the reclassification date fair value is adjusted for the
Cumulative gain or loss previously recognized in OCI.
• The impairment requirements of PFRS 9 apply only to financial assets measured at amortized
cost or FVOCI (mandatory), i.e., debt-type financial assets only.
• Only cash and property dividends can be recognized as dividend revenue (equal to the cash
received/receivable for cash dividend and fair value of the non-cash asset for property dividend).
• When shares are purchased dividend-on, the purchased dividend is excluded from the purchase
price when computing for the initial measurement of the investment. There is no Accounting
problem for shares purchased ex-dividend.
• Stock rights are accounted for separately at fair value when the related shares become ex-right.
T/P Value of 1 Right= FV of share rights on - Subscription Rights
No. of rights needed to purchase 1 share + 1
Chapter 12: OTHER LONG-TERM INVESTMENTS
• On initial recognition, cash surrender value is allocated over the required holding period. The
amount allocated to the current period is treated as a reduction of insurance expense; the
remainder is credited to retained earnings.
• Subsequent increases in the cash surrender value and dividends received are recognized as
deduction from insurance expense.
• The cash surrender value is updated when the key employee dies during the year. The gain on
life insurance settlement is 'squeezed' from the entry below:

Cash xx
Cash surrender value xx
Insurance expense / Prepaid insurance xx
Gain on life insurance (squeeze) xx

Chapter 13: BASIC 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.
• The characteristics of a derivative are:
(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.
• Underlying - a specified price, rate, or other variable, including a scheduled event that may or
may not occur..
• Notional amount - a specified unit of measure (e.g., number of currency units, number of
shares, bushels, pounds, etc.).
• Derivatives are obtained either as (a) hedging instrument to hedge some kind of risk or (b) non-
hedging instrument (e.g., for speculation).
• Examples of derivatives:
a. Forward contract - an agreement between two parties to exchange a specified amount of a
commodity, security, or foreign currency at a specified date in the future at a pre agreed price.
b. Futures contract - similar to forward contact but is traded on an exchange.
c. Option - a contract that gives the holder the right, but not the obligation, to buy (call option) or
sell (put option) an asset at a specified price any time during a specified period in the future.
d. Swap - a contract in which two parties agree to exchange payments in the future based on the
movement of some agreed-upon price or rate.
• Derivatives are measured at fair value. Changes in the fair value of a derivative that is not
designated as a hedging instrument are recognized in profit or loss.

Chapter 14: INVESTMENT IN ASSOCIATES

• An associate is an entity over which the investor h significant influence.
• Significant influence is the power to participate in the financial and operating policy decisions
of the investee but is not control or joint control over those policies. Significant influence is
presumed to exist when ownership interest is 20% or more.
• Under the equity method, the investment in an associate is initially recognized at cost and
subsequently adjusted for the investor's share in the changes in equity of the associate, such as
(a) profit or loss,
(b) other comprehensive income, and
(c) results of discontinued operations.
• When an associate has cumulative preference shares, the investor computes its share in profit
or loss after deducting one-year dividends on those shares, whether declared or not.
• The investor's share in the depreciation of an undervaluation of asset is a deduction to both the
investment income (share in profit of associate) and the investment in associate account. Share in
losses of associate is recognized up to the amount of the "interest in the associate."
• After the investor's interest in the associate is reduced to zero, additional losses are recognized
only for the following:
(a)legal or constructive obligations; or
(b) payments made on behalf of the associate. Other losses are not recognized.
• If the associate subsequently reports profits, the investor resumes recognizing its share in those
profits only after its share in the profits equals the share in the losses not recognized.

