BALIUAG UNIVERSITY

College of Business Administration and Accountancy

3rd Trimester A.Y 2018-2019

SYNTHESIS 101
“ASSETS”

Angulo, Jelyn M. Mercado, Dave Ryan B.

Cruz, Marinella B. Santos, Pauline Ruth V.
Cunanan, Yvette Everlyn G. Siron, Marianne Angel C.
Delos Santos, Elenica G. Valdez, Rochelle Ann M.
Gener, Vanezza M.
Juanico, Josemari B.
Landayan, Hazel Marie G.
Matic, Harvey Christopher F.
BSA 5-1 | MARCH 30, 2019
 FINANCIAL ASSETS

I. CASH AND CASH EQUIVALENTS

Related Standard: IAS 1 – Presentation of Financial Statements, IAS 7 – Statement of Cash

Flows

From layman’s view, cash pertain to money which is composed of bills and coins used to
facilitate trade and business. In legal sense, cash may strictly pertain, to the country’s legal
tender. For accounting purposes, cash is not ordinarily limited to bills, coins and the country’s
legal tender.

Definition of Terms
Cash - It comprises cash on hand and demand deposits.
Cash Equivalents – These are short-term, highly liquid investments that are readily convertible
to known amounts of cash and which are subject to an insignificant risk of changes in value.

Classification of Cash and Cash Equivalents

 Current assets include cash or a cash equivalent unless the same is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting period.
 For an item of cash and cash equivalent to be classified as current assets, it should be
unrestricted in use. Otherwise it is classified as noncurrent asset.

Cash Items
a. Cash on hand – Undeposited collections of currency and checks such as bills and coins,
customer’s checks, manager’s checks, traveler’s checks, bank drafts and money order.
b. Cash in Bank – Demand deposits such as savings account and checking account.
c. Cash Fund – Fund set aside for current operation such as petty cash fund, payroll fund,
dividend fund, interest fund, tax fund, revolving fund and change fund.
Cash Equivalents
 An investment normally qualifies as a cash equivalent only when it has a short maturity
of, say, three months or less from the date of acquisition.
 Equity investments are excluded from cash equivalents unless they are, in substance, cash
equivalents, for example in the case of preferred shares acquired within a short period of
their maturity and with a specified redemption date.
 Examples of cash equivalents:
a. Treasury bill
b. Short-term time deposit
c. Money market
d. Commercial paper
Note: On acquisition date, maturity of the preceding instruments must be 3 months or
less.

Various consideration for cash and cash equivalents

1. Foreign Currency
a. Cash in foreign currency should be translated to Philippine pesos using the
current exchange rate.
b. In the statement of financial position, foreign currencies should be translated
based on the exchange rates on the reporting period.
2. Cash in bank experiencing financial difficulty or bankruptcy
a. Cash in bank should be written down to estimated realizable value.
3. Cash fund for noncurrent purpose
a. The cash fund is presented as noncurrent asset and classified as long-term
investment.
b. Examples are sinking fund, preference share redemption fund, contingent fund,
insurance fund and fund for acquisition of PPE.
c. Cash fund set aside for payment of obligation should be presented in the
statement of financial position parallel to the related liability. If the sinking fund
is for a 5-year bond, then the fund is classified as noncurrent asset. Conversely, if
 the bond will mature in 12 months or less, then the fund is classified as current
asset.
4. Bank overdraft
a. Acash in bank with credit balance should not be offset against other bank
account in another bank.
b. Offsetting may be done if the entity has more than one bank accounts in the same
bank or when the amount is deemed immateria
5. Compensating Balance
a. Minimum bank account balance may be legally restricted (formal compensating
balance) or otherwise (informal compensating balance).
b. Formal compensating balance is not part of cash and cash equivalents. It is
classified as current asset if the related loan is short-term. Conversely, as
noncurrent asset if the related loan is long-term.
c. In most cases, compensating balance agreements are not legally binding.
6. Undelivered checks
a. Theoretically, checks not yet released to payee should still form part of the
cash and cash equivalents balance. It will require an adjusting entry to restore
the cash in bank balance.
b. In practice, checks drawn for payee are recorded and therefore deducted from the
cash in bank balance. Usually, no entry to restore the said balance is made. This is
because the balance is normally not very substantial and that there is no evidence
of actual cancellation of check.
7. Postdated Checks
a. Checks delivered to payee but are dated after the reporting period should still
form part of the cash in bank balance. Reversal of the previously recorded
payment should be made.
b. Moreover, checks received from the drawer but are dated the reporting period
should not form part of the cash in bank balance. Reversal of the previously
recorder collection should be made.
 8. Stale Checks
a. Checks issued but not encashed within six months from the time of issuance
become stale. Accordingly, the drawer may issue a stop payment order to the
bank.
b. If the amount is immaterial, stale check is recorder by the drawer as
miscellaneous income. If the amount is material and that liability is expected to
continue, cash is restored and liability is set up.
9. Cash short or over
a. Cash shortage that is traceable to a cashier or custodian is accounted as a
receivable from the employee held liable for the shortage.
b. If the shortage cannot be traced, then the amount is debited to loss account or
miscellaneous expense.
c. Cash overage that is traced to be the money of the cashier or custodian, the
amount is accounted as payable to the employee claiming the overage.
d. If the overage cannot be traced, then the amount is credited to miscellaneous
income.

