MODULE 1

LESSON 1

Lesson 1 or the first week will cover five chapters lifted from the book of the seasoned author
and renowned CPA Reviewer, Atty. Conrado Valix. It will show the nature, purpose and
usefulness of the revised conceptual framework and understand its authoritative status. Also
used were some links which had been useful in the preparation of this module.

Lesson 1 will also show the objectives and limitations of financial reporting.

It also will identify the qualitative characteristics of financial reporting, its fundamental and
enhancing characteristics.

Included also are the cost constraint on useful information.

Also, in lesson one are the general objectives of financial statement, what a reporting entity is
and the assumptions underlying the preparation of the financial statements.
Other topics include the different elements of financial statements, different elements directly
related to the measurement of financial position and financial performance.

Learning Objectives:
1. To have a better understanding of the conceptual framework.
2. To appreciate the conceptual framework’s effect on the accounting process.
3. To have the ability to remember the topics discussed.

Pre-Assessment
1. What are the three elements of accounting?
2. Explain why accounting is a service activity.
3. What are the so-called financial reports?
4. Why should the account balances in the financial statements distributed to the users be
accurate?
5. Are all entities required to submit financial statements?

LESSON PRESENTATION

Definition of Accounting:
Accounting is a service activity, the purpose of which is to provide quantitative information,
primarily financial in nature, about economic entities, that is intended to be useful in making
economic decisions.

According to the American Accounting Association [AAA]; “Accounting refers to the process

of identifying, measuring and communicating economic information to permit informed
judgments and decisions by users of the information”. Accounting is an art and science of
tracking monetary events.

Essential Characteristics of Accounting:

1. Identifying: Not all business activities are accountable events. An event
is accountable when it has an effect on assets, liabilities and equity. Accountable events
are recognized or recorded, in accounting.

Non-accountable events are not recorded. Examples of non-accountable events are

hiring of employees and a promise to buy goods from suppliers. Non accountable
events do not involve monetary considerations.

2. Measuring: Measurement is the process of determining the monetary

amounts at which the elements of the financial statements are recognized and carried in
the balance sheet and income statement.
 Usually the bases of measurement used (1) Historical cost, (2) Current cost.

The Philippine peso is the unit of measure being used. Historical cost is the most
commonly used.

3. Communicating: Is the core activity of the accounting profession,

transmitting information from one person to another, from
one organization to another – or a combination of both –
and to the shareholders and other stakeholders of the
organization.
================================================================
Conceptual Framework:
Objective of Financial Reporting:

The Conceptual Framework for the Financial Reporting (let's title it just “Framework”) is

a basic document that sets objectives and the concepts for general purpose financial
reporting. Its predecessor, Framework for the preparation and presentation of
the financial statements was issued back in 1989.

It is a complete, comprehensive and single document promulgated by the International

Accounting Standards Board. It is a summary of the terms and concepts that underlie the
preparation and presentation of the financial statements for external users. It describes the
concepts for general purpose financial reporting.

Why do we need a conceptual framework for financial reporting?

As the purpose of financial reporting is to provide useful information as a basis for economic
decision making, a conceptual framework will form a theoretical basis for determining how
transactions should be measured (historical value or current value) and reported – i.e., how
they are presented or communicated to users.
www.accaglobal.com

The principal way of providing financial information to external users is through the annual
financial statements. However, financial reporting encompasses not only financial statements
but also financial highlights, summary of important financial figures, analysis of financial
statements and significant ratios.

Financial reports also include nonfinancial information such as description of major products
and listing of corporate officers and directors.
There are three main goals/objectives of financial reporting:

 Provide information to investors. Investors will want to know how cash is being reinvested in the
business, and how efficiently capital is being used.
 Track cash flow. Where is your business' money coming from?
 Analyze assets, liabilities and owner's equity.

================================================================
Conceptual Framework:
Qualitative Characteristics:

Qualitative characteristics are the qualities or attributes that makes financial accounting
information useful to the users.
Under the Conceptual Framework for Financial Reporting, qualitative characteristics are
classified into
1. Fundamental Qualitative Characteristics
2. Enhancing Qualitative Characteristics

Fundamental Qualitative Characteristics relate to the content or substance of financial

information. The fundamental qualitative characteristics are relevance and faithful
representation.
Relevance – financial information is regarded as relevant if it is capable of influencing the
decisions of users.

Faithful representation – this means that financial information must be complete, neutral and

free from error.

Ingredients of Relevance:

The ingredients of Relevance are predictive value and confirmatory value.

Relevance means financial information is capable of making a difference in a decision. It has a

predictive value and confirmatory value.

Predictive value- when the financial information can be used to processes employed by users
to predict future outcomes. Predictive value refers to the fact that quality financial information
can be used to base predictions, forecasts, and projections on. Financial analysts and investors
can use past financial statements to chart performance trends and make predictions about
future performance and profitability.

Confirmatory value means the financial information provides feedback about previous
evaluation. Confirmatory value enables users to check and confirm earlier predictions or
evaluations.
Materiality is a quantitative threshold linked very closely to the qualitative characteristics of
relevance.

The materiality principle. The materiality principle states that an accounting standard can

be ignored if the net impact of doing so has such a small impact on the financial statements that
a user of the statements would not be misled.

In the exercise of judgement in determining materiality, the relative size and nature of the item
is considered.

Faithful Representation:

Faithful representation is the concept that financial statements be produced that accurately
reflect the condition of a business. For example, if a company reports in its balance sheet that it
had $1,200,000 of accounts receivable as of the end of June, then that amount should indeed
have been present on that date.

Ingredients of Faithful Representation:

There are three characteristics of faithful representation:

1. Completeness (adequate or full disclosure of all necessary information),
2. Neutrality (fairness and freedom from bias), and
3. Free from error (no inaccuracies and omissions).

Notes to Financial Statements:

To be complete, financial statements shall be accompanied by Notes to Financial Statement,

the purpose of which is to provide the necessary disclosures required by Philippine Financial
Reporting Standards.

Under the prudence concept, do not overestimate the amount of revenues recognized or

underestimate the amount of expenses. Also, one should be conservative in recording the
amount of assets, and not underestimate liabilities. The result should be conservatively-stated
financial statements.

Prudence Concept: Prudence is a key accounting principle which makes sure that assets and

income are not overstated and liabilities and expenses are not understated. It enables in the
comparability of this principle. It adheres to the true and fair representation of the financial
amounts of all financial statements.
 Conservatism is a principle that requires company accounts to be prepared with caution and
high degrees of verification. All probable losses are recorded when they are discovered, while
gains can only be registered when they are fully realized.

Free from error means there are no errors and inaccuracies in the description of the
phenomenon and no errors made in the process by which the financial information was
produced. (No inaccuracies and omissions). That does not mean no inaccuracies can arise,
particularly in case of making estimates.

In general, “uncertainty” means a state of limited knowledge where it is impossible or

impracticable to describe exactly an existing state or a future outcome.

Substance over form is an accounting principle used "to ensure that financial statements give
a complete, relevant, and accurate picture of transactions and events". In accounting for
business transactions and other events, the measurement and reporting are for the economic
impact of an event, instead of its legal form.

Enhancing Qualitative Characteristics:

The enhancing qualitative characteristics relate to the presentation or form of the financial
statements. It is intended to increase the usefulness of the financial information that is relevant
and faithfully represented.

The Enhancing Qualitative Characteristics are divided into 4 attributes.

 Comparability.
 Verifiability.
 Timeliness.
 Understandability.

Comparability is the level of standardization of accounting information that allows

the financial statements of multiple organizations to be compared to each other. This is a
fundamental requirement of financial reporting that is needed by the users of financial
statements.

Verifiability is the extent to which information is reproducible given the same data and
assumptions

Timeliness principle in accounting refers to the need for accounting information to be

presented to the users in time to fulfill their decision-making needs.

Understandability is the concept that financial information should be presented so that a

reader can easily comprehend it.

CONCEPTUAL FRAMEWORK:
Financial Statements and Reporting Entity Underlying Assumptions:

FINANCIAL STATEMENTS:
Financial statements are written records that convey the business activities and
the financial performance of a company. Financial statements are often audited by
government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or
investing purposes.

www.investopedia.com › ... › Financial Statements

Types of Financial Statements:

The Revised Conceptual Framework recognizes three types of financial statements:
1. Consolidated Financial Statements – The financial statements prepared are for the reporting
entity which is the parent and its subsidiaries.

2. Unconsolidated Financial Statements - Financial Statements prepared is only for the

reporting entity. Unconsolidated subsidiary is a company that is owned by a parent company,
but whose individual financial statements are not included in the consolidated or combined
financial statements of the parent company to which it belongs.

3. 3. Combined Financial Statements - The combined financial statement collectively lists the

activities of a group of related companies into one document. While combined, the financial
statements of each entity remain separate. Each subsidiary or related business appears as a
stand-alone company.

www.investopedia.com › Personal Finance › Banking

REPORTING ENTITY:

Reporting entities are all entities (including economic entities) in. respect of which it is

reasonable to expect the existence of users dependent on general purpose financial reports for
information which will be useful to them for making and evaluating decisions about the
allocation of scarce resources.

www.aasb.gov.au › admin › file › content102

The following are considered reporting entities:

1. Individual corporation, partnership or proprietorship,
2. The parent alone
3. Two or more entities without parent and subsidiary relationship as a single reporting entity
4. A reportable business segment of an entity.

Reporting Period – a period when financial statements are prepared for general purpose
financial reporting.

An interim statement is a financial report covering a period of less than one year. Interim

statements are used to convey the performance of a company before the end of normal full-
year financial reporting cycles. Unlike annual statements, interim statements do not have to
be audited.

www.investopedia.com › ... › Financial Statements

Financial statements are prepared for a specific period of time and provide information about:
1. Assets, liabilities and equity at the end of the reporting period.
2. Income and expenses during the reporting period.

UNDERLYING ASSUMPTIONS:
Underlying Assumptions are the basic notion or fundamental premises on which the accounting
process is based. It is also known as postulates.

Accounting assumptions is also defined as rules of action or conduct which are derived from

experience and practice, and when they prove useful, they become accepted principles
of accounting. ... They are part of GAAP (Generally Accepted Accounting Principles).
4 Accounting Assumptions are; Business Entity Assumption.

www.iedunote.com › accounting-assumptions
 The Conceptual Framework for Financial Reporting mentions only Going Concern as the
underlying assumption. However implicit in accounting are the basic assumptions of
Accounting Entity, Time Period and Monetary Unit.

Going Concern - The going concern concept is a fundamental principle of accounting. It

assumes that during and beyond the next fiscal period a company will complete its current
plans, use its existing assets and continue to meet its financial obligations.

Accounting Entity – the owner is treated as separate or distinct from the owners.

Time Period - The time period principle (or time period assumption) is an accounting

principle which states that a business should report their financial statements appropriate to a
specific time period.

Monetary Unit - The monetary unit principle is the assumption that money itself is treated as

a unit of measurement, and that all transactions or economic events recorded in the accounts
of a business can be expressed and measured in monetary terms by a currency.

