De La Salle University Manila

Ramon V. del Rosario College of Business

Department of Accountancy
Advanced Financial Accounting and Reporting Integrating Module

GOVERNMENT ACCOUNTING MANUAL (GAM)

1. Government Accounting Manual is the title of the revised government accounting system for national
government agencies which will be effective starting January 1, 2016.

2. Under Article IX-D Section 2 of the 1987 Constitution of the Republic of the Philippines, Commission on
Audit shall have the exclusive authority, subject to the limitations in this Article, to define the scope of its
audit and examination, establish the techniques and methods required therefore, and promulgate
accounting and auditing rules and regulations, including those for the prevention and disallowance of
irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government
funds and properties. It shall also be responsible to keep the general accounts of the Government and,
for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining
thereto.

3. Objectives of Government Accounting Manual

a. To update standards, policies, guidelines and procedures in accounting for government funds and
property
b. To update coding structure and accounts
c. To update accounting books, registries, records, forms, reports and financial statements.

4. Government Accounting encompasses the processes of analyzing, recording, classifying, summarizing

and communicating all transactions involving the receipt and disposition of government funds and
property, and interpreting the results thereof.

5. Government budget refers to the is the financial plan of a government for a given period, usually for a
fiscal year, which shows what its resources are, and how they will be generated and used over the fiscal
period.

6. Steps in the Government Budgetary Process

a. Budget preparation refers to first step in the government budgetary process wherein the President,
through the assistance of the Department of Budget and Management, shall prepare and submit to
the Congress a budget of expenditures and sources of financing, including receipts from existing and
proposed revenue measures. The President shall submit the budget within 30 days from the opening
of the regular session of the Congress.
b. Budget legislation or authorization refers to the second step in the government budgetary process
which involves the enactment by the Congress of the General Appropriation Act (GAA) based on the
budget submitted by the President which cannot be increased by the Congress. The initiative for the
enactment of the appropriation law shall come from the House of Representatives.
c. Budget execution refers to the third step in the government budgetary process which involves that
implementation of the general appropriation act which includes the release of revenue allotment under
the supervision of Department of Budget and Management.
d. Budget accountability refers to the last step in the government budgetary process which involves
the submission of proper documentary reports by responsible officer, liquidation of expenditures and
audit conducted by Commission on Audit to ensure the public funds are spent in accordance with the
appropriation act.

7. Definition of Terms
a. Appropriation refers to an authorization pursuant to laws or other legislative enactment, hence,
required Congressional action, directing the spending of public funds for a specific purpose, up to
a specified amount under specific conditions.
b. Allotment refers to authorization issued by the Department of Budget and Management (DBM)
to an agency to commit/incur obligation and/or pay out funds within a specified period of time
within the amount specified through General Appropriation Act.
c. Agency Performance Review refers to the process of determining the level of accomplishment
of each agency in terms of outputs, income generated, and actual expenditures incurred in the
production/delivery of goods and services to the public vis-à-vis the targets/budgets for the same
period.
 d. Balance of Payments refers to a summary of the economic transactions of a country with the
rest of the world for a specific period. It serves as an accounting statement on economic dealings
between residents of the country and nonresidents.
e. Budget Balance Derived as the difference between revenues collected and disbursements made
(excluding debt repayments and payments on nonbudgetary accounts) by the national
government during a given year. In the context of government budgeting, when revenues and
disbursements are equal, the budget is balanced. A budget surplus exists when revenues
exceed disbursements. A budget deficit is incurred if revenues are less than disbursements.
f. Obligational Authority refers to document issued to an agency authorizing the agency to incur
obligations or enter into a contract.
g. Subsidy refers to a grant or financial aid, usually by a government body, to some other persons
or institutions for general purposes. When applied to GOCCs, it may also refer to amounts used
to cover operational expenses not supported by corporate revenues or to cover corporate deficits
and losses.
h. Tax Revenues refers to compulsory charges or levies imposed by government on goods,
services, transactions, individuals, entities, and others, arising from the sovereign power of state.
i. Transparency Seal refers to a legal requirement for all government agencies including
Constitutional Offices enjoying fiscal autonomy, SUCs, GOCCs and LGUs to disclose relevant
budget information from approved budgets and targets, to procurement plans and contracts
awarded, among others through their respective websites.
j. Two-Tier Budgeting Approach refers to an approach to strengthen the strategic decision
making process by separating the evaluation of agency proposals, i.e., the first tier covering
review of Forward Estimates for ongoing/existing programs/projects and the second tier covering
review of new spending proposals and the expansion of on-going/existing programs/projects.
k. Zero-Based Budgeting refers to a budgeting approach through which major agency programs
and projects are evaluated to: a) determine the continued relevance of program objectives vis-à-
vis current developments/directions; b) assess whether program objectives/ outcomes are being
achieved; c) ascertain alternative or more viable ways of achieving the objectives, and ultimately;
d) guide decision makers on whether the program/project should continue to be funded at its
present level, or if funding should be increased, reduced or discontinued.

8. General Purpose Financial Statements of National Government Agencies

a. Statement of Financial Position

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

9. Books of accounts of National Government Agencies under the GAM

a. General Journal
b. Cash Receipts Journal
c. Cash Disbursement Journal
d. Check Disbursements Journal
e. General Ledgers
f. Subsidiary Ledgers

10. The registries of National Government Agencies under the GAM

a. Registry of Revenue and Other Receipts refers to the registry maintained by NGA unit to
monitor the revenue and other receipts estimated/budgeted, collected and remitted/deposited.
b. Registry of Appropriations and Allotments refers to registry maintained by NGA unit to show
the original, supplemental and final budget for the year and all allotments received charged
against the corresponding appropriation.
c. Registry of Allotments, Obligations and Disbursements refers to registry maintained by NGA
unit to show the allotments received for the year, obligations incurred against the corresponding
allotment and the actual disbursements made.
d. Registry of Budget, Utilization and Disbursements refers to registry maintained by NGA unit
to record the approved special budget and the corresponding utilizations and disbursements
charged to retained income authorized under the law and other retained income collection of a
national government agency with similar authority.

