Conceptual Framework for Financial Accounting PDF

REVISED CONCEPTUAL FRAMEWORK FOR FINANCIAL ACCOUNTING OVERVIEW Purpose: to serve as a guide in developing future PFRS and as a guide in resolving accounting issues not directly addressed by existing PFRSs. Authoritative Status: It is not a PFRS and does not define any instruction for measuremen...

REVISED CONCEPTUAL FRAMEWORK FOR FINANCIAL ACCOUNTING OVERVIEW Purpose: to serve as a guide in developing future PFRS and as a guide in resolving accounting issues not directly addressed by existing PFRSs. Authoritative Status: It is not a PFRS and does not define any instruction for measurement or disclosure. Conflict → the PFRS must prevail. PART 1. INTRODUCTION Conceptual Framework - underlying theory or foundation for the development or/and revision of accounting standards - contains concepts of General-Purpose Financial Reporting and summary of terms and concepts that underlie the preparation of financial statements Purpose: 1. Assist the IASB in the development of existing and future policies 2. Assist the Financial Statements prepares in the development of consistent accounting policies 3. Assist all parties in understanding and interpreting the standards. - Not an accounting standard. The hierarchy goes: 1. PFRS specific to the transactions 2. PFRS dealing with similar matters 3. Conceptual Framework and Accounting Standards 4. Most recent pronouncements PART 2. OBJECTIVE OF GENERAL-PURPOSE FINANCIAL REPORTING - This forms the foundation of conceptual framework; the “why” of accounting. Limitations: 1. do not and cannot provide all information; 2. are not designed to provide/show the value of the entity; 3. cannot accommodate every request of information; and 4. based on estimates and judgements rather than exact. 1 PART 3. QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION - Qualities or attributes that make financial accounting information useful. Fundamental Characteristics: relate to the content (or substance) of FI; these are the characteristics that make financial information useful to users. (1) Relevance – refers to the capacity of the information to affect a decision. a. Predictive value – if the information can be used as an input to predict future outcomes b. Confirmatory value – if it provides feedback about previous valuations. (2) Faithful Representation – descriptions and figures in the reports should match what really existed (or happened). a. Completeness – all information necessary for a user to understand must be included and clearly stated in the reports b. Neutrality – being neutral or fair. Prudence is the exercise of care and caution when dealing with uncertainties in the measurement process. c. Free from Error – This means there are no errors or omissions. Enhancing Characteristics: are intended to increase the usefulness of FI. (1) Verifiability - if it is supported by evidence; implies consensus. (2) Comparability – information is measured and reported in a similar fashion across entities. Consistency – information is measured and reported in a similar fashion across points in time. (3) Understandability – information should be presented in a form that users understand. (4) Timeliness – having the information available to users in time PART 4. FINANCIAL REPORTING AND REPORTING ENTITY Objective of Financial Statements: provide information about an entity’s A, L & E, Income and Expenses that are useful to users. Reporting Period – span of time which transactions are accounted for. Sole proprietorship, Partnership & Corporation Parent Company Reporting Entity – main entity required or chooses to prepare FSs. Parent and Subsidiaries Two or more entities Types of Financial Statements: Consolidated Financial Statements Unconsolidated FS Combined FS when comprises both the parents and when reporting party is parent company prepared by two or more entities that are subsidiaries alone not linked by a P/S relationship PART 5. ELEMENTS OF FINANCIAL STATEMENTS Elements of Financial Position ALOE Elements of Financial Performance Income/Expenses 2 PART 6. RECOGNITION AND DERECOGNITION Recognition – process of capturing an item for inclusion in the Financial Statements Derecognition – removal of all or part of a that meets the definition of one of its elements and would provide useful recognized asset or liability from the SFP. information; Expense recognition includes Cause and Effect (COGS), Systematic and 1. Asset loses control Rational allocation (DepEx) & immediate recognition (Direct write-off method). 2. Liability is no longer present obligation. PART 7. MEASUREMENT - is the process of quantifying the elements recognized in the FS. 1. Historical Cost – entry price; (a) Asset + TC and (b) Liability – TC 2. Current Value – using updated information to reflect conditions at the measurement date. a. Fair Value – price that would be received to sell an asset or paid to transfer a liability b. Value in Use (asset) or fulfillment value (liability) i. Value in Use – PV of CF derived from the use of an asset ii. Fulfillment Value – PV of cash obliged to transfer to fulfill liability Both do not include TC since they are based on cash flows c. Current cost ▪ Cost of an equivalent asset at the measurement date + TC (asset) ▪ Consideration that would be received for an equivalent liability at the measurement date – TC (liability) PART 8. PRESENTATION AND DISCLOSURE Classification – sorting of ALOE based on shared or similar characteristics Aggregation – adding together of ALOE + IE that have - Offsetting is generally not allowed similar or shared characteristics and are included in - Income & Expenses are classified in P/L or OCI the same classification PART 9. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE Financial - Invested money or purchasing power; net assets or equity; historical cost Concepts of Capital Physical - Regarded as entity’s productive capacity based on units of output per day. - Profit is earned only if Net Assets, Beg < Net Assets, End, Using the CAPM approach in Financial excluding contributions and distributions determining Net income: Concepts of - Does not require the particular use of measurement Dec (Inc) in net assets xx Capital Drawings or dividends xx Maintenance - Profit is earned only if productive capacity, beg < productive Inc (Dec) in share capital xx Physical capacity, end, excluding contributions and distributions Net Income xx - Requires the use of the current cost basis of measurement 3 BASIC ACCOUNTING CONCEPTS AND PROCESS Accounting Step 4: Preparation of unadjusted Trial balance - Service activity - To determine the equality of debits and credits - To provide quantitative financial information about economic - All accounts from the General Ledger will be transferred to entities that is useful in decisions; language of business. the trial balance - It aids in locating errors in posting Accounting Process and Cycle: Transplacement error Mixed Error Omission Step 1: Documenting Transactions error Transposition Error Misposting - Accountable events – if it could affect the elements of FS, then