======================================================================

CONCEPTUAL FRAMEWORK
Elements of Financial Statements

Elements directly related to the measurement of financial position:

1. Assets – under the Revised Conceptual Framework, an asset is a present economic resource
controlled by the entity, as a result of past events. An economic resource is a right that has the
potential to produce economic benefit.
This new definition clarifies that an asset is an economic resource and that the potential
economic benefits no longer need to be expected to flow to the entity.

Essential characteristics of Assets:

a. The asset is a present economic resource

b. The economic resource is a right that has the potential to produce economic benefits.
c. The economic resource is controlled by the entity as a result of past events.

2. Liability - In financial accounting, a liability is defined as the future sacrifices of economic

benefits that the entity is obliged to make to other entities as a result of past transactions or
other past events.

Under the Revised Conceptual Framework, a liability is defined as present obligation of an

entity to transfer an economic resource as a result of past events. The new definition clarifies
that a liability is an obligation to transfer economic resource and not the ultimate outflow of
economic benefits. The outflow of economic benefits no longer needs to be expected.

Essential Characteristics of liability:

a. The entity has an obligation.
b. The obligation is to transfer an economic resource. Of the liabilities.
c. The obligation is a present obligation that exist as a result of past events.

3. Equity – the residual interest in the assets of the entity after deducting all

Elements directly related to the performance of financial performance are:

1. Income – defined as increases in assets or decreases in liabilities that result in

increases in equity, other than those relating to contributions from
equity holders.

The definition of income encompasses both revenue and gains.

a. Revenue – arises in the course of the ordinary regular activities and referred to in different
names like Sales, Fees, Interest, Dividends, Royalties and Rent.

The essence of revenue is regularity.

b. Gains represent other items that meet the definition of income and do not arise in the course of
the ordinary regular activities.

2. Expense – defined as decreases in assets or increases in liabilities that result in

decreases in equity, other than those relating to distributions to equity
holders.

Expense encompasses losses as well as those expenses that arise in the ordinary course of
the business.

Generalization:

Lesson 1 is about Conceptual Framework, the objective of financial reporting, the qualitative
characteristics, underlying assumptions, and the elements of financial statements.

Activity /Evaluation:

1. Generally accepted accounting principles

A. are fundamental truths or axioms that can be derived from laws of nature.
B. derive their authority from legal court proceedings.
C. derive their credibility and authority from general recognition and acceptance by the
accounting profession.
D. have been specified in detail in the FASB conceptual framework

2. The underlying theme of the conceptual framework is

A. decision usefulness.
B. understandability.
C. reliability.
D. comparability.

3. Predictive value and confirmatory value are two of the ingredients of relevance.
A. True
B. False

4. Which of the following is not among the ingredients of the fundamental quality of faithful
representation?
A. freedom from error.
B. neutrality.
C. materiality.
D. completeness

5. Enhancing qualities of accounting information include:

A. comparability and verifiability.
B. relevance and consistency.
C. comparability and materiality.
D. relevance and faithful representation.

6. An ingredient of relevance is:

A. freedom from error.
B. neutrality.
C. comparability.
D. materiality

7. The change in net assets during a period from transactions and other events and circumstances
from non-owner sources is called
A. net income.
 B. gains.
C. comprehensive income.
D. revenues.

8. An increase in net assets arising from peripheral or incidental transactions is called

A. asset.
B. revenue.
C. gain.
D. investment by owners.

9. Under current GAAP, inflation is ignored in accounting due to

A. materiality.
B. the going concern assumption.
C. the monetary unit assumption.
D. consistency.

10. The periodicity assumption specifies that the most appropriate time periods for
financial reporting is weekly, bi-monthly, and yearly.
A. True
B. False

11. Depreciation and amortization policies are justifiable and appropriate because of

A. economic entity assumption.

B. going concern assumption.
C. monetary unit assumption.
D. periodicity assumption.

MODULE 2
LESSON 2

1. Conceptual Framework on Recognition and Measurement

2. Conceptual Framework on

a. Presentation and Disclosure

b. Concepts of Capital
=============================================================

Learning Objectives:

1. Grasps the meaning of the Measurement Bases Presentation and Disclosure.

2. Commitment to abide by the Concepts of Capital.

3. Grasps the preparation process of financial and physical capital concept.

===================================================================

Pre- Assessment:

1. Which accounting method will result in financial statements that report a more complete picture
of a corporation’s financial position and a better measure of profitability during a recent
accounting year? Accrual Method
2. Which type of journal entries are made at the end of each accounting period so that the
financial statements better reflect the accrual method of accounting? Adjusting
3. The generally accepted accounting principles used in the financial statements of U.S
corporations are researched and developed by which organization? Financial Accounting
Standards Board (FASB)
4. Which financial statement will allow you to determine the gross margin for a retailer or
manufacturer? Income Statement
5. Does the heading of a balance sheet indicate a period of time or a point in time? Point In Time
LESSON PRESENTATON
CONCEPTUAL FRAMEWORK
Recognition and Measurement

RECOGNITION:

The Revised Conceptual Framework defines recognition as the process of capturing for
inclusion in the financial statements an item that meets the definition of an asset, liability, equity,
income or expense.

The amount at which an asset, a liability or equity is recognized in the statement of financial
position, is reported as carrying amount.

Recognition links the elements of the statement of financial position and statement of financial
performance. The statements are linked because the recognition of an item in one statement
requires the recognition of the same item in another statement.

The recognition of expense happens simultaneously with the recognition of a decrease in asset
or decrease in liability.

RECOGNITION CRITERIA:

Only items that meet the definition of an asset, liability or equity are recognized in the statement
of financial position.

Only items that meet the definition of income or expense are recognized in the statement of
financial performance.

Items are recognized only when their recognition provides users of financial statements with
information that is both relevant and faithfully represented.

Before, recognition is made when future economic benefit will flow to or from the enterprise,
however at present, even if the inflow or outflow of benefit is low, it is now recognized.

In the sale of goods, in the ordinary course of the business, the point of sale is the point of
income recognition.

Under certain conditions, however, income maybe recognized at the point of production and at
the point of collection.

EXPENSE RECOGNITION:

Basic Expense Recognition – expense is recognized when incurred. The Matching Principle
requires that those costs and expenses incurred in earning a revenue will be reported in the
same period.

The Matching Principle has three applications namely:

a. Cause and effect association
b. Systematic and Rational allocation
c. Immediate Recognition

Cause and Effect Association: Under this principle, expense is recognized when the revenue
is already recognized.

Systematic and Rational Allocation: Under this principle, costs are expensed by simply
allocating them over the periods benefited. Example, depreciation.

Immediate Recognition: Under this principle, the cost incurred is expensed outright.
Examples are salaries, advertising, selling and administrative expenses etc.
 Many losses such as loss from disposal of building, sale of investments and casualty loss are
immediately recognized because they are not directly related to specific revenue.

DERECOGNITION:

Derecognition is the removal of all or part of a recognized asset or liability from the statement of
financial position.

Derecognition of an asset occurs whenever an asset is disposed of or is not expected to

provide any future benefits from either its use or disposal. As a result, the asset is removed
from the financial statements.

Disposal of a long-lived operating asset is affected by selling it, exchanging it, or abandoning it.

MEASUREMENT

Measurement is quantifying in monetary terms the elements in the financial statements.

Two Categories under the Revised Conceptual Framework:

a. Historical Cost
b. Current Value

Historical Cost

A historical cost is a measure of value used in accounting in which the value of an asset on
the balance sheet is recorded at its original cost when acquired by the company.

www.investopedia.com › ... › Accounting

The historical cost of a liability is the consideration received to incur the liability minus
transaction cost.

Historical Cost Updated:

1. Historical cost of an asset is updated because of:

a. Depreciation and amortization
b. Payment received as a result of disposing part or all of the asset
c. Impairment
d. Accrual of interest to reflect any financing component of the asset
e. Amortized cost measurement of financial asset

2. Historical cost of a liability is updated because of:

a. Payment made or satisfying an obligation to deliver goods.
b. Increase in value of the obligation to transfer economic resources such that the liability
becomes onerous.
c. Accrual of interest to reflect any financing component of the liability.
d. Amortized cost measurement of financial liability.

CURRENT VALUE:

Current value includes:

a. Fair value
b. Value in use for assets
c. Fulfillment value for liability
d. Current cost

Fair Value:
Asset's sale price agreed upon by a willing buyer and seller, assuming both parties are
knowledgeable and enter the transaction freely. ... In accounting, fair value represents the
estimated worth of various assets and liabilities that must be listed on a company's books.

www.investopedia.com › terms › fairvalue

Value in Use:

Value-in-use is the net present value of the cash flows generated by an asset as it is currently
being used by the owner. This amount may be less than the net present value of cash flows
from the highest and best use to which an asset can be put.

www.accountingtools.com › articles › value-in-use

Fulfillment value for liabilities:

The present value of cash that an entity expects to transfer in paying or settling a liability.
It does not include the transaction cost in incurring a liability but includes transaction cost on
fulfillment of a liability. Fulfillment value is the exit price or exit value.

Current Cost:

A method of accounting in which assets are valued on the basis of their current replacement
cost, and increases in their value as a result of inflation are excluded from calculations of profit.

SELECTING A MEASUREMENT BASIS:

Historical cost is the most commonly adopted in preparing financial statements. It is simpler
and less costly to measure, well understood and verifiable.

The IASB did not mandate a single measurement basis because the different measurement
bases could produce useful information under different circumstances.

CONCEPTUAL FRAMEWORK
PRESENTATION AND DISCLOSURE
CONCEPT OF CAPITAL

Presentation and Disclosure:

A reporting entity communicates information about the assets, liabilities, equity, income and
expenses by presenting and disclosing information in the financial statements. Effective
communication of information in financial statements also enhances the understandability and
comparability of information.

Classification:

The sorting of assets, liabilities, equity, income and expenses on the basis of shared or similar
characteristics. It may be necessary to classify components of equity separately if such
components are subject to legal, regulatory and other requirements. Thus, ordinary share
capital, preference share capital, share premium and retained earnings should be disclosed
separately.
 Classification of Income and Expenses:

The Revised Conceptual Framework has introduced the term statement of financial
performance to refer to the statement of profit and loss together with the statement presenting
other comprehensive income.

The statement of profit or loss is the primary sources of information about an entity’s financial
performance for the reporting period.

All income and expenses should be appropriately classified and included in the statement of
profit or loss.

There are certain items of income and expenses that are presented outside of profit and loss
but included in other comprehensive income.

Aggregation:

Aggregation is the adding together of assets, liabilities and equity, income and expenses that
have similar or shared characteristics and are included in the same classification.

Typically, the statement of financial position and the statement of financial performance provide
summarized or condensed information.

More detailed information is provided in the notes to financial statements.

CAPITAL MAINTENANCE:

The financial performance of an entity is determined using two approaches:

a. Transaction approach
b. Capital maintenance approach

Transaction approach is the traditional preparation of an income statement.

Capital maintenance approach means that the net income occurs only after the capital used ate
the beginning of the period is maintained.

Distinction between return on capital and return of capital is important to the understanding of
the net income.

Shareholders invest in entity to earn a return on capital or an amount in excess of their original
investment.

Return of capital is an erosion of the capital invested in the entity.

Financial Capital:

The financial capital maintenance concept is that the capital of a company is only maintained
if the financial or monetary amount of its net assets at the end of a financial period is equal to or
exceeds the financial or monetary amount of its net assets at the beginning of the period,
excluding any distributions to, or contributions from, the owners. 