Petty Cash Fund

Petty cash may be accounted as:
a. Imprest system
- Petty cash fund is debited during establishment of fund and
whenever the fund balance is increased.
- Petty cash fund is credited at the end of the accounting period to
reflect the actual cash in the fund. Likewise, it is credited whenever
the fund balance is decreased.
- Expenses are recorded during replenishment and at the end of the
accounting period.
b. Fluctuating system
- Petty cash fund is debited during establishment and replenishment
of fund and whenever the fund balance is increased.
- Petty cash fund is credited whenever the fund balance is decreased.
 - Expense are recorded whenever expenses are paid using the petty
cash fund.
- No adjusting entry is necessary at the end of the accounting period.

Bank Reconciliation Process

- The process of bringing into agreement the cash balance of the entity as recorded in
the entity’s books and as reflected in bank’s record.
- A bank reconciliation statement is periodically prepared, usually at the end of the
month.
- Unlike the bank reconciliation which is as of a specific date, a four-column cash
reconciliation, also known as a proof of cash, reconciles bank and book cash balance
over a specified time period.

Reconciling Items
Book reconciling items
- Bank credit memos, bank debit memos, book errors
Bank reconciling items
- Deposit in transit, outstanding checks and bank errors
II. LOANS AND RECEIVABLES

Definitions of Terms

Receivables - are financial assets that represent a contractual right to receive cash or another
financial asset from another entity. For retailers or manufacturers, there are trade and nontrade
receivables.

Trade Receivables – refers to those claims arising from the sale of good or services in the
ordinary course of business. May include accounts receivables, and notes receivables.

Accounts Receivables – these are open accounts arising from the sale of goods and services in
the ordinary course of the business and not supported by promissory notes.

Notes Receivables – those supported by formal promise to pay in the form of notes.

Nontrade Receivables – refers to claims arising from sources other than the sale of goods or
services in the ordinary course of the business.

Loans Receivables – these are receivables of bank and other financial institutions from their
customers. These loans are made to heterogeneous customers and the repayment periods are
frequently longer or over several years.

Recognition:

 Trade receivables that are collectible or expected to be realized in cash within the normal
operating cycle or one year, whichever is longer, shall be classified as current assets.
 Nontrade receivables that are expected to be realized in cash within one year are
classified as current assets. Those collectible beyond one year shall be classified as
noncurrent assets.
Initial Measurements

 IFRS 9 provides that, financial instruments (including notes and loans receivables), are
initially measured at fair value plus, in the case of a financial asset not at fair value
through profit or loss, transaction costs.
 For short-term receivables, such as accounts receivables, the fair value is equal to the
face amount or the original invoice amount.
 Initial measurement of loans receivables = Principal minus direct organization fees
received from borrower plus direct origination costs incurred by the lender.

Subsequent Measurement

 After the initial measurement, accounts receivables shall be subsequently measured at

amortized cost. The term amortized cost is actually the net realizable value. Net
realizable value is the amount of cash expected to be collected or the estimated
recoverable amount.
 Long-term notes and loans receivables shall be subsequently measured at amortized
cost using the effective interest method.
 Accounting for amortization of loan receivables:
Case Difference Amortization

Direct origination fees > Direct origination costs Unearned interest Increase interest
income income

Direct origination fees < Direct origination costs Direct origination Decrease interest
costs income