Chapter 15: PPE 1

• PPE are (a) tangible assets, (b) used in business, and (c) long term in nature.
• The capitalization of costs of a PPE ceases when the PPE is in the location and condition
necessary for it to be capable of operating in the manner intended by management.
• The lump-sum acquisition cost of two or more PPE is allocated to the individual assets based on
their relative fair values at the date of acquisition. The same accounting treatment is applied
whether the entity's management intends or does not intend to use one or more of the acquired
assets.
• The accounting treatment for demolition costs parallels the purpose for the demolition. For
example, if an old building is demolished to make way for the construction of a new building, the
demolition costs (net of any proceeds from sale of salvaged materials from the demolition) are
capitalized as cost of the new building.
• An entity determines the cost of a self-constructed asset using the same principles as for a
purchased asset. Accordingly, the cost does not include: internal profits or savings, cost
inefficiencies (e.g., losses on wasted resources and uninsured hazards), and income from
incidental operations.

Chapter 16: PPE 2

• Subsequent to initial recognition, an entity chooses either the cost model or the revaluation
model as its accounting policy and applies that policy to an entire class of PPE.
• Depreciation is the systematic allocation of the depreciable amount of an asset over its
estimated useful life. Each significant part of an item of PPE is depreciated separately.
• Depreciation begins when the asset is available for use and ceases when the asset is
derecognized, classified as "held for sale," or becomes fully depreciated.
• An asset is fully depreciated when its carrying amount is zero or equal to the residual value.
• Assets that are idle, temporarily taken out of use or retired from active use, or abandoned are
continued to be depreciated.
• SYD denominator = Life x [(Life + 1) / 2]
• DDB rate = 2 divided by life
• Composite Life DC / A; while A / TC Composite Rate. = Where: DC is 'depreciable cost', another
term for depreciable amount; A is annual depreciation; and TC is Total cost. The mnemonic is
pronounced as: "dee-ka-ah tee-see; left right." No gain or loss is recognized when one asset in
the group is disposed of or replaced.
• Leasehold improvement is depreciated over the shorter of its
(a) useful life and the
(b) remaining lease term.
• Changes in depreciation method, useful life, or residual value are changes in accounting
estimate that are accounted for prospectively.
• Revaluation surplus = Fair value less Carrying amount Revaluation may be recorded using the
proportional or elimination method.
• If the revalued asset is depreciable, a portion of the revaluation surplus may be transferred
periodically to retained earnings.
• Gain or loss on disposal = Net proceeds less Carrying amount

Chapter 17: DEPLETION OF MINERAL RESOURCES

• Exploration and evaluation expenditures start to be incurred after the legal right to explore an
area is obtained and ceases when the existence of reserves is in fact established.
• Exploration and evaluation expenditures are either recognized as asset or expense depending
on the entity's chosen accounting policy - which is based entirely on management's judgment.
• If the entity chooses to recognize exploration and evaluation expenditures as asset, it shall
initially measure the asset at cost and subsequently measure it using either the cost model or the
revaluation model. An entity may subsequently change its accounting policy if the change makes
the financial statements more relevant and no less reliable, or more reliable and no less relevant.
• Exploration and evaluation assets are initially recognized as a separate class of assets. When the
existence of mineral resources is established, the exploration and evaluation assets are
reclassified to other assets (e.g., as part of the cost of the mine).
• The cost of a natural resource includes:
(a) purchase cost, direct costs, and decommissioning and restoration costs for which the
entity has incurred a present obligation,
(b) exploration and evaluation costs to the extent that they are capitalized in accordance
with the entity' accounting policy, and
(c) intangible development costs.
• Depletion is computed using the units-of-production method.
• Tangible development costs are not included as cost of a natural resource but rather capitalized
as equipment and depreciated separately.
• Liquidating dividends are those declared in excess of the balance of retained earnings.
Liquidating dividends are return of capital rather than return on capital.

