FINANCIAL ACCOUNTING AND REPORTING

Assets Summary Notes

1. CASH AND CASH EQUIVALENTS

• Money – standard medium of exchange in business transactions which refers to the currency
and coins which are in circulation and legal tender.
• In accounting parlance, cash includes money and any other negotiable instrument that is
payable in money and acceptable by the bank for deposit and immediate credit.
• Cash includes checks, bank drafts, and money orders.
• Cash Equivalents (PAS 7)
Ø Short-term and highly liquid investments that are readily convertible into and so near
their maturity that they present insignificant risk of changes in value because of
changes in interest rates
Ø Only highly liquid investments that are acquired three months before maturity
Ø Equity securities CANNOT QUALIFY as cash equivalents because shares do not have
maturity date
Ø Preference shares with specified redemption date and acquired three months before
redemption date CAN QUALIFY as cash equivalents
• Valuation
Ø Cash at FACE AMOUNT
Ø Cash in foreign currency is valued at CURRENT EXCHANGE RATE
Ø If the bank or financial institution holding the funds is in bankruptcy or financial
difficulty, cash should be valued at ESTIMATED REALIZABLE VALUE
• Investments in time deposit, money market instruments, and treasury bill
Ø 3 months or less – CASH AND CASH EQUIVALENTS
Ø more than 3 months but within 1 year – CURRENT ASSETS
Ø more than 1 year – LONG-TERM INVESTMENT
• Cash in Foreign Currency
Ø Shall be translated to Philippine peso using the current exchange rate
Ø If not restricted, part of CASH
Ø If restricted, NONCURRENT ASSETS
• Cash Funds
Ø Current
ü Petty cash fund
ü Payroll fund
ü Travel fund
ü Interest fund
ü Dividend fund
ü Tax fund
Ø Noncurrent
ü Sinking fund
ü Preferred redemption fund
ü Contingent fund
ü Insurance fund
ü Fund for acquisition of PPE
Ø Classification of a cash fund as current or noncurrent should parallel the classification
of the related liability.
• Bank Overdraft
Ø Cash in bank has a CREDIT balance
Ø Classified as CURRENT LIABILITY, and should not be offset against other bank
account with a debit balance
Ø Maybe offset against other bank account within the same bank and if the amount is
immaterial
• Compensating Balance
Ø Minimum checking account or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a bank
Ø If not legally restricted, part of CASH
Ø If legally restricted, classified separately as CASH HELD AS COMPENSATION
BALANCE under current asset but if the related loan is long-term, the compensating
balance is considered as NONCURRENT INVESTMENT
• Checks
Ø Undelivered/Unreleased – merely drawn and recorded but not given to the payee
before the end of reporting period; shall not be treated as outstanding check and
restore it to CASH balance

/reabCPA 1
 Ø Postdated – check drawn, recorded, and already given to the payee but it bears a date
subsequent to the end of reporting period and the amount will be restored back to
CASH account
Ø Stale – check not encashed by the payee within relatively long period of time; in
practice, 6 months from the date of issuance; stale check issued shall be restored to
the cash balance
• Petty Cash Fund
Ø Fund set aside for minor disbursements of the entity
Ø Approaches:
ü Imprest fund system – expenses are recorded upon replenishment,
ü Fluctuating fund system – expenses are immediately recorded

2. BANK RECONCILIATION
• Bank reconciliation is a statement which brings into agreement the cash balance per book
and cash balance per bank. It is usually prepared monthly because the bank provides the
depositor with the bank statement at the end of every month.
• Book Reconciling Items
Ø Credit Memos – items representing deposits credited by the bank to the account of
the depositor but not yet recorded as cash receipts by the depositor (ex: note collected
by bank, proceeds of bank loan)
Ø Debit Memos – items not representing checks paid by bank which are charged or
debited to the account of the depositor but not yet recorded as cash disbursement (ex:
bank service charge, NSF checks)
• Bank Reconciling Items
Ø Deposits in Transit – collections already recorded by the depositor as cash receipts
but not yet reflected on the bank statement
Ø Outstanding Checks – checks already recorded by the depositor as cash
disbursements but not yet reflected on the bank statement
• Forms
Ø Adjusted balance method
Ø Book to bank method
Ø Bank to book method

3. PROOF OF CASH
• Expanded reconciliation which includes receipts and disbursements
• Useful in discovering possible discrepancies in handling cash particularly when cash receipts
have been recorded but have not been deposited

4. ACCOUNTS RECEIVABLE & ALLOWANCE FOR DOUBTFUL ACCOUNTS

• Receivables are financial assets because they represent a contractual right to receive cash
or another financial asset from another entity.
• Classification
Ø Trade receivable – claims arising from sale of merchandise or services in the ordinary
course of business operations (ex: accounts receivable, notes receivable); CURRENT
ASSET if it is expected to be realized within the normal operating cycle or one year,
whichever is longer
Ø Nontrade receivable – claims arising from sources other than sale of merchandise or
services in the ordinary course of business; CURRENT ASSET if realizable within one
year, if not classify as NONCURRENT ASSET
• Initial Measurement
Ø PFRS 9 – measure at FAIR VALUE plus TRANSACTION COSTS that are directly
attributable to the acquisition, which is usually the transaction price
Ø For short-term receivables – Fair Value = Face Value; not discounted
Ø For long-term interest-bearing receivables – Fair Value = Face Value
Ø For long-term noninterest-bearing receivables – Present Value
• Subsequent Measurement
Ø Should be measured subsequently at NET REALIZABLE VALUE with the following
deductions:
ü Allowance for freight charge
o FOB destination – seller owns the good until the buyer received the
goods and shall be responsible for the freight charge up to the point of
destination
o FOB shipping point – buyer owns the goods upon shipment and pays
the transportation charge from the point of shipment to the point of
destination

/reabCPA 2
 o Freight collect – common carrier shall collect the same from the buyer,
thus, freight charge is actually paid by the buyer
o Freight prepaid – freight charge is already paid by the seller
ü Allowance for sales returns
ü Allowance for sales discounts
ü Allowance for doubtful accounts
o Allowance method
o Direct writeoff method
• Estimation of Doubtful Accounts
Ø Aging – balance sheet approach; ending or required balance of allowance for doubtful
account
Ø Percent of accounts receivable – balance sheet approach; ending or required balance
of allowance for doubtful account
Ø Percent of sales – income statement approach; recorded as doubtful accounts
expense

5. NOTES RECEIVABLE
• Claims supported by formal promises to pay usually in the form of notes
• Negotiable promissory note – unconditional promise in writing made by one person, signed
by the maker, engaging to pay on demand or at a fixed determinable future time a sum certain
in money to order or bearer
• Dishonored notes
Ø When a promissory note matures and is not paid
Ø Transferred back to accounts receivable including face amount, interest, and other
charges
• Initial Measurement
Ø If short-term, measure at FACE VALUE
Ø If long-term interest bearing, measure at FACE VALUE
Ø If long-term noninterest bearing, measure at PRESENT VALUE
• Subsequent Measurement
Ø Should be measured at AMORTIZED COST

6. LOANS RECEIVABLE & IMPAIRMENT

• Initial Measurement
Ø Should be measured at FAIR VALUE plus DIRECTLY ATTRIBUTABLE COSTS
Ø Directly attributable costs – direct origination costs
Ø Indirect origination costs – not included in the initial measurement and should be
EXPENSED OUTRIGHT
• Subsequent Measurement
Ø Should be measured at AMORTIZED COST using effective interest method
• Origination Fees – fees charged by the bank to the borrower
Ø Evaluating the borrower’s financial condition
Ø Evaluating guarantees, collateral, and other security
Ø Negotiating and processing the documents related to the loan
Ø Closing and approving the loan transaction
• Accounting for Origination Fees
Ø Direct Origination Costs – deferred and also amortized over the term of the loan
Ø Origination Fees Received from Borrower – recognized as UNEARNED INTEREST
INCOME and amortized over the term of the loan
Ø Direct origination costs are offset directly against origination fees received
ü If direct origination costs exceed the origination fees received
o Difference is charged to Direct Origination Costs
o Amortization will decrease interest income
ü If the origination fees received exceed direct origination costs
o Difference is Unearned Interest Income
o Amortization will increase interest income
• Impairment of Loan
Ø PFRS 9
ü Entity shall recognize a loss allowance for expected credit losses on financial
asset measured at amortized cost
ü Expected credit losses are an estimate of credit losses (present value of all
cash shortfalls) over the life of the financial instrument