Illustration:

The following assets, liabilities and other financial data pertain to the current year:
January 1 December 31
Total Assets 1,500,000 2,500,000
Total Liabilities 1,000,000 1,200,000
Additional investments during the year 400,000
Dividend paid during the year 300,000

COMPUTATION OF NET INCOME:

 Net Assets, December 31 1,300,000
Add: Dividends Paid 300,000
Total 1,600,000
Less: Net Assets, January 1 500,000
Additional Investments 400,000 900,000
Net Income 700,000

The physical capital maintenance concept is that the physical capital is only maintained if the
physical productive or operating capacity, or the funds or resources required to achieve this
capacity, is equal to or exceeds the physical productive capacity at the beginning of the period,
after excluding any distributions to, or contributions from, owners during the financial period. 

Illustration:

Using the same data in the first illustration but instead net assets is P500,000 as of January 1
but had a current cost of P800,000 by reason of inflationary condition:

Net Assets, December 31 1,200,000

Add: Dividends paid 300,000
Total 1,500,000
Less: Net Assets at current cost 800,000
Additional Investments 400,000 1,200,000
Net Income 400,000

===================================================================

Generalization:

Week 2 covered two chapters from the same book of Atty. Valix. It covered recognition
and measurement under the conceptual framework. It showed the recognition criteria
and measurement of the elements of financial statements. It discussed awareness of
the various financial attributes for measuring the accounting elements.

The lesson covered the determination of net income under the financial capital and
physical capital concept.

Assignment:

Research on the following:

1. Presentation of Financial statements

a. Financial Position
b. Comprehensive Income
===================================================================

Activity: Multiple Choice

1. Under current GAAP, inflation is ignored in accounting due to

A. materiality.
B. the going concern assumption.
C. the monetary unit assumption.
D. consistency

2. The periodicity assumption specifies that the most appropriate time periods for financial
reporting are weekly, bi-monthly, and yearly.
A. True
B. False

3. A contract is an agreement between two parties that creates enforceable rights or

obligations.
A. True
 B. False

4. Generally, revenues are recognized when the:

A. cash is received.
B. performance obligation is satisfied.
C. product is produced.
D. All of these answer choices are correct.

5. Measurement relates to the time period that a specific transaction is recorded.

A. True
B. False

6. The FASB has increased the recognition and measurement of fair values in U.S. GAAP
over time.
A. True
B. False

7. A conceptual framework is helpful and necessary for which of the following

reasons?
A. It allows the profession to quickly solve new and emerging issues.
B. It enables standard setters to issue more useful and consistent pronouncements
over time.
C. It increases financial statement users' understanding of and confidence in financial
reporting.
D. All of these answer choices are correct.

8. Which level of the conceptual framework is devoted to elements of financial

statements and the qualitative characteristics?
A. 4th
B. 3rd
C. 2nd
D. 1st

9. When a company's does not use the same accounting principle in the current period
compared to the previous period, this is referred to as a lack of:
A. confirmatory value.
B. predictive value.
C. faithful representation.
D. consistency.

10. Which of the following increases equity from non-owner sources:

A. a revenue transaction.
B. A gain.
C. comprehensive income.
D. All of the above.

MODULE 3
LESSON 3

Topics:

1. Philippine Accounting Standards PAS 1

Presentation of Financial Statements in minimum line items as required by International

Financial Reporting Standards:

a. Statement of Financial Position

b. Statement of Comprehensive Income
c. Natural and Functional Presentation of the Income Statement
 Learning objectives:

1. Understand the presentation of the Statement of Financial Position in minimum line items.

2. Awareness in the requirements of the minimum line items as required by IFRS.

3. Develop the ability to prepare the Income Statement in natural and functional form.

Pre-Assessment

1. The financial statement that shows the result of the operation in a certain period.
 Income Statement
2. The financial statement that shows the financial condition of the business as of a certain date.
 Balance Sheet
3. The financial statement that shows the inflow and outflow of cash.
 Cash Flow Statement
4. An income statement method where expenses are disclosed according to their nature.
 Income Statement by Nature

5. An income statement method where expenses are disclosed according to their functions.
 Income Statement by Function of Expense

Conceptual Framework PAS 1

PRESENTATION OF FINANCIAL STATEMENTS

Statement of Financial Position FINANCIAL STATEMENTS:

The financial statements are the end product or main output of the financial accounting process.

GENERAL PURPOSE FINANCIAL STATEMENTS:

General purpose financial statements in accordance with the International Financial Accounting
Standards are simply referred to as financial statements. They are those intended to meet the
needs of users who are not in a position to require an entity to prepare reports tailored to their
particular information needs. They are directed to all common users and not to specific users.

COMPONENTS OF FINANCIAL STATEMENTS:

1. Statement of financial position
2. Income statement
3. Statement of Comprehensive Income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other explanatory notes

OBJECTIVE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions.

FREQUENCY OF REPORTING:

Financial statements shall be reported at least annually.

When an entity’s end of the reporting period changes and financial statements are presented for
a period longer or shorter than one year, an entity shall disclose:
1. The period covered by the financial statements
2. The reason for using a longer or shorter period
3. The fact that amounts presented in the financial statements are not entirely
comparable.
 STATEMENT OF FINANCIAL POSITION:

The statement of financial position also known as a Balance Sheet represents the
Assets, Liabilities and Equity of a business at a point in time. For example: Assets
include cash, stock, property, plant or equipment - anything the business owns.
Liabilities are what the business owes to outside parties, e.g.
Statement of financial position (Balance Sheet) - FutureLearn www.futurelearn.com
› courses › steps

Investors, creditors and other statement users analyze the statement of financial
position to evaluate such factors as liquidity, solvency and the need of the entity for
additional financing.

DEFINITION OF ASSET:

Asset is an economic resource controlled by an entity as a result of past event. An

economic resource is a right that has the potential to produce economic benefits.

CLASSIFICATION OF ASSETS:

Assets are classified into Current and Non-Current Assets The operating cycle of
an entity is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents.

When the entity’s normal operating cycle is not clearly identifiable, the duration is
assumed to be twelve months.

CURRENT ASSETS:

PAS 1 paragraph 66 provides that an entity shall classify an asset as current

when:

1. The asset is cash or cash equivalent unless the asset is restricted to settle a
liability for more that twelve months, after the reporting period.

2. The entity holds the asset primarily for the purpose of trading

3. The entity expects to realize the asset within twelve months after the reporting
period.

4. The entity expects to realize the asset or intends to sell or consume it within the
entity’s normal operating cycle.

PRESENTATION OF CURRENT ASSETS:

Current assets are usually listed in the order of liquidity. PAS 1 paragraph 54,
provides that as a minimum, the line items under current assets are:

a. Cash and cash equivalents

b. Financial assets at fair value such as trading securities and other investments in
quoted equity instruments
c. Trade and other receivables
d. Inventories
Prepaid expense
NON-CURRENT ASSETS:

PAS 1, paragraph 66, simply states that an entity shall classify all other assets not
classified as current, as non-current. Non-current assets include the following:
a. Property, plant and equipment
b. Long term investments
c. Intangible assets
d. Deferred tax assets
e. Other non-current assets

Property, Plant and Equipment:

Property, plant and equipment are tangible items that are held for use in the
production or supply of goods or services, for rental to others, or for
administrative purposes; and are expected to be used during more than one
period.

IAS 16 states that the cost of an item of property, plant and equipment shall be
recognized as an asset if, and only if:

 it is probable that future economic benefits associated with the item will
flow to the entity; and
 the cost of the item can be measured reliably

This recognition principle shall be applied to all costs at the time they are incurred,
both incurred initially to acquire or construct an item of property, plant and
equipment and incurred subsequently after recognition to add to, replace part of or
service it.
https://www.ifrsbox.com/

Examples of property, plant and equipment include land, building, machinery,

equipment, furniture, fixtures, patterns, molds, dies and tools.

Most PPE except land is presented at cost less accumulated depreciation.

Long Term Investments:

The International Accounting Standards Committee defines investment as “an asset

held by an entity for the accretion of wealth, through capital distribution, such as
interest. royalties, dividends and rentals for capital appreciation or for other benefits
to the investing entity such as those obtained through trading relationship.

Intangible Assets:

An intangible asset is an asset that is not physical in nature. Goodwill, brand

recognition and intellectual property, such as patents, trademarks, and copyrights,
are all intangible assets. Intangible assets exist in opposition to tangible assets,
which include land, vehicles, equipment, and inventory.
https://www.investopedia.com/terms

Additionally, financial assets such as stocks and bonds, which derive their value
from contractual claims, are considered tangible assets

Other Noncurrent Assets:

Noncurrent assets are a company's long-term investments for which the full
value will not be realized within the accounting year. Examples of noncurrent
assets include investments in other companies, intellectual property (e.g.,
patents), and property, plant and equipment.
www.investopedia.com › ... › Accounting
Also defined as assets that do not fit into the definition of the previously mentioned
non-current assets. Other examples include advances to officers, directors,
shareholders, and employees and abandoned property and long-term refundable
deposit.

Liabilities:

Defined as obligations of the company; they are amounts owed to creditors for a
past transaction and they usually have the word "payable" in their account title.

An obligation can either be legal or constructive. A liability is classified as current and

noncurrent.

Current Liabilities:

PAS 1 paragraph 69 provides that liability shall be classified as current when:

 The entity expects to settle the liability within the entity’s normal operating
cycle
 The entity holds the liability primarily for the purpose of trading
 The liability is due to be settled within twelve months after the reporting
period
 The entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.

Presentation of current liabilities:

PAS 1 paragraph 54, provides that as minimum, the face of the statement of
financial position shall include the following line items for current liabilities:

 Trade and other payables

 Current provisions
 Short term borrowing
 Current portion of long-term debt
 Current tax liability

The “trade and other payables” is a line item for accounts payable, notes payable, accrued
interest on note payable, dividends payable and accrued expenses. No objection can be
raised if the trade accounts and notes payable are separately presented.

Non-Current liabilities:

The term non-current liabilities are a residual definition.

PAS 1 paragraph 69, provides that all liabilities not classified as current are
classified as non-current.
 Non-current portion of long-term debt
 Finance lease liability
 Deferred tax liability
 Long-term obligations to company officers
 Long term deferred revenue
Currently maturing long term debt:

A liability due to be settled within twelve months after the reporting period is
classified as current, even if:
 The original term is for a period longer then twelve months
 An agreement to refinance or to reschedule payment on a long-term
basis is completed after the reporting period and before the financial
statements are authorized for issue.

However, if the refinancing on a long-term basis is completed on or before the

end of the reporting period, the refinancing is an adjusting event and therefore
the obligation is classified as non-current.

Discretion to refinance:

If the entity has the discretion to refinance or roll over an obligation for at least
twelve months after the reporting period under an existing loan facility, the
obligation is classified as noncurrent even if it would otherwise be due within a
shorter period.

The refinancing or rolling over must be at the discretion of the entity, if not, then the
rolling over is classified as a current liability.

Covenants:

Covenants are restrictions on the borrower as to undertaking further borrowings,

paying dividends, maintaining specified level of working capital and so forth. If there
is a breach on the covenant, the liability becomes payable on demand.

