CFAS Lecture Notes PDF

lOMoARcPSD|21441027 CFAS notes - To understand the conceptual framework and accounting standards (e.g., Philippine Conceptual Framework and Accounting Standards (Western Mindanao State University) Studocu is not...

lOMoARcPSD|21441027 CFAS notes - To understand the conceptual framework and accounting standards (e.g., Philippine Conceptual Framework and Accounting Standards (Western Mindanao State University) Studocu is not sponsored or endorsed by any college or university Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes OVERVIEW OF ACCOUTING Accounting is the DT assets, their difference is deferred tax expense. If DT liability < DT assets, their difference is deferred tax income Tax base – amount of asset or liability that is taxable Current tax liability – unpaid current taxes Current tax asset – excess tax payments over the current tax due Current Income Tax Deferred Income Tax Actual amount payable to tax office An accounting measure to measure tax Payable in respect on current period effect to accounting āÿąÿĀýă āÿĀĄćā (ýĀĀĀ) × āÿą ÿÿāă (%) = ÿ 㕰ă Settled or recovered in future period āăþāĀÿÿÿĆ Ă楥ăÿăÿāă × āÿą ÿÿāă = Ā 㕰ă PAS 12 permits offsetting of deferred tax assets and liabilities only if, Legally enforceable right to offset current tax and liability; and Levied by the same taxation authority 17 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes PAS 12 permits offsetting of current tax assets and liabilities only if: Legally enforceable right; Intention to realize in net basis Presentation in Statement of Comprehensive Income Tax consequences are accounted for the same way as the related transactions or events. Thus, If transaction is recognized in profit or loss, as well as its tax effect If transaction is recognized outside profit or loss (e.g., OCI and equity), as well as its tax effect Tax effect recognized directly in equity is accounted for as direct adjustment to related component of equity. PAS 16 PROPERTY, PLANT AND EQUIPMENT PAS 16 applies to all items of PPE except: a. Held for sale b. Biological assets other than bearer plants but not produce on bearer plants c. Exploration and evaluation assets d. Mineral rights and mineral reserves (non-renewable resources) Characteristics of PPE Recognition a. Tangible assets; 1. Future economic benefits will flow to the entity; and b. Used in normal operation; and 2. Cost can be measured reliably c. Long-term in use (>1 yr.) Spare-parts, stand-by equipment and servicing equipment are PPE if it meets its definition. If not, then recognized as inventory. Safety and environmental equipment are PPE. It does not increase the future benefits, but it is necessary in obtaining future benefits of other assets. Initial Measurement Measured at cost a. Purchase price b. Direct costs of bringing the asset to the location and condition c. Initial estimate of dismantlement, removal and site restoration costs Except cost of opening new facility, introducing new product or service, new business location or new class customers, and administration and general overheads. Recognition of initial cost stops when the item is in the location and condition necessary Cost of PPE is the cash equivalent at the recognition date. If deferred payment (installment), the excess amount is interest. Acquisition through exchange: Additional Cost 1. Replacement Cost Replaced parts carrying amount is derecognized as loss If replaced part cannot be determined, replacement part is used as indication 2. Major Inspections Major inspection cost is capitalized while previous inspection cost is derecognized If it has commercial substance, cost is measured using: 1. Fair value of asset given up 2. Fair value of asset received; if 1 can9t be determined 3. Carrying amount of asset given up; if 2 can9t be determined If exchange lacks commercial use, use number 3. Subsequent Measurement 18 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes a. Cost Model b. Revaluation Model Entity can choose either the two, and then applies the accounting policy to an entire class of PPE COST MODEL - cost less any accumulated depreciation and any accumulated impairment losses Depreciation Each significant part of item of PPE is depreciated separately. Depreciation is recognized as expense, unless it is included in the cost of producing another asset. Depreciation starts