/reabCPA 3
 Ø Measurement of Impairment
ü Probability-weighted outcome – should reflect the possibility that a credit loss
will occur or not
ü Time value of money – should be discounted
ü Reasonable and supportable information – available without undue cost or
effort
Ø Credit Risk
ü Risk that one party to a financial instrument will cause a financial loss for the
other party by failing to discharge an obligation

7. RECEIVABLE FINANCING
• Pledge
Ø No entry is made.
Ø It is sufficient that disclosure is made.
Ø When receivables are pledged, these serve as collateral security for the payment.
Ø Considers all receivables (general).
• Assignment
Ø More formal type of pledging
Ø Secured borrowing evidenced by a financing agreement and a promissory note both
of which the assignor signs
Ø Can assign selected accounts as collateral security (specific)
Ø Can be done either on a
ü Nonnotification Basis – customers are not informed that their accounts have
been assigned
ü Notification Basis – customers are notified to make their payments directly to
the assignee
• Factoring
Ø Sale of accounts receivable on without recourse, notification basis
Ø Factor
ü bank or finance entity where the receivable is sold
ü assumes responsibility for uncollectible factored accounts
ü has the responsibility of keeping the receivable records and collecting the
accounts
Ø Gain or Loss is recognized.
Ø There is transfer of ownership.
Ø Forms
ü Casual factoring
o If the entity finds itself in a critical cash position, it may be forced to
factor some or all of its accounts receivable at a substantial discount to
a bank or a finance entity to obtain the much needed cash.
ü As a continuing agreement
o Where a finance entity purchases all of the accounts receivable of a
certain entity
o Selling entity requests the factor’s credit approval before merchandise
is shipped to customer
o If approved, the account is sold immediately to the factor
o The factor then assumes the credit and collection function
o Factor’s Holdback
v factor may withhold a predetermined amount as a protection
against customer returns and allowances and other special
adjustments
v a receivable from factor and classified as CURRENT ASSET
v final settlement is made after the factored receivables have been
fully collected
Ø Credit Card
ü Plastic card which enables the holder to obtain credit up to a predetermined
limit from the issuer of the card for the purchase of goods and services
ü Has enabled retailers and other businesses to continue to sell goods and
services where the customers obtain possession of the goods immediately but
do not have to pay for the goods for about one month.

/reabCPA 4
 • Discounting
Ø Specifically pertains to notes receivable
Ø Endorsement
ü Transfer of right to a negotiable instrument by simply signing at the back of the
instrument
o With recourse – the endorser shall pay the endorsee if the maker
dishonors the note
v Secondary liability – legal parlance
v Contingent liability – accounting parlance

v Accounted for either:

§ Conditional sale – Notes Receivable Discounted Account
is deducted from the total notes receivable with
disclosure of the contingent liability
§ Secured borrowing – recognize an accounting liability
equal to the face amount and there is no gain or loss on
discounting
o Without recourse – the endorser avoids future liability even if the maker
refuses to pay the endorsee on the date of maturity
Ø Net Proceeds = Maturity Value – Discount
Ø Discounting Own Note
ü Primary liability exists
ü In effect, the party discounting is entering into a contract of loan with the
endorsee

8. INVENTORIES
• PAS 2
Ø Inventories 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.
• Classes
Ø Trading – buys and sells goods in the same form
Ø Manufacturing – buys goods which are altered or converted into another form before
they are made available for sale
ü Finished goods
ü Goods in process
ü Raw materials
• Inclusions
Ø Owned and on hand
Ø In transit and sold FOB destination
Ø In transit and purchased FOB shipping point
Ø Out on consignment
Ø In the hands of salesmen or agents
Ø Held by customers on approval
• Maritime Shipping Terms
Ø Free Alongside (FAS) – seller must bear all the expenses and risk involved in
delivering the goods to the dock next to or alongside the vessel on which the goods
are to be shipped
Ø Cost, Insurance, and Freight (CIF) – buyer agrees to pay in a lump sum the cost of
the goods, insurance cost, and freight charge
Ø Ex-ship – seller bears all the expenses and risk of loss until the goods are unloaded
at which time title and risk of loss shall pass to the buyer
• Consignment
Ø Method of marketing goods in which the owner called the consignor transfers physical
possession of certain goods to an agent called the consignee who sells them on the
owner’s behalf.
Ø Consigned goods are included in the consignor’s inventory.
Ø Freight and handling charges on goods out on consignment are part of the cost of
goods consigned.
• Presentation
Ø CURRENT ASSETS as one line item

/reabCPA 5
 • Accounting for Inventories
Ø Periodic System
ü Calls for physical counting of goods on hand at the end of the accounting period
to determine quantities
ü Generally used when the individual inventory items have SMALL PESO
INVESTMENT (ex. groceries, hardware, autoparts)
Ø Perpetual System
ü Stock cards are kept to reflect and control both units and costs
ü Physical count of the units on hand at least be made once a year
• Inventory Shortage or Overage
Ø Resulted from normal shrinkage or breakage – closed to COST OF GOODS SOLD
Ø Abnormal and material shortage – presented as OTHER EXPENSES
• Discounts
Ø Trade Discount
ü Deductions from the list price in order to arrive at the invoice price which is the
amount actually charged to the buyer
ü Not recorded
ü To encourage trading or increase sales
Ø Cash Discount
ü Deductions from the invoice price when payment is made within the discount
the discount period
ü Recorded as PURCHASE DISCOUNT by the buyers and SALES DISCOUNT
by the seller

9. INVENTORY COST FLOW

• Cost Formulas (PAS 2)
Ø First in, first out (FIFO)
ü Will result to the same inventory cost whether periodic or perpetual system is
used
Ø Weighted average
ü Periodic
,-./0 12345
o 𝑊𝐴 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 =
,-./0 6789:; -< =>?.@ 4A/?0/90: <-; 5/0:
o 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝑊𝐴 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 𝑥 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠

ü Perpetual
o WA is calculated every shipment received.
o New
Ø Does not permit the use of Last in, first out (LIFO) as an alternative formula
Particulars FIFO LIFO
1. Ending inventory Recent prices Old prices
2. COGS Old prices Recent prices
3. Favors Balance sheet Income statement
4. Inflation Highest net income Lowest net income
5. Deflation Lowest net income Highest net income
• Other Methods
Ø Specific Identification
ü Appropriate for inventories that are segregated for a specific project and
inventories not ordinarily interchangeable
ü Either periodic or perpetual
ü There is actual determination of cost of units sold and on hand
Ø Standard Costs
ü Predetermined product costs establishes on the basis of normal levels of
materials and supplies, labor, efficiency, and capacity utilization
Ø Relative Sales Price
ü When different commodities are purchased at a lump sum, the single cost is
apportioned among the commodities based on their respective sales price

/reabCPA 6
 10. LOWER OF COST OR NET REALIZABLE VALUE
• PAS 2
Ø Inventories shall be measured at LCNRV
• Net Realizable Value (NRV)
Ø Estimated selling price in the ordinary course of business less the estimated cost of
completion and estimated cost of disposal
Ø May be recoverable if:
ü Damaged
ü Wholly or partially obsolete
ü Selling price have declined
ü Cost of completion or cost of disposal has increased
Ø Written down on an ITEM by ITEM basis, if not appropriate, based on classification of
inventory
• Inventory Writedown
Ø Cost < NRV – increase in value is not recognized
Ø Cost > NRV – writedown
ü Direct method – closed to COST OF GOODS SOLD
ü Allowance method – recognize an ALLOWANCE account and recognize LOSS
and defer allowance to GAIN (deduction from COST OF GOODS SOLD) up to
the extent of the allowed balance
• Purchase Commitments
Ø Obligations of the entity to acquire certain goods sometime in the future at a fixed price
and fixed quantity
Ø Disclosure is required in the accompanying notes to financial statements
Ø LOSSES expected to arise from firm or noncancelable commitments shall be
RECOGNIZED
Ø If there is a decline in the purchase price, LOSS is recorded
Ø If the purchase price falls below the agreed price, the DIFFERENCE is accounted for
as a DEBIT to LOSS ON PURCHASE COMMITMENTS and CREDIT to an
ESTIMATED LIABILITY