11. Classifications of different RAPAL, RAOD and RBUD

 a. RAPAL/RAOD/RBUD – Personal Services
b. RAPAL/RAOD/RBUD – Maintenance and Other Operating Expenses
c. RAPAL/RAOD/RBUD – Financial Expenses
d. RAPAL/RAOD/RBUD – Capital Outlays

12. Classifications of Cash Account of National Government

a. Cash Collecting Officer - Cash on Hand Account

b. Cash Treasury/Agency Deposit Regular - Cash Clearing Account for Cash Remittance to Bureau
of Treasury
c. Cash Modified Disbursement System, Regular - Checking Account for Disbursement of Public
Funds as authorized by Notice of Cash Allocation (NCA) issued by Department of Budget and
Management (DBM)
d. Cash in Bank (Local Currency) - Land Bank of the Philippines - Cash in Bank Account held and
used only by Bureau of Treasury
e. Cash in Bank (Foreign Currency) - Bangko Sentral ng Pilipinas - Cash in Bank Account held and
used only by Bureau of Treasury

13. On December 31, 2016, the Department of Health billed its lessee on one of its buildings in the amount
of P100,000. On January 31, 2017, the Department of Health collected all of the accounts receivable. On
February 28, 2017, the Department of Health remitted all the collected amount to the Bureau of Treasury.

Journal Entries by Department of Health (DOH) for the abovementioned transactions:

a. 12/31/2016 Debit – Accounts Receivable P100,000 and Credit – Rent Income P100,000

b. 1/31/2017 Debit – Cash Collecting Officers P100,000 and Credit – Accounts Receivable P100,000

c. 2/28/2017 Debit – Cash – Treasury/Agency Deposit, Regular – P100,000 and Credit Cash –
Collecting Officer – P100,000

Journal Entry by Bureau of Treasury (BoT) for the receipt of cash remittance from Department of Health
(DOH) on February 28, 2017

a. 2/28/2017 Debit - Cash in Bank (Local Currency) Land Bank of the Philippines (LBP) P100,000 and Credit
Cash - Treasury Agency Deposit Regular P100,000

14. On January 1, 2016, the Department of Public Works and Highways (DPWH) received a P10,000,000
appropriation from the national government for the acquisition of construction machinery. On February 1,
2016, DPWH received the allotment from the Department of Budget and Management. On March 1,
2016, DPWH entered into a contract with CAT Inc. for the acquisition of the machinery with a price of
P8,000,000. On April 1, 2016, DPWH received the Notice of Cash Allocation from Department of Budget
and Management net of 1% withholding tax for income tax of supplier and 5% withholding of Final Tax
on VAT of supplier. On May 1, 2016, CAT Inc. delivered the machinery to DPWH. On June 1, 2016,
DPWH paid the obligation to CAT Inc. On July 1, 2016, DPWH remitted the withheld income tax and final
VAT to BIR.

Journal Entries by Department of Public Works and Highways (DPWH) for the abovementioned
transactions:

a. 1/1/2016 - No entry but just posting to appropriate RAPAL

b. 2/1/2016 - No entry but just posting to appropriate RAPAL and to RAOD

c. 3/1/2016 - No entry but just posting of ORS (Obligation Request and Status) to appropriate RAOD

d. 4/1/2016 - Debit Cash-MDS, Regular P7,520,000 and Credit Subsidy Income from National
Government P7,520,000.

e. 5/1/2016 - Debit Machinery P8,000,000 and Credit Accounts Payable P8,000,000

f. 6/1/2016 - Debit Accounts Payable P8,000,000 and Credit Due to BIR P480,000 and Cash-MDS,
Regular P7,520,000.
 g. 7/1/2016 - Debit Due to BIR P480,000 and Credit Subsidy Income from National Government
P480,000.

15. The salary accountant of DENR provided the following data concerning the salaries of its officers and
Employees for the month ended December 31, 2016:

Salaries and wages P510,000

Personal Economic Relief Allowance (PERA) 55,000
Gross compensation 565,000
Withholding income tax 51,000
GSIS 15,300
PAG-IBIG 10,200
Philhealth 510
Net P487,990

DENR received the notice of cash allocation from the DBM net of 10% tax on basic salary. Afterwards, DENR
granted cash advance to the cashier for the payroll. Afterwards, the DENR cashier paid the employees and
submitted the liquidation report of the payroll fund with the corresponding supporting documents. Afterwards,
DENR remitted the withheld tax to BIR and the withheld contribution to GSIS, PAG-IBIG and Philhealth. Journal
Entries for Disbursements for salaries

Journal Entries by Department of Environment and Natural Resources (DENR) for the abovementioned
transactions:

a. Receipt of Notice of Cash Allocation (NCA)

Cash – MDS, Regular 508,500

Subsidy Income from National Government 508,500

b. Accrual of Salaries

Salaries and Wages Regular 510,000

PERA 55,000
Due to BIR 51,000
Due to GSIS 15,300
Due to PAG-IBIG 10,200
Due to Philhealth 510
Due to officers and employees 487,990 (

c. Grant of Cash Advance to Cashier

Advances for payroll 487,990

Cash-MDS, Regular 487,990

d. Submission of Liquidation Report by Cashier

Due to officers and employees 487,990

Advances for payroll 487,990

e. Remittance of withheld tax to BIR

Due to BIR 51,000

Subsidy Income from National Government 51,000

f. Remittance of withheld government employee contribution to GOCCs

Due to GSIS 15,300

Due to PAG-IBIG 10,200
Due to Philhealth 510
Cash – MDS, Regular 26,010

Theory of Accounts
 1. It encompasses the process of analyzing, classifying, summarizing and communicating all transactions
that are involved in the receipt and disbursement of all government funds and properties, and interpreting
the results thereof.
a. Responsibility accounting
b. Government accounting
c. Financial accounting
d. Management accounting