Effect of breach of covenant:

PAS 1 paragraph 74 provides that the liability is classified as current even if the
lender has agreed, after the reporting period and before the statements are
authorized for issue, not to demand payment as a consequence of the breach.

The liability is classified as current, because at reporting date, the borrower does
not have an unconditional right to defer payment for at least twelve months after the
reporting period.

Paragraph 75 however, provides that the liability is classified non-current if the

lender has agreed on or before the end of the reporting period to provide a grace
period ending at least twelve months after the end of the reporting period.

Definition of Equity:

Defined as the residual interest in the assets of the entity after deducting all its
liabilities.

Terms used in reporting the equity of the entity depending on the form of business
organization are:

1. Owner’s Equity for sole proprietorship

2. Partners’ Equity for partnership
3. Stockholders’ Equity or Shareholders’ Equity in a corporation

the term Equity may simply be used for all business entities.

Under PAS 1 paragraph 7, holders of instruments classified as equity are simply

known as owners.
Shareholders’ Equity:

Shareholders’ Equity is the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities.

The elements constituting shareholders’ equity with their equivalent IAS term :

Philippine Term IAS Term

Capital Stock Share Capital

Subscribed Capital Stock Subscribed
Share Capital Preferred Stock Preference Share
Capital
Common Stock Ordinary Share Capital
Additional Paid in Capital Share Premium
Retained Earnings (Deficit) Accumulated Profits
(Losses) Retained Earnings Appropriated Appropriated Reserve
Revaluation Surplus Revaluation Reserve
Treasury Stock Treasury Share
 Example of Income Statement

Generalization:

The lesson under Philippine Accounting Standards PAS 1 will give a knowledge of
identifying the minimum line items in the presentation of a statement of financial
position and the statement of comprehensive income as required by IFRS. It will
also give a knowhow of the natural and functional presentation of the income
statement.

Assignment:

Research on the following:

Choose a Statement of Cash Flow from one different company for each student
and try to study and explain its parts.

======================================================================

Activity: Preparation of the Statement of Cash Flow. Data as follows:

F Company for the current year

Cash receipts from issuance of ordinary shares 4,000,000

Cash collections from customers 2,000,000

Dividends received 300,000

Payment of loan 2,200,000

Payment for Operating Expenses 1,200,000

Payment for dividends 200,000

Payment for insurance 100,000

Payment for taxes 400,000

Purchase of land 800,000

Cash beginning 3,500,000

 MODULE 4
LESSON 4
Topics :

1. Philippine Accounting Standards PAS 2 Inventories and

1. Philippine Accounting Standards PAS 7 Statement of Cash Flows.

Learning Objectives :

1. To describeand differentiate inventories and statement of cash flows.

2. To appreciate the different inventory valuation methods.
3. To have the ability to discuss the cost formulas required by IFRS.

========================================================================

Pre-Assessment :

Multiple choice (PAS 2)

1. Inventories shall be measured at

a. Cost
b. Net realizable value
c. Lower of cost and net realizable value
d. Lower of cost and market

2. The cost of inventories shall be measured using

a. FIFO
b. Average method
c. LIFO
d. Either FIFO or average method

3. Net realizable value is

a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete.
d. Estimated selling price less estimated cost to complete and estimated cost of
disposal

4. Inventories are usually written down to net realizable value

a. Item by item
b. By classification
c. By total
d. By segment

5. The amount of any write-down of inventory to net realizable value and all losses of
inventory should be
a. Recognized as operating expense in the period the write-down or loss occurs.
b. Recognized as other expense in the period the write-down or loss occurs.
c. Recognized as component of cost of sales in the period the write-down or
loss occurs.
d. Deferred until the related inventory is sold.

=====================================================================================
=

Lesson Presentation:
PAS 2
Inventory is an accounting term that refers to goods that are in various stages of being made
ready for sale, including: Finished goods (that are available to be sold) Work-in-progress
(meaning in the process of being made) Raw materials (to be used to produce more finished
goods)
What is Inventory - Shopifywww.shopify.com › encyclopedia › inventory

 Classes of Inventories
a. Merchandising company
b. Manufacturing
 Cost of Inventories
 Cost of purchase
 Cost of conversion
 Other Cost

Cost of Inventories of a service provider

Cost formulas
a. First In First Out (FIFO)
b. Weighted Average

First In, First Out (FIFO) is an accounting method in which assets purchased or
acquired first are disposed of first. FIFO assumes that the remaining inventory
consists of items purchased last.

When using the weighted average method, you divide the cost of goods available for sale by
the number of units available for sale, which yields the weighted-average cost per unit. In this
calculation, the cost of goods available for sale is the sum of beginning inventory and net
purchases.
 WEIGHTED AVERAGE

Last In First Out

LIFO stands for “Last-In, First-Out”. It is a method used for cost flow assumption purposes in
the cost of goods sold calculation. The LIFO method assumes that the most recent products
added to a company's inventory have been sold first. The costs paid for those recent products
are the ones used in the calculation.

Specific Identification Inventory Valuation Method: The specific identification

inventory valuation method is a system for tracking every single item in
an inventory individually from the time it enters the inventory until the time it leaves
it.

www.investopedia.com › terms › specific-identification...

Net realizable value (NRV) is the value of an asset that can be realized upon the sale of the
asset, less a reasonable estimate of the costs associated with the eventual sale or disposal of the
asset. NRV is a common method used to evaluate an asset's value for inventory accounting. NRV
is a valuation method used in both Generally Accepted Accounting Principles (GAAP) and
International Financial Reporting Standards (IFRS).

Inventory Write-down: The write down of inventory involves charging a portion of

the inventory asset to expense in the current period. Inventory is written down when goods are
lost or stolen, or their value has declined. ... Then, as items are actually disposed of, the reserve
would be debited and the inventory account credited.

www.accountingtools.com › articles › how-do-i-write-do...

Allowance Method: Using the allowance method, a business will record a journal entry with a
credit to a contra asset account, such as inventory reserve or the allowance for
obsolete inventory. An offsetting debit will be made to an expense account.

Statement of Cash Flows:

A cash flow statement is a financial statement that provides aggregate data regarding all cash
inflows a company receives from its ongoing operations and external investment sources. It
also includes all cash outflows that pay for business activities and investments during a given
period.

Classification of Cash Flow Activities:

 Operating cash flow (OCF) is a measure of the amount of cash generated by a

company's normal business operations. Operating cash flow indicates whether a
company can generate sufficient positive cash flow to maintain and grow its
operations, otherwise, it may require external financing for capital expansion.
https://www.investopedia.com/terms/o/operatingcashflow.asp

 Cash flow from investing activities involves long-term uses of cash. The purchase or

sale of a fixed asset like property, plant, or equipment ...
www.investopedia
  In the cash flow statement, financing activities refer to the flow of cash between a
business and its owners and creditors. It focuses on how the business raises capital
and pays back its investors. The activities include issuing and selling stock, paying cash
dividends and adding loans.
https://www.freshbooks.com/hub/accounting/financing-activities

STATEMENT OF CASH FLOW SAMPLE

Generalization:

Module 4 introduces the different Inventory measurement and the different cost formulas, FIFO
and the weighted average method. It also shows how the Statement of Cash Flows is prepared
and what the statement contains and represents.

Assignment:
Read and prepare for discussion on topics “Accounting Policies, Estimate and Errors”

Activity: Multiple Choice

1. Which of the following is not an acceptable method of applying the LCNRV?

a. Inventory location
b. Group Inventory
c. Individual Item
d. Total of the inventory

2. Reporting inventory at the lower of cost and net realizable value is a departure from
a. Historical cost
b. Consistency
c. Conservatism
d. Full disclosure
3.When inventory declines in value below original cost, what is the maximum
amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Sales price reduced by estimated cost of disposal

4. Lower of cost and net realizable value as it applies to inventory is best described as
a. Reporting of a loss when there is decrease in the future utility below the
original cost.
b. Method of determining cost of goods sold.
c. Assumption to determine inventory flow.
d. Change in inventory value to net realizable value.

5. Which method may be used to record a loss due to a price decline in the value of
inventory?
a. Loss method
b. Sales method
c. Cost of goods sold method
d. Loss method and cost of goods sold method

Items 6- 10 For all questions assume that the indirect method is used.

There are four parts to the Statement of Cash Flows (or Cash Flow Statement):
1. Operating Activities
2. Investing Activities
3. Financing Activities
4. Supplemental Disclosures

For each of the following items, indicate which part will be affected.
6. Depreciation Expense.
Operating Activities
Depreciation is added back to net income in the operating activities section because the
company's net income was reduced by the depreciation expense shown on the income
statement; however, the company's cash was not reduced by depreciation expense.
(Accordingly, depreciation expense is referred to as a non-cash expense.)

7. Proceeds from the sale of equipment used in the business.

Investing Activities
The entire proceeds from the sale of a long-term asset are shown in the investing activities
section of the statement of cash flows.

8. The Loss on the Sale of Equipment in Question #2.

Operating Activities
The loss (computed as proceeds minus the book value) appeared on the income statement
and reduced the company's net income. However, the company's cash did not decrease.
(Actually, the company's cash increased by the amount received for the asset.) You need to
add back the loss that reduced net income on the income statement so that the amount
reflects the cash from operating activities.
9. Declaration and payment of dividends on company's stock.
Financing Activities
Dividends cause stockholders' equity and cash to decrease. Changes in long-term liabilities
and stockholders' equity are shown in the financing activities section of the statement of
cash flows.

10. Gain on the Sale of Automobile formerly used in the business.

Operating Activities
The gain (computed as proceeds minus the book value) appeared on the income statement
and increased the company's net income. However, the entire proceeds from the sale of a
company's assets are shown in the investing section. In order to avoid double-counting the
 gain, the gain must be subtracted from the net income amount appearing in the operating
activities section of the statement of cash flows.

MODULE 5-6
LESSON 5-6

Subject : Conceptual Framework and Accounting Standards

Topics : 1.PAS 8 Accounting Policies, Estimate and Errors

2. PAS 10 Events After the Accounting Period

Lesson: The week’s lesson covers PAS 8 and PAS 10. Arrangement and some topics
were taken from Chapters 12 and 13 of the book of Atty. Valix, Conceptual Framework
and Accounting Standards.

The objectives of PAS 8 and PAS 10 are the following:

1. To know the recognition and reporting of a change in accounting policy.

2. To appreciate the recognition and reporting of prior period errors.
3. To discuss the recognition of adjusting and non-adjusting events.

Pre-Assessment:

1. Is change in provision for bad debts a change in accounting estimate? Explain.

2. It is impracticable to determine the cumulative effect of applying a change in accounting
principle to any prior period. Why?
3. How do you report an accounting error?
4. How is a change in accounting policy presented?
5. What could be one reason why companies change accounting methods?

============================================================

LESSON PRESENTATION:

Accounting Policies:

Accounting policies are the specific principles and procedures implemented by a company's
management team that are used to prepare its financial statements. These include any
accounting methods, measurement systems, and procedures for presenting disclosures.

Change in Accounting Policy:

As a general rule, changes in Accounting Policies must be applied retrospectively in the

financial statements. Consequently, entity shall adjust all comparative amounts presented in
the financial statements affected by the change in accounting policy for each prior period
presented.