Transactions Affecting Loans and Receivables

Accounting for Bad Debts

 Bad debt is the amount of an account receivable that is considered to be not collectible.
This may be computed using two methods:
 a. Direct Write-off
- This is done when it becomes apparent that a specific customer invoice will not be
collected or when accounts proved to be worthless.
- This is a debit to the bad debt expense account and a credit to the accounts
receivable account.
b. Allowance method
- This method estimates the portion of the customer’s accounts that are doubtful of
collection.
- This is recorded as a debit to the bad debt expense account and a credit to the
allowance for doubtful accounts.
- The actual elimination of the unpaid accounts receivable is later accomplished by
drawing down the amount in the allowance account.
 Methods of estimating bad debts (Allowance method)
a. Percent of sales (Income statement approach)
- Bad debts are computed based on amount of credit sales.
- The resulting figure is recorded as the bad debts expense for the period.
b. Percent of receivables (Statement of Financial Position Approach)
- Bad debts are computed based on the amount of outstanding receivables.
- The resulting figure is already the required allowance for bad debts that is
deducted from the receivables to arrive at the net realizable value of receivables.
c. Aging of receivables (Statement of Financial Position Approach)
- Similar to percent of receivables, the computed figure is already the required
allowance for bad debts that is deducted from the accounts receivable balance.
- This requires classification of past due customer accounts in terms of length of
time outstanding. Various rates are used to compute the bad debts. Rates used in
computation increases as the receivables become “older”.

Other allowances:

 Allowance for freight charges

 Allowance for sales returns
 Allowance for sales discounts
Impairment and Credit Losses (Loans Receivables)

 Expected credit losses are required to be measured through a loss allowance at an amount
equal to:
a. The 12-month expected credit losses (expected credit losses that result from those
default events on the financial instrument that are possible within 12 months after the
reporting date).
b. Full lifetime expected credit losses (expected credit losses that result from all possible
defaults events on the financial life of the financial instrument).
 Impairment loss = Carrying amount of loan receivable minus present value of cash
flows.
 Allowance for loan impairment is recorded and the allowance account shall be amortized
subsequently to interest income.

Presentation

 Trade and nontrade receivables which are currently collectible shall be presented in the
statement of financial position under the current assets section as one line item called the
“trade and other receivables”.
 Items under trade and other receivables include:
- Accounts receivables
- Allowance for doubtful accounts as deduction from accounts receivables to arrive
at net realizable value
- Notes receivables
- Accrued Income
- Short-term advances to (supplier, employee, officers, etc.)
- Subscription receivables collectible within one year
- Creditor’s account with debit balance
- Deposits collectible currently
- Claims receivables
  Those nontrade receivables that are not collectible within one year shall be presented in
the statement of financial position under the noncurrent assets section.

Disclosures

 IFRS 7 provides that there are disclosures required to be presented for loans and
receivables.
 The following are the necessary disclosures for most accounts receivables:
- The current portion of accounts receivable should represent only the amounts that
are collectible within a year.
- Significant concentrations of credit risk (such as material balances concentrated
within a specific creditor, geographical location, or industry)
- Accounts receivable that are pledged as collateral for other borrowings.
- The contractual write off of the amount outstanding during the reporting period.
III. INVESTMENT IN DEBT INSTRUMENTS (IFRS 9, IAS 39)

Definition of Terms

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

Debt instrument - is a paper or electronic obligation that enables the issuing party to raise funds
by promising to repay a lender in accordance with terms of a contract.

 Types of debt instruments include notes, bonds, debentures,

certificates, mortgages, leases or other agreements between a lender and a borrower.

Recognition

Initial recognition

IAS 39 requires recognition of a financial asset or a financial liability when, and only when, the
entity becomes a party to the contractual provisions of the instrument, subject to the
following provisions in respect of regular way purchases.

Measurement

Initial Measurements

 Financial Assets at Fair Value through Profit or Loss are initially measured at fair value.
Transaction costs are expensed outright.
 Financial Assets at Fair Value through Other Comprehensive Income and Financial
 Assets at amortized Cost are initially measured at fair value plus transaction costs.

Subsequent Measurement

 Financial asset shall be measured at fair value through profit or loss.

  Financial asset shall be measured at fair value through other comprehensive income.
 Financial asset shall be measured at amortized cost.

Transactions Affecting Investment in Debt Instruments

 Fair Value through Profit or Loss

Carrying Amount + Unrealized Gain - Unrealized Loss

 Fair Value through Other Comprehensive Income

Carrying Amount + Amortization of Discount - Amortization of Premium + Unrealized
Gain - Unrealized Loss

 Financial Assets at Amortized Cost

Amortized Cost (Initial recognition amount of the Investment) - Repayments +

Amortization of Discount - Amortization of Premium - Reduction for Impairment

Presentation

 Interest revenue is always required to be presented as a separate line item; it is calculated

differently according to the status of the asset with regard to credit impairment.
 In the case of a financial asset that is not a purchased or originated credit impaired
financial asset and for which there is no objective evidence of impairment at the reporting
date, interest revenue is calculated by applying the effective interest rate method to the
gross carrying amount.
 In the case of a financial asset that is not a purchased or originated credit impaired
financial asset but subsequently has become credit impaired, interest revenue is
calculated by applying the effective interest rate to the amortized cost balance, which
comprises the gross carrying amount adjusted for any loss allowance.
  In the case of purchased or originated credit impaired financial assets, interest revenue is
always recognized by applying the credit adjusted effective interest rate to the amortized
cost carrying amount.
 The credit adjusted effective interest rate is the rate that discounts the cash flows
expected on initial recognition (explicitly taking account of expected credit losses as well
as contractual terms of the instrument) back to the amortized cost at initial recognition.
 Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including
reversals of impairment losses and impairment gains (in the case of purchased or
originated credit impaired financial assets), are presented in a separate line item in the
statement of profit or loss and other comprehensive income.