2. It refers to the newest system adopted by the Commission on Audit for the analyzing, classifying,
summarizing and communicating all transactions that are involved in the receipt and disbursement of all
government funds and properties, and interpreting the results thereof.
a. New government accounting system
b. Government accounting manual
c. Fund accounting
d. Public fund accounting

3. Which of the following cash in bank accounts is used by national government agencies for disbursement?
a. Cash Treasury/Agency Deposit Regular
b. Cash – Modified Disbursement System – Regular
c. Cash in Bank Land Bank of the Philippines
d. Cash in Bank Bangko Sentral ng Pilipinas

4. Which of the following cash in bank accounts is used by national government agencies for cash
remittances to Bureau of Treasury?
a. Cash Treasury/Agency Deposit Regular
b. Cash – Modified Disbursement System – Regular
c. Cash in Bank Land Bank of the Philippines
d. Cash in Bank Bangko Sentral ng Pilipinas

5. The receipt of notice of cash allocation by a national government agency shall be credited by the said
agency to
a. Cash – Modified Disbursement System – Regular
b. Cash Treasury/Agency Deposit Regular
c. Subsidy income from national government
d. Advances from national government

Answers in TOA
1. B
2. B
3. B
4. A
5. C
Problem Solving

1. On December 31, 2020, the Department of Finance billed its lessee on one of its buildings in the amount
of P10,000. On January 31, 2017, the Department of Finance collected all of the accounts receivable.
On February 28, 2017, the Department of Finance remitted the entire collected amount to the Bureau of
Treasury. What is the journal entry to record the remittance by to the Bureau of Treasury?

a. Debit – Accounts Receivable P10,000 and Credit – Rent Income P10,000

b. Debit – Accounts Receivable P10,000 and Credit – Retained Earnings P10,000
c. Debit – Cash Collecting Officers P10,000 and Credit – Accounts Receivable P10,000
d. Debit – Cash – Treasury/Agency Deposit, Regular – P10,000 and Credit Cash – Collecting Officer
– P10,000

2. On January 1, 2016, the Department of Public Works and Highways (DPWH) received a P10,000,000
appropriation from the national government for the acquisition of constructionmachinery. On February 1,
2016, DPWH received the allotment from the Department of Budget and Management. On March 1,
2016, DPWH entered into a contract with CAT Inc. for the acquisition of the machinery with a price of
P8,000,000. On April 1, 2016, DPWH received the Notice of Cash Allocation from Department of Budget
and Management net of 1% withholding tax for income tax of supplier and 5% withholding of Final Tax
on VAT of supplier. On May 1, 2016, CAT Inc. delivered the machinery to DPWH. On June 1, 2016,
DPWH paid the obligation to CAT Inc. On July 1, 2016, DPWH remitted the withheld income tax and final
VAT to BIR. What is the journal entry on March 1, 2016?

a. No entry but just posting to appropriate RAPAL

b. No entry but just posting to appropriate RAPAL and to RAOD
c. No entry but just posting of ORS (Obligation Request and Status) to appropriate RAOD
d. Debit Machinery P8,000,000 and credit Accounts Payable P8,000,000

3. Using the same data in number 115, what is the journal entry on April 1, 2016?

a. Debit Cash-MDS, Regulary P7,520,000 and Credit Subsidy Income from National Government
P7,520,000.
b. Debit Machinery P8,000,000 and Credit Accounts Payable P8,000,000
c. Debit Accounts Payable P8,000,000 and Credit Due to BIR P480,000 and Cash-MDS, Regular
P7,520,000.
d. Debit Due to BIR P480,000 and Credit Subsidy Income from National Government P480,000.

4. Department of Health (DOH) received Notice of Cash Allocation in the amount of P100,000 from
Department of Budget and Management. DOH made a total cash disbursements in the amount of
P95,000. What is the journal entry to recognize reversion of unused Notice of Cash Allocation by DOH
in its books?

a. Debit Subsidy Income from National Government P5,000 and credit Cash-MDS, Regular P5,000.
b. Debit Retained Earnings of DFA P5,000 and credit Cash-MDS, Regular P5,000.
c. Debit Expenses of DFA P5,000 and credit Cash-MDS, Regular P5,000.
d. Debit Investment of DFA P5,000 and credit Cash-MDS, Regular P5,000.

5. The Bureau of Treasury received P20,000 cash remittance from Department of Agrarian Reform (DAR)
from its miscellaneous income. What is the journal entry of the Bureau of Treasury in its accounting books
to record the receipt of cash remittance from the income of a national government agency?
a. Debit Cash in Bank, Local Bank or BSP P20,000 and Credit Cash-Treasury/Agency Deposit,
Regular P20,000.
b. Debit Cash in Bank, Local Bank or BSP P20,000 and Credit Miscellaneous Income of DA
P20,000.
c. Debit Cash in Bank, Local Bank or BSP P20,000 and Credit Savings of DA, Regular P20,000.
d. Debit Cash in Bank, Local Bank or BSP P20,000 and Credit Cash-Collecting Officer, DA P20,000.

Answers in Problem Solving

1. D
2. C
3. A
4. A
5. A
NONSTOCK NONPROFIT ORGANIZATION ACCOUNTING

I. Nonstock corporation is a corporation which has no shares of stocks and is not authorized to declare
dividends.

1. Mode of conversion of nonstock corporation to stock corporation

a. By dissolving the nonstock corporation and forming a new stock corporation.

2. Modes of conversion of stock corporation to nonstock corporation

a. By mere amendment of articles of incorporation; or
b. By dissolving the stock corporation and forming a new nonstock corporation.