Should be made when:

1. Required by Accounting Standards

2. The change will result in more relevant and faithfully represented information
about the financial position, performance and cash flow of the enterprise.

Accounting Policies

Accounting policies are the specific principles and procedures implemented by a company's
management team that are used to prepare its financial statements. These include any
accounting methods, measurement systems, and procedures for presenting disclosures.
Accounting policies differ from accounting principles in that the principles are the accounting
rules and the policies are a company's way of adhering to those rules.

Accounting policies are the rules used by an entity to ensure that transactions are recorded
properly and financial statements produced correctly. These policies ensure that
accounting activities are handled consistently over time. They are also needed to ensure
that an organization follows the applicable accounting framework, such as GAAP or
IFRS.

Examples of change in Accounting Policy:

Accounting policies are included in the notes that accompany the financial statements
of a business.

1. How the business recognizes revenue

2. How the business recognizes depreciation

3. Which cost flow method is used to recognize inventory

4. Which research and developments costs are capitalized and which are expensed.

How to report a change in accounting policy if the report is voluntary:

1. Retrospectively
2. Retroactively

PAS 8 paragraph 10 provides that in the absence of an accounting standard that specifically
applies to the transaction or event, management shall use judgement in selecting and
applying an accounting policy that results in information that is relevant to the economic
decision-making needs of users and faithfully represented.

Accounting Estimate:

Accounting estimate is an approximation of the amount to be debited or credited on items for

which no precise means of measurement are available. They are based on specialized
knowledge and judgment derived from experience and training Examples of accounting
estimates include: Useful life of non-current
assets.

Prior Period Errors:

Prior period errors are omissions from, and misstatements in, an entity's financial statements for
one or more prior periods arising from a failure to use, or misuse of, reliable information that
was available and could reasonably be expected to have been obtained and taken into account in
preparing those statements.

PAS 10 Events After the Reporting Period

PAS 10, paragraph 3 defines events after the reporting period, as those events, whether
favorable or unfavorable, that occur between the end of the reporting period and the date on
which the financial statements are authorized for issue.

Events after the Reporting Period are also known as Subsequent Events.

Types of Events After the Reporting Period:

1. Adjusting Events
2. Non-Adjusting Events
Adjusting events are those providing evidence of conditions existing at the end of the reporting
period, whereas non-adjusting events are indicative of conditions arising after the reporting
period (the latter being disclosed where material). https://www.iasplus.com/

============================================================

Generalization:

The week’s lesson covers PAS 8 and PAS 10. PAS 8 covers changes in accounting policies,
estimates and errors. An example of change in accounting estimate is depreciation.

Events after the end of the accounting period are presented to the users of the financial
statements, if it will affect their economic-decisions.

Assignment:

Advance reading on Property, Plant and Equipment and Government Grants.

Activity:

EXERCISES: Matching accounting changes to situations:

The four types of accounting changes including error correction are

a. Change in accounting principle.

b. Change in accounting estimate.
c. Change in reporting entity
d. Error correction

Instructions. Following is a series of situations. You are to enter a code letter to the left to
indicate the type of change

C. 1.Change from presenting nonconsolidated to consolidated financial

statements.

D. 2.Change due to charging a new asset directly to an expense account

B. 3.Change from expensing to capitalizing certain costs due to a change in periods

benefited

A. 4.Change from FIFO to LIFO inventory procedures

D. 5.Change due to failure to recognize an accrued uncollected revenue

B. 6.Change in amortization period for an intangible asset

C. 7.Changing the companies included in combined financial statements

B. 8.Change in the loss rate on warranty costs

D. 9.Change due to failure to recognize and accrue income

B. 10.Change in residual value of a depreciable plant asset

MODULE 7
 LESSON 7

Topic : Philippine Accounting Standards

PAS 20 Government Grant
Government Assistance

LEARNING OBJECTIVES:
At the end of this lesson, you should be able to:

1. To distinguish government grant from government assistance.

2. To value the different government grants

3. To know the proper accounting treatment of government grants.

PRE-ASSESSMENT:
Direction. Read the instruction carefully.

1. Which of the following terms are defined by this statement: “Action by government
designed to provide an economic benefit specific to an entity or range of entities
qualifying under certain criteria”?

a. Grants related to assets

b. Government assistance
c. Government grants
d. Forgivable loans

2. Why can the receipt of government assistance by an entity be significant for the preparation
of the financial statements?

a. To find an appropriate method of accounting for the transfer of resources

b. To give an indication of the extent to which the entity has benefited from such
assistance
c. To identify the conditions giving rise to the period over which the grant will be earned
in order to determine costs and expenses
d. A and B
e. All of the above

3. Receipt of a grant provides of itself conclusive evidence that the conditions attaching to
the grant have been or will be fulfilled.

a. True
b. False

4. A forgivable loan from government is treated as a when there is

reasonable assurance that the entity will meet the terms for forgiveness of the loan.

a. government assistance
b. government grant
c. grant related to asset
d. government loan at a below-market rate of interest

LESSON PRESENTATION:

GOVERNMENT GRANTS/GOVERNMENT ASSISTANCE

Government grants are transfers of resources to an entity by government in return for past or
future compliance with certain conditions relating to the operating activities of the entity.

Measurement of Government Grants

If government grant is in the form of cash, it will be measured at the amount of cash received or
receivable. If the government grant is in the form of non-monetary asset such as free of cost land,
license or other non-monetary resources, it will be measured either at fair value of asset or
nominal cost of such asset.

Recognition of Government Grants *

Government grant shall be recognized when there is reasonable assurance that:

a. The entity will comply with the conditions attached to the grant;
b. The grant will be received.

Government grant shall not be recognized on a cash basis as this is not consistent with generally
accepted accounting practice.

Classification of government grants: *

a. Grant related to asset

This is a government grant whose primary condition is that an entity qualifying

for the grant shall purchase, construct or acquire long term asset
b. Grant related to income

By residual definition, this is government grant other than grant related to asset.

Accounting for Government Grants

IAS 20 Accounting for Government Grants and Disclosure of Government

Assistance outlines how to account for government grants and other assistance.
Government grants are recognized in profit or loss on a systematic basis over the periods
in which the entity recognizes expenses for the related costs for which the grants are
intended to compensate, which in the case of grants related to assets requires setting up the
grant as deferred income or deducting it from the carrying amount of the asset.

Illustration 1 *

An entity received a grant of P 15,000,000 from the national government for the purpose
of defraying safety and environmental expenses over a period of three years.

The safety and environmental expenses will be incurred by the entity as follows:

First year P 2,000,000

Second year 3,000,000
Third year 5,000,000
P10,000,000
==========
Grant in recognition of specific expenses shall be recognized as income over the period of
related expense.

Accordingly, the grant of P15,000,000 is allocated as income over three years in proportion to
the cost incurred.

Journal Entries – First Year

Cash 15,000,000
Deferred Grant Income 15,000,000

Deferred Grant Income 3,000,000

Grant Income 3,000,000

Environmental Expense 2,000,000

Cash 2,000,000
 First year (2/10 x 15,000,000) 3,000,000
Second year (3/10 x 15,000,000) 4,500,000
Third year (5/10 x 15,000,000) 7,500,000
15,000,000
========
Illustration 2 *

An entity received a grant of P 50,000,000 from the Australian government for the acquisition
of a chemical facility with an estimated cost of Php 80,000,000 and a useful life of five years.

Grant related to depreciable assets shall be recognized as income over the period and in
proportion to the depreciation of the related asset.

Accordingly, the grant of P 50,000,000 shall be allocated as income over five years depending on the
method of depreciation.

Straight line method is used.

Journal Entries – First year

1. Cash 50,000,000
Deferred Grant Income 50,000,000

2. Building 80,000,000
80,000,000
Cash

3. Depreciation 16,000,000
16,000,000
Accumulated Depreciation

(80,000,000/5)

4. Deferred Grant Income 10,000,000

10,000,000
Grant Income

(50,000,000/ 5)

Illustration 3 *

An entity is given a large tract of land in Mindanao by the national government with the condition
that a refinery will be built on that site.

The fair market value of the land is P 60,000,000.

The cost of the refinery is estimated to be P 100,000,000 and the useful life is 20 years.

Grants relating to non-depreciable assets requiring fulfilment of certain conditions

shall be recognized as income over the periods which bear the cost of meeting the
conditions.

Accordingly, the grant of P 60,000,000 is allocated over 20 years. Journal Entries in

the first year:

1. Land 60,000,000
Deferred Grant Income 60,000,000

2. Refinery 100,000,000
100,000,000
Cash

3. Depreciation 5,000,000
5,000,000
Accumulated Depreciation
 (100,000,000/20)

4. Deferred Grant Income Grant 3,000,000

3,000,000
Income

(60,000,000 /20)

Illustration 4 *

An entity received from the USA government a grant of P 50,000,000 to compensate for the massive
losses incurred because of a recent earthquake.

A government grant that becomes receivable as compensation for expenses or losses

already incurred or for the purpose of giving immediate financial support to the entity with
no further related cost shall be recognized as income of the period in which it becomes
receivable.

Accordingly, the grant of P 50,000,000 is recognized as income immediately.

Cash 50,000,000
Grant Income 50,000,000

Presentation of Government Grant *

1. Government grant related to asset shall be presented in the Statement of Financial

Position in either two ways:

a. By setting the grant as deferred income.

b. By deducting the grant in arriving at the carrying amount of the asset.

2. Government Grant related to income is presented as follows:

a. The grant is presented in the income statement, either separately or under the general
heading, “Other Income. “

b. Alternatively, the grant is deducted from the related expense.

Illustration *

At the beginning of the current year, an entity purchased an equipment for an received a
government grant of P500,000 with respect to this asset.

The equipment is to be depreciated on a straight-line basis over five years. The estimated residual
value of the equipment is P 200,000.

Deferred Income Approach:

1. To record the acquisition of the equipment.

Equipment 5,000,000
Cash 5,000,000

2. To record the government grant as deferred income

Cash 500,000
Deferred Grant Income 500,000

3. To record annual depreciation.

 Depreciation 960,000
Accumulated Depreciation 960,000

Cost of Equipment 5,000,000

Residual Value 200,000
Depreciable amount 4,800,000
========

Annual Depreciation ( 4,800,000/5 years ) 960,000

========
4. To recognize the income from the government grant for the current year.

Deferred Grant Income 100,000

Grant Income 100,000

(500,000/ 5 years)

Deduction from Asset Approach *

1. To record the acquisition of the equipment:

Equipment 5,000,000
Cash 5,000,000

2. To record the government grant as a deduction from the cost of the asset: Cash

500,000
Equipment 500,000

3. To record the annual depreciation:

Depreciation 860,000
Accumulated Depreciation 860,000

Acquisition Cost 5,000,000

Government Grant 500,000

Net Cost 4,500,000
Residual Value 200,000
Depreciable Amount 4,300,000
========

Annual Depreciation 860,000

========

Government Assistance:

Government assistance is as action by government designed to provide an

economic benefit specific to an entity or range of entities qualifying under certain criteria.

