Accounting Handout - FAR Eastern University PDF

Page 1 of 8 FAR EASTERN UNIVERSITY INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE DEPARTMENT OF ACCOUNTANCY AND INTERNAL AUDITING AUD1207 – INTEGRATED INTERNAL AUDITING REVIEW...

Page 1 of 8 FAR EASTERN UNIVERSITY INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE DEPARTMENT OF ACCOUNTANCY AND INTERNAL AUDITING AUD1207 – INTEGRATED INTERNAL AUDITING REVIEW COURSES SECTION B – FINANCIAL ACCOUNTING AND REPORTING FAR 03 – ACCOUNTING FOR SPECIFIC ACCOUNT BALANCES MR. CHRISTIAN ANDREI G. UTANES, CPA, CMA, MBA units NOTE TO STUDENTS: These handouts are of property of the reviewer. Unnecessary sharing and uploading of these materials are not allowed. LEARNING OBJECTIVES Upon completion of this chapter, you should be able to: 1. Account for Bonds Payable 2. Account for Leases 3. Account for Employee Benefits 4. Account for Intangible Assets 5. Account for Business Combinations and Consolidations LECTURE NOTES ACCOUNTING FOR BONDS PAYABLE A bond is a formal unconditional promise, made under seal to pay a specified sum of money at a determined future date and to make periodic payments at a stated rate until the principal sum is paid. A bond is a contract of debt whereby one party called the issuer borrows funds from another party called the investor. A bond is evidenced by a certificate and the contractual agreement between the issuer and investor is contained in a “bond indenture”. INITIAL MEASUREMENT OF BONDS PAYABLE The fair value of the bonds payable is equal to the present value of the future cash payments to settle the liability. SUBSEQUENT MEASUREMENT OF BONDS PAYABLE At year-end, the bonds payable shall be measured at amortized cost, using the effective interest method.  Page 2 of 8 TYPES OF BONDS Serial bonds - Bonds issued in groups that mature at different dates. For example, P5,000,000 of serial bonds, P500,000 of which mature each year from 5–14 years after they are issued. Term bonds - Bonds issued in groups that mature at a single date. For example, P5,000,000 bonds mature at the end of year 10. Convertible bonds - Bonds that can be exchanged for a fixed number of shares of the company's common stock. In most cases, it is the investor's decision to convert the bonds to stock, although certain types of convertible bonds allow the issuing company to determine if and when bonds are converted. Registered bonds - Bonds issued in the name of a specific owner. This is how most bonds are issued today. Having a registered bond allows the owner to automatically receive the interest payments when they are made. Secured bonds - Bonds are secured when specific company assets are pledged to serve as collateral for the bondholders. If the company fails to make payments according to the bond terms, the owners of secured bonds may require the assets to be sold to generate cash for the payments. Debenture bonds - These unsecured bonds require the bondholders to rely on the good name and financial stability of the issuing company for repayment of principal and interest amounts. These bonds are usually riskier than secured bonds. A subordinated debenture bond means the bond is repaid after other unsecured debt, as noted in the bond agreement. ACCOUNTING FOR LEASES ❖ A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. [IFRS 16:9] ❖ Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. [IFRS 16:B9] ❖ An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being implicitly specified at the time it is made available for use by the customer. ❖ Lessors shall classify each lease as an operating lease or a finance lease. [IFRS 16:61] ❖ A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. (aka RENT TO OWN) ❖ Otherwise, a lease is classified as an operating lease. [IFRS 16:62] Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: [IFRS 16:63] the lease transfers ownership of the asset to the lessee by the end of the lease term the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised the lease term is for the major part of the economic life of the asset, even if title is not transferred at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset  Page 3 of 8 the leased assets are of a specialized nature such that only the lessee can use them without major modifications being made ACCOUNTING FOR INTANGIBLE ASSETS ❖ Intangible asset: an identifiable non-monetary asset without physical substance. ❖ An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. [IAS 38.8] Thus, the three critical attributes of an intangible asset are: identifiability control (power to obtain benefits from the asset) future economic benefits (such as revenues or reduced future costs) Identifiability: an intangible asset is identifiable when it: [IAS 38.12] is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. RESEARCH AND DEVELOPMENT COSTS Charge all research cost to expense. [IAS 38.54] Development costs are capitalized only after technical and commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. [IAS 38.57] If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only. When can an expense be considered as a research or a development cost? RESEARCH COSTS ❖ Costs of obtaining new knowledge. ❖ Cost of searching for product technicalities  Page 4 of 8 ❖ search for application of knowledge and material. ❖ testing of materials. DEVELOPMENT COSTS ❖ project is technically feasible to complete. ❖ company intends to complete the project. ❖ it is capable of being used/sold and future benefits can be generated. ❖ resources are available to complete it. ACCOUNTING FOR EMPLOYEE BENEFITS Objective of IAS 19 (2011) The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits, requiring an entity to recognize a liability where an employee has provided service and an expense when the entity consumes the economic benefits of employee service. [IAS 19(2011).2] 1. Short-term employee benefits Short-term employee benefits are those expected to be settled wholly before twelve months after the end of the annual reporting period during which employee services are rendered, but do not include termination benefits.[IAS 19(2011).8] Examples include wages, salaries, profit-sharing and bonuses and non-monetary benefits paid to current employees. 