journalized o External events (exchange and non-reciprocal transfer). Step 5: Preparation of Adjusting Journal Entries o Internal events – happen without any other entity - To bring the accounts up to date of an accrual basis involved. - Affects at least one real account and one nominal account Step 2: Journalizing Transactions Three classes of accounts: - General Journal: chronological list of transactions and other 1. Real accounts – permanent or balance sheet accounts; events expressed in terms of debit and credits. carried from one accounting period to another. - Posting: process of transferring info from journal to GJ. 2. Nominal accounts – temporary or income statement - Analyze the effects of transactions in debits and credits accounts; they are closed at the end of every accounting period. Step 3: Posting to Ledger 3. Mixed accounts – they have the nature of both real and Ledger – accumulates the effect of transactions during a nominal accounts and are subject to adjustments; prepaid period; to know the ending balance of each account expensed and unearned income. Subsidiary ledger – contains the supporting details or Classification of Adjusting Journal Entries breakdown of the general ledger account (a) Accruals (b) Deferrals (c) Estimates (d) Accrued Prepaid Depreciation setting up of expense expense Doubtful ending Accrued Unearned accounts inventory income income Step 6: Preparation of Worksheet / Adjusted Trial Balance - Pertains to 10-column sheet; not part of the formal accounting records - Output: Adjusted Trial Balance 4  Under the IS column in the worksheet: 3. Close the balance of IS account to the drawings/dividends Total Debits > Total Credits → Net Loss accounts Total Debits < Total Credits → Net Income 4. Close the drawing/dividends account to equity account Under the BS column in the worksheet: Step 9: Preparation of post-closing Trial Balance Total Debits > Total Credits → Net Income - Real accounts only; optional step Total Debits < Total Credits → Net Loss Step 10. Reversing Entries Step 7: Preparation of Financial Statements - Optional step; simplifies recording of certain - SFP, SCI, SCE, SCF and Notes to FS transactions. - Based on standard of uniformity - is made if an adjustment previously entered increases a SFP account. Step 8: Journalizing and posting of CE Accrued Expense Accrued Income - to bring temporary accounts to zero Prepayment (expense Deferred Income (income - nominal accounts will be closed to income summary account method) method) 1. Close all income accounts 2. Close all expense accounts THE STANDARD (IFRS AND GAAP) PFRS are guiding principles rather than laws. Paragraphs and pronouncements in bold and plain wordings have equal authority; those in bold dictate principles, and those in plain text are supporting principles. FSRSC – current setting body in the Philippines; the successor to the Accounting Standards Council (ASC). The FSRSC’s main function is to prepare interpretations of PFRS for approval by the Philippine Interpretations Committee (PIC). IASB is the successor of the International Accounting Standards Council (IASC). The chairman and the members are appointed by the PRC upon BOA and the APO. The Standard setting processes 1. Consideration OF IASB pronouncements. 2. Formulation of a task force to advise the FRSC 3. Issuance for comment an exposure draft. 4. Consideration of all comments received within the comment period 5. Approval of a standard or an interpretation by a majority of FSRSC members. 5 CASH AND CASH EQUIVALENTS Overview 1. refers to money, readily available/unrestricted use Undeposited collections – currencies and deposits 2. used as medium of exchange On hand 3. includes money and other negotiables Working fund – cash set aside for short-term demand Measurement of cash: Face Value In Bank Can be withdrawn upon demand Considerations in accounting for cash: In general: Part of Cash: unrestricted and immediately available for use in the current operations such as o for payment of OPEX o for payment of CL o for acquisition of CA Other NCA: for use other than current operations. Payroll account Part of Cash Post-dated check Received: not part of cash Issued: part of cash Undelivered/Unreleased check Reverted to cash Stale company checks (6mos) Received – not part Delivered – reverted to cash Compensating balance Not legally restricted = unrestricted NSF/DAIF/DAUD issued Reverted to cash Bank overdraft (Negative Part of liability Cash in foreign currency Cash @spot rate balance in bank) Cash in Foreign Currency (refer to the diagram) Postage stamps and Supplies Expense/Prepayments Compensating balance (refer to the diagram) expense advances Employees’ PDC Receivables Unused credit line Disclosed only Cash in closed banks Receivables Cryptocurrencies Investments, inventories, IA NSF/DAIF/Drawn against Receivables Cash set aside for LT Non-current Asset uncleared deposits (contingency fund, insurance fund, appropriation for PPE) IOUs/advances from employees Receivables GR: Investments PS redemption fund / Depends on the classification of Preferred Redemption Fund XPN: CA if currently redeemable Sinking Fund related liability 6 CASH EQUIVALENTS - These are short-term and highly liquid investments that are readily convertible into cash and so near maturity. - All investments that are acquired three (3) months or less before their maturity can only qualify as part of CE. Part of CE: Not acquired within 3 months but with 1 year maturity Not part of CE: ✓ Three-month time deposit - Short term Investment/CA  Share investments ✓ Three-month money market  Treasury bonds instrument or commercial papers Not acquired within 3 months but beyond 1 year maturity  Equity securities ✓ Three-month treasury bills - Long-term Investment/NCA BANK RECONCILIATION - A process of matching the cash balance per company’s books with the company’s cash balance per bank; usually prepared monthly. Cash balance per Company’s cash company’s books balance per bank DIT – sent by depositor but the bank is yet to recognize. Reported (adjusted cash balance) XX XX OC – disbursed by depositor but is yet to be reflected in Bank reconciling items the bank. Deposit in Transit XX Certified check – no longer outstanding; should be Outstanding Checks (XX) deducted from total OC. Bank errors – recorded twice, not recorded or incorrect Bank Errors XX (XX) Book reconciling items Bank Credit memo – added by the bank but not yet added Bank credit memo XX by the book. (e.g bank loans, interest, collections) Bank debit memo (XX) Bank Debit memo – deducted by bank but not by book. Book Errors XX (XX) (e.g NSF, DAIF or DAUD) Adjusted (or reconciled balances) XX XX Book Errors – recorded twice, not recorded or incorrect Deposit in Transit, beginning xx Outstanding Checks, beginning xx Add: Book receipts (debits) xx Add: Book disbursements (credits) xx Less: Credit memos last month (xx) xx Less: Debit memos last month (xx) xx Less: Bank receipts (credits) xx Less: Bank disbursements (debits) xx Less: Credit memos this month (xx) (xx) Less: Debit memos this month (xx) (xx) Deposit in