when used. Depreciation stops when: a. Derecognized (sold or disposed); or b. Classified as held for sale; or c. Fully depreciated; however, if the residual value decreases below the carrying amount, the decrease is recognized as an additional depreciation Carrying amount (Book Value) – recognized asset amount after deducting accumulated depreciation and impairment loss Depreciation does not cease when the asset becomes idle or is retired from active use. Land and building are accounted separately. Land is not depreciated while building is depreciated. Depreciation Methods Does not prescribe any method. It depends on the Straight-line Method management9s judgment, but the choice must be the method ÿąĉĊ 2 þÿĂČÿąă āÿĂċă that best reflects the expected pattern of consumption. ĀĉăĄċĂ ÿÿĄă Prohibits the use of depreciation based on revenue Diminishing Balance Method Requires annual review of depreciation method, useful life Units of Production Method and residual value. Any changes are treated as changes in accounting estimates REVALUATION MODEL Fair value less any subsequent accumulated depreciation and impairment losses Frequency of revaluation: If fair value fluctuates significantly, annually If fair value does not fluctuate significantly, every 3-5 years. Revaluation applied to entire class of PPE Revalued simultaneously. If not possible, use rolling basis (i.e., one asset after another) Accounting for Revaluations An increase or decrease in the carrying amount of PPE resulting from revaluation is recognized in OCI and equity under PV of DBO, the difference is surplus Step 2. Determine the Net Defined Benefit Liability (Asset) 20 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes If deficit, then net defined benefit liability If surplus, then net defined benefit asset is the lower of the surplus and asset ceiling Presented in statement of financial position under non-current item. Step 3. Determine the Benefit Cost Service Cost: (recognized in P/L) (a) Current Service Cost xx (b) Past Service Cost xx (c) Any (gain) loss on settlement xx xx Net interest on the net defined benefit liability (asset): (recognized in P/L) (a) Interest cost on the DBO (ĀăąÿĄĄÿĄą Āā ąĄ Āþÿ Ď %) xx (b) Interest income on plan assets (ĀăąÿĄĄÿĄą ĂāĀý Ď %) xx (c) Interest on the effect of the asset ceiling xx xx Remeasurement of the net defined liability (asset): (recognized in OCI) (a) Actuarial (gains) losses xx (b) Difference between interest income on plan asset and return on plan assets xx (c) Difference between the interest on the effect of the asset ceiling and change in the effect of the asset ceiling xx xx Total Defined Benefit Cost xx Definition of Terms 1. Current Service Cost – increase in the PV of DBO resulting from employee service in current period 2. Past Service Cost – change in the PV of DBO resulting from a plan amendment or curtailment 3. Gain or loss on settlement – difference between PV of DBO and the settlement price 4. Interest cost on the defined benefit liability (asset) – change in the net defined benefit liability (asset) during the period that arises from the passage of time 5. Actuarial gain or loss – changes in PV of DBO resulting from changes in actuarial assumptions Actuarial Assumption – give value or best estimate of the variables that will determine the ultimate cost of providing post-employment benefits 1. Demographic assumptions – e.g., mortality, health condition 2. Financial assumptions – i.e., discount rate and future salary levels Discount rate used to discount post-employment benefits obligation is based on high quality corporate bonds. If no deep market, use government bonds. 6. Return on plan of assets – investment income earned by the plan assets during the year after deducting the cost of managing the fund Multi-employer plan – unrelated employers contribute to common fund State Plan - established by law and operated by gov9t; absence of one definition is not a state plan Insurance Plan – employer pays insurance premium to fund a post-employee benefit OTHER LONG-TERM EMPLOYEE BENEFITS Due to be settled beyond 12 months after the end of the reporting period other than post-employment and termination benefits Accounted similar to defined benefit plan. However, all the components are recognized in profit or loss. TERMINATION BENEFITS Employer9s act of terminating an employee as a