2. Profit-sharing and bonus payments An entity recognizes the expected cost of profit-sharing and bonus payments when, and only when, it has a legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the expected obligation can be made. [IAS 19.19] 3. Post-employment benefits Post-employment benefit plans are informal or formal arrangements where an entity provides post- employment benefits to one or more employees, e.g. retirement benefits (pensions or lump sum payments), life insurance and medical care. 4. Termination Benefits A termination benefit liability is recognized at the earlier of the following dates: [IAS 19.165-168] when the entity can no longer withdraw the offer of those benefits - additional guidance is provided on when this date occurs in relation to an employee's decision to accept an offer of benefits on termination, and as a result of an entity's decision to terminate an employee's employment ACCOUNTING FOR BUSINESS COMBINATIONS AND CONSOLIDATIONS Determining whether a transaction is a business combination IFRS 3 provides additional guidance on determining whether a transaction meets the definition of a business combination, and so accounted for in accordance with its requirements. This guidance includes:  Page 5 of 8 Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments (or any combination thereof), or by not issuing consideration at all (i.e. by contract alone) [IFRS 3.B5] Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming a subsidiary of another, the transfer of net assets from one entity to another or to a new entity [IFRS 3.B6] The business combination must involve the acquisition of a business, which generally has three elements: [IFRS 3.B7] Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates outputs when one or more processes are applied to it Process – a system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs (e.g. strategic management, operational processes, resource management) Output – the result of inputs and processes applied to those inputs. Method of accounting for business combinations - “Acquisition method” Steps in applying the acquisition method are: [IFRS 3.5] 1. Identification of the 'acquirer' 2. Determination of the 'acquisition date' 3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree 4. Recognition and measurement of goodwill or a gain from a bargain purchase Method of Consolidation – “LINE BY LINE CONSOLIDATION”  Page 6 of 8 MULTIPLE CHOICE QUESTIONS BONDS PAYABLE 1. In accounting for Bonds Payable, which of the following is NOT a part of initial measurement? A. Present value of Interest B. Present value of Principal C. Amortization of premium or discount D. Face value of bonds payable 2. These are bonds issued in groups that mature at different dates. For example, P5,000,000 of serial bonds, P500,000 of which mature each year from 5–14 years after they are issued. A. Serial Bonds B. Term Bonds C. Convertible Bonds D. Debenture Bonds 3. When the initial measurement of bonds payable at present value is greater than the face value, it is said that the bonds are issued at __________. A. Face value B. Discount C. Premium D. Neither A, B or C LEASES 4. By default, all lease contracts under IFRS 16 are accounted for as _________. A. Finance Lease B. Operating Lease C. Either A or B D. Neither A nor B 5. IFRS 16 enumerated instances where a lease contract is deemed to be considered as a finance lease. Which of the following is NOT one of this instance? A. the lease transfers ownership of the asset to the lessee by the beginning of the lease term B. the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised C. the lease term is for the major part of the economic life of the asset, even if title is not transferred D. at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset 6. How does IFRS 16 define “control”? A. Control is obtained upon delivery of the leased asset B. Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. C. Control is transferred through a commercial exchange of resources D. Control is given when an entity transacts with another entity for a profit INTANGIBLE ASSETS 7. IAS 38 on Intangible Assets enumerated critical attributes of an intangible assets. Which of the following is not part of these attributes? A. Identifiability B. Control  Page 7 of 8 C. future economic benefits D. rights to variable returns 8. Which of the following is/are TRUE relating to accounting for research and development costs? A. All identified research costs are charged to expense B. Development costs are capitalized only after technical and commercial feasibility of the asset for sale or use have been established. C. If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only. D. All of the Above 9. Which of the following is considered to be a development cost? A. Costs of obtaining new knowledge. B. Cost of searching for product technicalities C. Engineering follow-through to arrive at technological feasibility D. Formulation for search for application of knowledge and material. EMPLOYEE BENEFITS 10. Wages, salaries, profit-sharing and bonuses and non-monetary benefits form what type of employee benefits? A. Short-term employee benefits B. Post-employment benefits C. Profit sharing and bonus payments D. Termination benefits 11. These plans are informal or formal arrangements where an entity provides post-employment benefits to one or more employees, e.g. retirement benefits (pensions or lump sum payments), life insurance and medical care. A. Short-term employee benefits B. Post-employment benefits C. Profit sharing and bonus payments D. Termination benefits 12. In understanding core business functions, which department is primarily concerned in ensuring feasible employee benefits? A. Operations B. Top Management C. Human Resources D. Production BUSINESS COMBINATIONS AND CONSOLIDATIONS 13. IFRS 3 enumerated and explained that business combination must involve the acquisition of a business, which generally has three elements. Which of the following is NOT part of these elements? A. Input B. Output C. Process D. Programs  Page 8 of 8 14. IFRS 3 applies the “Acquisition Method” in accounting for business combinations. Which of the following comes SECOND in the acquisition method? A. Identification of the 'acquirer' B. Determination of the 'acquisition date' C. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree D. Recognition and measurement of goodwill or a gain from a bargain purchase 15. A business combination may result in a goodwill, or a negative goodwill also known as “Gain on Bargain Purchase”. What is the proper treatment if the business combination resulted to a negative goodwill? A. As part of current assets B. As part of non-current assets C. As part of shareholder’s equity of the parent in the consolidated financial statement D. As part of income of the parent in the year of business combination GOODLUCK, FEUture CIAs! ---END--- “Many of life’s failures are people who did not realize how close they were to success when they gave up” – THOMAS A. EDISON