Chapter 18: GOVERNMENT GRANTS

• Government grants are recognized when there is reasonable assurance that
(a) the attached conditions will be satisfied and
(b) the grants will be received. The mere receipt of a grant is not a conclusive evidence of the
satisfaction of the attached conditions.
• A government grant is recognized as income as the related expense for which the grant was
intended to compensate is incurred. (MATCHING - no expense, no income')
• A grant related to a depreciable asset is recognized as income as the asset is depreciated.
• A grant related to a non-depreciable asset (land) is recognized as income as the depreciable
asset built on the land is depreciated.
• A grant received as compensation for expenses already incurred or as immediate financial
support is recognized immediately as income.
• Grants related to assets are grants conditioned on the acquisition of long-term assets. Other
grants are considered grants related to income.
• Grants are measured at fair value. Alternatively, non monetary grants may be measured at
nominal amount.
• Grants are presented in the financial statements (except statement of cash flows) either by
gross presentation or net presentation.
• Forgivable loans and the benefit of loans at below-market interest rate are considered
government grants.
• The repayment, of a government grant is accounted for prospectively.
• The following are not government grants:
(1) Tax benefits,
(2) Free technical or marketing advice,
(3) Provision of guarantees,
(4) Government procurement policy that is responsible for a portion of the entity's sales, and
(5) Public improvements that benefit the entire community.

Chapter 19: BORROWING COSTS

• Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset are capitalized. Other borrowing costs are expensed.
• Borrowing may include:
(a) interest expense calculated using the effective interest method;
(b) finance charges on finance leases;
(c) exchange differences.
• Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale. It may be an
(a) inventory,
(b) PPE,
(c) investment property measured at cost, or
(d) intangible asset.
• The following are not qualifying assets:
(a) assets produced over a short period of time,
(b) assets that are ready for their intended use or sale,
(c) assets produced routinely and in large quantities and
(d) assets measured at fair value.
• The capitalization of borrowing costs starts when the entity
(a) incurs expenditures for the asset,
 (b) incurs borrowing costs, and
(c) necessary activities are being undertaken.
• Capitalization of borrowing costs is suspended during extended periods of suspension of active
development of a qualifying asset.
• The capitalization of borrowing costs ceases when the qualifying asset is substantially
completed.
• Only avoidable borrowing costs are eligible for capitalization.
• Capitalizable borrowing cost on specific borrowing = (interest expense less investment income)
• Capitalizable borrowing cost on general borrowing = (average expenditure x capitalization rate)
• Capitalization rate = Total interest expense on general borrowings divided by Total general
borrowings
• Qualifying assets are not segregated from other assets in the financial statements.

Chapter 20: INVESTMENT PROPERTY

• Biological asset is a living animal or plant.
• Agricultural produce are harvested products from biological assets before any processing.
• Harvesting from unmanaged sources is not agricultural activity.
• Biological assets and agricultural produce are recognized when the following are present:
(a) control;
(b) probable future economic benefits; and
(c) fair value or cost can be measured reliably.
• Biological asset is initially and subsequently measured at fair value less costs to sell.
• Agricultural produce is initially measured at fair value less costs to sell at the point of harvest
and subsequently measured under PAS 2 Inventories or other applicable standard.
• Costs to sell include
(a) commissions to brokers,
(b) levies by regulatory agencies and commodity exchanges, and
(c) transfer taxes and duties.
• Transport costs are not costs to sell; they are deducted from the market price when measuring
fair value.
• Gains and losses from changes in FVLCS of biological assets and FVLCS of agricultural produce at
the point of harvest are recognized in profit or loss.
• If the fair value cannot be measured reliably on initial recognition, the biological asset is
measured at cost less accumulated depreciation and accumulated impairment loss.
• Land used in agricultural activity is classified as PPE.
• An unconditional government grant related to a biological asset measured at FVLCS is
recognized in profit or loss when the e government grant becomes receivable.