11. INVENTORY ESTIMATION/VALUATION

• Common Reasons for Estimation
Ø Destroyed by fire and other catastrophe
Ø Necessary to prove the correctness or reasonableness of such cost
Ø Interim financial statements are prepared
• Methods
Ø Gross Profit Method
ü Based on the assumption that the rate of gross profit remains approximately
the same from period to period and therefore the ratio of cost of goods sold to
net sales is relatively constant from period to period.
o 𝐸𝑛𝑑. 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝐺𝑜𝑜𝑑𝑠 𝐴𝑣𝑎𝑖𝑏𝑙𝑒 𝑓𝑜𝑟 𝑆𝑎𝑙𝑒 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
o 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑥 𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑖𝑜
o 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 ÷ 𝑆𝑎𝑙𝑒𝑠 𝑅𝑎𝑡𝑖𝑜
ü Sales allowance and sales discount are IGNORED and not deducted from
sales because it does not affect the physical volume of goods sold
Ø Retail Inventory Method
ü Used in the retail industry for measuring inventory of large numbers of rapidly
changing items with similar margin for which it is impracticable to use other
costing methods
345 /. 1-@.
o 𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 =
345 /. 5:00?>V W;?X:
o

o 𝑀𝑎𝑖𝑛𝑡𝑎𝑖𝑛𝑒𝑑 𝑀𝑈 = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − 𝐶𝑜𝑠𝑡

/reabCPA 7
 ü Approaches
o Conservative/LCNRV
v Includes MU
v Excludes MD
o Average
v Includes both Net MU and Net MD
o FIFO
v Includes Net MU and MD
v Excludes beginning inventory in computing current cost ratio

12. BIOLOGICAL ASSETS

• PAS 41 applied up to the point of harvest:
Ø Biological assets
Ø Agricultural produce
Ø Government grant related to biological asset
• After harvest, PAS 2 is applied.
• Terms and Definition
Ø Biological Asset – living animals and living plants
Ø Agricultural Produce –harvested product of an entity’s biological assets
Ø Harvest – detachment of produce from a biological assets or the cessation of a
biological asset’s life processes
Ø Agriculture – management by an entity of the biological transformation and harvest of
biological assets for sale or for conversion into agricultural produce into additional
biological asset
ü Capability to change
ü Management of change
ü Measurement of change
Ø Biological Transformation – processes of growth, degeneration, production, and
procreation that cause qualitative or quantitative changes in biological asset
ü Growth – increase in quantity or improvement in quality of an animal or plant
ü Degeneration – a decrease in quantity or deterioration in quality of an animal
or plant
ü Procreation – creation of additional living animal or plant
• Measurement – FV less Cost of Disposal (at point of harvest)
• Gain or Loss – included in P/L
• Agricultural Land – not deemed a biological asset (PAS 16)
• Biological Asset Attached to Land – use information to determine Fair Value
• Government Grant
Ø Unconditional – measured at fair value less cost of disposal shall be recognized as
INCOME when the grant becomes receivable
Ø Conditional – measured at fair value less cost of disposal shall be recognized as
INCOME when the conditions to the grant are met
Ø If government grant is measured at COST, PAS 20 on government grant is applied.
• Bearer Plants
Ø Treated as PPE (PAS 16) because the operation of bearer plants is similar to that of
manufacturing
Ø Used solely to grow agricultural produce over several periods
• Agricultural Produce Growing on Bearer Plants
Ø Agricultural Produce – PAS 41
Ø Once harvested – measured at FAIR VALUE LESS COST OF DISPOSAL at the point
of harvest and will be the deemed cost of inventory
• Not Considered Bearer Plants
Ø Trees grown to be harvested and sold as a log or lumber
Ø Annual crops which do not bear produce for more than 1 period and are held solely to
be harvested as agricultural produce
• Plant with Dual Use
Ø Reported as BIOLOGICAL ASSET
Ø Dual use:
ü Cultivated for bearing agricultural produce
ü Being sold either as a living plant or an agricultural produce
• Separating Bearer Plant from Agricultural Produce
Ø Bearer Plant – NONCURRENT ASSET
Ø Agricultural Produce – CURRENT ASSET

/reabCPA 8
 • Immature Bearer Plants
Ø PPE being constructed before the intended use
Ø Measured at accumulated cost in the same manner as self-constructed item of PPE
• Mature Bearer Plants
Ø No specific guidance
Ø Measured using either the COST or REVALUATION MODEL
Ø Useful life = Number of years bearing agricultural produce
Ø Subject for impairment (PAS 36)
• Measurement of Agricultural Produce
Ø As it grows – measured at FAIR VALUE LESS COST OF DISPOSAL
Ø Harvested produce – measured at FAIR VALUE LESS COST OF DISPOSAL AT THE
POINT OF HARVEST
• Bearer Plants
Ø Maybe held solely for the produce
Ø Explicitly excluded from the amendment and will continue to be accounted for under
PAS 41
Ø Continued to be reported as BIOLOGICAL ASSETS
• Animal-related Recreational Activities
Ø Accounted for as PPE (PAS 16) – NOT AGRICULTURAL ACTIVITY
• Financial Statement Presentation
Ø Shall be presented as a separate line item
• Changes in Fair Value
Ø Price Change
Ø Physical Change

13. FINANCIAL ASSETS AT FAIR VALUE (P/L & OCI)

• Definition
Ø 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 other
benefits to the investing entity.
Ø Investments are assets NOT DIRECTLY IDENTIFIED with the operating activities of
an entity.
• Purposes
Ø Accretion of wealth
Ø Capital appreciation
Ø Ownership control
Ø Meeting business requirements
Ø Protection
• Classification
Ø CURRENT – not more than 1 year
Ø NONCURRENT – more than 1 year
• Financial Instrument (PAS 32)
Ø Any contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity.
Ø Characteristics
ü Contract
ü At least 2 parties
ü Shall give rise to a financial asset and financial liability or equity instrument
• Financial Asset
Ø Cash
Ø Contractual right to receive cash or financial asset from another entity
Ø Contractual right to exchange financial instrument with another entity under conditions
that are potentially favorable
Ø Equity instrument of another entity
Ø Considered as financial asset
ü Cash/currency
ü Deposit of cash
ü Receivables
ü Trading securities
Ø Not considered as financial asset
ü Gold bullion
ü Intangibles
ü Physical assets
ü Prepaid expenses
ü Leased assets

/reabCPA 9
 • PFRS 9 Classification
Ø FA FVPL – equity and debt
Ø FA FVOCI – equity and debt
Ø FA AC – debt only
• Equity Securities
Ø Any instrument representing ownership shares and rights, warrants, or options to
acquire or dispose of ownership shares at a fixed or determinable price
Ø Represent an ownership interest in an entity
ü Ordinary share capital
ü Preference share capital
ü Rights or options
Ø Do not include redeemable preference shares, treasury shares, and convertible debt
Ø If Equity Investment is:
1. Held for trading FVPL
2. Not held for trading FVPL
3. Not held for trading by irrevocable designation FVOCI
4. All other investments in quoted equity instrument FVPL
5. Investments in unquoted equity instrument COST
• Debt Securities
Ø Any security that represents a creditor relationship with an entity
Ø Has a maturity date and maturity value
ü Corporate bonds
ü BSP treasury bills
ü Government securities
ü Commercial papers
ü Preference shares with mandatory redemption date or are redeemable at the
option of the holder
Ø If Debt Investment is:
1. Held for trading FVPL
2. Held for collection of contractual cash flow AC
3. Collection of contractual cash flow by irrevocable
FVPL
designation or fair value option
• Initial Measurement (PFRS 9)
Ø FA FVPL – transaction price; directly attributable costs are expensed outright
Ø FA FVOCI – transaction price plus directly attributable costs
• Financial Asset shall be measured at FVPL
Ø By requirement
Ø By consequence
Ø By irrevocable designation or by option
Ø By default
• Equity Instrument FVOCI
Ø Irrevocable approach
ü amount recognized in OCI is NOT RECLASSIFIED to P/L under any
circumstances
ü when derecognize, it may be transferred to EQUITY or RETAINED EARNINGS
ü if held for trading, changes in FV are included in P/L
• Debt Investment at Amortized Cost
Ø Hold the financial asset to collect contractual cash flows and by selling the financial
asset
Ø Contractual cash flows are solely payments of principal and interest on the principal
amount outstanding
• Debt Investment at FVOCI
Ø Business model is achieved both by collecting contractual cash flows and by selling
the financial asset
Ø Solely for the payments of principal and interest
Ø When derecognition, cumulative gain or loss in OCI is transferred to P/L