3. Transferability of membership in a nonstock corporation - Membership in a non-

stock corporation and all rights arising therefrom are personal and non-transferable,
unless the articles of incorporation or the by-laws otherwise provide.

4. Revocation of membership in a nonstock corporation - Membership shall be

terminated in the manner and for the causes provided in the articles of incorporation
or the by-laws. Termination of membership shall have the effect of extinguishing all
rights of a member in the corporation or in its property, unless otherwise provided in
the articles of incorporation or the by-laws.

II. Financial Statements of Nonstock Nonprofit Organization

A. Statement of Financial Position
B. Statement of Activities
C. Statement of Cash Flows
D. Notes to Financial Statements

III. Statement of Activities provides information about the income, expenses and changes in net assets of
a nonstock nonprofit organization for the reporting period ended.

A. Income Recognition
a. Contribution revenue or donation income refers to income arising from unconditional contribution
by donor or benefactor. Contribution revenue or donation income is recognized when the donation
is received or becomes receivable under cash basis approach whether restricted or unrestricted
by the donor as long as it is unconditional. Conditional donation or contribution revenue is
recognized as liability or unearned revenue.
b. Other revenues and gains refer to income of organization other than coming from donation
income. Other revenues and gains are recognized when earned regardless of collection under
accrual basis approach.

B. Expense Recognition
a. Expense for Program Activities refers to expense incurred to achieve the mission-vision of the
organization.
b. Expense for Support Activities refers to expense incurred other than those for program activities.

C. Movement or Changes in Net Assets of Nonprofit Organization

a. Unrestricted Net Asset
• Increased by unrestricted contribution revenue or unrestricted donation
• Increased by other revenues and gains
• Increased by reclassification from temporarily restricted net asset to unrestricted net asset
due to removal of temporary restrictions
• Increased by satisfaction of condition of conditional donation or unearned revenue
• Decreased by expenses

b. Temporarily Restricted Net Asset

• Increased by temporarily restricted contribution revenue or temporarily restricted donation
• Decreased by reclassification from temporarily restricted net asset to unrestricted net
asset due to removal of temporary restrictions

c. Permanently Restricted Net Asset

• Increased by permanently restricted revenue
IV. Statement of Financial Position provides information about the assets, liabilities and net assets of a
nonstock nonprofit organization as of the end of the reporting period.
A. Total Assets
a. Current Assets
• Cash and Cash Equivalents
• Receivables
• Inventory
• Prepaid Assets
b. Noncurrent Assets
• Property, Plant and Equipment
• Investment Property

B. Total Liabilities
a. Current Liabilities
• Accounts Payable
• Accrued Expense
• Salaries Payable
• Short-term Borrowings
b. Noncurrent Liabilities
• Long-term Borrowings

C. Net Assets
a. Unrestricted Net Assets
• Current Fund
• Quasi-Endowment Fund
b. Temporarily Restricted Net Assets
• Term Endowment Fund
• Purpose Restricted Fund
• Plant Fund
• Annuity Fund
• Life Income Fund
c. Permanently Restricted Net Assets
• Regular Endowment Fund

V. Statement of Cash Flows provides information about the cash inflows or receipts, cash outflows or
disbursements, beginning cash, ending cash, increase or decrease of cash of a nonstock nonprofit
organization for the reporting period ended.

A. Operating Activities
a. Cash receipts from unrestricted cash contribution or donation
b. Cash receipts from other revenues and gains
c. Cash disbursements for expenses
d. Cash disbursements for interest expense or finance cost

B. Investing Activities
a. Cash receipts from sale or disposal of property, plant and equipment or investment
property
b. Cash disbursements for acquisition of property, plant and equipment or investment
property

C. Financing Activities
a. Cash receipts from restricted (whether temporary or permanent restriction) cash contribution or
donation
b. Cash receipts from short-term or long-term borrowings
c. Cash disbursements for payment of principal of short-term or long-term borrowings

Theory of Accounts
 1. Which of the following funds shall be classified as temporarily restricted net asset in statement of financial
position of nonprofit organization?
a. Board designated plant fund
b. Term endowment fund
c. Regular endowment fund
d. Current operation fund

2. Which of the following funds shall be classified as unrestricted net asset in statement of financial position
of nonprofit organization?
a. Internally restricted fund
b. Plant endowment fund
c. Annuity fund
d. Life income fund

3. In the statement of activities, expenses of nonprofit organization shall be recorded only as reduction from
a. Temporarily restricted net assets
b. Unrestricted net assets
c. Permanently restricted net assets
d. Current liability

4. Last year, a nonprofit organization received a contribution with a donor restriction for educational
scholarship of its members. In the current year, the nonprofit organization fully spent the said contribution
for the intended purpose. What is the effect of this expenditure to current year’s change in net assets?
a. It will increase the temporarily restricted net assets.
b. It will not affect the unrestricted net assets.
c. It will not affect the total net assets.
d. It will decrease the permanently restricted net assets.

5. In the statement of cash flows of nonprofit organization, how shall the following cash flows be presented?
I. Cash receipts from other income and gain
II. Cash payments for the acquisition of equipment
III. Cash receipts from donor who imposed term restriction
a. Operating, Investing, Financing
b. Investing, Financing, Operating
c. Financing, Operating, Investing
d. Operating, Financing, Investing

Answers in TOA
1. B
2. A
3. B
4. B
5. A
Problem Solving

For Numbers 1 – 3
On the first year of operations of a non-profit organization, the following transactions occurred:

• The non-profit organization received P1,000,000 fund from a donor who stipulated that it shall be invested
indefinitely and the dividend from such investment shall be used for research project of the organization.
Dividend amounting to P150,000 was received during the year but only P50,000 was spent for the
research project.

• The non-profit organization received P300,000 fund from a donor who stipulated that it shall be used for
the acquisition of service car. P100,000 of the fund was used for the acquisition of a service car with
useful life of 5 years. The car was acquired at the middle of the year.