Transit, ending xx Outstanding Checks, ending xx 7 PETTY CASH FUND - A type of cash fund set aside to cover relatively small expenditures. - Expenses are not recorded until the fund is replenished or it is already the reporting date, whichever comes earlier. Establishment of PCF: Replenishment of PCF: PCF xx Expenses xx CIB xx CIB xx Computations related to PCF: 1. PCF overage/shortage PCF per count Xx Less: PCF per accountability (xx) PCF Overage (Shortage) xx (xx) Per count > Per accountability → PCF overage (debit Cash S/O) Per count < Per accountability → PCF shortage (cr Cash S/O) 2. Formula to compute the PCF per count: Coins and currencies (cash items) xx Add: PCF Vouchers (NCI) xx Replenished Check xx IOUs or advances to employees (NCI) xx Employee’s NSF Check (xx) PCF per count xx 3. Amount of PCF ending balance Coins and currencies xx Add: Replenishment Check (xx) PCF, End xx (xx) 8 RECEIVABLES OVERVIEW Accounts receivable – are open accounts from sale of goods and services; customer’s accounts, trade debtors Definition Financial asset that represents a contractual right to receive cash Initial – at transaction price Measurement Subsequent – at net realizable value (net of allow. and impairment) Classification either current or non-current AR – @ NRV Presentation DAE – part of administrative Expense Cash discounts: 1. Gross method – discount is not yet deducted from invoice; CD is only recognized when taken. 2. Net method – recorded net of the highest discount; CD not taken is credited to SD forfeited. 3. Allowance method – AR is recorded at gross while sales are recorded at net of discount. Contractual Terms should pay the freight actually paid freight Treatment FOB Shipping point, Freight prepaid Buyer Seller Plus receivables FOB Shipping point, Freight Collect Buyer Buyer No adjustment FOB Destination, Freight Prepaid Seller Seller No adjustment FOB Destination, Freight Collect Seller Buyer Minus receivables Accounts Receivable Non-trade receivables: Beg, balance Collections Advances to officers, directors, SH CA if within 12 months Credit sales Sales Discount or employees NCA if beyond SD forfeited Sales Return Notes as payment Advances to affiliates GR: NCA Write-off > 12m – deduction to SHE End, Balance Subscription Receivable < 12m – CA Special deposits GR: NCA Allowance for Doubtful Accounts Advances to suppliers CA Write-off Beg, Balance DAE Supplier’s debit balance CA Recoveries of AR Accrued income CA End, Balance Claims Receivable CA 9  Accounts Receivable, gross xx ADA (xx) SD (xx) Freight (xx) SRA (xx) Net Realizable Value xx Special Sales Consideration Bill and Hold arrangement Sold upon issuance of the bill/invoice Layaway sales Goods are delivered upon final installment, sold in installments Goods shipped awaiting instructions Sold upon completion of installments and inspections Sales on approval Sold upon formal acceptance Sales to distributors Treated as consigned out to the buyer-consignee Sales partially paid in advance Sold upon completion of delivery Subscription sales Sales is recognized over a straight-line basis Installment sales Exclusive of interest, recognize sale upon delivery of goods Credit card sales Sold upon purchase by buyer NOTES RECEIVABLE - customer accounts supported by formal promises to pay. - Initially measured at Fair Value plus DACs. Dishonored notes – a promissory note that is not paid at maturity; should be transferred from notes to accounts receivable account. It shall include: ✓ Face amount ✓ Interest ✓ Other fees and charges. Interest-bearing Interest-bearing Non-interest S=E S≠E bearing Initial Meas Face PV PV Subsequent Out. FA AC AC Int. income Face x SIR CV = EIR CV x EIR Int. rec Face x SIR Face x SIR Face x SIR 10 LOANS RECEIVABLE - a financial asset arising from a loan granted by a financial institution. Principal Amount xx Less: Origination Fees received (xx) To record the origination fees received: To record payment of DOC: Add: Direct Origination Cost (xx) Cash xx Unearned Int. Inc xx Initial Measurement of LR xx Unearned Int. Inc xx Cash xx IMPAIRMENT OF LOANS RECEIVABLE - an entity shall recognize a loss allowance for expected credit loss on financial asset measured at amortized cost. ✓ Debt instrument at AC  Equity instrument at FVPL CA of long-term receivable xx ✓ Debt instrument at FVOCI  Equity instrument at FVOCI Less: PV of expected future CF xx ✓ Loan under PFRS 16  Debt instrument at FVPL Impairment loss xx Stage 1 Stage 2 Stage 3 ✓ DI that has not declined significantly ✓ No objective evidence of impairment ✓ There is already objective evidence of since recognition. ✓ Int Income is still based on CA impairment ✓ No significant increase in credit risk. Carrying amount of loan xx Carrying amount of loan xx Carrying amount of loan xx PV of ECL (xx) PV of ECL (xx) PV of ECL (xx) Expected lifetime credit loss xx Expected lifetime credit loss xx Expected lifetime credit loss xx Multiply by probability x% Already recognized (xx) Required loss allowance xx Multiply by probability x% Impairment loss xx Already recognized (xx) Impairment loss xx Impairment loss xx OBJECTIVE EVIDENCE OF IMPAIRMENT 1. Significant financial difficulty of the issuer or obligor 2. Breach of contract, such as a default or delinquency in interest or principal payments 3. The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider 4. High probability that the borrower will enter bankruptcy or other financial reorganization 5. Measurable decrease in the estimated future cash flows from the financial asset 11 RECEIVABLE FINANCING (IFRS 9) Overview - the capability of an entity to generate cash out of its receivables. PLEDGING/HYPOTHECATING OF ACCOUNTS RECEIVABLE - Collateral only; memo entry but requires disclosure. - Not derecognized, not separated to AR. Discount is amortized and charged to interest expense. ASSIGNMENT OF ACCOUNTS RECEIVABLE - Loanable amount is % of AR. - Bank service charge & commission is collected. - also known as specific assignment - Assigned AR are presented in SFP as regular receivables. However, the equity in the assigned is disclosed in the notes. Non-notification Basis Notification Basis FACTORING OF ACCOUNTS RECEIVABLE Customers are not informed that their accounts are assigned. - sale of accounts receivable to a factor. Customer are notified. Customers continue to make payments to the entity. Factoring with recourse Factoring without recourse Proceeds Equity Company guarantees Company is not liable in case FV of loan xx CA of AR xx payment in the event the the customer fails to pay; Less: BSC and Comm (xx) Less: CA or LP (xx) customer fails to pay; no G/L outright sale of AR Net proceeds xx Equity on assigned xx is recognized. Proceeds G/L on factoring FV of AR xx SP (NP + Holdback) xx Less: Service Fee (xx) Less: CA of AR (xx) Less: Factor’s Holdback (xx) G/L on factoring xx Less: Interest expense (xx) G/L on factoring xx 12 DISCOUNTING OF ACCOUNTS RECEIVABLE Discounting without Recourse Basis Discounting with Recourse Basis Holder is not liable in case the maker Holder is held liable. Discount rate – discount on the note (not market rate) fails to pay. The note is essentially sold Discount period – unexpired portion of the note. [Age and derecognized. of note – (Date of receivable up to date of discount)] Proceeds Equity Interest – use market rate for rate; use age of note for period) MV (Principal + Total Interest) xx SP (net proceeds) xx Discount (MV x DR x DP) (xx) CA of NR (xx) Net Proceeds xx G/L on discounting xx DERECOGNITION OF RECEIVABLES Contractual right to receive cash expires The entity transfers the financial asset ceding its control to some other entity Gain or Loss = Net proceeds – Book Value PRESENTATION Presented as one line-item as Trade and Other Receivables under current assets Long-term receivables are reported as Long-term investments and or other non-current assets DISCLOSURES Nature of receivables Credit risk exposures without taking into account any collaterals Information regarding interest rate risk exposures Receivable financing as to the nature, the terms/conditions/fair values Interest income, accrued interest, and impairment losses. 