Chapter 21: AGRICULTURE

• Investment Property is land and/or building held to earn rentals or for capital appreciation or
both.
• The portions of a property that is partly being rented out and partly owner-occupied are
accounted for separately if the portions can be sold separately (or leased out separately under a
finance lease). If not, the entire property is classified as either investment property or PPE,
whichever portion is more significant.
• If ancillary services provided to occupants are insignificant, the property is classified as
investment property.
• A property that is leased between members of a group is classified as PPE in the group's
consolidated financial statements.
• Investment property is initially measured at cost.
• Investment property is subsequently measured using either the cost model or the fair value
model.
• An investment property that is measured under the cost model is accounted for using PAS 16
(PPE).
• An investment property that is measured under the fair value model is remeasured to fair value
at the end of each reporting period. Changes in fair value are recognized in profit or loss. The
investment property is not depreciated.
• Regardless of which model is used, an entity is required to determine the fair value of an
investment property.
• Transfers to or from investment property are made only when there is a change in use.
• When an investment property is derecognized (e.g., disposed of), the difference between the
net disposal proceeds, if any, and the carrying amount is recognized as gain or loss in profit | or
loss.

Chapter 22: INTANGIBLE ASSETS

• Intangible assets are identifiable non-monetary assets without physical substance.
• Essential elements:
(1) Identifiability (separable or arises from contractual or other legal rights);
(2) Control; and
(3) Future economic benefits.
• Intangible assets are initially measured at cost. The measurement of cost depends on the
intangible asset's mode of acquisition.
• Internal generation:
1. Research cost - recognized as expense.
2. Development cost - capitalized only if all of the conditions under PAS 38 are met.
• If it is not clear whether an expenditure is a research or a development cost, it is treated as a
research cost.
• Reinstatement of costs already expensed is prohibited.
• Internally generated brands, mastheads, publishing titles, customer lists, goodwill and similar
items are not recognized as intangible assets.
•Subsequent expenditures on recognized intangible assets are generally expensed, unless they
meet the definition of an intangible asset and the recognition criteria.
• Intangible assets are subsequently measured using the cost model or the revaluation model.
The revaluation model is applicable only when the intangible asset has an active market.
Amortization:
1. Indefinite useful life - not amortized but tested for
2. Finite useful life - amortized using the straight line method impairment at least annually using
PAS 36.
(unless another method better reflects the consumption of the economic benefits from the asset)
over the shorter of the asset's useful life and legal life, if any. The residual value is assumed to be
zero, unless the entity has the ability to sell the asset at the end of its useful life.

Chapter 23: IMPAIRMENT OF ASSETS

• An asset is impaired if its carrying amount exceeds its recoverable amount. The excess
represents the impairment loss.
• Recoverable amount is the higher of an asset's (a) fair value less costs of disposal and its (b)
value in use.
• An asset is tested for impairment only when an indication of impairment exists, except for
certain intangible assets that are required to be tested for impairment at least annually.
• It is not always necessary to compute both the FVLCD and the VIU. If any one of them exceeds
the carrying amount, the asset is not impaired and the other one need not be computed. If the
FVLCD cannot be determined, the VIU is used as the recoverable amount. If the asset is held for
disposal, its recoverable amount is the FVLCD.
•Value in use is the present value of estimated future cash flows expected to arise from the
continuing use of an asset (or CGU) and from its disposal at the end of its useful life.
• Impairment loss is recognized in profit or loss, unless it represents a revaluation decrease.
• After impairment, subsequent depreciation (amortization) is based on the asset's recoverable
amount.
• If an asset's recoverable amount can be determined reliably, it is tested for impairment on its
own. If its recoverable amount cannot be determined reliably, the CGU to which that asset
belongs is the one tested for impairment.
• For purposes of impairment, goodwill and corporate assets are allocated to CGUS.
• The impairment loss on a CGU is allocated first to any goodwill in the CGU. The excess is
allocated to the other assets of the CGU pro rata based on their carrying amounts.
• The reversal of impairment loss shall not result to a carrying amount in excess of the asset's
would-be carrying amount had no impairment loss been recognized in prior periods.
• Impairment loss on goodwill is never reversed.