result, either: Entity9s decision to terminate an employee before the normal retirement date; or Employee9s decision to accept the benefits in exchange of termination 21 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes Employee9s request for termination, is considered post-employee benefits Termination benefits are accounted: If payable within 12 months, same as short-term employee benefits If payable beyond 12 months, same as long-term employee benefits If are in substance, enhancement to post-employee benefits, same as post-employee benefits PAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE Government grants are assistance received from the government in the form of transfers of resources in exchange for compliance with certain conditions. Recognition a. Conditions will be complied; and b. Grants will be received Types of government grants according to attached condition 1. Grants related to assets – primary condition is to acquire or construct long-term assets 2. Grants related to income – grants other than those related to assets Measurement Monetary Grants Non-monetary Grants Amount of cash received; or Fair value of the non-monetary asset Fair value of amount receivable received Alternatively, at nominal amount Grants in the form of loan, such as: Forgivable loan measured the carrying amount of the loan forgiven Loan at below-market rate of interest or zero interest measured at the discounted amount Accounting PAS 20 uses income approach in which grant is recognized in P/L. Not automatically that when you received the grant, it is recognized in P/L.j Uses matching concept Recognized in P/L in systematic basis as related condition expenses are recognized. Analyze the recognition of income in the following cases: a. Grants related to depreciable assets b. Grants related to non-depreciable assets c. Grants received as financial aid for expenses or losses The depreciation method used for computing related must also be the same for computing grants. Presentation of Grants related to assets In statement of cash flows, the cash flows from the receipt of the grant and the purchase of the related asset are presented separately, even if the entity uses the net presentation Presentation of grants related to income 22 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes Repayment of Grants Treated as change in accounting estimate There are government assistances that are not recognized as government grants. These are whose: 1. Value cannot be reasonably measured; or 2. Cannot be distinguished from the entity9s normal trading transactions Examples are: a. Tax benefits b. Free technical or marketing advice c. Provision of guarantees d. Government procurement policy that is responsible for a portion of the entity9s sales If significant, only disclosed. PAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Two ways of conducting foreign activities 1. Foreign currency transactions 2. Foreign operations Functional Currency The currency of the primary economic environment in which the entity operates. The currency that is mostly used by the entity9s operation and not necessary the country9s currency Factors to consider: Currency of sales and cost Currency of cash flows from financing and operating activities Cannot be changed once determined, unless necessary. The changes are then treated prospectively. All currencies other than the entity9s functional currency are foreign currencies. Presentation Currency – currency used in presenting FS FOREIGN CURRENCY TRANSACTIONS A transaction that is denominated or requires settlement in a foreign currency. Initial using spot exchange rate at the date of transaction Recognition Monetary items – retranslated using closing rate Nonmonetary items measured at historical cost – exchange rate at the date of Subsequent transaction Recognition Nonmonetary items at fair value – exchange rate at the date when the fair value was determined Hence, nonmonetary items do not need translation at the end of the reporting period. Monetary items - amount received or paid in fixed or determinable (e.g., cash, receivables, payables) Non-monetary items - do not give rise to monetary items (e.g., inventories, prepaid assets, PPEs) Exchange Differences – the difference of translating one currency into another currency at different exchange rates Recognition of exchange difference: a. Monetary