13 INVENTORIES (IAS 2) OVERVIEW (a) are held for sale in the ordinary course of business (b) in process of production for such sale (c) materials and supplies (RM, WIP & FGI) Initial Measurement Subsequent Measurement: LCNRV Write-down: Cost > NRV Cost inclusions Cost Exclusions Estimate SP xx Direct – loss is already included 1. Purchase price  Abnormal waste Estimated cost of disposal (xx) in LCNRV 2. Import duties and taxes  Selling costs Estimated cost to complete (xx) Indirect – loss is separately 3. Transport  Admin costs Net Realizable Value xx recognized (allowance) 4. Conversion & other DACs  Storage costs Reversal – allowed up to write-down balance. Gain on allowance (under Inventory Inclusions: all goods which the entity has title in it. allowance only) INVENTORY SYSTEMS ACCOUNTING FOR DISCOUNTS Period Inventory Systems - Physical count is required - Low price, large quantities - Uses purchase-related accounts Perpetual Inventory Systems - Physical count not required - High price, low quantities - Do not use purchase accounts COST FORMULAS 14 SPECIAL CONSIDERATIONS 1 Goods in Transit a. FOB shipping point Buyer b. FOB Destination Seller c. Free Along Side (FAS) Buyer shoulders the freight and the ownership of the goods is transferred to the buyer upon possession of the shipping carrier; essentially the same with FOB SP. d. Cost, Insurance, Freight (CIF) Buyer shoulders the freight charges; essentially the same with FOB SP. e. Ex-ship Seller is responsible for the freight charges and the risks until the goods are unloaded at the point of destination. 2 Consigned goods Remains to the entity – included 3 Goods in the hand of agent Remains to the entity – included 4 Held by customer for trial/approval Remains to the entity – included 5 Bill-and-hold arrangement Remains possession – included until not billed 6 Segregated goods a. Special order With customer specifications – excluded b. Customarily manufactured goods Physically segregated – included until delivered 7 Installment sales Included until fully paid 8 Good sold with buyback Product financing arrangement, included in transferor 9 Good under layway sale Goods are not transferred unless fully paid 10 Goods sold with refund Right to rescind the purchase of goods – excluded SUBSEQUENT MEASUREMENT – at LCNRV - also termed as impairment of inventory; done on a per item basis. Inventories Finished Goods Work-in-process Raw Materials Net Realizable Value xx Estimated SP xx Estimated SP xx Impaired only if FG is Less: Historical cost (xx) Less: Cost to Sell (xx) Less: Cost to complete (xx) impaired; NRV = current Loss on inventory WD xx Net Realizable Value xx Less: Cost to Sell (xx) replacement cost Net Realizable Value xx PURCHASE COMMITMENTS - follows the Principle of Conservatism, and NRV recognition. Accounts Payable is Fixed, Purchases can go down, but never go above the contract terms. Upon incurrence of loss, Gains can be recovered up to the extent of the loss only. Cancellable PC Noncancellable PC Can simply cancel; no provision nor journal entries Entity is obligated to perform Disclose the ff: future loss, can be estimated and material amount There is a loss on purchase commitment 15 INVENTORY ESTIMATION METHODS - When physical count is impossible to perform, inventory estimation methods may be performed. Done for the reasons: Interim financial statements Necessary to prove the correctness and The inventory is destroyed by fire and are prepared. reasonableness of such count by making an estimate inventory is required for insurance purposes. Gross Profit Method – assumes that the GPR remains approximately the same from period to period. Sales xx Estimated cost of inventory on xx 𝐶𝑂𝐺𝑆 Sales Allowances and Sales Discount are 𝐺𝑃𝑅 = Sales Return xx hand 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 Net Sales xx not included since these do not decrease Inventory on physical count xx the physical flow of inventories. Inventory shortage/(overage) xx Retail Method – used in the retail industry for measuring large quantities of inventories with rapidly changing items. Cost Retail Cost rate Beginning Inventory xx xx LCNRV/ Average FIFO Conservative Purchases xx xx Estimated Ending Freight In xx xx xx xx Inventory at retail Purchase returns (xx) (xx) x cost-to-retail ratio x% x% x% Purchase allowances (xx) Estimated cost of Purchase discounts (xx) ending inventory xx xx xx Department Transfer-In xx xx Department Transfer-Out (xx) (xx) Gross Sales xx Sales Return (xx) Stolen/Abnormal spoilage xx xx Employee Discount xx Net Mark-up xx xx Normal spoilage xx COGAS – LCNRV/Conservative xx xx x% COGAS at retail xx Less: COGS at retail (xx) Net Markdown (xx) (xx) Estimated Ending Inv xx COGAS – Average xx xx x% Beginning Inventory (xx) (xx) COGAS – FIFO xx xx x% 16 INVESTMENT IN EQUITY SECURITIES EQUITY INVESTMENTS DEBT SECURITIES - Represents a share in a company’s ownership - Any security that represents a creditor relationship with an entity - Includes: (a) ordinary shares; (b) preference shares: (c) - Features: (a) maturity value; (b) interest payments; (c) date of maturity rights and options to acquire shares - Includes: (a) corporate bonds; (b) BSP treasury shares; (c) government securities; (d) commercial papers; (e) redeemable preference shares The substance of security, not its legal form or structure, determines whether it will be classified as equity or debt security. Ownership Ownership Shares Classification Purpose of investment percentage Ordinary Shares Preference Shares FVPL Less than 20% For trading ✓ ✓ FVOCI Less than 20% Non-trading ✓ ✓ Investment in Associate 20%-50% Significant Influence ✓  Investment in Subsidiary More than 50% Control ✓  FVPL FVOCI Initial measurement Fair Value – Div on FV + TC – Div on Transaction cost Expensed Capitalized Subsequent measurement FV at year-end FV at year-end Reporting of changes Profit or loss OCI FS classification Current asset Non-current Impairment consideration N/A N/A FV at year end > CA = unrealized gain Disposition: FV at year end < CA = unrealized