*The essence of the government assistance is that no value can reasonably be placed upon it.
Examples of government assistance are:

a. Free technical or marketing advice

b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the entity’s
sales.
*Government assistance does not include the following indirect benefits or benefits not specific
to an entity:

a. Infrastructure in development areas such as improvement to the general transport

and communication network.
b. Imposition of trading constraints on competitors
c. Improved facilities such as irrigation for the benefit of an entire local
community.

*Disclosure About Government Grant

a. The accounting policy adopted for government grant, including the method of
presentation adopted in the financial statements.

b. The nature and extent of government grant recognized in the financial statements
and an indication of other forms of government assistance from which the entity
has directly benefited.

c. Unfulfilled conditions and other contingencies attaching to the government assistance

that has been recognized.

*It is not required to disclose the name of the government agency that gave the grant
along with the date of sanction of the grant by such government agency and the date
when cash was received in case of monetary grant.

Generalization:

Lesson 7 introduces PAS 20. It shows how government grants are granted and presented in the
financial statements. It also covers government assistance and how they differ with government
grants, and the presentation in the financial statements.

(*Asterisk – Lifted from the book of Atty. Conrado Valix, Conceptual Framework and Accounting
Standards, 2019 edition)

MODULE 8
LESSON 8

Topics : 1. Borrowing Costs

2. Related Party Disclosures

LEARNING OBJECTIVES:

At the end of this lesson, you should be able to:

1. To know what borrowing costs are and the accounting methods for them.

2. To appreciate the disclosures about related party transactions

3. To be able to define related and unrelated parties.

PRE ASSESMENT:

1. Is interest a borrowing cost? YES

2. Do you capitalize borrowing costs? YES

3. Are bridges qualifying assets? YES

 4. Is an aunt or uncle a related party? YES

5. Is a director of that corporation a related party? YES

LESSON PRESENTATION:

Borrowing costs are finance charges that are directly attributable to the acquisition,
construction or production of a qualifying asset that forms part of the cost of that asset,
i.e., such costs are capitalized.
All other borrowing costs are recognized as an expense.

Borrowing costs is interest and other costs incurred by an entity in connection with the
borrowing of funds

Examples may include:

(a) interest expense calculated using the effective interest rate method as described in
IAS 39 Financial Instruments: Recognition and Measurement

(b) finance charges in respect of finance leases recognized in accordance with IAS 17
Leases (IFRS 16 Leases if early adopted or when it becomes effective); and

(c) exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs

A qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.

Examples may include:

(a) inventories (d) intangible assets

(b) manufacturing plants (e) investment property

(c) power generation (f) bearer plants

facilities

*Excluded from Capitalization:

PAS 23 does not require capitalization of borrowing costs relating to the following:

a. Asset measured at fair market value, such as biological asset

b. Inventory that is manufactured in large quantity on a repetitive such as

maturing whisky even as it takes a substantial period of time to get ready for
sale.

c. Asset that is ready for the intended use or sale when acquired.

Accounting for Borrowing Cost

IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the
acquisition, construction or production of a 'qualifying asset' (one that necessarily takes
a substantial period of time to get ready for its intended use or sale) are included in the
cost of the asset IAS 23

*Capitalization of borrowing cost is mandatory for qualifying assets

*All other borrowing costs shall be expense when incurred.

Asset financed by specific borrowing

Costs eligible for capitalization as the actual borrowing costs incurred on that borrowing
during the period, less any investment income on the temporary investment of those
borrowings (IAS 23R paragraph 12).

*Illustration

At the beginning of the current year, an entity obtained a loan of P4,000,000 at an

interest rate of 10% specifically to finance the construction of a new building. The
building was completed at the current year-end.

Availments from the loan were made quarterly in equal amounts. Total borrowing cost
incurred amounted to P250,000 for the current year.

Prior to their disbursements, the proceeds of the loan were temporarily invested and
earned interest income of P40,000.

Actual borrowing cost P 250,000

Interest income from investment of proceeds 40,000
Capitalizable borrowing cost P 210,000
========

*Asset financed by general borrowing

PAS 23, paragraph 14 provides that if the funds are borrowed generally and used for
acquiring a qualifying asset, the amount of capitalizable borrowing costs equal to the
average carrying amount of the asset during the period multiplied by a capitalization rate
or average interest rate.

However, the capitalizable borrowing cost shall not exceed the actual interest incurred.

The capitalization rate or average interest rate is equal to the total annual borrowing cost
divided by the total general borrowings outstanding during the period.

No specific guidance is provided for general borrowing with respect to investment

income.

Accordingly, any investment income from general borrowing is not deducted from the
capitalizable borrowing cost.

*Illustration

An entity has the following borrowings on January 1 of the current year. The borrowings
were made for general purposes and the proceeds were partly used to finance the
construction of a new building.

Principal Borrowing Costs

10% bank loan 3,000,000 300,000

12% short term note 1,500,000 180,000
8% long-term loan 3,500,000 280,000
8,000,000 760,000
======== =======

The construction of the building was started on January 1 and was completed on
December 31 of the current year.

January 1 400,000
March 31 1,000,000
June 30 1,200,000
September 30 1,000,000
 December 31 400,000
Total expenditures on the building 4,000,000
=======

*Average carrying amount of the building

(a) (b) (axb)

Date Expenditures Months Outstanding Amount

January 1 400,000 12 4,800,000

March 31 1,000,000 9 9,000,000
June 30 1,200,000 6 7,200,000
September 30 1,000,000 3 3,000,000
December 31 400,000 0 _________
24,000,000
=========
Average carrying amount ( 24,000,000 / 12 ) 2,000,000
========
*Another Approach
(a) (b) (axb)
Date Expenditures Fraction Average

January 1 400,000 12/12 400,00

March 31 1,000,000 9/12 750,00
June 30 1,200,000 6/12 600,000
September 30 1,000,000 3/12 250,000
December 31 400,000 0 _________
2,000,000
========
The capitalization rate is computed by dividing the total annual borrowing cost by the
total general borrowings.

P 760,000 divided by P 8,000,000 equals 9.5%.

The amount of capitalizable borrowing cost is the average carrying amount of the
building multiplied by the capitalization rate.

Thus, P 2,000,000 x 9.5% equals P 190,000.

The total capitazable borrowing cost shall not exceed the actual borrowing cost.

The amount of P 190,000 is the proper capitalizable borrowing cost because it is less
than the actual borrowing cost of P 760,000.

The excess of P 760,000 over P 190,000 or P 570,000 is charged to the interest

expense.

*Asset financed both by specific and general borrowing

At the beginning of the current year, an entity borrowed P 1,500,000 at an interest of

10% specifically for the construction of a new building. The actual borrowing cost on the
loan is P 150,000.

The entity had also outstanding during the year, a 5-year, 8% general borrowing of P
7,000,000.

The construction of the building started on January 1 and was completed on December
31 of the current year
January 1 500,000
April 1 1,000,000
May 1 1,500,000
September 1 1,500,000
December 31 500,000
Total Cost 5,000,000
========
 (a) (b) (axb)
Date Expenditures Fraction Average
January 1 500,000 12/12 500,000
April 1 1,000,000 9/12 750,000
May 1 1,500,000 8/12 1,000,000
September 1 1,500,000 4/12 500,000
December 31 500,000 ________
Average Expenditures 2,750,000
========
Average expenditures 2,750,000
Specific borrowing 1,500,000
Applicable to general borrowing 1,250,000
=======
Capitalizable Interest

Specific borrowing ( 10% x 1,500,000 ) 150,000

General borrowing ( 8% x 1,250,000 ) 100,000
Total capitalizable interest 250,000
=======
*Commencement of capitalization

Commencement of the borrowing cost as part of the qualifying asset shall start when
the following three conditions are present :

a. When the entity incurs expenditures for the asset

b. When the entity incurs borrowing cost
c. When the entity undertakes activities that are necessary to prepare the asset for the
intended use or sale

*Activities necessary to prepare

Activities necessary to prepare the asset for intended use or sale is not only the physical
construction of the asset but include technical and administrative work prior to the
commencement of physical construction, such as drawing up plans and obtaining permit
for the building.

Merely holding assets for use or development without any associated development
activity does not qualify for capitalization.

Example, borrowing cost incurred while land is under development are capitalized during
the period in which development activities are being undertaken.

Borrowing cost incurred, while land acquired for building purposes is held without any
associated development activity do not qualify for capitalization.

*Suspension of capitalization

It shall be suspended during extended periods in which active development is

interrupted.

However, capitalization of borrowing cost is not normally suspended during a period

when substantial technical and administrative work is being carried out.

Capitalization of borrowing cost is not suspended when a temporary delay is a

necessary part of the process of getting the asset ready for its intended use or sale.

*Cessation of capitalization

Capitalization of borrowing cost shall cease when substantially all the activities
necessary to prepare the qualifying asset for the intended use or sale are complete.

An asset is normally ready for the intended use or sale when the physical
construction of the asset is complete even though routine administrative work might
still continue.
 *Disclosure required related to borrowing cost:

a. The amount of borrowing cost during the period.

b. The capitalization rate used to determine the amount of borrowing cost eligible for
capitalization.

Segregation of assets that are qualifying assets from other assets in the
statement of financial position is not required to be disclosed.

Related Party

A related party is a person or an entity that is related to the reporting entity: A

person or a close member of that person's family is related to a reporting entity if
that person has control, joint control, or significant influence over the entity or is a
member of its key management personnel.

Who are the related parties of a company?

A related party, with reference to a company means:

a. Director or his/her relative;

b. Key managerial personnel or his/her relative;
c. A firm, in which a Director, Manager or his/her relative is a Partner;
d. Private limited company in which a Director or Manager or his/her relative is a
member or Director.

*Control is the power over the investee or the power to govern the financial and
operating policies of the entity so as to obtain benefits.

Control is ownership directly or indirectly thru subsidiaries or more than half of

the voting power of the entity.

*Significant influence is the power to participate in the financial and operating

policy decision of an entity so as to obtain benefits. Significant influence maybe
gained by share ownership of 20% or more.

If an investor holds directly or indirectly thru subsidiaries 20% or more of the

voting power of the investee, it is presumed that the investor has significant
influence, unless it can be clearly demonstrated that this is not the case.

Generalization:

Lesson 8 pertains to PAS 23, Borrowing Cost and PAS 24 Related Party
Disclosures.

It shows when borrowing cost is added to qualifying assets and when it is not. It
also shows the accounting for borrowing cost.

This lesson also introduces PAS 24, Related Party Disclosures and when they
are called related parties. Also, as to what are the characteristics of related party
transactions.
MODULE 10
LESSON 10

Topics : Philippine Accounting Standards

PAS 28 Investment In Associate

LEARNING OBJECTIVES
At the end of this lesson, you should be able to:

1. To identify what an associate is.

2. To understand the meaning of significant influence.

3. The ability to identify the circumstances when an investment in

associate is not accounted for under the equity method.

PRE-ASSESSMENT:

1. If an investor is holding 20% of the voting power, is there an instance in

which he can he control the policy making decisions? Explain.

2. What are cumulative preference shares? How do you compute its

dividends?

3. What are non-cumulative preference shares? How does its dividend

compare with cumulative preference shares?

4. What is an associate?

5. What is significant influence?

LESSON PRESENTATION: PAS 28

Definition of Associate: an entity which the investor has significant influence.

