Accounting Policies and CPD

Continuing Professional Development (CPD)

• CPD is a prerequisite for both CPA license renewal and accreditation to practice accountancy.

Selecting Accounting Policies

• Management should follow a hierarchy of guidance when selecting accounting policies
• First, consider definitions, recognition criteria, and measurement concepts in the Conceptual Framework
• Second, apply requirements in PFRSs dealing with similar issues
• Third, consider recent pronouncements from other standard-setting bodies if they don't conflict with PFRS or the Conceptual Framework
• Finally, apply a specific PFRS standard if it directly relates to the transaction, event, or condition.

Qualitative Characteristics of Financial Statements

• The conceptual framework describes the qualities that make financial statements useful to users.

Objectivity in Accounting Transactions

• Objectivity is achieved when an accounting transaction involves an arm's length transaction between two independent parties.

Reclassification Adjustments

• These involve amounts reclassified to profit in the current period that were initially recognized in other comprehensive income (OCI) in the current or previous periods.

Adjusting Entries

• Adjusting entries involve accruals or deferrals
• Cash is not debited or credited in adjusting entries
• Adjusting entries impact one statement of financial position account and one income statement account.
• Adjusting entries do NOT always affect one revenue and one expense account

Petty Cash Account Statements

• At the end of the period, the petty cash account is adjusted to prevent understatement of expenses and overstatement of cash
• Entries adjust the petty cash account to increase or decrease the fund size or balance if not replenished at year-end
• The imprest petty cash system uses disbursements by check
• The petty cash account is debited when the fund is replenished

Returns and Allowances on Credit Sales

• Estimated future returns and allowances should theoretically be recorded during the sales period
• This avoids overstating sales and ending accounts receivable
• Usually these estimates are rarely recorded because the amount of such returns and allowances is usually not material

Accounts Receivable Aging Schedule

• An accounts receivable aging schedule calculates the desired credit balance of the allowance for bad debts, determining the amount to be reported in year-end financial statements.

Freight Charges

• When the seller pays freight charges but is not legally responsible for them, it is considered FOB destination, freight prepaid.

Gross Profit Method Limitations

• The gross profit method can be used to estimate inventories for interim and annual statements, and by auditors
• However, it is not reliable for estimating inventory pilferages

Initial Operating Losses

• Initial operating losses incurred when installing a new production facility should be expensed and charged to the income statement.

Accounting for Donated Assets

• Donations of property, plant, and equipment are recorded at the fair value of the donated asset at the time of donation.
• When a group of assets is acquired for a lump sum, the total cost is allocated to individual assets based on their fair values.
• Property acquired in exchange for shares is recorded at the fair value of the property or the shares, whichever is more evident.
• The cost of property acquired in exchange for another asset is determined by reference to the fair value of the asset received.

Gain or Loss on Investment Property Disposal

• The gain or loss from disposal of investment property is the difference between the net disposal proceeds and the carrying amount of the asset.

Private Jet Depreciation

• Galaw Inc.'s private jet costing P15 million should be depreciated using the straight-line method over seven years of composite useful life.

Goodwill Accounting

• Goodwill isn't amortized due to its indefinite useful life, but it is tested for impairment annually or more frequently if circumstances indicate a possible impairment
• Costs of developing, maintaining, and restoring goodwill aren't capitalized
• Impairment losses recognized for goodwill are not reversed in subsequent periods.

Intangible Assets and Amortization

• Unless demonstrated otherwise, the residual value of an intangible asset is presumed to be zero
• The residual value does not enter into the determination of the amortization charge

Characteristics of Current vs. Long-Term Liabilities

• Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities
• This is characteristic of a current liability, but not a long-term liability
• Current and long-term liabilities share common characteristics

Treatment of Gains/Losses from Debt Extinguishment

• Gains or losses from the early extinguishment of debt are treated as the difference between the reacquisition price and the net carrying amount of the debt
• These gains or losses should be recognized in the period of redemption

Warranty Costs Recognition

• Cegg Company should recognize warranty costs when the machines are sold, based on the P300 estimate for each machine.

Provisions under PFRS

• Under PFRS, warranty liabilities, bad debts, and taxes payable are considered provisions
• Notes payable is not

Appropriations of Retained Earnings

• Appropriations of retained earnings don't alter the total amount of shareholders' equity
• They designate funds for specific purposes, such as plant expansion, and can arise from contractual requirements or board discretion.

Ordinary Shareholders' Ownership Rights

• Ordinary shareholders have ownership rights unless specifically withheld by agreement
• These rights include voting on policy issues, sharing in profits when dividends are declared, and asset distribution at liquidation.
• Ordinary shareholders do NOT have a right to dividends equal to a stated rate times par (if dividends are paid)

Measuring Compensation Costs for Share-Based Payments

• Compensation cost is measured as the change in fair value of the instrument for each reporting period

Measuring Service Cost Component of Net Periodic Pension Cost

• The service cost component of net periodic pension cost is measured using the projected benefit obligation.

Deferred Tax Liability Item

• Revenues or gains that are taxable before they are recognized in financial income are most likely to result in a deferred tax liability

Income Tax Expense for Interim Reporting

• Income tax expense for the second quarter of interim reporting uses the effective tax rate expected for the full year, estimated at the end of the second quarter

Presenting Financial Statements

• An entity must present each material class of similar items separately
• Condensed and classified data forms line items in financial statements
• An entity need not provide a specific disclosure required by PFRS if the information is not material, except when required by law
• Line items that are not individually material do not remain presented separately

Disclosing Financial Risks

• Disclosing a significant portion of unsecured trade accounts receivable from firms in the same industry informs users of the concentration of credit risk

Accounting for Receivables in Equity Method

• In financial statements, if Galante Corp. uses the equity method for Sundy Corp. and has a receivable from Sundy, then the total amount of the receivable should be disclosed separately.