loss FVPL → P/L FVOCI → OCI → RE 17 TRANSACTIONS SUBSEQUENT TO INITIAL MEASUREMENT 1. Dividends Dividends-on period Ex-dividends period 2. Share Splits – to raise share count; memo entry only Split up - ↑ # of shares, ↓par Date of Declaration Date of record Date of settlement Split down - ↓ # of shares, ↑ par 3. Special assessments – additional contribution on the part of Dividends: shareholders; capitalized as part of investment. a. Cash – recognized in P/L whether FVPL/FVOCI 4. Redemption of shares – like a sale in shareholdings. b. Property – in kind, recognized in P/L whether Redemption price > acquisition cost → Gain FVPL/FVOCI Redemption price < acquisition cost → Loss c. Share dividends – dividends out in the form of company’s 5. Share Rights – rights granted to shareholders to subscribe to own shares; not an income. new shares before it is offered to public; memo entry only; not SAME KIND – only number of shares is affected; an income. memo entry only. Exercise: Sell the rights: DIFF KIND – the CA of old is carried and divided Inv. in shares xx Cash xx between the new & old based on respective FV. Cash xx Inv inc Xx d. Scrip Dividends – dividends in promissory notes (cash Inv inc xx dividends) e. Liquidating dividends – dividends out of capital, not an MV – cash paid # of rights x FV income INVESTMENT IN EQUITY SECURITIES (PART 2) OVERVIEW Only investment in OS is qualified to be classified; investment in PS does not have voting rights; not subject for impairment. Significant Influence Investor holds directly or indirectly 20% or more voting power of the investee or evidenced by: MEASUREMENT Equity method: @ cost; Investor and investee are viewed as one. Investment in Associate Discontinuance of use of EM – lose of significant influence over investee Acquisition cost Dividends received/receivable Adjusted share in NI Adjusted share in NL Proceeds xx FV xx Share in increase of OCI Share in decrease of OCI CV xx CV xx Share in decrease of OCL Share in increase of OCI P/L Gain on disposal xx P/L Gain on reclass xx Impairment Loss End, Balance 18 OTHER ISSUES: 1. Purchase Differential 5. Step Acquisition – achieved in staged; Δ in FV → P/L (FV – CA) Cost > FVINA → Goodwill Cost of additional xx Cost < FVINA → Gain on acquisition (included in income in Add: FV of previous xx share in associate) Initial measurement xx Elim of UP/L Recognition of RP/L Inventory In the year of When sold 6. Associate with Preferred Shares Land intercompany When disposed/sold Cumulative – 1 year only Depreciable asset sales Over its remaining life NI (NL) of associate xx (declared or not Less: Dividends of PS (xx) Non-cumulative – actual 2. Intercorporate sales NI (NL) to OS xx dividends only Downstream Sales Upstream Sales x % of ownership x% Transaction Investor to investee Investee to investor Share in P/L xx Redeemable PS – liability UG/L Eliminate in full Eliminate the share RG/L Recognize in full Recognize the share 7. Investment of DGI, recognize immediately in P/L (Loss on repayment) - The cumulative AD that would have been recognized - (Dr) Deferred Grant Income (Dr) Loss on repayment of grant (Cr) Cash will be recognized immediately in P/L. Loss: GRANT ON INTEREST-FREE LOAN DISCLOSURES: - The benefit of a government loan with no 1. The accounting policy adopted for government Amount of repayment (total GG) xx interest or below-market interest rate is grants Unamortized DGI (xx) treated as GG. 2. The nature and extent of government grants Loss on Repayment of Grant xx - The benefit is recognized as the discount on recognized the note payable amortized over term. 3. Unfulfilled conditions and other contingencies 26 DEPLETION OF NATURAL RESOURCES (PFRS 6) OVERVIEW - The search for non-regenerative resources after obtaining legal rights to explore an area. MEASUREMENT: at cost Exclusion:  Expenditures incurred before obtaining rights;  After TF and CV are demonstrable; and  Any developmental expenditure. 1. Development Cost – cost incurred to exploit or extract the mineral resources after exploration. TANGIBLE EQUIPMENT – includes all transportation and heavy equipment; not INTANGIBLE DEVELOPMENT COST – such as drilling capitalized as part of natural resources; depreciated separately costs, tunnels, shafts and wells; capitalized. No alternative use – shorter of UL of wasting asset (output method) and With alternative use – UL of equipment UL of equipment (straight-line method) 3. Exploration Cost – expenditures incurred before the technical feasibility and commercial viability are demonstrable. Purchase of exploration rights Geological studies Exploratory drilling Trenching & sampling 4. Acquisition Costs – cost of acquiring the land on which the natural resource is located; Purchase price + DACs 5. Restoration costs – at present value; costs that will be incurred to restore back the area to its original condition. DEPLETION - systematic allocation of the depletion base of natural resource over the period of the natural resource is extracted. Development costs xx Revision of depletion rate: Exploration costs xx 𝐷𝑒𝑝𝑙𝑒𝑡𝑎𝑏𝑙𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 - an estimate of the resource deposit has to be changed. Acquisition costs xx 𝑭𝒐𝒓𝒎𝒖𝒍𝒂: 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑥 𝑈𝑛𝑖𝑡𝑠 𝑒𝑥𝑡𝑟𝑎𝑐𝑡𝑒𝑑 1. New information is available Restoration costs xx 2. More sophisticated production processes. Total cost of Natural 1. Treatment of depletion: Inventoriable (or product cost) - The revision is treated as a change in accounting estimate. resources xx 2. IL, Amor & Depreciation not capitalized into inventory - Formula: Less: Residual Value (xx) 3. Interest on Restoration costs 𝐶𝐴, 𝑏𝑒𝑔 + 𝐴𝑑𝑑𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑹𝒆𝒗𝒊𝒔𝒆𝒅 𝒓𝒂𝒕𝒆 = Depletable Amount xx 4. Excess interest in BC 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑛𝑖𝑡𝑠 DIVIDEND PAYMENTS BY WASTING ASSET ENTITIES - Dividends are normally paid out from RE; any amount declared in excess of URE is referred as Liquidating Dividends. WASTING ASSET DOCTRINE – states that TRUST FUND DOCTRINE – states that the share Unrestricted retained earnings xx dividends can be distributed not only to capital of a corporation is held as trust fund for the Add: Accumulated Depreciation xx the extent of URE but also to the extend protection of the creditors and no part of such Less: Capital Liquidated xx of AD that has been realized but not shall be distributed to owners unless dissolution Less: Depletion in ending inv xx liquidated. or liquidation. Maximum Amount of dividends xx 27 ACCOUNTING FOR DRILLING DRY HOLES: Successful effort method Full cost method Successful: Capitalized Successful/not: Capitalized Unsuccessful: Expensed IMPAIRMENT (PAS 36) AND REVALUATION OF ASSETS (PAS 16) OVERVIEW - CA > RA; (1) decline of asset’s value thru benefits and (2) decline in future potential benefits; tested on Individual Asset. SCOPE ✓ PPE (cost and revaluation model)  Receivables, inventories, cash ✓ Investment property under cost model  Equity securities in cost model ✓ Intangible assets  They have their own standard on this ✓ Investments in associates, JV and subsidiaries DEFINITION OF TERMS 1. Carrying amount – amount at which an asset is recognized in 4. Fair Value – the price that would be received to sell an asset SFP after deducting AD and AIL. or paid to transfer a liability. 