Disclosures

In 2003 all disclosures about financial instruments were moved to IAS 32, so IAS 32 was
renamed Financial Instruments: Disclosure and Presentation. In 2005, the IASB issued IFRS
7 Financial Instruments: Disclosures to replace the disclosure portions of IAS 32 effective 1
January.
IV. INVESTMENT IN ASSOCIATE

Definitions of Terms

Associate - is an entity over which an investor has significant influence, being the power to
participate in the financial and operating policy decisions of the investee (but not control or joint
control), and investments in associates are, with limited exceptions, required to be accounted for
using the equity method.

Significant Influence – the power to participate in the financial and operating policy decisions
of the investee but is not control or joint control of those policies.

 A holding of 20% or more of the voting power (directly or through subsidiaries) will
indicate significant influence unless it can be clearly demonstrated otherwise.

Accounting for Investment in Associates

Situation Excess Accounting

Cost of Investment > FV of Net Assets Goodwill Goodwill not accounted separately.
Goodwill is included in the cost of the
investment.
Cost of Investment < FV of Net Assets Gain Included in income determination in the
period of acquisition in full amount.
Increase investment account and record
income from investment.

 Investment in Associates should be accounted using equity method.

 Under the equity method, on initial recognition, the investment in an associate or a joint
venture is recognized at cost and the carrying amount is increased or decreased to
 recognize the investor's share of the profit or loss of the investee after the date of
acquisition.

Amortization of excess

Situation Accounting
Undervaluation of asset (CA < FV) Decrease investment income and decrease investment
account.
Overvaluation of asset (CA > FV) Increase investment income and decrease investment
account.
 Excess attributable to depreciable asset is amortized based on remaining useful life.
 Excess attributable to inventories is amortized when inventories are sold.

Applying the Equity Method of Accounting

Particular Effect of Investment Account Accounting Treatment

Net income of associate Increase Income from investment
Net loss of associate Decrease Loss from investment
Dividends from associate Decrease Return of investment

Upstream and Downstream Transactions

Transactions Unrealized Profit Realized Profit

Inter-entity sale of Inventory Profit on ending inventory Profit on beginning inventory
Deducted from net income of Added to net income of
associate associate
Inter-entity sale of PPE Gain/loss on sale of PPE Gain/Loss on Sale ÷ Useful
Gain – deducted from net life
income of associate Gain – added to net income of
 Loss – added to net income of associate
associate Loss – deducted from net
(made only on the year of income of associate
sale) (Repeated over the life the
asset)

Presentation

 Equity method investment must be classified as noncurrent assets.

 The investor’s share of changes recognized directly in the associate’s other
comprehensive income are also recognized in the other comprehensive income by the
investor.

Disclosures

The following disclosures are required:

 Fair value of investments in associates for which there are published price quotations
 Summarized financial information of associates, including the aggregated amounts of
assets, liabilities, revenues, and profit or loss
 Explanations when investments of less than 20% are accounted for by the equity method
or when investments of more than 20% are not accounted for by the equity method
 Use of a reporting date of the financial statements of an associate that is different from
that of the investor
 Nature and extent of any significant restrictions on the ability of associates to transfer
funds to the investor in the form of cash dividends, or repayment of loans or advances
 Unrecognized share of losses of an associate, both for the period and cumulatively, if an
investor has discontinued recognition of its share of losses of an associate
 Explanation of any associate is not accounted for using the equity method
 Summarized financial information of associates, either individually or in groups, that are
not accounted for using the equity method, including the amounts of total assets, total
liabilities, revenues, and profit or los
V. DERIVATIVES

Nature (IAS 39 Financial instrument)

A derivative is a financial instrument with the following three characteristics:

 Its value changes in response to a change in price of, or index on, a specified underlying
financial or non-financial item or other variable;
 It requires no, or comparatively little, initial investment; and
 It is to be settled at a future date.

Forward Contract – an agreement to buy or sell an asset at a predetermined price as of a future

date. This is a highly customizable derivative, which is traded on an exchange.

Future Contract – an agreement to buy or sell an asset at a predetermined price as of a future

date. This is a standardized agreement, so that they can be more easily traded on a futures
exchange.