/reabCPA 10
 14. INVESTMENT IN EQUITY SECURITIES
• Initial Measurement – FAIR VALUE PLUS DIRECTLY ATTRIBUTABLE COSTS
• Acquisition
Ø By exchange
Ø Lump sum
• When Dividends are Earned
Ø Date of Declaration – approval and recognize revenue
---DIVIDENDS-ON---
Ø Date of Record – books are closed for registration
---EX-DIVIDENDS---
Ø Date of Payment – dividends are paid
• Kinds
Ø Cash Dividend
ü If FVPL/FVOCI, dividends earned are considered as INCOME
ü Do not affect investment account
Ø Property Dividend
ü Dividends in the form of property or noncash assets
ü Considered as income at FAIR VALUE
Ø Liquidating Dividend
ü Return of invested capital, therefore NOT INCOME
ü When received from a wasting asset corporation, it is designated as PARTLY
INCOME & PARTLY RETURN OF CAPITAL
ü If liquidating dividends is greater than the cost of investment, difference is
CREDITED to GAIN ON INVESTMENT
Ø Share/Stock Dividend
ü Bonus issue
ü Not considered income because there is no distribution of asset
ü Receives additional shares, but the same total value
ü Share dividends of the same class
o Memo entry
o Don’t affect total cost
o Reduce the cost of investment per share
ü Share dividends different from those held
o Not considered income
o Original cost is apportioned between original shares and shared
dividends on the basis of market value of each at the date of receipt
ü Share dividends in lieu of cash dividends
o Generally accepted as INCOME at FAIR VALUE
o In effect, property dividends
o If fair value if not determinable, income is equal to the CASH
DIVIDENDS THAT WOULD HAVE BEEN RECEIVED
ü Cash received in lieu of cash dividends
o Share dividends are ASSUMED TO BE RECEIVED and
SUBSEQUENTLY SOLD at the cash received
o GAIN/LOSS may be recognized
Ø Share Split
ü Change in the number of share without capitalizing retained earnings or
changing its legal capital
ü Doesn’t affect the cost of investment
ü Memo entry only
ü Split Up and Split Down
o Split Up – higher share, lower par or stated value
o Split Down – lower shares, higher par or stated value
• Special Assessments
Ø Additional capital contribution
Ø Recorded as additional cost of investment
• Redemption of Shares
Ø Recorded like as sale of share
Ø Redemption price = Sales price
• Stock Right/Share Right
Ø Legal right granted to shareholders to subscribe for new shares
Ø Right issue
Ø Inherent in every share and receives one right for every share issued
Ø Valuable to a shareholder because the price at which the new shares are sold is
generally below the prevailing market price
Ø To preserve equity interest of existing shareholders
/reabCPA 11
 Ø Evidenced by stock warrants
Ø Accounting for stock rights
ü Accounted for separately
o Shall be measured initially at FAIR VALUE
o Stock rights are classified as CURRENT ASSETS
ü Not accounted for separately
o Recognized as embedded derivative
o This should be separated host contract and accounted for separately
under conditions
o If host contract is a financial asset, embedded derivative is not
separated
ü Receipts of stock rights is credited to INVESTMENT IN EQUITY SECURITIES
Ø Dates
ü Date of Declaration
---RIGHTS-ON---
ü Date of Record
---EX-RIGHTS---
ü Date of Expiration

15. INVESTMENT IN ASSOCIATE

• Terms
Ø Significant Influence – power to participate in the financial and operating policy
decisions of the investee but not control or joint control over those policies
Ø Control – power over investee and to govern the financial and operating policies of an
investee
Ø Associate – entity over which the investor has significant influence
Ø Subsidiary – entity that is controlled by another entity
• PAS 28
Ø Investor holds 20% OR MORE (presumed to have significant influence), directly or
indirectly
Ø Beyond the mere 20% threshold, significant influence exists by:
ü Representation in the BOD
ü Participation in the policy making process
ü Material transactions between investor and the investee
ü Provision of essential technical information
• Equity Method
Ø Based on the economic relationship between the investor and investee
Ø Viewed as a single unit
Ø When the investor has a significant influence
• Accounting Procedures
Ø Initially recognize at cost
Ø Carrying amount is INCREASED by SHARE OF PROFIT
Ø Carrying amount is DECREASED when DIVIDEN DISTRIBUTION
Ø Investment must be in ORDINARY SHARE CAPITAL
Ø If preference share capital, there is NO VOTING RIGHT and will be accounted for as
at FVPL, FVOCI, or at COST
Ø If the investor has significant influence, the investee is said to be the ASSOCIATE
Ø Classified as NONCURRENT ASSET
• Excess of Cost over Carrying Amount
Ø Undervaluation of investee’s assets
ü PPE – depreciated
ü Land – until sold
ü Inventory – until sold
Ø Goodwill
ü Attached to the cost of the asset not amortized
ü Tested for impairment at the end of each reporting period
• Excess of Net Fair Value over Cost
Ø Included as income in the determination of the investor’s share of the associate’s profit
or loss in the period of which the investment is acquired

/reabCPA 12
 16. FINANCIAL ASSET AT AMORTIZED COST
• Bond
Ø Formal unconditional promise made under a seal to pay a specific sum of money at a
determinable future date and to make periodic interest payments at a stated rate until
the sum is paid
Ø Contract of debt
Ø Evidenced by bond indenture
• Initial Measurement
Ø If held for trading, FAIR VALUE
Ø If OCI, FAIR VALUE plus TRANSACTION COST
• Timing of Acquisition
Ø On interest date
ü PURCHASE PRICE = ACQUISITION COST
Ø Between interest dates
ü PURCHASE PRICE = ACQUISITION COST + ACCRUED INTEREST
• PFRS 9
Ø To collect contractual cash flows on specified dates
Ø Solely payments of principal and interest
Ø NONCURRENT INVESTMENT
• Amortized Cost
Ø Initial recognition amount of the investment MINUS repayments, PLUS amortization
of discount, MINUS amortization of premium, and MINUS reduction for impairment
• Sale of Bonds Prior to Maturity
Ø Necessary to determine the carrying amount
Ø Update amortization
Ø If between interest dates, sales price normally includes accrued interest
Ø Portion of selling price pertaining to accrued interest should be credited to interest
income
• Types of Bonds
Ø Callable Bonds
ü May be called in or redeemed by issuing entity prior to their date of maturity
Ø Convertible Bonds
ü Give the bondholders the right to exchange their bonds for share capital of the
issuing entity at any time prior to maturity
Ø Serial Bonds
ü Those which have a series of maturity dates or those bonds which are payable
in installment
Ø Term Bonds
ü Bonds that mature on a single date
• Amortization Method
Ø Straight line method
Ø Bond outstanding method
Ø Effective interest method

17. BOND INVESTMENT – FVOCI

• PFRS 9
Ø Financial asset shall be measured at FVOCI if:
ü Business model is achieved both by collecting contractual cash flow and by
selling the financial asset
ü Contractual cash flows are solely payments of principal and interest on the
principal outstanding
• Interest income is recognized using the effective interest method (not the nominal rate).
• On derecognition, the cumulative gain or loss recognized in OCI shall be reclassified to P/L/
• Fair Value Option
Ø Entity at initial recognition may irrevocably designate a financial asset measured at
FVPL even if it satisfies AC or FVOCI
Ø Interest income is based on nominal rate rather than effective interest rate

/reabCPA 13
 18. RECLASSIFICATION & IMPAIRMENT
• PFRS 9
Ø Entity shall reclassify financial assets only when it changes its business model
Ø Applied prospectively from the reclassification date and shall not restate any
previously recognized gains, losses, and interests
Ø Exemptions:
ü EI at FVPL can’t be reclassified (all equity investments can’t be reclassified)
ü EI at FVOCI by irrevocable election
ü DI at FVPL by irrevocable election
• Treatment on Reclassification
From To Treatment
FVPL AC • FV at redemption date will be the new carrying amount
• New carrying amount is amortized over the remaining life
using effective interest method
• Effective interest rate is determined rate at determined
FVPL FVOCI • Continues to measure at FV
• FV at reclassification date is the new carrying amount
• Effective interest rate must be determined based on the
new carrying amount
FVOCI AC • FV at redemption date will be the new carrying amount
• Cumulative gain or loss in OCI is eliminated and adjusted
against the FV at redemption date
• Original effective interest rate is not adjusted
FVOCI FVPL • Continues to measure at FV
• FV at redemption date is the new carrying amount
• Cumulative gain or loss in OCI is reclassified to P/L at
redemption date
AC FVPL • FV is determined at redemption date
• P/L = CA – FV
AC FVOCI • FV is determined at redemption date
• OCI = CA – FV
• Original effective rate is not adjusted
• Impairment
Ø Equity Investment at FV
ü Not necessary to assess financial asset measured at FVPL and equity
instrument at FVOCI for impairment