2. Recoverable amount of an asset – higher amount between 5. Value in Use – PV of future cash flows expected (discounted) FV and VIU. Inclusions: Exclusions: 3. Cost of disposal – incremental DACs to the disposal 1. FCF from continuing use 1. FCF relating to restructuring 2. FCF necessary to be incurred 2. FCF for enhancing or improving excluding finance costs and income tax expense. Examples: 3. Net cash flows received on the asset legal costs, stamp tax, transaction taxes, cost of removing the disposal of the asset 3. CF from financing asset, direct cost. 4. Income tax IDENTIFICATION OF IMPAIRED ASSETS - GR: entity estimates the asset’s recoverable amount. - XPN: some assets are required to be tested annually: (1) intangible asset with indefinite useful life; (2) Intangible asset not yet available for use and (3) Goodwill in business combination. 28  EXTERNAL INTERNAL ✓ Significant decline in MV ✓ Obsolescence/physical damage ✓ Negative changes in technical environment ✓ Economic performance is worse REVERSAL OF IMPAIRMENT GR: There is reversal if RA is higher than CA. GR: The reversal of impairment shall be recognized in P/L. XPN: The increased CA shall not exceed the could-have-been CA if XPN: Recognize in P/L to the extent it reverses an unrecovered no impairment is recognized. revaluation decrease and any excess is credited to RV. REVALUATION SURPLUS Cost Sound RS (RD) / IL CA xx xx xx AD (xx) (xx) (xx) BV/FV/Rev xx xx xx - REVALUATION SURPLUS – equity account, storage of any upward changes in the value of assets; item of OCI and not recycled in P/L. CA – SV / CA – FV; original life is used. - Sound value is depreciated using the figures of historical cost. - Impairment and Revaluation happens on both Fair Value model and Cost Model. - RS is applied to an entire class of PPE/IP. - RS is allowed for Intangibles only if there are active markets for the assets measured at revaluation model. - Negative balance in RS is impairment loss; transferred on RE on a piecemeal basis based on the revised remaining UL. 𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 − 𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑃𝑖𝑒𝑐𝑒𝑚𝑒𝑎𝑙 𝑅𝑒𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 CASH GENERATING UNIT - is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets. The impairment loss is allocated to: First, GOODWILL Second, to ALL OTHER NON-CASH ASSETS ON A PRO-RATA BASIS - If there is a given FVLCTS for any asset, then it is presumed to be its carrying amount already. (will not form part in prorating. - Reversal of impairment loss: the gain is allocated to the non-cash assets (except goodwill) based on Relative Fair Value. 29 INVESTMENT PROPERTY (PAS 40) OVERVIEW Land and Building only; held by lessee under Finance Lease OTHER CLASSIFICATION ISSUES (A) Can be split easily, account separately (B) Ancilliary services (in hotels) (C) Intercompany sales Leased out separately: IP → IP; OOP → PPE Insignificant/Incidental → IP Individual FS → IP Cannot be L/S: Significant IP → IP; Significant OOP → OOP. Significant → PPE Consolidated FS → PPE INITIAL MEASUREMENT General Self-Constructed Non-cash Undeterminable Cost + Transaction Costs Cost Incurred to Date Property given – Received – Given Cost Directly Attributable Costs: Transaction costs: SUBSEQUENT MEASUREMENT ✓ Import duties ✓ Professional fees/Legal fees  Start-up costs at FAIR VALUE MODEL or COST MODEL Cost Model: depreciating ✓ Non-refundable tax ✓ Property/Transfer Taxes  Operating costs Fair Value Model: remeasure at FV at the end of ✓ Less trade discount & rebates ✓ Other TC  Abnormal waste RP; Δ → P/L; no depreciation & impairment RECLASSIFICATION OF MODEL - From Cost to FV model: if it reflects changes in the Financial Statements more reliably; the opposite is not allowed. TRANSFERS – if there is a change in use Fair Value model Cost model: (a) made at carrying amount (valuation); (b) no G/L is recognized. FROM TO INITIAL Δ IN FV IP to PPE Commencement of owner occupation IP PPE/Inventory at FV P/L PPE to IP End of owner occupation PPE Investment Prop at FV RS (OCI); Loss (P/L) Inventory Investment Prop at FV P/L IP to INVTY Commencement of development with a view to sale INVT to IP Commencement of operating lease to another party PRESENTATION Non-current Asset of the Balance Sheet Cost model DERECOGNITION FROM TO INITIAL Δ IN FV 1) Upon disposal IP PPE/Inventory at CV None 2) Permanent withdrawal from use PPE/Inventory Investment Prop at CV None 30 INTANGIBLE ASSETS (PAS 38) OVERVIEW - An intangible asset is an identifiable, non-monetary asset without physical substance. Identifiability Control Future Economic Benefits - Asset is identifiable when (a) it is - is the power of the entity to obtain the future - May include revenue from the sale of separable and (b) it arises from economic benefits flowing from the intangible products or services, cost savings contractual or other legal rights. asset and restrict access from others. and other benefits. SCOPE; does not include the following:  Goodwill acquired from business combination  Deferred Taxes (PAS 12)  Rights arising from exploration and evaluation of assets (PFRS 6)  Leases (PAS 16) &Employee benefits (PAS 19R)  Expenditure on the development and extraction of wasting asset  Deferred acquisition cost and intangible assets  Intangible assets held for sale (PAS 2)  Financial assets & non-current intangible assets HFS RECOGNITION Probable that the FEB will flow to the entity. The cost can be measured reliably. INITIAL MEASUREMENT GR: @ cost. XPN: it can be acquired through 1. SEPARATE ACQUISITION 5. EXCHANGE - PP + import duties and non-refundable taxes after - Given up + Cash paid → Asset Received → CA + Cash paid discounts + DACs - No CS: CA + cash paid 2. DEFERRED SETTLEMENT BASIS 6. INTERNALLY GENERATED - CPE; the difference of CPE and total payments is interest - DACs: (1) cost of materials and services, (2) cost of employee expense. benefits (3) legal right registration and (4) Amortization of 3. ACQUISITION THROUGH BUSINESS COMBINATION patents and licenses used. - The cost is based on the FV on the date of acquisition. - Expensed: (1) selling, admin and general OH costs (2) clearly 4. ACQUISITION THROUGH GOVERNMENT GRANT identified inefficiencies and initial operating losses (3) - either at Fair Value or Nominal amount or Zero + DACs training expenses. SUBSEQUENT MEASUREMENT - Choose between (same with PPE) o COST MODEL – cost less AA less AIL. (used in practice) o REVALUATION MODEL – carried at revalued amount less AA less AIL. 31 RESEARCH PHASE - All research costs in this phase are expensed. It includes: Laboratory research aimed at obtaining new knowledge. Search for application of research findings Search for alternatives for materials, devices and etc. Evaluation of possible alternatives for new or improved materials