Interest rate swap – interest rate swap is a contract between two counterparties who agree to
exchange the future interest rate payments they make on loans or bonds. These two
counterparties are banks, businesses, hedge funds, or investors.

Call options – agreement that give the option buyer the right, but not the obligation, to buy a
stock, bond, commodity or other instrument at a specified price within a specific time period.
The stock, bond, or commodity is called the underlying asset.

Put Option – a put option is an option contract giving the owner the right, but not the obligation,
to sell a specified amount of an underlying security at a specified price within a specified
time frame. This is the opposite of a call option, which gives the holder the right to buy an
underlying security at a specified price, before the option expires.

Recognition

 An entity must recognize a financial asset or a financial liability (including a derivative)

when it becomes a party to the instrument’s contractual provisions.
Measurement

 Initial recognition – when it is first acquired, recognize a derivative instrument in

the balance sheet as an asset or liability at its fair value.
 Subsequent recognition – recognize all subsequent changes in the fair value of the
derivative (known as marked to market)
 Subsequent recognition (ineffective portion) – recognize all subsequent changes
in the fair value of the derivative.
 Subsequent recognition (speculation) – recognize in earnings all subsequent
changes in the fair value of the derivative.

Unrealized gain or loss is recognized when there is change in the fair value.

Presentation

Derivative assets and liabilities recognized on financial position at fair value should be
presented as current and non-current based on the following considerations:

 Derivatives intended for trading/speculative purposes: current assets and liabilities

 Derivatives that hedge recognized assets or liabilities are classified based on the hedge
item.
 Derivatives being hedges of forecasted transactions/firm commitments are classified
based on the settlement/maturity dates of the derivative contracts.
 Periodic or multiple settlements – derivatives such as interest rate swaps should not be bi-
furcated into current and non-current elements. Their classification should be based on
when a predominant portion of their cash flows are due for settlement as per their
contractual terms.

Disclosure

 Both the fair value and notional shall be fully disclosed.

VI. INVENTORIES

Inventories (IAS 2) – are assets held for sale in the ordinary course of business; in the process of
production for such sale; or in the form of materials or supplies to be consumed in the production
process or in the rendering of services.

Measurement

Inventories shall be measured at the lower cost and net realizable value.

 The cost of inventories shall comprise all cost of purchase, cost of conversion and other
cost incurred in bringing the inventories to their present location and condition.

Net Realizable Value – is defined as the expected selling price in the ordinary course of
business minus the cost of completion, disposal, and transportation.

Inventory Estimation

1. Gross Profit Method

- It is used to estimate inventory from accounting records without taking physical count.
- Ending inventory = Cost of good sold – computed cost of sales
- Computations:

Gross Profit based on Sales: Net Sales x Cost Ratio

Gross Profit based on Cost: Net Sales / Sales Ratio

2. Standard Costing

- Standard cost take into account normal levels of materials and supplies, labor, efficiency
and capacity utilization.
- Materials are recorded at standard prices and labor and overhead are charged at work in
process at standard rate.
3. Retail Method

- The cost of inventory is determined by reducing the sales value of the inventory by the
appropriate percentage gross margin.
- Cost Ratio = Goods available for sale at cost / Goods available for sale at sales price
- Ending inventory = Ending inventory at retail price x Cost ratio
- Approaches of Retail Method
a. Average method – consist both net mark-up and net markdown in the
calculation of cost ratio.
b. Conservative method – includes net markup but excludes net markdown.
c. FIFO method – considered both net markup and net markdown but
excludes beginning inventory in the calculation of cost ratio.

Disclosure

 The accounting policies that were adopted in measuring inventories, including the cost
formula used
 The total carrying amount of inventories and the carrying amount in classifications that
are appropriate to the entity
 The carrying amount of inventories that are carried at fair value less the costs to sell
 The amount of inventories that are recognized as an expense during the reporting period
 The amount of any write-down of inventories that are recognized as an expense in the
reporting period
 The amount of any reversal of any write-down that is recognized as a reduction in the
cost of sales during the reporting period
 The circumstances or events which have led to the reversal of a write-down of inventories
 The carrying amount of inventories that are pledged as security for liabilities.
VII. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment (IAS 16) 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
- are expected to be used during more than one period.

Recognition Principle
 Property, plant and equipment should be recognized as assets when:
a. it is probable that the future economic benefits associated with the asset will flow
to the entity
b. the cost of the asset can be measured reliably.
 This recognition principle is applied to all property, plant and equipment costs at the time
they are incurred. These costs include costs incurred initially to acquire or construct an
item of property, plant and equipment and costs incurred subsequently to add to, replace
part of, or service it.