Significant Influence: power to participate in the financial and operating policy

decisions of the associate but not control or joint control over these policies.

The assessment of significant influence

Under PAS 28, How can significant influence be evidenced?

The main indicator of significant influence is holding (directly or indirectly) more

than 20% of the voting power of the investee.

BUT!

It’s not the rule of thumb and often, the truth is different.

Sometimes, when an investor holds more than 20% of the voting power (but less than 50),
it can still control the investee.

Here, CarProd does not own the majority (over 50%), but it’s still more than 20% – that
would indicate significant influence.

But, as other investors own max. 1% each, the probability of outvoting CarProd in major
decisions is very low, so CarProd may in fact exercise control over TyreCorp, rather than
significant influence. Of course, you would need to examine it further.
The other ways of evidencing significant influence are as follows:

 Investor has a representation on the board of directors (or other equivalent

governing body) of the investee.

 Investor participates in policy-making processes (including

 dividend decisions).

 There are material transactions between the investor and its investee.

 There’s interchange of managerial personnel.

 Provision of essential technical information.

When you assess the presence of significant influence, you should not forget to examine
potential voting rights (in form of some options to buy shares, or convertible debt
instruments, etc).

https://www.cpdbox.com/ias-28-investments-associates-joint-ventures/

Measurement of Investment in Associate:

The investment in associate is measured using the equity method of

accounting.

The equity method is based on the economic relationship between the investor and the
investee.

The investor and the investee are viewed as a single economic unit. The investor and the
investee are one and the same.

The equity method is applicable when the investor has a significant influence over the
investee.

Accounting procedures – equity method

a. The investment is initially recognized at cost.

b. The carrying amount is increased by the investor’s share of the profit of the
investee and decreased by the investor’s share of the loss of the investee.

The investor’s share of the profit or loss of the investee is recognized as investment
income.

c. Dividends received from an equity investee reduce the carrying amount of the
investment.

d. Note that the investment should be in ordinary shares.

If the investment is in preference shares, the equity method is not appropriate
regardless of the percentage because the preference share is a non-voting equity.

e. Technically, if the investor has significant influence over the investee, the investee is
said to be an associate.

Accordingly, under the equity method, the investment in ordinary shares should be
appropriately described as investment in associate.

f. The investment in associate accounted for using the equity method, shall be
reported as non-current asset.

Illustration – Equity Method

1. On January 1, 2019, an investor purchased 20,000 shares of the outstanding

ordinary shares of another entity at P200 per share.

The investment represents a 20% equity interest and the investor has a significant
influence over the investee.

Investment in Associate 4,000,000

 Cash 4,000,000

2. The investee reported a net income of P5,000,000 for 2019.

The investor recognized a share of the net income of the investee equal to 20% of
P5,000,000 or P1,000,000.

Investment in Associate 1,000,000

Investment Income 1,000,000

3. Received a 25% share dividend from the investee on December 31, 2019.

Memorandum Entry – Received 5,000 ordinary shares as 25% share dividend on

20,000 original shares. Shares now held, 25,000 shares.

Note that the 20% equity interest is not affected by the share dividend. Equity
interest remains the same.

4. Investee reported a net loss of P1,000,000 for 2020.

The investor recognized a share in the net loss of the investee equal to 20% of P1,000,000 or
P200,000.

Loss on Investment 200,000

Investment in Associate 200,000

5. The investee declared and paid a cash dividend of P2,500,000on ordinary

shares on December 31, 2020.

Cash 500,000
Investment in Associate 500,000

Under the equity method, cash dividend is not an income but a

reduction in investment.

EXCESS OF COST OVER CARRYING AMOUNT

CFAS by Valix, 2019 edition

An accounting problem arises if the investor pays more or less for an investment than the
carrying amount of the underlying net assets.

For example, if the earning potential of the investee is abnormally high, the current value
of the investee’s net assets is frequently higher than their carrying amount.

If the investor pays more than the carrying amount of the net assets acquired, the difference
is commonly known as “excess of cost over carrying amount” and maybe attributed to the
following:

a) Undervaluation of the investee’s assets, such as building, land and inventory.

b) Goodwill

If the assets of the investee are fairly valued, the excess of the cost over carrying amount of
the underlying net assets is attributed to goodwill.

If the excess is attributable to the undervaluation of depreciable asset, it is

amortized over the remaining life of the depreciable asset.

If the excess is attributable to the undervaluation of land, it is not amortized because land
is non depreciable.

The amount is expensed when the land is sold.

If the excess is attributable to inventory, the amount is expenses when the inventory is sold.

If the excess is attributable to goodwill, it is included in the carrying amount of the

investment and not amortized.

However, the entire investment in associate, including the goodwill is tested for
impairment at the end of each reporting period.

ILLUSTRATION
CFAS by Valix, 2019 edition

At the beginning of the current year, an investor purchased 20% of the outstanding
Ordinary shares of an investee for P 5,000,000.

The net assets of the investee on the date of the acquisition are fairly valued. Any excess is
attributable to goodwill.

The carrying amount of the investee’s net assets was P20,000,000, equal to fair value.
The investor paid P1,000,000 in excess of the carrying amount of the net assets.

Acquisition cost P5,000,000

Carrying amount (20% X P20,000,000 4,000,000
Excess of cost over carrying amount (Goodwill) P1,000,000
=========
Excess of Fair Value over Cost
CFAS by Valix, 2019 edition

PAS 28, paragraph 32 provides that any excess of the investor’s share of the net fair value
of the associate’s identifiable assets and liabilities over the cost of the investment is
included as income in the determination of the investor’s share of the associate’s profit or
loss in the period in which the investment is acquired.

ILLUSTRATION

At the beginning of the current year, an investor purchased 40% of the ordinary shares
outstanding of an investee for P10,000,000 when the net assets of the investee amounted to
P30,000,000.

At acquisition date, the carrying amounts of the identifiable assets and liabilities of the
investee were equal to fair value.

Acquisition Cost P10,000,000

Fair value of net assets ( 40% X P 30,000,000 ) 12,000,000 Excess
fair value P 2,000,000
==========

The excess fair value is included in the investment income of the investee on the date of
the acquisition.

Investment in Associate 2,000,000

Investment Income 2,000,000
Impairment Loss

If there is an indication that an investment in associate maybe impaired, an impairment

loss shall be recognized whenever the carrying amount of the investment in associate
exceeds recoverable amount.

The recoverable amount is measured as the higher between fair value less cost of
disposal and value in use.

Fair value is the price that would be received to sell an asset in an orderly transaction
between market participants at the measurement date.
Value in use is the present value of the estimated future cash flows expected to arise
from the continuing use of an asset and from the ultimate disposal.

Since goodwill is not separately recognized from the investment amount, the impairment
loss recognized is applied to the investment as a whole.

The recoverable amount in an investment in associates assessed for each individual

associate.

INVESTEE WITH CUMULATIVE PREFERENCE SHARES

When an investee has outstanding cumulative reference shares, the investee shall compute
its share of earnings or losses after deducting the preference dividends, whether or not such
dividend is declared.

INVESTEE WITH NON-CUMULATIVE PREFERENCE SHARES

When the associate has outstanding non-cumulative preference shares, the investor shall
compute its share of earnings after deducting the preference dividends only when declared.

DISCONTINUANCE OF EQUITY METHOD

PAS 28 paragraph 22 provides that an investor shall discontinue the use of the equity
method from the date that it ceases to have significant influence over its associate.

GENERALIZATION:

Lesson 10, Module 9 is about PAS 28, Investment in Associate and shows the meaning of
significant influence and how it is interpreted.

MODULE 11
LESSON 11

Topics : PAS 34 INTERIM FINANCIAL STATEMENTS

LESSON PRESENTATION;

What is the interim financial statement?

An interim statement is a financial report covering a period of less than one year. Interim
statements are used to convey the performance of a company before the end of normal full-year
financial reporting cycles. Unlike
annual statements, interim statements do not have to be audited
What Is an Interim Statement? - Investopedia
www.investopedia.com › terms › interim-statement

Is it required to prepare interim financial reports? Interim

Financial Reporting

IFRS does not require the preparation of interim financial statements. Paragraph 36 in IAS
1 Presentation of Financial Statements only requires that: 'An entity shall present a complete set
of financial (including comparative information at least annually.

Interim IFRS Illustrative Financial Statements -

BDO Global www.bdo.global › IFRS › Model-IFRS-
statements › Int...

What do interim financial statements include?

Interim financial statements contain the same documents as will be found

 in annual financial statements - that is, the income statement, balance sheet, and
statement of cash flows. Some accompanying disclosures are not required in interim
financial statements, or can be presented in a more summarized format
Interim inancial statements definition —
AccountingTools www.accountingtools.com › articles
› what-are-interim-fi...

Does IFRS require quarterly reporting?

A company is not required to prepare interim financial statements in order for its annual financial
statements to comply with IFRS Standards. However, local laws and regulations may require a
company to prepare interim financial statements and also specify the frequency – e.g., quarterly or
half-yearly.

Philippine Jurisdiction
(CFAS by Atty Valix)

The Securities and Exchange Commission and Philippine Stock Exchange require entities covered
by the reportorial requirement of the Revised Securities Act to file quarterly interim financial
reports within 45 days after the end of each of the first three quarters.

The SEC also requires entities covered by the Rules on Commercial Papers and Financing Act to file
quarterly financial reports with 45 days after each quarter- end.

Entities that provide interim financial reports in conformity with Philippine Financial Reporting
Standards shall conform to the recognition, measurement and disclosure requirements set out in the
standard.

Inventories
CFAS by Atty Valix

Paragraph 25 of Appendix B of PAS 34 provides that the inventories are measured for interim
financial reporting by the same principal as at financial year-end.

This simply means that the inventories shall be measured at the lower of cost or net realizable value.

The cost of the inventory maybe estimated using the gross profit method or retail inventory method.

MODULE 12
LESSON 12

Topics : PAS 36 IMPAIRMENT OF ASSETS

LEARNING OBJECTIVES:

1. Know when an asset is impaired

2. Appreciates the process of determining the asset impairment

3. Accurately know how to compute the impaired asset amount.

PRE-ASSESSMENT:

1. How is an asset impaired?

2. Can an impaired asset still be recovered?
3. What are those that lead to the impairment of assets?
LESSON PRESENTATION:

What is impairment?

An Impairment is a fall in the market value of an asset so that the recoverable amount is now less
than the carrying amount in the statement of financial position.

What is Carrying of impairment?

It is the basic principle underlying impairment of asset is relatively straightforward.

There is an established principle that an asset shall not be carried at above the recoverable
amount.

An entity shall write down the carrying amount of an asset to the recoverable amount if the carrying
amount is not recoverable in full.

If the carrying amount is higher than the recoverable amount, the asset is judged to have suffered and
impairment loss.

The asset shall therefore be reduced by the amount of the impairment loss.
Accounting for impairment

In this regard, there are three main accounting issues to consider, namely;

a. Indication of possible impairment

b. Measurement of the recoverable amount
c. Recognition of impairment loss

Indication of impairment

An entity shall assess at each reporting date weather there is any indication that an asset may be
impaired.

If any such indication exists the entity shall estimate the recoverable amount of the asset.