DEVELOPMENT PHASE - is the application of research findings or other knowledge to a plan. Capitalization depends if the entity can demonstrate ALL: Probability of Economic benefit Ability to use or sell Intention to complete Technical feasibility (when prototype or model is produced) Resources adequate and available Expenses can be measured reliably. Development activities include: Design, construction and testing of preproduction prototypes Design, construction and operation of pilot plant Design of tools, jigs, molds and dies involving new technology Design, construction and testing of a chosen alternative - If the entity cannot distinguish → treat the expenditure as research costs. - In process R&D acquired separately → recognized as asset initially. Subsequent: depends on the related phase. - If the item of PPE has alternative use, the depreciation is charged to R&D expense; the CV → PPE. - If the item of PPE has no alternative use, the cost is immediately recognized as R&D Expense. - Internally generated brands, mastheads, publishing titles, customer lists are not intangible assets; expensed outright. AMORTIZATION CONCEPT the systematic allocation of the depreciable amount of an intangible asset over the asset’s UL. PERIOD shall begin when the asset is available for use and ceases when the asset is derecognized. AMOUNT Cost less residual value RESIDUAL VALUE GR: Zero; XPN: (a) third party is committed to buy the IA and (b) there is an active market for the IA METHOD Shall reflect the pattern in which the asset’s FEB are expected; Straight-line method. PRESENTATION - Amortization charge is recognized in P/L unless it is required to be included in CA of another asset. SUBSEQUENT COSTS ON INTANGIBLE ASSET - GR: expensed because most subsequent expenditures are likely to maintain only the expected FEB in the IA. - XPN: capitalized or added if (a) probable that the FEB will flow to the entity and (b) the sub exp can be measured reliably. 32  Finite or Limited Life Indefinite Life If the entity can determine reliably the length When based on an analysis of all relevant factors, there is Useful life definition of or number of productions, the IA’s UL. no foreseeable limit to the period; but not endless. Copyright, Fixed-term Franchise, Patent, Examples Trademark, Perpetual Franchise & Goodwill License & Computer Software, Not amortized but tested for impairment at least Amortization Amortized using UL annually. Asset is tested for impairment when Asset is tested for impairment annually and when Impairment indicators are present. impairment indicators are present. Computation of Value in Future Cash Flows x PV Factor Annual Cash Flow / Discount Rate Use MAJOR CATEGORIES OF INTANGIBLE ASSETS (1) MARKETING-RELATED Trademarks Masthead Web Development Costs Definition ✓ Visible sign of distinguishing goods Refer to a list, usually Internal – capitalized; ✓ Not amortized but subject to found on the editorial External and customer can place order – impairment test at least annually. page of the newspaper capitalized; ✓ 10 years, renewable for 10 years each customer cannot place order – Expense Recognition Acquired separately – PP + DACs Acquired separately – PP Planning – expensed Internally developed – expenditures + DACs Internally Application, infrastructure, graphic design stage required to establish it, filing and developed are expensed. & content development – capitalized registration fees Content development stage – expensed Subsequent All expensed whether successful or not Operating stage – expensed unless criteria is costs met CUSTOMER-RELATED ARTISTIC-RELATED CONTRACT-RELATED Customer list Copyright Franchise Leasehold customer database exclusive right granted by the Agreement to take-on Right acquired by virtue of Definition and information government to the author business activity under brand contract of lease Purchased: PP + DACs; or LSP & Payment for PP + DACs; part of IFF and all legal fees and Purchased Developed: expenses incurred assignment: Capitalized intangible expenses in the production of the work 33  CUSTOMER-RELATED ARTISTIC-RELATED CONTRACT-RELATED Customer list Copyright Franchise Leasehold Periodic Payments: Expense When internally Copyright is written off against Expensed Periodic payments (CFF) And if not substantial, generated the revenue of first printing. expensed outright. Granted for definite period – Amortization: GR: over the amortized over UL or definite useful life of the lease. Useful life or legal life period (SHORTER) Leasehold improvements – Life/Term Amortized over life (SHORTER) Granted indefinitely or item of PPE, not IA; depreciated perpetually – not be amortized over the life of the lease or life but tested for impairment (SHORTER). (5) TECHNOLOGY-RELATED a. Patent – exclusive right granted to an inventor i. Acquired separately – PP + DACs ii. Internally developed – costs include licensing & legal fees; R&D and defense litigation are expensed. iii. Legal life: 20 years iv. Amortization – legal life or UL (SHORTER) 1. Acquired separately – remaining legal life or useful life (SHORTER) 2. Internally developed – legal life or useful life (SHORTER) 3. Competitive patent to protect patent – remaining life of the original patent. 4. Acquisition of related patent to extend life – extended life b. Computer Software – collections of computer data and instructions. i. System software – basic non-specific functions of the computer; application – used to accomplish tasks. ii. Related expenses: 1. Cost of coding, testing and to produce the product masters – capitalized 2. Prior to establishment of Technical Feasibility – expensed 3. Costs before technical feasibility – expensed 4. After establishment of Technical Feasibility – capitalized 5. Reproduction of CS – inventories iii. Classification (depends on intention of entity) 1. Integral part of PPE – not an IA but rather a PPE. 2. Used for licensing or rental – intangible assets 3. Reproduced for resale – inventories 34  (6) OTHERS c. Goodwill – when earnings exceed normal earnings by reason of good name i. From business combination – IA ii. Internally developed – not recorded iii. Amortization: GR: Not amortized; XPN: tested for impairment at least annually iv. Measurement of goodwill 1. Residual approach – PP less FVINA. 2. Direct approach Purchase of Average Excess Earnings Capitalization of Average Excess Earnings Average Earnings xx Average Earnings xx Less: Normal Earnings (xx) Less: Normal Earnings (xx) Average excess Earnings xx Average excess Earnings xx Multiply by: Number of periods xx Divided by: Capitalization Rate xx GOODWILL xx GOODWILL xx Capitalization of Average Earnings PV or Discounted Value Average Excess Earnings Average Earnings xx Average Earnings xx Divided by: Capitalization Rate xx Less: Normal Earnings (xx) FVINA, including goodwill xx Average excess Earnings xx Less: FVINA, excluding goodwill (xx) Multiply by: PV of Ordinary annuity at % xx GOODWILL xx GOODWILL xx DERECOGNITION AND FINANCIAL STATEMENT PRESENTATION - The intangible asset is derecognized when (1) upon disposal and (2) when no FEB are expected from its use. - Presented under Non-Current Section of the SFP. CASH GENERATING UNIT - Smallest identifiable group of assets that generates cash inflows that are largely dependent of the cash inflows. - Examples are: product line, bookstore of a school, convenience store of a gasoline station & supermarket of a mall. - Same impairment application with tangible assets is used. 35 AGRICULTURE (PAS 41) OVERVIEW 1. Agriculture is the practice of farming, cultivation of the soil for the growing of crops. 