• The non-profit organization received P500,000 fund from a donor who stipulated that it shall be used
based on the discretion of the Board of Trustees of the non-profit organization. P100,000 was used by
the organization for the acquisition of souvenir items which were sold by the non-profit organization for
P150,000. The remaining P400,000 was designated by the Board of Trustees for future fundraising
projects.

1. What is the amount of permanently restricted net assets at the end of the first year?
a. P1,100,000
b. P1,300,000
c. P1,200,000
d. P1,000,000

2. What is the amount of temporarily restricted net assets at the end of the year?
a. P100,000
b. P300,000
c. P200,000
d. P700,000

3. What is the amount of unrestricted net assets at the end of the year?
a. P640,000
b. P540,000
c. P590,000
d. P630,000

For Numbers 4 - 7
On January 1, 2020, a non-profit organization, received P1,000,000 cash donation from a donor who stipulated
that the amount should be invested indefinitely in revenue producing investment. The deed of donation also
provides that the dividend income shall be used for the acquisition of computers of the non-profit organization.

On December 31, 2020, the non-profit organization received P100,000 cash as dividend income from the
investment of the fund.

On January 1, 2021, the non-profit organization acquired a computer at a cost of P20,000 with a useful life of 5
years without residual value.

4. In the statement of activities of the statement the NPO for the year ended December 31, 2020, which of
the following is the proper effect of the transactions?
a. Increase in temporarily restricted net assets by P100,000.
b. Increase in unrestricted net assets by P10,000,000.
c. Increase in unrestricted net assets by P16,000.
d. Decrease in temporarily restricted net assets by P20,000.

5. In the statement of activities of the statement the NPO for the year ended December 31, 2021, which of
the following is the proper effect of the transactions?
a. Increase in temporarily restricted net assets by P100,000.
b. Increase in unrestricted net assets by P1,000,000.
c. Increase in unrestricted net assets by P16,000.
d. Decrease in temporarily restricted net assets by P100,000.
 6. How shall the cash flows be reported in NPO’s Statement of Cash Flows for the year ended December
31, 2020?
a. Cash receipts from operating activities by P100,000.
b. Cash receipts from financing activities by P1,100,000.
c. Cash disbursements for investing activities by P50,000.
d. Cash disbursements for financing activities by P1,000,000

7. How shall the cash flows be reported in NPO’s Statement of Cash Flows for the year ended December
31, 2021?
a. Cash receipts from operating activities by P100,000.
b. Cash receipts from financing activities by P1,100,000.
c. Cash disbursements for investing activities by P20,000.
d. Cash disbursements for investing activities by P100,000.

Solution in Problem Solving

1. Permanently restricted net asset (1) (D) P 1,000,000

Note: Only the fund which is to be invested indefinitely is considered permanent or regular endowment fund.

2. Remaining unspent dividend income for research (P150,000 – P50,000) P 100,000

Remaining unused fund for acquisition of service car (P300,000 – P100,000) 200,000
Temporarily restricted net asset (2) (B) P 300,000

3. Reclassification from temporarily restricted dividend income P 50,000

Reclassification from temporarily restricted service car fund 100,000
Fund subject to discretion of board of trustees 500,000
Add: Gain on sale of souvenir items (P150,000 – P100,000) 50,000
Less: Research expense (50,000)
Less: Depreciation expense of service car (P100,000/5) x 6/12 (10,000)
Unrestricted net asset (3) (A) P 640,000

4. Increase in temporarily restricted net asset during 2020 by (4) (A) P 100,000
Note: The receipt of the dividend income is classified as increase of temporarily restricted net assets because it
is restricted for acquisition of computer but none has been spent during 2020.

5. Reclassification from temporarily restricted net asset to unrestricted net asset during 2021P 20,000
Less: Depreciation expense of computer during 2021 (P20,000/5 years) (4,000)
Increase in unrestricted net asset during 2021 by (5) (C) P 16,000

6. Cash receipts from financing activities (P1,000,000 + P100,000) (6) (B) P 1,100,000
Note: All cash receipts with donor stipulation shall be classified in the Statement of Cash Flows as financing
activities.

7. Cash disbursements for investing activities (7) (C) P 20,000

Note: All cash disbursement for acquisition of non-current asset shall be classified in the Statement of Cash
Flows as investing activities.
IFRIC 12: Service Concession Arrangement

Definition of Service Concession Arrangement - A service concession arrangement is an arrangement

whereby a government or other public sector body contracts with a private operator to develop (or upgrade),
operate and maintain the grantor's infrastructure assets such as roads, bridges, tunnels, airports, energy
distribution networks, prisons or hospitals. The grantor controls or regulates what services the operator must
provide using the assets, to whom, and at what price, and also controls any significant residual interest in the
assets at the end of the term of the arrangement.

Two Types of Service Concession Arrangement

In one, the operator receives a financial asset, specifically an unconditional contractual right to receive a
specified or determinable amount of cash or another financial asset from the government in return for
constructing or upgrading a public sector asset, and then operating and maintaining the asset for a specified
period of time. This category includes guarantees by the government to pay for any shortfall between amounts
received from users of the public service and specified or determinable amounts.
In the other, the operator receives an intangible asset – a right to charge for use of a public sector asset that
it constructs or upgrades and then must operate and maintain for a specified period of time. A right to charge
users is not an unconditional right to receive cash because the amounts are contingent on the extent to which
the public uses the service.

IFRIC 12 allows for the possibility that both types of arrangement may exist within a single contract: to the extent
that the government has given an unconditional guarantee of payment for the construction of the public sector
asset, the operator has a financial asset; to the extent that the operator has to rely on the public using the service
in order to obtain payment, the operator has an intangible asset.

Accounting – Financial asset model

The operator recognizes a financial asset to the extent that it has an unconditional contractual right to receive
cash or another financial asset from or at the direction of the grantor for the construction services. The operator
has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator
• (a) specified or determinable amounts or

• (b) the shortfall, if any, between amounts received from users of the public service and specified or
determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure
meets specified quality or efficiency requirements.