However, irrespective of whether there is any indication of impairment, an entity shall test an
intangible asset with an indefinite useful life or intangible asset not yet available for use for
impairment annually by comparing the carrying amount with the recoverable amount.

The events and changes in circumstances that lead to an impairment of assets may be classified as
external and internal sources of information.

External sources

a. Significant decrease or decline in the market value of the asset as a result of passage of time
or normal use or a new competitor entering the market.

b. Significant change in the technological, market, legal, or economic environment of the

business in which the asset is employed. This could be as simple as a change in customer
taste.

c. An increase in the interest rate or market rate of return on investment which will likely affect
the discount rate used in calculating the value in use.

d. The carrying amount of net assets of the entity is more than the “market capitalization.”

In other words, the carrying amount exceeds the fair value of the net assets.

The market capitalization simply means the fair value of the net assets of the entity.
Internal sources

a. Evidence of obsolescence or physical damage of an asset.

b. Significant change in the manner or extent in which the asset is used with an adverse
effect on the entity. For example, the asset is part of restructuring or held for sale or the
asset is idle.
c. Evidence that the economic performance of an asset will be worse than expected.
For example, undiscounted net cash flows from the asset are significantly worse those
budgeted.

The external and internal sources of information are not exhaustive. An entity may identify
other indications that an asset may be impaired.

Measurement of recoverable amount

After establishing evidence that an asset has been impaired, the next step is to determine the recoverable
amount preparatory to the recognition of an impairment loss.

The recoverable amount of an asset is the fair value less cost of disposal or value in use,
whichever is higher.

Fair value less cost of disposal

Fair value is the price that would be received to sell an asset in an orderly transaction between
market participants at the measurement date.

Cost of disposal is an incremental cost directly attribute to the disposal of an asset, excluding
finance cost and income tax expense.

Examples of cost of disposal include legal cost, stamp duty and similar transaction tax, cost of
removing the asset, and direct cost in bringing the asset into condition for sale.

In simple terms, fair value less cost of disposal is equal to the exit price or selling price of an asset
minus cost of disposal.

Value in use

Value in use is measured as the present value or discounted value of future net cash flows
expected to be derived from and asset.

The cash flows are pretax cash flows and pretax discount rate is applied in determining the present
value.
Calculation of value in use

Calculating a value in use calls for estimates of future cash flows and there is the possibility
that an entity might come up with “overoptimistic” estimates of cash flows.

a. Cash flows projections shall be based on reasonable and supportable

assumptions.
b. Cash flows projections shall be based on the most recent budgets on financial forecasts,
usually up to a maximum period of 5 years, unless a longer period can be justified.
c. The discount rate used in estimating future cash flows is the current pretax rate.

Composition of estimates of future cash flows

Estimates of future cash flows include:

a. Projections of cash inflows from the continuing use of the asset.

b. Projections of cash outflows necessarily incurred to generate the cash flows inflows
 from the continuing use of the asset.
c. Net cash flows received or paid on the disposal of the asset at the end of its useful life in an
arm’s length transaction.

Estimates of future cash flows do not include:

a. Future cash flows relating to restructuring to which the entity is not yet committed.
b. Future costs of improving or enhancing the asset’s performance.
c. Cash inflows or outflows from financing activities.
d. Income tax receipts or payments.

Recognition of impairment loss

If the recoverable amount of an asset is less that the carrying amount, and impairment loss has
occurred.

The impairment loss shall be recognized immediately by reducing the asset’s carrying amount to its
recoverable amount.

The impairment loss is recognized in profit or loss and presented separately in the income statement.

Illustration

At year-end, and entity has a machinery with the following cost and accumulated
depreciations:

Machinery 5,000,000
Accumulated depreciation (5-year life, 2 years expired) 2,000,000
Carrying amount 3,000,000

Due to obsolescence and physical damage, the machinery is found to be impaired.

The entity has determined the following information with respect to the machinery at year- end:

Fair value less cost of disposal 2,400,000

Value in use 2,400,000

Journal entry

Impairment loss 600,000

600,000
Accumulated depreciation

Carrying Amount 3,000,000

Fair value less cost of disposal (recoverable amount) 2,400,000
Impairment loss 600,000

Note that the fair value less cost of disposal is considered the recoverable amount and used in
computing the impairment loss because it is higher than the value in use.

After the recognition of an impairment loss, the depreciation charge for the asset shall be adjusted in
future periods to allocate the revised carrying amount less residual value on a systematic basis over
the remaining useful life.

Reversal of an impairment loss

PAS 36, paragraph 114, provides that an impairment loss recognized for an asset in prior years shall
be reversed if there has been a change in estimate of the recoverable amount.
 In the other words, if the recoverable amount of an asset that has previously been impaired turns out
to be higher than the current carrying amount, the carrying amount of the asset shall be increased to
new recoverable amount.
However, PAS 36, paragraph 117, provides that the increased carrying amount of an asset due to a
reversal of an impairment loss shall not exceed the carrying amount that would have
been determined, had no impairment loss been recognized for the asset in prior years.

The reversal of the impairment loss shall be recognized immediately in the income statement as
gain on reversal of impairment loss.

But any reversal of an impairment loss on a revalued asset shall be credited to income to the extent
that it reverses a previous revaluation decrease and any excess credited directly to revaluation surplus.

QUIZZES
QUIZ I-1

August 31, 2022

1.It is the concept that financial statements be produced that accurately reflect the condition of a
business. FAITHFUL REPRESENTATION

2. It means a state of limited knowledge where it is impossible or impracticable to describe exactly an

existing state or a future outcome. UNCERTAINTY

3. It is the concept that financial information should be presented so that a reader can easily comprehend
it. UNDERSTABILITY

4. The owner is treated as separate or distinct from the owners. BUSINESS ENTITY CONCEPT

5. Decreases in assets or increases in liabilities that result in decreases in equity, other than those
relating to distributions to equity holders. EXPENSES

6. It is a financial report covering a period of less than one year. INTERIM STATEMENT

7-9 Three accounting elements. (any order) ASSETS, LIABILITIES, EQUITY

10. This principle requires that those costs and expenses incurred in earning a revenue will be reported
in the same period. MATCHING PRINCIPLE
 11-13 Three main financial statements (any order) INCOME STATEMENT, BALANCE SHEET,
STATEMENT OF CASH FLOWS

14. The removal of all or part of a recognized asset or liability from the statement of financial position.
DERECOGNITION

15. It is the quantifying in monetary terms the elements in the financial statements. MEASUREMENT

16. It is the transmitting of information from one person to another, from one organization to another –
or a combination of both – and to the shareholders and other stakeholders of the organization.
COMMUNICATION

17. It is a basic document that sets objectives and the concepts for general purpose financial reporting.
CONCEPTUAL FRAMEWORKS FOR THE FINANCIAL REPORTING

18. It is the adding together of assets, liabilities and equity, income and expenses that have similar or
shared characteristics and are included in the same classification. AGGREGATION

19. The fundamental qualitative characteristics that can influence the decision of the users.
RELEVANCE

20. It is an ingredient of Relevance that refers to the fact that quality financial information can be used
to base predictions, forecasts, and projections on. PREDICTIVE VALUE

QUIZ I-1

September 28, 2022

1. The essential characteristic of an asset include all, except;

a. The asset is the result of past event
b. The asset provides future economic benefit
c. The cost of the asset can be measured reliably
d. The asset is tangible

2. The cost of purchase of inventory does not include

a. purchase price
b. Import duty
c. Freight and handling cost
d. Trade discount and rebate

3. A property developer must classify properties that it holds for sale in the
ordinary course of the business as
a. Inventory
b. Property, Plant and equipment
c. Financial asset
d. Investment property

4. Cash receipts from royalties and commissions are

a. Cash outflow from operating activities
b. Cash inflow from operating activities
c. Cash inflow from investing activities
 d. Cash outflow from financing activities

5. Cash receipts from issuing shares are

a. Cash inflow from investing activities
b. Cash outflow from investing activities
c. Cash inflow from financing activities
d. Cash outflow from financing activities

6. Which of the following is accounted for as a change in accounting policy?

a. A change in the estimated useful life of PPE
b. A change from cash basis to accrual basis of accounting
c. A change from expensing immaterial expenditures to deferring and
amortizing them when material
d. A change in inventory valuation from FIFO to average method.

7. When financial statements for a single year are being presented, a prior
period error should
a. Be shown as an adjustment of the balance of retained earnings at the
start of the current year
b. Affect net income of the current year
c. Be shown in the statement of changes in equity
d. Be included in other comprehensive income

8. Financial statements are authorized for issue

a. When the BOD reviews and authorizes the financial statements for
issue
b. When the shareholders approve the financial statements at their
annual meeting
c. When the financial statements are filed with the regulatory agency
d. When a supervisory board made solely of non executives approves the
financial statements

9. Which event after the end of the reporting period would generally require
disclosure?
a. Retirement of key management personnel
b Settlement of litigation when the event that gave rise to the litigation
occurred in a prior period.
c. Strike of employees
d. Issue of large amount of ordinary shares

10. Non adjusting events include all except

a. The entity announced the discontinuation of an operation
b. The entity entered into an agreement to purchase the leased
building.
c. Destruction of a major production plant by fire
d. A mistake in the calculation of allowance for uncollectible accounts
receivable

11. This represents the assistance by the government in the form of transfer of
resources to an entity in return for past or future compliance with certain
conditions.
a. Government grant
b. Government assistance
c. Government donation
d. Government aid

12. Government grant in recognition of specific cost is recognized as income

a. Over the same period as the relevant expense
b. Immediately
c. Over a maximum of 5 years using the straight line method
 d. Over a maximum of 5 years using the sum of year’s digit method

13. It is an action by a government designed to provide an economic benefit

specific to an entity and for which the government cannot reasonably place a
value.
a. Government grant
b. Government assistance
c. Government takeover
d. Government benefit

14. Which statement is true about depreciation?

a. It is not a matter of valuation but of cost allocation
b. It is part of matching expenses with revenue
c. It retains funds by reducing income tax and dividend.
d. All the statements are true

15. The period of time during which interest must be capitalized ends when:
a. The asset is substantially complete and ready for the intended use.
b. No further interest is being incurred
c. The asset is fully abandoned, sold or fully depreciated
d. The activities that are necessary to get the asset ready for the
intended use has begun.

16. Which is not a disclosure requirement in relation to borrowing cost:

a. Accounting policy adopted for borrowing cost
b. Amount of borrowing cost capitalized during the period.
c. Segregation of qualifying asset from other asset.

17. When the investor uses the equity method to account for investment in
ordinary shares, the investment account will be increased when investor
recognizes;
a. A proportionate interest in the net income of the investee.
b. A cash dividend received from the investee
c. Periodic amortization of goodwill
d. A share dividend received from the investee

18. It is an entity over which the investor has significant influence

a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund

19. Which statement best describes significant influence?

a. The holding of a significant proportion of the share capital in another
entity.
b. The contractually agreed sharing of control over an economic entity.
c. The power to participate in the financial and operating policy
decisions of an entity
d. The mutual sharing in the risks and benefits of a combined entity.

20. An investor shall discontinue the equity method when

a. The investor ceases to have significant influence over the associate
b. The associate operates under severe long term restrictions
c. The investor cease to have control over the associate
d. The business activities of the investor and associate are dissimilar