2. Agricultural activity – management of the biological transformation and harvest of biological asset for sale or for conversion. 3. Biological transformation includes (A) Growth (B) Generation (C) Procreation. This transformation is manifested by the Unrealized Gains in the Books. SCOPE  After point of harvest (PAS 2) ✓ Biological Asset (living plant or animals)  Land related to AA (PAS 16) ✓ Agricultural produce at the point of harvest  AA that is extractive in nature (IFRS 16) like ocean fishing, foraging (IFRS 6)  Animals for recreation (PAS 16) RECOGNITION 1. Controls the asset as a result of past event 2. Future economic benefits are probable 3. It can be measured reliably. MEASUREMENT - Initial & Subsequent: Fair Value less Cost to Sell - All costs after harvest are expensed. Cost to sell includes: (BLT)  Income taxes ✓ Broker’s commission  Interest income/finance costs ✓ Levy by agencies  Transportation costs Same Age, Different ✓ Transfer taxes and duties  Advertising costs Price Change SADD Dates Estimated Selling Price xx Cost of Contracts – Ignored; this is transaction Same Dates, Different Physical Change SDDA Transport and Other Cost to xx specific and has no bearing over market Age bring to Market conditions Fair Value xx Costs to sell are always incremental, in that Cost to Sell xx the sale will never occur if these are not Fair Value less Costs to Sell xx incurred. PRESENTATION AND DISCLOSURE OTHER ISSUES - Presented as Non-current Asset of the Balance sheet Government Grant: Measured at FVLCTS - Disclosure of Price/Physical change is ENCOURAGED but unconditional government grant is recognized in P/L if it is already receivable. not required. conditional government grant is recognized in P/L if it met the conditions in GG 36 FINANCIAL LIABILITIES (IAS 1) OVERVIEW Classification: Essential characteristics: 1. According to nature 1. Present obligation – legal or contractual; a. Financial Liability – deliver cash; exchange Financial Instruments with binding and contract another entity 2. Arising from past events – obligating events b. Non-financial Liability – residual definition 3. Outflow of economic benefits Payment of cash 2. According to FS presentation: Transfer of NCA a. Current liability Performance of service i. to be settled within 1 year; ii. to be settled within normal operating cycle; and iii. held for trading b. Non-current liability – residual definition * Due to be settled within 12 months * Due to be settled beyond 12 months: GR: CURRENT GR: NONCURRENT XPN: XPN: 1. Discretion to refinance or to roll over for 12 months Breach of covenant – CL after the RP – NCL XPN: Grace period is given on or before RP – NCL 2. Agreement to refinance an obligation on or before after RP – CL (non-adjusting event) the RP – NCL 3. According to source 37 ACCOUNTS PAYABLE - always current A. Accounting for discounts - within the normal operating cours Gross Method Net Method - Measured at fair value (equals the ✓ Cash discount offered is not yet ✓ Purchases and AP are recorded at net invoice price of the goods) deducted from the invoice price. amount ✓ CD is recognized when actually taken ✓ Cash discount not taken is debited to PD ✓ Widely used lost (classified as finance cost) ✓ Adjusting entry to recognize the PD ✓ When not taken, debit PD lost & credit AP B. Accounting for Freight ✓ In transit ✓ Owner will pay the freight FOB SP FOB Destination Who actually pay? Transfer of title at point of shipment (AP Transfer of title at point of destination A. Freight prepaid – freight is paid before it is recorded) While in transit, seller is liable is shipped; seller paid it While in transit, buyer is liable B. Freight collect – buyer paid it C. Supplier’s debit balances - These are debit balances in AP resulting from overpayments, returns and allowances and advance payments to suppliers. - Classified as Current Asset, added back to AP - Debit: Suppliers’ debit balances, Credit: AP NOTES PAYABLE CLASSIFICATION AND MEASUREMENT Initial Subsequent Fair Value CLASSIFICATION Amortized? Interest Expense Measurement measurement Changes FL at Attrib to risk – Financial FVPL Fair Value Fair Value NO OCI Face x Nominal Rate Liabilities (elected) YES (P/L) (NP, LP, BP) FL at AC FV – TC Amortized Cost YES NO CV x Effective Rate Best Estimate of Best Estimate of YES, if measure at Usually, EIR if liability is Non-financial Liabilities NO Cash Outflow Cash Outflow PV measured at FVPL 38  Sub-classification Notes Payable at Amortized Cost Initial Measurement Interest Bearing Face Value Short Term Non-interest Bearing Face Value, unless discounting is material. If so, Present Value Interest Bearing – with reasonable rate Face Value Long Term Interest Bearing – with unreasonable rate Present Value Non-interest Bearing REO handouts DEBT RESTRUCTURING - allows business that experiencing Cash flow problems to decrease and renegotiate their delinquent obligations in order to enhance liquidity and rehabilitate their operations. EQUITY SWAP MODIFICATION OF TERMS ASSET SWAP - Involving the issuance by - Involving modifications or changes in the terms of the contract or debt - Involving transferring the debtor of equity - Substantial: at least 10% of the old of a non-cash asset to 10% test financial liability the creditor instruments to the CA of the old FL xx creditor in full or partial - New liability is measured at PV using - Dacion en Pago Less: PV of modified (xx) payment prevailing market rate - CA of Liab – CA of amount using old rate - Debt-to-equity swap - CA of old > PV of modified → Gain = G/L on extinguishment. G/L on modification xx - CA of old < PV of modified → Loss DEBT FORGIVENESS - Non-substantial: not accounted for as the extinguishment of old FL - The CA of the liability forgiven is simply recognized - Any G/L is recognized in P/L; accounted for as adjustment in the old liability. in P/L as gain on debt extinguishment. - Old liability is not extinguished and simply continued. BONDS PAYABLE ✓ Bonds Payable is a contract where one party borrows funds from another party. ✓ Bond Indenture – or a deed of trust is the document which shows in detail the terms of the bonds ✓ Bond Certificate – certificate given to bondholders or investors to provide evidence of ownership. Initial Subsequent Fair Value CLASSIFICATION Amortized? Interest Expense Measurement measurement Changes Financial FL at FVPL Fair Value Fair Value NO YES (P/L) Nominal Rate Liabilities (NP, LP, BP) FL at AC FV – TC Amortized Cost YES NO Effective Rate 39  Scenario Comparison S.P.E.D Effect PREMIUM Proceeds > Face Amount Stated > Ef