Initial Recognition
 An item of property, plant and equipment that qualifies for recognition as an asset shall
be measured at its cost. It comprises:
a. its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates.
b. any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
management.
c. the initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located, the obligation for which an entity incurs
either when the item is acquired or as a consequence of having used the item
 during a particular period for purposes other than to produce inventories during
that period.

Note 1: If payment is deferred, interest at a market rate must be recognized or imputed.

Note 2: If asset is acquired in exchange of another asset (similar or dissimilar in nature), cost
will be measured at fair value, if not, the carrying amount of the asset given up.

Cash Price Equivalent

 The cost of an item of property, plant and equipment is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is recognized as interest over the
period of credit unless such interest is capitalized in accordance with IAS 23 Borrowing
Costs.

Asset Exchange
 One or more items of property, plant and equipment may be acquired in exchange for a
non-monetary asset or assets, or a combination of monetary and non-monetary assets.
The following discussion refers simply to an exchange of one non-monetary asset for
another, but it also applies to all exchanges described in the preceding sentence. The cost
of such an item of property, plant and equipment is measured at fair value unless:
(a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received nor the asset given up is reliably
measurable.

 The acquired item is measured in this way even if an entity cannot immediately
derecognize the asset given up. If the acquired item is not measured at fair value, its cost
is measured at the carrying amount of the asset given up.
 An entity determines whether an exchange transaction has commercial substance by
considering the extent to which its future cash flows are expected to change as a result of
the transaction. An exchange transaction has commercial substance if:
 (a) the configuration (risk, timing and amount) of the cash flows of the asset
received differs from the configuration of the cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the entity’s operations affected by
the transaction changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets
exchanged.

 For the purpose of determining whether an exchange transaction has commercial

substance, the entity-specific value of the portion of the entity’s operations affected by
the transaction shall reflect post-tax cash flows. The result of these analyses may be clear
without an entity having to perform detailed calculations. The fair value of an asset is
reliably measurable if:
a. the variability in the range of reasonable fair value measurements is not
significant for that asset; or
b. the probabilities of the various estimates within the range can be reasonably
assessed and used when measuring fair value.

 If an entity is able to measure reliably the fair value of either the asset received or the
asset given up, then the fair value of the asset given up is used to measure the cost of the
asset received unless the fair value of the asset received is more clearly evident.

 Recognition of costs in the carrying amount of an item of property, plant and equipment
ceases when the item is in the location and condition necessary for it to be capable of
operating in the manner intended by management. Therefore, costs incurred in using or
redeploying an item are not included in the carrying amount of that item. For example,
the following costs are not included in the carrying amount of an item of property, plant
and equipment:
a. costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity
b. initial operating losses, such as those incurred while demand for the item’s output
builds up
 c. costs of relocating or re-organizing part or all of an entity’s operations.

 Government Assistance The carrying amount of an item of property, plant and

equipment may be reduced by government grants in accordance with PAS 20 Accounting
for Government Grants and Disclosure of Government Assistance.

Subsequent Measurement
IAS 16 permits two (2) accounting models
a) Cost Model – The asset is carried at cost less accumulated depreciation and
impairment.
b) Revaluation Model – The asset is carried at a revalued amount, being its fair value
at the date of revaluation less subsequent depreciation and impairment, provided
that fair value can be measured reliably.
Note 3: Revaluation should be carried out regularly, so that the carrying amount of an asset does
not differ materially from its fair value at the balance sheet date.

Derecognition
 The carrying amount of an item of property, plant and equipment shall be derecognized:
a. on disposal; or
b. when no future economic benefits are expected from its use or disposal.
 The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal proceeds, if
any, and the carrying amount of the item.
 The gain or loss shall be included in profit or loss when the item is derecognized (unless
PFRS 16 Leases requires otherwise on a sale and leaseback). Gains shall not be classified
as revenue.
 However, an entity that, in the course of its ordinary activities, routinely sells items of
property, plant and equipment that it has held for rental to others shall transfer such assets
to inventories at their carrying amount when they cease to be rented and become held for
sale. The proceeds from the sale of such assets shall be recognized as revenue in
 accordance with IFRS 15 Revenue from Contracts with Customers. IFRS 5 does not
apply when assets that are held for sale in the ordinary course of business are transferred
to inventories.
Depreciation Methods
 Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life.
 A variety of depreciation methods can be used to allocate the depreciable amount of an
asset on a systematic basis over its useful life. These methods include:
 Straight-line Depreciation Method results in a constant charge over the useful
life if the asset’s residual value does not change.
 Diminishing Balance Method results in a decreasing charge over the useful life.
 Units of Production Method result in a charge based on the expected use or
output.
 Depreciation of an asset begins when it is available for use, i.e. when it is in the location
and condition necessary for it to be capable of operating in the manner intended by
management.
 Depreciation of an asset ceases at the earlier of the date that the asset is classified as held
for sale (or included in a disposal group that is classified as held for sale) and the date
that the asset is derecognized.
 Therefore, depreciation does not cease when the asset becomes idle or is retired from
active use unless the asset is fully depreciated. However, under usage methods of
depreciation the depreciation charge can be zero while there is no production.