Ø Debt Investments
ü Recognize LOSS ALLOWANCE for expected credit loss (for debt investment
at FVOCI and amortized cost
Ø Measurement
ü Probability-weighted outcome
ü Time value of money
ü Reasonable and supportable information

19. INVESTMENT PROPERTY

• PAS 40
Ø Property held by an owner or by the lessee under a finance lease to earn rentals or for
capital appreciation or both
Ø Only land and building can qualify
Ø Not held for:
ü Use in the production or supply of goods or services or for administrative
purposes (OWNER-OCCUPIED)
ü Sale in the ordinary course of business (INVENTORY)

/reabCPA 14
 • Examples of Investment Property and Owner-Occupied Property
Investment Property Owner-Occupied Property
• Land held for long term capital • Owner-occupied property held for use
appreciation in the production or supply of goods and
• Land held for a currently services of for administrative purposes
UNDERTIMINED USE • Held for future use as owner-occupied
• Building owned under FINANCE property
LEASE, and leased out under • Held for future development and
OPERATING LEASE subsequent use as owner-occupied
• Building that is VACANT, but is held to property
be LEASED OUT under OPERATING • Occupied by employees
LEASE • Owner-occupied property awaiting for
• Property that is being CONSTRUCTED disposal
or DEVELOPED for future use as • Held for sale or in the process of
investment property construction for such sale
• Constructed and developed on behalf
of third party
• Lease to another entity under finance
lease
• PFRS 16
Ø Requires a lessee to recognize a RIGHT OF USE ASSET and LEASE LIABILITY
Ø If a lessee applies FV model, the lessee shall also apply the FV model to the right of
use asset
• Partly Investment and Partly Owner-Occupied
Ø If can be sold or leased separately, shall be accounted for separately
Ø If can’t be sold separately
ü Significant part for owner-occupied property, then treat as OWNER-
OCCUPIED PROPERTY
ü Significant part for investment property, then treat as INVESTMENT
PROPERTY
ü Provide security services to the lessee, building is INVESTMENT PROPERTY
ü Manage hotel, services provided to guests, building is OWNER-OCCUPIED
PROPERTY
• Property Leased to Affiliates
Ø Perspective of individual entity that owns it, INVESTMENT PROPERTY
Ø Perspective of group as a whole and for consolidated financial statement purposes,
INVESTMENT PROPERTY
• Initial Measurement – COST + TRANSACTION COSTS
Ø If self-constructed, cost at the date when construction or development is complete
Ø If payment is deferred, cost is the cash price equivalent
Ø If exchange – FV unless it lacks commercial substance
• Subsequent Measurement
Ø Fair Value – changes in fair value are recognized in P/L
Ø Cost – FV should be disclosed
• Transfers of Investment Property
Ø Fair Value Model

Ø Cost Model
ü Investment Property, Owner-Occupied Property, and Inventory will be
measured at CARRYING AMOUNT

/reabCPA 15
 • Disposal of Investment Property
Ø Gain or loss shall be determined and recognized in P/L
Ø Gain/Loss = Proceeds – Carrying Amount

20. FUND AND OTHER INVESTMENT

• Fund is defined as cash and other assets set aside for a specific purpose either by reason of
the action of management or by virtue of a contract or legal requirement.
• Measurement
Ø Amount of cash plus cost of securities adjusted for discount or premium amortization,
and other assets in the fund.
• Examples
Current Noncurrent
• Petty Cash • Bond Sinking
• Payroll • Preference Share Redemption
• Interest • Plant Expansion
• Dividend • Contingency
• Tax • Insurance
• Bond Sinking Fund
Ø Fund set aside for the liquidation of long term debt bonds payable
Ø Accounted for whether
ü Under entity’s administration – entity records the fund transactions currently
and makes distinction whether the fund is in the form of cash, securities, and
other assets
ü Under trustee – fund transactions are not currently recorded by the entity and
are recorded only when the entity receives a report from the trustee
Ø Contribution
ü Voluntary – discretion of management
ü Mandatory – required by contract
Ø Classification
ü Classification shall be parallel the classification of the related liability, but
generally NONCURRENT
• Preference Share Redemption Fund
Ø Issuing entity may set up a fund to insure the eventual redemption of preference share
• Fund for Acquisition of Property
Ø Replacement Fund – anticipation of future replacement
Ø Plant Expansion Fund – anticipation of future acquisition
• Contingency Fund
Ø Set aside for the purpose of meeting obligations that may arise from contingencies like
pending lawsuits or taxes in dispute
• Insurance Fund
Ø Cash set aside for the purpose of meeting obligations that may arise from certain risks
not insured against fire, typhoon, explosion, and other similar casualties
• Cash Surrender Value
Ø To insure the life of its officers and name of the entity as beneficiary
Ø To compensate the entity for the loss of services arising from the untimely death of
important members of management
Ø Beneficiary
ü Officer
o Payment of premium is simply charged to INSURANCE EXPENSE
ü Entity itself
o Cash surrender value is the amount which the insurance firm will pay
upon the surrender and cancellation of the life insurance policy
o Requisites:
v The policy is a life policy. No CSV in fire, accident, and other
nonlife policies.
v Premiums for 3 full years must have been paid.
v The policy is surrendered after 3rd year or anytime thereafter.
Ø Classified as NONCURRENT INVESTMENT

/reabCPA 16
 21. DERIVATIVES
• Financial instruments that derives its value from the movement in commodity price, foreign
exchange rate, and interest rate of an underlying asset or financial instrument
• An executory contract, not a transaction, but an exchange of promises about future action
• Characteristics:
Ø Value of derivative changes in response to the underlying variable
Ø Requires either no initial net investment or initial small net investment
Ø Readily settled at a future date by a net cash payment
• Purpose
Ø To manage financial risk.
• Sources of Financial Risk
Ø Change in commodity price
Ø Change in cash flows
Ø Foreign currency exposure
• Types of Financial Risk
Ø Price – uncertainty about the future price of an asset
Ø Credit – uncertainty over whether a counterparty or the party on the other side of the
contract will honor the terms
Ø Interest rate – uncertainty about the future, interest rates, and their impact on cash
flows and the fair value of financial instrument
Ø Foreign currency – uncertainty about the future Philippine peso cash flow stemming
from assets and liabilities denominated in foreign currency
• Hedging
Ø Means of protecting a financial loss or structuring of a transaction to reduce risks
Ø Types:
ü Fair Value Hedge
ü Cash Flow Hedge
ü Hedge on Net Investment in Foreign Operations
Ø Components
ü Hedging Instrument
ü Hedged Item
• Measurement
Ø FAIR VALUE, whether asset or liability
Ø Fair value and notional shall be fully disclosed
Ø Unrealized gain or loss is recognized when there is a change in fair value
• Designation
Particulars No Designation Cash Flow Hedge Fair Value Hedge
1. Measurement Fair Value Fair Value Fair Value
2. Change in FV P/L OCI, if effective P/L
P/L, if ineffective
3. Hedge item Not adjusted Adjusted
• Examples
Ø Interest rate swap
ü Two parties agree to exchange cash flows for future interest payment based
on the contract of loan
Ø Forward
ü Two parties to exchange a specified commodity, security, or foreign currency
at a specified future date at a specified price or exchange rate (private)
Ø Futures
ü Contract to purchase or sell a specified commodity at some future date at a
specified price (traded in a futures exchange market)
Ø Options
ü Contract that gives the holder the right to purchase (call option) or sell (put
option) an asset at a specified price during a definite period at some future time
ü Must be paid for, requires small payment for the protection against unfavorable
outcome in price
ü If MARKET PRICE is
o Greater than strike price, IN THE MONEY
o Lesser than strike price, OUT OF THE MONEY
o Equal to strike price, AT THE MONEY
ü No liability if the market price is lesser than the underlying price because people
will buy at a cheaper price
Ø Foreign currency forward contract
ü As a protection against foreign currency risk