Accounting – Intangible asset model

The operator recognizes an intangible asset to the extent that it receives a right (a licence) to charge users of
the public service. A right to charge users of the public service is not an unconditional right to receive cash
because the amounts are contingent on the extent that the public uses the service.

Operating revenue
The operator of a service concession arrangement recognises and measures revenue in accordance with PFRS
15 on the the services it performs.

Accounting by the government (grantor)

IFRIC 12 does not address accounting for the government side of service concession arrangements. PFRSs are
not designed to apply to not-for-profit activities in the private sector or the public sector. The Government
Accounting Manual (GAM) issued by Commission on Audit (COA) shall govern the accounting treatment by the
government of the infrastructure asset as its property, plant and equipment.

Comparison of Infrastructure Assets

Financial Asset Intangible Asset Compound Financial
Asset and Intangible
Asset
Criteria Contractual Right to License to Charge the Combined
Receive Cash or Users of Characteristics of
Financial Asset Infrastructure Asset Financial Asset and
Intangible Asset
Accounting Treatment PFRS 9: FAFVPL or PAS 38: Cost Model Bifurcate the Financial
FAFVOCI or FAAC or Revaluation Model Asset Component
and Intangible Asset
Component
Revenue Financing or Interest Service Revenue Both Interest
Revenue collected from the Revenue and Service
public Revenue
 Accounting Models of Infrastructure Asset classified as Intangible Asset (PAS 38)
Cost Model Revaluation Model
Initial Measurement Historical Cost Historical Cost
Subsequent Measurement Cost - Accumulated Fair Value or Sound Value or
Depreciation - Accumulated Amortized Replacement Cost
Impairment - Subsequent Depreciation -
Subsequent Impairment
Amortization Yes Yes
Impairment Yes Yes
Revaluation Surplus None Yes in OCI without RA (RE)

Accounting Models of Infrastructure Asset classified as Financial Asset (PFRS 9)

FAFVPL FAFVOCI FAAC
Business Models To obtain short-term To collect contractual To collect contractual
(Criteria for gain or loss on cash flows from cash flows from
Classification) changes in fair value principal and interest principal and interest
and to sell the
investment to obtain
gain or loss on
changes in fair value
Classification Current Asset Noncurrent Asset Noncurrent Asset
Initial Measurement Fair Value Fair Value plus Fair Value plus
Transaction Cost Transaction Cost
Transaction Cost Expensed as incurred Capitalizable Capitalizable
Interpolation of No Yes Yes
Effective Interest Rate
Subsequent Fair Value Fair Value Amortized Cost
Measurement
Interest Income Nominal Interest Effective Interest Effective Interest
(Face Value x Stated (Amortized Cost x (Book Value x
Rate) Effective Interest Effective Interest
Rate) Rate)
Amortization of None Yes Yes
Discount or Premium
Gain or Loss on Yes in P/L Yes in OCI with RA None
Changes in Fair Value (P/L)

XII. Accounting for Build, Operate & Transfer

1. IFRIC 12 is an arrangement whereby a government or other public sector body contracts with a private
operator to develop (or upgrade), operate and maintain the grantor's infrastructure assets such as roads,
bridges, tunnels, airports, energy distribution networks, prisons or hospitals.
a. Joint arrangement
b. Service concession arrangement
c. Consignment arrangement
d. Business arrangement

2. Under IFRIC 12, if the concession arrangement provides that the operator has an unconditional
contractual right to receive a specified or determinable amount of cash or another financial asset from
the government in return for constructing or upgrading a public sector asset, and then operating and
maintaining the asset for a specified period of time, the infrastructure asset shall be accounted for by the
operator as
a. Property, plant and equipment
b. Intangible asset
c. Financial asset
d. Prepaid asset

3. Under IFRIC 12, if the concession arrangement provides that the operator has a right to charge for use
of a public sector asset that it constructs or upgrades and then must operate and maintain for a specified
period of time but the right is not an unconditional right to receive cash because the amounts are
contingent on the extent to which the public uses the service, the infrastructure asset shall be accounted
for by the operator as
a. Property, plant and equipment
b. Intangible asset
 c. Financial asset
d. Prepaid asset

4. The Philippine government granted a concession arrangement to MRT7 Inc. which will construct the
mass train transportation and will be authorized to operate it for a period of 50 years. The arrangement
provides that MRT7 Inc. receives a right or a license to charge users of the public service but there is no
an unconditional right to receive cash because the amounts will be contingent on the extent that the
public uses the service. How shall MRT7 Inc., the operator, account for its infrastructure asset?
a. It shall be recognized as property, plant and equipment by the operator.
b. It shall be recognized as financial asset at fair value by the operator.
c. It shall be recognized as financial asset at amortized cost by the operator.
d. It shall be recognized as intangible asset of the operator.

5. The Philippine government granted a concession arrangement to Makati Med Inc. which will construct a
hospital and will be authorized to operate it for a period of 10 years. The arrangement provides that
Makati Med Inc. will provide medical services to underprivileged members of the community for free. In
exchange, Makati Med Inc. has an unconditional contractual right to receive cash or another financial
asset from or at the direction of the Philippine government for the construction services and medical
services. How shall MRT7 Inc., the operator, account for its infrastructure asset?
a. It shall be recognized as property, plant and equipment by the operator.
b. It shall be recognized as intangible asset of the operator.
c. It shall be recognized as Investment in stocks at cost method of the operator.
d. It shall be recognized as financial asset either at (1) FAFVP/L or (2) FAFVOCI or (3)
FA@Amortized Cost depending on the business model of the operator.