items – recognized in P/L 23 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes b. Nonmonetary items – recognition of exchange component is the same as how gain or loss are identified, whether in OCI or P/L When foreign currency transaction occurred in one period and settles in another: Exchange difference between the transaction date and end of reporting period Then, exchange difference between the previous reporting period and settlement date. FOREIGN OPERATIONS A subsidiary, associated, joint venture or branch that is based in foreign country and using foreign currency. Before financial statements of the branch is incorporated to the FS of main branch or other necessary translations (e.g., gov9t requirements), it is translated using the procedures below. Translation of Financial Statements a. Assets and liabilities are translated using closing rate at the date of balance sheet b. Income and expense are translated, using spot exchange rates c. All resulting exchange differences are recognized in OCI. Average rate for the period may be used, except when exchange rates fluctuate significantly. PAS 23 BORROWING COST Borrowing cost is capitalized to qualifying asset – long term to get ready for use or sale Types of borrowing cost: 1. Interest expense 2. Finance charge on finance leases 3. Exchange differences on borrowings in foreign currencies Other borrowing cost not used for qualifying asset is expense. Capitalization starts when it meets all the conditions: a. Incurs expenditures for the asset; b. Incurs borrowing cost; and c. Activities necessary to prepare the asset for its intended use or sale are being undertaken Interest incurred during the suspended period are not capitalized, instead expense. Capitalization ceases when qualifying asset is substantially complete or shall no longer incur borrowing cost, whichever comes first. ACCOUNTING FOR BORROWING COST Specific borrowing – funds borrowed only for the qualifying asset ÿÿāćāÿýććăĂ þÿ = ýāāĂÿý þÿ 2 㕰ÿăăĀāþăÿā 㕰ÿāĀþă General borrowing – funds borrowed for multiple purposes ÿÿāćāÿýććăĂ þÿ = ýăă. āąāăÿĂćāĂÿăĀ ą ÿÿāćāÿýććÿāćĀÿ āÿāă ĀąĄĊ/ĉ ÿċĊĉĊÿĄĂÿĄą ÿąĊÿĂ ąĄĊăĈăĉĊ ąĄ ăăĄăĈÿĂ þąĈĈąčÿĄąĉ ∑ ăĎĆăĄĂÿĊċĈăĉ 12 㹥Ċ/ĉ ÿąĊÿĂ ăăĄăĈÿĂ þąĈĈąčÿĄąĉ Compare the value of actual BC vs. capitalized BC, the lowest value will be capitalized as general borrowing cost. ÿĀĀā ĀĄ ĀĂÿýćĄĆćÿą ýĀĀăā = āąāăÿĂćāĂÿăĀ + ĀĀÿÿĀĄćÿą āĀĀā Question: Why is borrowing cost capitalized to qualifying asset? 24 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes PAS 24 RELATED PARTIES Related parties have the ability to affect the financial and operating decision of the other party through control, significance influence or joint control. Importance of disclosures of related parties Its transactions or existence can affect an entity9s financial position and performance To help users better assess the risks and opportunities surrounding the entity For transparency because there might be a conflict of interest DISCLOSURES Close Family Members Parent-subsidiary relationship Subsidiary discloses the parent name, even if no transaction happened in the period. Key management personnel – CEO, CFO, COO Discloses his compensation by breaking down respectively into: short-term, post-employment, other long-term, termination; and share-based payment Related party transaction Discloses: a. Nature or related party relationship b. Nature terms and amount of the transaction and outstanding balances c. Doubtful debts on the outstanding balances Outstanding balances are disclosed in individual FS, and eliminated in consolidated FS. Government-related entities – entity that is controlled, jointly controlled or significantly influenced by a government Discloses if there is related party transaction a. Name of the gov9t and the nature of the relationship b. Nature and amount of each individually significant transaction c. Other transactions that are collectively significant but are individually insignificant. Questions: 1. What makes parties related and not related? 