Note 4: A depreciation method that is based on revenue that is generated by an activity that
includes the use of an asset is not appropriate.

Impairment
 PAS 16 requires impairment testing and, if necessary, recognition for property, plant and
equipment.
 To determine whether an item of property, plant and equipment is impaired, an entity
applies PAS 36 Impairment of Assets. That Standard explains how an entity reviews the
 carrying amount of its assets, how it determines the recoverable amount of an asset, and
when it recognizes, or reverses the recognition of, an impairment loss.

Recoverable Amount
 An item in the property, plant and equipment shall not be carried at more than the
recoverable amount. Recoverable Amount is the higher between the asset’s fair value
less cost to sell and its value in use.
 If fair value less cost to sell or value in use is more than the carrying amount, it is
not necessary to calculate the other amount. The asset is not impaired.
 If fair value less cost to sell cannot be determined, then the recoverable amount is
the value in use.
 For assets to be disposed of, the recoverable amount is the fair value less costs of
disposal.

 Fair Value Less Cost of Disposal

- Fair value is determined in accordance with PFRS 13 Fair Value Measurement.
Cost of disposal are the direct added cost only (not existing cost or overhead).

 Value in Use
- The value in use is the present value of the future cash flows expected to be
derived from an asset or cash generating unit.
- In determining the value in use, the discount rate to be used should be the pre-tax
rate that reflects current market assessments of the time value of money and the
risks specific to the assets. If such rate cannot be determined, a surrogate must be
used that reflects the time value of money over the asset’s life as well as country
risk, currency risk, price risk, and cash flow risk. The following would normally
be considered
a. The entity’s own weighted average cost of capital
b. The entity’s own incremental borrowing cost
c. Other market borrowing rates
  Cash Generating Unit
- Recoverable amount should be determined for the individual asset if possible. If
not, determine the recoverable amount for the asset’s cash generating unit.
- Cash Generating Unit is the smallest identifiable group of assets that generates
cash inflow that are largely independent of the cash inflows from other assets or
group of assets.

Impairment Loss Recognition

1. An impairment loss is recognized whenever recoverable amount is below carrying
amount.
2. The impairment loss is recognized as expense (unless it relates to a revalued asset where
the impairment loss is treated as revaluation decrease).

Reversal of Impairment Loss

1. Assess at each statement of financial position date whether there is an indication that an
impairment loss may have decreased.
2. No reversal for unwinding discount.
3. The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been recognized.
4. Reversal of the impairment loss is recognized in the profit or loss unless it relates to
revalued assets.
5. Adjust depreciation for future periods.
6. Reversal for impairment loss for goodwill is prohibited.

Presentation
 The property, plant and equipment shall be presented in the non-current assets section of
the statement of financial position as a group account “Property, Plant and Equipment” in
their carrying amount.
Disclosure
 The financial statements shall disclose, for each class of property, plant and equipment:
a. the measurement bases used for determining the gross carrying amount;
b. the depreciation method(s) used;
c. the useful lives or the depreciation rates used;
d. the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period; and
e. a reconciliation of the carrying amount at the beginning and end of the period
showing:
i. addition
ii. disposals
iii. acquisitions through business combinations
iv. revaluation increases or decreases
v. impairment losses
vi. reversals of impairment losses
vii. depreciation
viii. net foreign exchange differences on translation
ix. other movements

 The financial statements shall also disclose:

a. restrictions on title and items pledged as security for liabilities
b. expenditures to construct property, plant, and equipment during the period
c. contractual commitments to acquire property, plant, and equipment
d. compensation from third parties for items of property, plant, and equipment that were
impaired, lost or given up that is included in profit or loss.

 If property, plant and equipment is stated at revalued amounts, certain additional disclosures
are required:
a. the effective date of the revaluation
 b. whether an independent value was involved
c. for each revalued class of property, the carrying amount that would have been
recognized had the assets been carried under the cost model
d. the revaluation surplus, including changes during the period and any restrictions on
the distribution of the balance to shareholders.
VIII. INVESTMENT PROPERTY
(IAS 40 Investment Property, IFRS 13 Fair Value Measurement)

Investment property – a land, a building (or a part of it), or both, held for the following specific
purposes: (Purpose is the determining factor)
 To earn rentals;
 For capital appreciation; or
 Both (IAS 40.5)

If held for the following purposes, NOT an investment property:

 For production or supply of goods or services, (PPE, IAS 16)
 For administrative purposes, (PPE, IAS 16) or
 For sale in the ordinary course of business. (Inventory, IAS 2)

Examples of investment property:

 Land held as investment for long-term capital appreciation, or for future undetermined
use (i.e. do not know yet what it will be used for).
 A building owned by the entity and leased out under one or more operating leases.
 Any property constructed or developed for future used as investment property.