/reabCPA 17
 22. PROPERT, PLANT, & EQUIPMENT
• PAS 16
Ø Property, plant, and equipment are TANGIBLE ASSETS that are held for USE IN
PRODUCTION OR SUPPLY OF GOODS AND SERVICES, FOR RENTAL TO
OTHERS, OR FOR ADMINISTRATIVE PURPOSES, and are expected to be used
during MORE THAN ONE PERIOD.
• Spare parts and servicing equipment
Ø Qualify as PPE when the entity expects to use them during more than one period.
Ø Depreciated over their useful life or the useful life of the related asset, whichever is
shorter
• Safety and environmental equipment
Ø PPE maybe acquired for safety or environmental reasons
• Initial Measurement
Ø COST
ü Purchase price, including import duties and nonrefundable purchase taxes,
after deducting trade discounts and rebates
ü Cost 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
o Cost of employee benefits arising directly from the construction or
acquisition of the item
o Cost of site preparation
o Initial delivery and handling cost
o Installation and assembly cost
o Professional fees
o Cost of testing
ü Initial estimate of the cost of dismantling and removing the item and restoring
the site on which it is located, the obligation for which an entity incurs.
• Subsequent Measurement
Ø Cost Model
ü Carried at cost less any accumulated depreciation and any impairment losses
Ø Revaluation Model
ü Carried at revalued carrying amount
• Acquisition
Ø Cash basis
ü The cost is the cash price equivalent at the recognition date plus directly
attributable cost
Ø On account subject to cash discount
ü Cost is equal to the invoice price minus discount WHETHER TAKEN OR NOT
ü If the discount is not taken, the same is charged to PURCHASE DISCOUNT
LOST
ü Accounted for using either gross or net method
Ø Installment basis
ü Cost is the cash price equivalent
ü The difference between the installment price over cash price is treated as
INTEREST to be amortized over the credit period

Ø Issuance of share capital

ü FV of the property received
ü FV of the share capital
ü Par value or stated value of the share capital
Ø Issuance of bonds payable
ü FV of bonds payable
ü FV of asset received
ü Face amount of bonds payable
Ø Exchange
ü Measured at fair value
ü If recorded carrying amount
o The transaction lacks commercial substance
o The FV of the asset given and received is not reliably measured
Ø Donation
ü From shareholders
o FV credited to donated capital
o Expense charged to donated capital

/reabCPA 18
 ü From nonshareholders
o FV when received or receivables recognized as income
o If restricted, credit liability until restrictions are met, then transfer to
income
Ø Government grant
ü Recognize at fair value if the entity will comply with the conditions
ü Recognize at fair value if the grant will be received
Ø Construction
ü Cost shall include direct cost of materials, cost of labor, indirect costs, and
incremental overhead specifically identifiable or traceable to the construction
ü If actual cost of construction is less than the price at which the constructed
asset can be purchased from outside parties, the difference is treated as
SAVING
ü Any internal profit is eliminated in arriving at the cost of self-constructed asset
ü If actual cost is greater than the purchase price, if the difference is material, it
is treated as LOSS chargeable against management
ü Intervening operations – the income and related expenses are recognized in
P/L
• Derecognition
Ø Removal from the accounts
Ø Gain/Loss = Net proceeds – Carrying amount
• Fully Depreciated Property
Ø Carrying amount is equal to zero or residual value
Ø PPE and AD are closed, setup separate account for residual value
Ø Still continue if still used but encouraged to disclose fully depreciated property
• Held for Sale
Ø PFRS 5
ü If asset is available for immediate sale within one year from the date of
classification as held for sale
ü Excluded from PPE and presented separately as CURRENT ASSET
ü Entity shall measure a noncurrent asset classified as held for sale at the
LOWER OF CARRYING AMOUNT or FV LESS COST OF DISPOSAL
ü The difference is treated as impairment loss
ü Noncurrent asset held for sale should not be depreciated
• Idle or Abandon Property
Ø PFRS 5
ü Shall not be classified as held for sale
ü Carrying amount would be recovered through continuing use
ü Temporary activity or abandonment does not preclude depreciation

23. ACQUISITION BY EXCHANGE

• Commercial Substance
Ø Event or transaction causing the cash flows of the entity to change significantly by
reason of the exchange
Ø Considers amount, timing, and risk
• Entity-specific Value
Ø Present values of cash flows an entity expects to arise from the continuing use of an
asset and from the disposal at the end of useful life or expects to incur when settling
a liability
• Transactions
Ø With commercial substance with no cash involved
ü Fair value of the property given
ü Fair value of the property received
ü Carrying amount of the property given
Ø With commercial substance with cash involved
ü Payor – FV of asset given plus cash payment
ü Payee – FV of asset given minus cash payment
Ø With no commercial substance
ü Carrying amount of the asset given
ü No gain or loss is recognized
• Trade-in
Ø Form of exchange
Ø Involves a nondealer acquiring asset from a dealer
Ø Involves significant amount of cash

/reabCPA 19
 Ø Priority
ü FV of asset given plus cash payment (Fair Value Approach)
ü Trade-in value plus cash payment (Trade-in Value Approach)

24. GOVERNMENT GRANT

• PAS 20
Ø Assistance by government in the form of transfer of resources to an entity in return for
part or future compliance with certain conditions relating to the operating activities of
the entity
• Classification
Ø Related to asset
ü Whose primary condition is that an entity qualifying for the grant shall purchase,
construct, or otherwise acquire long-term asset
Ø Related to income
ü If not considered as related to asset, it is considered related to income (residual
definition)
• Accounting for Government Grant
Ø Taken to income over one or more periods on which the related cost is incurred
Ø Grant in recognition of specific expenses shall be recognized as income over the
periods of the related expenses
Ø Grant related to depreciable asset shall be recognized as income over the periods and
in proportion to the depreciation of the related asset
Ø Grant related to nondepreciable asset requiring fulfillment of certain conditions shall
be recognized as income over the periods which bear the cost of meeting the
conditions
Ø A government grant that becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial support to the entity
with no further related costs shall be recognized as income of the period in which it
becomes receivable
• Presentation of Government Grant
Ø Related to asset
ü Setting the grant as deferred income; or
ü Deducting the grant in arriving at the carrying amount of the asset
Ø Related to income
ü Presented in the income statement, either separately or under the general
heading “other income”
ü Alternatively, the grant is deducted for the related expense
• Repayment of Government Grant
Ø Change in accounting estimate
Related to Income Related to Asset
Applied first against any unamortized Increasing the carrying amount of asset
deferred income
Cumulative additional depreciation that
Excess will be recognized as expense would have been recognized to date in
the absence of grant shall be
immediately expense

25. BORROWING COST

• PAS 23
Ø Interest and other cost that an entity incurs in connection with borrowing of funds
• Qualifying Asset
Ø Asset necessarily takes a substantial part of time to get ready for the intended use or
sale
• Excluded from Capitalization
Ø Assets measured at fair value at fair value, such as biological asset
Ø Inventories manufactured in large quantities and repetitive basis
Ø Assets that are ready for their intended use or sale
• Commencement
Ø When the entity incurs expenditures for the asset
Ø When the entity incurs borrowing cost
Ø When the entity undertakes activities that are necessary to prepare the asset for the
intended use or sale

/reabCPA 20
 • Suspension
Ø During periods in which development is interrupted
Ø Not suspended
ü Period when substantial technical and administrative work is being carried out
ü Temporary delay is a necessary part of the process
• Cessation
Ø When substantially all of the activities are COMPLETE