2. Elaborate significance of related parties9 disclosures. PAS 26 ACCOUTING AND REPORTING RETIREMENT BENEFITS PLANS Preparation of FS of retirement benefits plans to account and report all participants of the plan, instead of individual. Hence, PAS 26 views retirement benefits plan as a reporting entity. Applies to all retirement benefits plan, except gov9t social security type arrangements and employee benefits other than retirement benefits. Hybrid plans are considered defined benefit plans. FS of Defined Contribution Plan contains the ff.: a. a statement of net asset available for benefits b. a statement of changes in net asset available for benefits; and c. accompanying notes to the FS FS of Defined Benefit Plan contains either of the ff.: (actuarial report is needed) 1. a. net asset available for benefits b. actuarial PV of promised retirement benefits, distinguishing vested and non-vested; and c. resulting excess or deficit 2. statement of net asset available for benefits including either: a. note disclosing the APV of PRV, distinguishing vested or non-vested benefits; or 25 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes b. a reference to this information in an accompanying actuarial report Plan assets are measured at fair value. Questions: 1. Why defined contribution plan contains that info in FS, as well as the defined benefit plan? 2. What makes defined benefit plan FS different from defined contribution plan FS? PAS 27 SEPARATE FINANCIAL STATEMENTS Accounting and disclosure requirements for investments in subsidiaries, associates and joint ventures, when entity prepares separate FS No entity is mandated to produce Applicable if entity chooses to prepare or is required by law Separate FS is an addition to: a. consolidated FS; or b. FS of entity with an investment in associates or joint ventures using equity method under PAS 28 Preparation of Separate FS: Prepared in accordance to applicable PFRS, except/however that investment in subsidiaries, associates or joint ventures are accounted for either: a. at cost; or b. in accordance of PFRS 9; or c. using equity method under PAS 28 Entity shall apply the same accounting for each category of investment. The measurement used for investment in separate FS is the same to non-separate FS. PAS 28 INVESTMENT IN ASSOCIATES AND JOINT VENTURE Nature of relationship Type of Investment Percentage of ownership interest with investee Financial asset at FV FV, the excess is included in the carrying amount of the investment If cost < FV, deficiency is included in income If FS reporting period and accounting policies of the investee and investor do not coincide, investee adjust his accounting policies before investor uses, and prepare FS that coincide to the investor reporting period (difference should not exceed 3 months). Preference Share – priority dividends Cumulative PS → deduct 1 yr. dividends, declared or not PS computation is not based on latest share but to the past shares In losses, investor discontinues sharing losses when his investment becomes 0. If the investee reports profit, resume recognition of shares only after its share in the profit equals share of losses unrecognized. Investor is exempted using equity method if exempted in preparing consolidated FS Investment in associate or joint venture with a portion of other PFRS or PAS, the remaining portion is accounted using equity method. If investment in joint venture is in accordance to PAS 28 by referring to PFRS 11, then use the equity method. Question: 1. Why is investment in associate initially recognized as cost? 2. Explain the effect of P/L, dividends and OCI to investment in associate. PAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES Restatement applies if an entity9s functional currency is that of a hyperinflationary economy. No prescribe absolute rate to recognize hyperinflation. It is a matter of judgment. Indicators of hyperinflation: a. General population keep its wealth in non-monetary assets or in a stable foreign currency b. General population regards monetary amounts in terms of stable foreign currency c. Sales and purchases on credit take place at expected loss of purchasing power of credit period d. Interest rates, wages and prices are linked to a price index; and e. Cumulative inflation rate over 3 years is approaching, or >100% 27 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes Core principle Restate FS using the measuring unit current at the end of the period or General Price Index (GPI) Restate also the comparative FS, whether monetary or non-monetary items Prohibits the presentation of this information as a supplement to unrestated FS GPI – reflects the inflation hence Restatement of