Solution in TOA
1. B
2. C
3. B
4. D
5. D

Problem Solving

1. The Philippine Government and Heaven’s Path Inc. entered into a concession arrangement for the
construction and operation of Skyway 4 connecting Tawi-tawi and Batanes. On December 31, 2010, the
concession operator constructed the Skyway 4 at a cost of P100M. Heaven’s Path Inc. has a right or
license to charge users over the term of the arrangement of 50 years. The amounts to be received by the
concession operator are contingent on the extent that the public uses the Skyway 4. During 2012, the
concession operator collected toll fees amounting to P10,000,000 from the motorists. What is the book
value of infrastructure asset on December 31, 2012?
a. P98,000,000
b. P96,000,000
c. P94,000,000
d. P92,000,000

2. Using the same data in number 1, what is the revenue to be presented by the concession operator for
the year ended December 31, 2012?
a. P2,000,000
b. P10,000,000
c. P4,000,000
d. P6,000,000

3. The Philippine Government and St. Lukes Inc. entered into a concession arrangement for the
construction and operation of Pro-poor Hospital for a period of 20 years. On December 31, 2010, the
concession operator constructed the Hospital at a cost of P48M and incurred transaction cost amounting
 to P1M. The arrangement stipulates that St.Lukes Inc. will be paid a specified amount that will enable it
to recover the investment made provided that is has a pre-determined minimum order of hospital beds
operating and available. St. Lukes has a guaranteed right to receive P8M every end of the year. The
interpolated effective interest rate is 10%. What is the book value of infrastructure asset on December
31, 2011?
a. P49,000,000
b. P53,900,000
c. P45,900,000
d. P41,000,000

4. Using the same data in number 3, what is the revenue to be presented by the concession operator for
the year ended December 31, 2011?
a. P2,450,000
b. P8,000,000
c. P4,000,000
d. P4,900,000

Solution in Problem Solving

Historical Cost of Intangible Asset P100,000,000
Less: Accumulated Amortization as of 12/31/2012 (100M/50 x 2 years) ( 4,000,000)
1. Book Value of Intangible Asset on 12/31/2012 under Cost Model (1) (B) P 96,000,000

2. Toll Fee Revenue from License or Right to Collect from Public Users (2) (B) P10,000,000

Fair Value plus transaction cost of Financial Asset at Amortized Cost (P48M + P1M) P49,000,000
Plus Effective Interest Revenue (49M x 10%) 4,900,000
Less: Cash collected from government-grantor ( 8,000,000)
3. Book Value of Financial Asset at Amortized Cost on 12/31/2011 (3) (C) P45,900,000

4. Interest or Finance Revenue of Financial Asset at Amortized Cost for the year
ended December 31, 2011 (P4,900,000 x 10%) (4) (D) P4,900,000
INSURANCE CONTRACTS

Insurance
• A social device which combines that risks of individuals into a group to pay for losses
• A device for reducing risk by combining a sufficient number of exposure units to make their individual losses
collectively predictable

Insurance Contracts
- Contracts between two parties, where one party, the insurer, agrees to compensate the other party, the
policyholder, if it is adversely affected by an uncertain future event

An uncertain future event exists where at least one of the following is uncertain at the inception of an insurance
contract:
▪ the occurrence of an insured event;
▪ the timing of the event; or
▪ the level of compensation that will be paid by the insurer if the event occurs

Insurance contract do not necessarily pay monetary compensation.

Types of Risks
1. Speculative Risk - result in either gain or loss, as in the fluctuation of prices of merchandise
2. Pure Risk - produces only loss

Financial Risks vs. Insurance Risks

Financial Risk Insurance Risks
There is a possible change in a financial or non- A risk that is not a financial risk. The risk in an
financial variable, for example a specified interest insurance contract is whether an event will occur
rate, commodity prices, an entity’s credit rating or (rather than arising from a change in something),
foreign exchange rates. for example a theft, damage to property, or product
or professional liability.

A contract that exposes the issuer to financial risk without significant insurance risk does not meet the definition
of an insurance contract.

Examples of insurance contracts:

1. life insurance and prepaid funeral plans
2. disability and medical cover
3. credit insurance
4. travel cover

Examples of non-insurance contracts:

1. Product warranty by manufacturers
2. Employer’s assets and liabilities in a defined pension plan
3. Guaranteed residual value of finance lease
4. Financial guarantee
5. Contingent consideration
6. Insurance contracts that the entity holds as policyholder

BASIC INSURANCE PRINCIPLES

1. Principle of Insurable Interest

- The law requires insurable interest as a requisite to the enforcement of insurance contracts to prevent
the “deliberate” destruction of life or property for profit.

2. Principle of Utmost Good Faith

- Implies that all contracts of insurance must be negotiated with utmost good faith to both the insurer and
the proposer because they are entered into by parties who do not have the same access to relevant
information

3. Principle of Indemnity
- an insured is compensated for losses sustained and is placed as much as possible in the same pecuniary
position as he occupied immediately before the misfortune
- an insured should not be allowed to make a profit or gain out of his misfortune
4. Principle of Subrogation
- Subrogation – the right of one person to stand in the place of the latter’s rights and remedies
- the substitution of the insurer in the place of the insured in order to enforce recovery of rights and
remedies of the insured

5. Principle of Contribution
- The principle of “contribution” is necessary since it prevents an insured from recovering more than the
full amount of his loss, where 2 or more policies exist for the same interest and of the same subject matter

6. Principle of Proximate Cause

- Proximate cause – the direct and efficient cause that stimulates related and uninterrupted sequence of
events, acting together and concurrently which brings about a loss

General Classification of Insurance Contracts:

1. Personal insurance
2. Property insurance

ACCOUNTINGY BY POLICYHOLDERS

1. Fire Insurance
Fire Loss Recovery:
1. Valued Policy – value of property at date of policy x percent destroyed
2. Open policy – value of property at date of fire x percent destroyed

Valued policy may take include either the book value of the fair value of the property depending on the
agreements of the insured and insurer in the insurance contracts.