26. LAND & BUILDING

• Land
Ø Statement Classification
ü Used as a plant – PPE
ü Held for a currently undetermined used – INVESTMENT PROPERTY
ü Held for long-term capital appreciation – INVESTMENT PROPERTY
ü Held for current sale – INVENTORY
Ø Costs Chargeable to Land
ü Purchase price
ü Legal fees and other expenditures for establishing clean title
ü Broker or agent commission
ü Escrow fees
ü Fees for registration and transfer of title
ü Cost of relocation or reconstruction of property belonging to others in order to
acquire possession
ü Mortgages, encumbrances, and interest on such mortgages assumed by buyer
ü Unpaid taxes up to date of acquisition assumed by buyer
ü Cost of survey
ü Payments to tenants to induce them to vacate the land in order to prepare the
land for the intended use but not to make room for the construction of new
building
ü Cost of permanent improvements such as cost of clearing, cost of grading,
leveling and landfill
ü Cost of option to buy the acquired land
Ø Land Improvements
ü Not subject to depreciation – LAND
ü Subject to depreciation – LAND IMPROVEMENTS
Ø Special Assessment
ü Taxes paid by the landowner as a contribution to the cost of public
improvements
ü Treated as part of the cost of the land
ü Capitalized as cost of land because public improvements increase definitely
the value of the land
Ø Real Property Taxes
ü Treated as OUTRIGHT EXPENSE
ü If assumed by buyer, taxes are CAPITALIZED but only up to the date of
acquisition
• Building
Ø Cost of Building when Purchased
ü Purchase price
ü Legal fees and other expenses incurred in connection with the purchase
ü Unpaid taxes up to date of acquisition
ü Interest, mortgage, liens, and other encumbrances on the building assumed by
the buyer
ü Payments to tenants to induce them to vacate the building
ü Any renovating or remodeling costs incurred to put a building purchased in a
condition suitable for the intended use such as lighting installations, partitions,
and repairs
Ø Cost of Building when Constructed
ü Materials used, labor employed, and overhead incurred during the construction
ü Building permit or license
ü Architect fee
ü Superintendent fee
ü Cost of excavation
ü Cost of temporary buildings used as construction offices and tools or materials
shed
ü Expenditures incurred during the construction period such as interest on
construction loans and insurance
/reabCPA 21
 ü Expenditures for service equipment and fixtures made a permanent part of the
structure
ü Cost of temporary safety fence around construction site and cost of subsequent
removal thereof
ü Safety inspection fee
Ø Sidewalks, Pavements, Parking Lot, Driveways
ü If part of blueprint, BUILDING
ü Occasionally made or incurred, LAND IMPROVEMENTS
Ø Claims for Damages
ü If insurance is taken during the construction, BUILDING
ü If not, EXPENSE
Ø Building Fixtures
ü If immovable, BUILDING
ü If movable, FURNITURE AND FIXTURE
Ø Ventilating System, Lighting System, Elevator
ü If during construction, BUILDING
ü If not, BUILDING IMPROVEMENT
• PIC Interpretation of Land and Building
Ø Land and an old building are purchased at a single cost

Ø Old building is demolished immediately to make room for construction of a new

building

Ø A building is acquired and used in a prior period but demolished in the current period
to make room for construction of a new building

27. MACHINERY & CAPITAL EXPENDITURE

• Cost of Machinery
Ø Purchase price
Ø Freight, handling, storage, and other cost related to the acquisition
Ø Insurance while in transit
Ø Installation cost, including site preparation, and assembling
Ø Cost of testing and trial run, and other cost necessary in preparing the machinery for
its intended use
/reabCPA 22
 Ø Initial estimate of cost of dismantling and removing the machinery and restoring the
site on which it is located, and for which the entity has a present obligation
Ø Fee paid to consultants for advice on the acquisition of the machinery
Ø Cost of safety rail and platform surrounding machine
Ø Cost of water device to keep machine cool
Ø Removal cost not previously recognized is charged to EXPENSE
Ø VAT is NOT CAPITALIZABLE but charged to INPUT TAX, however any
IRREVOCABLE OR NONREFUNDABLE PURCHASE TAX is CAPITALIZED
• Tools
Ø Machine tools – segregated from machinery account
Ø Hand tools – segregated from machinery account
• Patterns and Dies
Ø Recorded as assets and depreciated over their life
• Equipment
Ø Delivery
Ø Store and Office
Ø Furniture and Fixture
• Returnable Containers
Ø Include bottles, boxes, tanks, drums, and barrels which are returned to the seller by
the buyer when the contents are consumed or used
Ø Containers in big units or of great bulk – PPE
Ø Containers that are small and individually involve small amounts – OTHER
NONCURRENT ASSETS
Ø If not returnable, charged to EXPENSE
• Capital and Revenue Expenditures
Ø Capital Expenditure
ü Benefits the current period and future periods
ü Reported as an asset
Ø Revenue Expenditure
ü Benefits only the current period
ü Reported as expense
• Recognition of Subsequent Cost
Ø Will increase the future service potential – CAPITALIZED
Ø Maintains the existing level of standard performance – EXPENSE
• Subsequent Costs
Ø Additions
ü Modifications or alterations which increase the physical size or capacity of the
asset
ü Types
o Entirely new unit – CAPITALIZED
o Expansion, enlargement, or extension of the old asset – CAPITALIZED
Ø Improvements/Betterments
ü Modifications or alterations which increase the service life or the capacity of the
asset
ü CAPITALIZED
Ø Replacements
ü Substitution of an equal or lesser quality
ü Classification
o Replacement of old asset – CAPITALIZED
o Replacement of major parts – CAPITALIZED
o Replacement of minor parts – EXPENSED
Ø Repairs
ü Expenditures used to restore assets to good operating condition upon their
breakdown or replacement of broken parts
ü Classification
o Extraordinary repairs – CAPITALIZED
o Ordinary repairs – EXPENSE
Ø Rearrangement Costs
ü Relocation or redeployment of an existing PPE
ü EXPENSED
• Accounting for Major Replacement
Ø If separately identifiable, DEBIT ASSET ACCOUNT
Ø If not, use the COST OF THE REPLACEMENT, current replacement cost shall be
DISCOUNTED

/reabCPA 23
 28. DEPRECIATION
• Systematic allocation of the depreciable amount of an asset over the useful life
• Kinds
Ø Physical
ü Wear and tear
ü Passage of time
ü Action of the elements
ü Casualty or accident
ü Disease or decay
Ø Functional or Economic
ü Inadequacy
o the asset is no longer useful to the entity because of an increase in the
volume of operations
ü Supersession
o when a new asset becomes available and the new asset can perform
the same function more efficiently and economically or for substantially
less cost
ü Obsolescence
o encompasses both inadequacy and supersession
• Factors
Ø Depreciable amount
ü Cost of an asset or other amount substituted for cost less residual value
Ø Residual value
ü Estimated amount that an entity would currently obtain from disposal of an
asset, after deducting the estimated cost of disposal
ü Reviewed at least at each financial year-end
Ø Useful life
ü Either the period over which an asset is expected to be available for use by the
entity, or the number of production or similar units expected to be obtained from
the asset by the entity
ü Expressed as
o Time periods as in years
o Units of outputs or production
o Service hours or working hours
ü Factors
o Expected usage of the asset
o Expected physical wear and tear
o Technical or commercial obsolescence
o Legal limits
• Methods of Depreciations
Ø Equal or uniform charge methods
ü Straight line
ü Composite method
ü Group method
Ø Variable charge or use-factor or activity methods
ü Working hours or service hours
ü Output or production method
Ø Decreasing charge or accelerated or diminishing balance methods
ü Sum of year’s digits
ü Declining balance method
ü Double declining balance
Ø Other methods
ü Inventory or appraisal
ü Retirement method
ü Replacement method

29. DEPLETION
• PFRS 6
Ø The objective of this standard is to specify the financial reporting for the exploration
and evaluation of mineral resources
• Wasting Asset
Ø Material objects of economic value and utility to man produced by nature
Ø Natural resources
Ø Physically consumed and irreplaceable

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 • Cost of Wasting Asset
Ø Acquisition cost
ü Price paid to obtain the property containing the natural resources
ü Land value is the residual value for the purpose of computing depletion
Ø Exploration cost
ü Cost incurred in an attempt to locate the natural resources that can
economically be extracted or exploited
ü May result in either success or failure
o Successful effort method
v Capitalize only the successful exploration (usually with large
companies)
o Full cost method
v All costs are capitalized (usually practice by small companies)
Ø Development cost
ü Cost incurred to exploit or extract the natural resource that has been located
through successful exploration
ü Can be in the form of tangible or intangible
Ø Estimated restoration cost
ü Cost to be incurred in order to bring the property to its original condition
ü Must be an existing present obligation
ü Must be discounted
• Depletion
Ø Systematic allocation of the depletable amount of a wasting asset over the period the
natural resource is extracted or produced
• Depreciation of Mining Property
Ø Based on the useful life of the equipment or the useful life of the wasting asset,
whichever is shorter
ü If useful life of the equipment is shorter, use STRAIGHT LINE METHOD
ü If useful life of the wasting asset is shorter, use OUTPUT METHOD
Ø If the mining equipment is movable, depreciate using STRAIGHT LINE METHOD
• Shutdown
Ø Output method will not be used
Ø Depreciation is based on the remaining life of the equipment using straight line method
Ø When operations are resumed, the depreciation is computed again using the output
method
• Trust Fund Doctrine
Ø Share capital is conceived as a trust fund
Ø Cannot be returned to shareholders during the life of the corporation
Ø Can pay dividends but limited to the balance of RE
• Wasting Asset Doctrine
Ø Can legally return capital to shareholders
Ø Pay dividends up to the extent of accumulated depreciation
Ø Paid in excess of RE is considered liquidating dividends