Recognition
Recognize investment property as an asset only if two conditions are met:
1. It is probable that future economic benefits associated with the item will flow to the
entity, and
2. The cost of the item can be measured reliably.
Measurement
INITIAL MEASUREMENT: At cost, including transaction cost. The cost of investment
property includes:
 Its purchase price, and
 Any directly attributable expenditure, such as legal fees or professional fees, property
taxes, etc.

Cost does NOT include:

 Startup expenses,
 Operating losses, and
 Abnormal waste of material, labor or other resources incurred at construction.

When the payment for the investment property is deferred, discount the payment to its present
value in order to set the cash price equivalent.

SUBSEQUENT MEASUREMENT: There are two options for subsequent measurement. Once
choice is made, all investment property should be measured using the same model.

Option 1: FAIR VALUE MODEL.

 Investment property is carried at fair value at the reporting date. Fair value is determined
in line with IFRS 13 Fair Value Measurement.
 Gain or loss from remeasurement to fair value shall be recognized in profit or loss.
 If the fair value cannot be reliably measured:
o Measure investment property at cost, if not yet completed and is under
construction; or
o Measure investment property using cost model, if completed.

Option 2: COST MODEL

 Refer to IAS 16 Property, Plant and Equipment.
Switching between two models: Yes, but only if the change results in the financial statements
providing better, more reliable information about the company’s financial position, results and
other events.

Transactions – Subsequent – What will increase or decrease?

Reclassification or transfer of property, if there is a change in the use of property such as:
 Development of investment property to be sold in the normal course of business (from
IAS 40 to IAS 2 Inventories)
 Use of investment property as owner-occupied property (from IAS 40 to IAS 16
Property, plant and equipment)
 Cease of use of owner-occupation in a property to be used as investment property (from
IAS 16 PPE to IAS 40)
 Property is let out under operating lease to other party, which was held for sale in normal
course of business (IAS 2 Inventories to IAS 40)

Accounting treatment for reclassification:

 From inventory (IAS 2) to investment property (IAS 40): Measured at fair value. Any
difference between the FV of property and previous carrying value under IAS 2 will be
reported in the profit/loss on the date of reclassification. Subsequently, apply fair value
model.
 From owner-occupied (IAS 16) to investment property (IAS 40): Entity will apply IAS
16 rules up to the date of reclassification. Any difference between the FV of property and
its carrying value under IAS 16 on the date of reclassification will be treated as
revaluation surplus/loss. Subsequently, apply fair value mode.
 From investment property (IAS 40) to inventory (IAS 2) or owner-occupied property
(IAS 16): No gain/loss on the date of reclassification. Carrying value under IAS 40 will
become deemed cost for subsequent accounting.
 When the development of the investment property under construction is completed,
which will be measured under fair value model, any resulting difference between its fair
value and carrying value will be reported to profit/loss.
DERECOGNITION: The investment property will be derecognized from the financial
statements under the following situations:
 Upon disposal of investment property, or
 When no economic benefits are available either by use of property or from its sale.
 However, any gain or loss, resulting from the disposal of investment property will be
charged to the profit/loss in the related period.
 Any compensation recoverable from any third parties will be recognized in profit/loss, in
respect of investment property which was impaired or lost, in the period in which it
becomes receivable.

Presentation
As a separate line item under non-current assets.

Disclosure – The entity should disclose the following:

 The measurement model used by the entity (i.e. cost model or fair value model).
 The circumstance in which entity has opted the classification option for property interest.
 How entity has determined the fair value for investment property.
 Any amounts recognized in statement of profit/loss in respect of:
a. Any rental earnings from investment property
b. Any operating expense such as repair and maintenance
c. Any movement in fair value of investment property
 For the investment property under cost model, the entity should disclose:
a. Depreciation method
b. Estimate of useful life
c. Gross carrying amount
d. Impairment loss, if any.
 For the property for which fair value could not be determined and the entity has to
measure such property under cost model, the entity should disclose:
a. Nature of the investment property
b. Reason why the fair value is not determinable
 For the property which has been disposed off, the entity should disclose:
a. Its carrying amount on disposal date
b. Any amount of gain or loss on disposal