Insurance Receivable:
Valued or open policy – amount of loss or face value of policy, whichever is lower

Policy with co-insurance clause:

Insurance receivable = (face of policy/value of property) x loss

Policy with 80% co-insurance clause:

Insurance receivable is the lowest among:
a. Face of the policy
b. Loss
c. Co-insurance indemnity
- This is computed as: (Face of policy / Co-insurance requirement) x loss
Co-insurance requirements = (80% x MV of property)

Double Insurance
Policy with contribution clause (double insurance) – occurs when one property is insured under several insurance
companies.

Computation of insurance receivable from each insurance company:

Policy with no co-insurance clause:

Insurance receivable from an insurer= (face of policy/total face of the policies) x Loss

Policy with co-insurance clause:

Insurance receivable = [face of policy/(higher between total face value of the policy or co-insurance requirements]
x loss

Normally, in the Philippines the value of the property at the date of perfection of the insurance contract is used
in the co-insurance formula. However, the insurer and the insured may also agree to use the value at the date
of the fire. Co-insurance exists only for valued policy.

2. Life Insurance
Under Philippine laws, life insurance will have cash surrender value after 3 years. The cash surrender value is
treated as long-term investment in the financial statement of the entity. The initial recognition of the cash
surrender value on the third year is treated as pro-rata reduction of previously recognized and the current year
insurance expense. Increases in the cash surrender value or dividend received from the life insurance policy is
treated as reduction of insurance expense.

Problem Solving
Problem 1:
On February 1, 2023, Excel Insurance issues a one-year car insurance contract for a total premium of P40,000.

1. How much is the earned portion of the motor insurance premium for the year 2023?

40,000 x 21/24 = 35,000

2. How much is the unearned portion of the motor insurance premium on December 31, 2023?

40,000 x 3/24 = 5,000

Problem 2:
The following relates to fire insurance issued by Mano Po Insurance Co. for the year ended December 31, 2023:
Premiums received
January P30,000
February 25,000
March 20,000
April 15,000
May 20,000
June 15,000
July 25,000
August 35,000
September 35,000
October 30,000
November 40,000
December 35,000
TOTAL PREMIUMS 325,000

As of January 1, 2023, the unearned premium reserve balance amounted to P90,000.

1. Prepare the journal entry to record the receipt of premiums.

2. How much is the premium revenue for the year ended 2023?
3. How much is the unearned premium reserves on December 31, 2023?
4. Prepare the journal entry to adjust the unearned premium reserve account.

Premiums written: Earned Unearned 1 Cash/Prem. Rcvbl 325,000.00

January 30,000.00 x 23 28,750.00 1.00 1,250.00 Premium Rev. 325,000.00
February 25,000.00 x 21 21,875.00 3.00 3,125.00
March 20,000.00 x 19 15,833.33 5.00 4,166.67 4 Premium Rev. 89,791.67
April 15,000.00 x 17 10,625.00 7.00 4,375.00 UPR 89,791.67
May 20,000.00 x 15 12,500.00 9.00 7,500.00
June 15,000.00 x 13 8,125.00 11.00 6,875.00
July 25,000.00 x 11 11,458.33 13.00 13,541.67
August 35,000.00 x 9 13,125.00 15.00 21,875.00
September 35,000.00 x 7 10,208.33 17.00 24,791.67
October 30,000.00 x 5 6,250.00 19.00 23,750.00
November 40,000.00 x 3 5,000.00 21.00 35,000.00
December 35,000.00 x 1 1,458.33 23.00 33,541.67
TOTAL PREMIUMS WRITTEN 325,000.00 145,208.33 179,791.67
UPR, 1/1/2019 90,000.00 No. 3
235,208.33
No. 2
Problem 3:
During April 2023, ASA Insurance Co. wrote fire insurance policies for a total premium of P144,000. During the
same period, total premiums of P48,000 were ceded to reinsurers.

1. How much is the premium earned by the Cedant for the year ended 2023?
2. How much is the premium earned by the Reinsurer for the year ended 2023?
3. How much is the Insurance Contract Liability on December 31, 2023?

Total prem. 144,000.00

Ceded to reinsurers 48,000.00 x 17/24 = 34,000.00 No. 2
96,000.00 x 17/24 = 68,000.00 No. 1
28,000.00 No. 3

Problem 4:
Pro Fire Insurance has issued the following fire insurance policies for the year 2023:

Gross premiums Premiums ceded

January P25,000 P10,000
February 20,000 8,000
March 30,000 12,000
April 26,000 13,000
May 18,000 6,000
June 21,000 7,000
July 42,000 20,000
August 16,000 7,000
September 10,000 4,000
October 18,000 8,000
November 20,000 10,000
December 16,000 8,000

1. How much is the premium earned by Pro Fire Insurance for 2023? 82,291.67
2. How much is the insurance contract liability on December 31, 2023? 66,708.33

Gross premiums Premiums ceded Net premiums Earned Unearned

January 25,000 10,000 15,000 23 14,375.00 1 625.00
February 20,000 8,000 12,000 21 10,500.00 3 1,500.00
March 30,000 12,000 18,000 19 14,250.00 5 3,750.00
April 26,000 13,000 13,000 17 9,208.33 7 3,791.67
May 18,000 6,000 12,000 15 7,500.00 9 4,500.00
June 21,000 7,000 14,000 13 7,583.33 11 6,416.67
July 42,000 20,000 22,000 11 10,083.33 13 11,916.67
August 16,000 7,000 9,000 9 3,375.00 15 5,625.00
September 10,000 4,000 6,000 7 1,750.00 17 4,250.00
October 18,000 8,000 10,000 5 2,083.33 19 7,916.67
November 20,000 10,000 10,000 3 1,250.00 21 8,750.00
December 16,000 8,000 8,000 1 333.33 23 7,666.67
82,291.67 66,708.33