30. REVALUATION
• Initial Measurement
Ø COST
• Subsequent Measurement
Ø Cost
Ø Revaluation
• Frequency
Ø Depends upon the changes in the fair value of PPE
Ø When the FV of revalued asset differs materially from carrying amount, a further
revaluation is necessary
Ø Annual revaluation is needed if there are significant and volatile changes
Ø 3-5 years may be sufficient
• Revaluation of all items in an entire class
Ø When revalued, entire class of PPE should be revalued
• Basis
Ø Fair value – determined by appraisal, normally undertaken by professional qualified
valuers
Ø Depreciated Replacement Cost – if market value is not applicable
• Approaches
Ø Proportional – accumulated depreciation is proportionately restated
Ø Elimination – accumulated depreciation is eliminated

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 • Treatment
Ø OCI – when realized, transfer to retained earnings
Ø Piecemeal recognition – systematic allocation of revaluation surplus
• Reversal
Ø Charged against any revaluation surplus to the extent of the previous revaluation
surplus
Ø The balance is charged to expense

31. IMPAIRMENT
• PAS 36
Ø A fall in the market value of an asset.
Ø Entity shall write down the carrying amount of an asset to its recoverable amount if the
carrying amount is not recoverable in full.
Ø RA < CA
• Reversal
Ø Shall be reversed if there has been a change in the estimate of recoverable amount
Ø If RA > CA, increased amount shall not exceed that carrying amount that would have
been determined, had no impairment loss been recognized
Ø Recognized as income
• Cash Generating Unit (CGU)
Ø Smallest identifiable assets that generates cash inflows from continuing use
Ø Recoverable amount should be determined individually
Ø If not possible, determine the recoverable amount of CGU to which the asset belongs
Ø If impairment loss is recognized, allocate first to goodwill, then to all other noncash
assets

32. INTANGIBLES
• PAS 38
Ø Identifiable nonmonetary asset without physical substance
• Essential Criteria
Ø Identifiability
ü separable, arises from contractual and legal rights
Ø Control
ü power to obtain the future economic benefits
Ø Future Economic Benefits
ü may include revenue from the sale of products or services, cost savings, other
benefits
• Initial Measurement
Ø Cost
• Subsequent Measurement
Ø Cost
Ø Revaluation
• Acquisition
Ø Separate acquisition
ü Cost of separate acquisition
o Purchase price
o Import duties and nonrefundable purchase taxes
o Directly attributable costs
v Costs of employee benefits arising from bringing the asset to its
working condition
v Professional fees arising directly from bringing the asset to its
working condition
v Cost of testing whether the asset is functioning properly
ü If deferred, the cost is the cash price equivalent.
Ø Business combination
ü Based on the fair value on the date of acquisition
ü If there is an active market, the quoted price of an identical asset provides the
most reliable evidence of fair value
ü If there is no active market, the fair value is equal to any available quoted price
for identical or similar asset
ü The fair value can also be based on unobservable input usually developed by
the entity using the best available information from the entity’s own data

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 Ø Government grant
ü May initially record at
o Fair value
o Nominal amount or zero, plus any expenditure that is directly
attributable to preparing the asset for its intended use
Ø Exchange
ü Cost is measured at FAIR VALUE unless the exchange transaction lacks
commercial substance or the fair value of neither the asset given up nor the
asset received is reliably measured
ü If eh exchange transaction lacks commercial substance, the cost is the
CARRYING AMOUNT OF THE ASSET GIVEN UP
Ø Self-creation/internally generated
ü Cost includes
o Cost of materials and services used or consumed in generating the
intangible asset
o Costs of employee benefits arising from the generation of the intangible
asset
o Fees to register a legal right
o Amortization of patents and licenses that are used to generate the
intangible asset
ü Shall not be recognized as intangible assets
• Subsequent Expenditure
Ø Shall be recognized as expense
• Identifiable Intangible Assets
Ø Patent
ü Cost includes
o Purchase price
o Import duties
o Nonrefundable purchase taxes
o Any directly attributable cost of preparing the asset for the intended use
ü In internally developed, cost includes licensing and other legal fee
ü All related R and D are expensed.
ü Capitalized development cost is recognized as intangible asset and amortized
over the useful life of the patent.
ü Cost of litigation
o Whether successful or not, EXPENSED
ü Amortization
o Amortized over the legal life, 20 years, or useful life, whichever is shorter
o If competitive patent is acquired, it will be amortized over the remaining
life of the old patent
o If related patent, the cost of the related patent shall be amortized over
the extended life
ü Should also be tested for impairment
Ø Copyright
ü Exclusive right granted by the government to the author, composer, or artist
enabling the grantee to publish, sell, or otherwise benefit from the literary,
musical or artistic works
ü Artistic-related intangible asset
ü Cost includes of all expenses incurred in the production of the work including
those required to establish or obtain the right
ü Term of protection is during the lifetime of the author and for 50 years after
death
Ø Franchise
ü An agreement between the franchisee and the franchisor
ü Contract-based intangible asset
o Between the government and a private entity or individual
v Use of public water for interisland shipping
v Use of public land for telephone and electric lines
v Use of streets and highways for a bus line
o Between private entities or individuals
ü Cost includes lump sum payment plus directly attributable cost (initial franchise
fee)
ü Periodic payments made by the franchisee (periodic franchisee)

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 Ø Trademark/Brand Name
ü Symbol, sign, slogan, or name used to mark a product to distinguish it from
other products
ü Market-related intangible asset
ü Cost includes purchase price plus directly attributable costs
ü Litigation cost is outright expense
ü Amortization
o Legal life of 10 years and may be renewed for periods of 10 years each
ü Impairment
o Trademarks with indefinite life is tested for impairment at least annually
and whenever there is an indication of impairment
Ø Customer list
Ø Website development cost
ü Website that has been developed for the purpose of promoting and advertising
an entity’s products and services does not meet the requirements to be
recognized as an intangible asset
ü Expensed as incurred
Ø Broadcasting license
Ø Airline right
Ø Fishing right
• Unidentifiable Intangible Asset
Ø Goodwill – most intangible of all
ü Developed – not recorded
ü Purchased – business purchase
ü Measurement
o Residual – purchase price less fair value of net assets
o Direct – basis of future earnings
ü Tested for impairment at least annually and whenever there is an indication
that it may be impaired
• Amortization
Ø Intangibles with limited or finite life are amortized over their useful life
Ø Intangibles with indefinite life are not amortized but are tested for impairment at least
annually and whenever there is an indication that the asset may be impaired.

33. RESEARCH AND DEVELOPMENT COST

• PAS 38
Ø An entity classifies the generation of the asset into research phase and development
phase
o Research
v Original and planned investigation undertaken with the prospect o
gaining scientific or technical knowledge and understanding
o Development
v application of research findings or other knowledge to a plan or design
for the production of new or substantially improved material, device,
product, process, system, or service, prior to the commencement of
commercial production
• Accounting for Research Cost
Ø Recognized as expense when incurred
Ø Too much uncertainty about the likely success of the project
Ø Entity cannot demonstrate that an intangible asset exists that will generate probable
future economic benefits
• Accounting for Development Cost
Ø Probability of success may be more apparent
Ø Maybe recognized as intangible asset depending on the criteria
o Technical feasibility of completing the intangible asset
o Intention to complete
o Ability to use or sell
o Will generate probable future economic benefits
o Availability of resources or funding
o Ability to measure reliably
• Acquired In-process R and D Project
Ø Recognized as asset
Ø Subsequent expenditure is accounted for either expense or asset depending on the
recognition criteria

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 • Internally Developed Compute Software
Ø Charged to expense until technical feasibility has been established
Ø Technological feasibility is established when an entity has produced either a detailed
program design of the software or a working model
Ø Capitalizable costs include cost of coding and testing and the cost to produce the
product masters
• Amortization
Ø Shall reflect the pattern in which the future economic benefits are expected to be
consumed by the entity
Ø If cannot be determined reliably, straight line method is used
• Impairment
Ø Tested for impairment whenever there is an indication of impairment at the end of
reporting period
• Classification of Computer Software
Ø Intangible asset
Ø If purchased for resale, classify as inventory
Ø Purchased as an integral part of a machine tool that cannot operate without the
software shall be treated as PPE

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