Statement of Financial Position reflect general purchasing power a. Monetary items → not restate b. Non-monetary items at FV or NRV → not restated c. Non-monetary items at historical cost → restated Statement of Comprehensive Income and Cash Flows - restate all amount Restatement Formula: ăĀą (ÿĊ ăĄĂ ąĄ ĈăĆąĈĊÿĄą ĆăĈÿąĂ) ĄÿĉĊąĈÿāÿĂ ÿąĉĊ × ĄÿĉĊąĈÿāÿĂ ĀĈÿāă ąĄĂăĎ (ÿĊ ÿāćċÿĉĊÿąĄ ĂÿĊă) NOTE: Average price index can be used if historical price index is undeterminable, such transactions recurring very frequently Gain or loss on the net monetary position due to restatement (historical amount – restated amount) is recognized in P/L. Retained earnings – balancing figure after restatement Question: 1. Why is FS restated in hyperinflation economy? Understatement of assets and overstatement of income will happen and it can distort the comparison 2. How will you compute gain or loss on net monetary position? PAS 32 FINANCIAL INSTRUMENTS: PRESENTATION Financial Instruments – any contract that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity PAS 32 complement PFRS 9 Financial Instruments and PFRS 7 Financial Instruments: Disclosure Presentation Classifies financial instrument based on the substance of the contract and not its legal form. Classification of Financial Instruments Financial Assets Financial Liabilities Equity Instruments potentially favorable potentially unfavorable potentially unfavorable; residual A-L Contractual right to receive Contractual obligation to pay No contractual obligation to pay cash/financial instruments onfinancial asset or exchange financial asset or exchange favorable condition instrument instrument To receive: Requires delivery of: Variable number of EI for Variable number of own EI Requires deliver of: a fixed amount of FA for a fixed amount of FA Fixed number own EI for a fixed Fixed number of EI for a Fixed number own EI for a amount of FA variable amount FA variable amount of FA Ex.: Redeemable preference share – holder redeem PPE, inventories, intangible Ex.: Callable preference share – share at a set date asset are not included issuer will only call holder Unearned revenues, gov9t obligations are not included Compound Financial Instrument – contains both liability and equity; issuer9s perspective Ex. Convertible bonds – bonds converted into issuer9s shares of stocks 28 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes ýĉĉăĊĉ ÿÿÿĀÿĂÿĊÿăĉ āćċÿĊď 2 = č/ąĂă Ăā ąĄ ĂăĀĊ č/ąċĊ ăćċÿĊď ÿĄĉĊĈċăăĄĊ ăćċÿĊď ĄăÿĊċĈă āąăĆąĄăĄĊ Offsetting of financial asset and liability is permitted if: a. Legal rights to offset; and b. Intention to offset PAS 32 requires offsetting when it reflects entity9s future cash flows. OTHER Puttable Instrument – holder9s right to return the instrument in exchange for financial asset or automatically returned because of specified future event - Classified as financial liabilities, except when it meets definition of equity instrument Treasury Shares (Treasury Stocks) – entity9s own shares; reflect transactions to equity Interest, Dividends, Losses and Gains that relate to: Financial liability are recognized as income or expenses in P/L Equity instruments are recognized directly in equity Transaction cost from issuing: Financial liability are included in financial liabilities and subsequently amortized as P/L Equity instrument are deduction from equity PAS 33 EARNINGS PER SHARE Publicly-listed entities are required to present Earnings Per Share – how much profit (loss) each ordinary shares (OS) earned Ordinary share – subordinate to all other equity instrument Preference share – prioritize over other classes of shares Types of EPS Basic EPS Dilutive EPS Actual outstanding OS Includes potential outstanding OS ýăā 㕰ÿāĀþă 2 ÿÿăĄăÿÿăĂ ĂĆÿÿăĀ ýăā 㕰ÿāĀþă + ÿĄāăÿ āÿą Āÿ ÿþ þāÿĂ = ĀāÿĂ = þýýþĂ þýýþĂ + āĀāăÿāćÿý ĀĆÿÿăĀ Net Income is after tax Potential OS Preferred Shares 1. Convertible Preference Share Cumulative – deduct 1 yr., declared or not 2. Convertible Bonds Payable Non-cumulative – deduct declared 3. Options/Warrants Ave. Outstanding OS 4. Contingent Ordinary Shares 1. Shares issued 2. Subscribed shares Dilutive decreases EPS 3. Treasury shares Dilutive →included in DEPS computation Reacquired – deduct Antidilutive →ignored Reissued (sold) – add Below are adjusted retrospectively until Test for Dilution: issuance date: 1. PS/BP → convertible 㔼Ā 㕐ÿÿÿÿĀāĀ āĀ ý 㔼−ÿ 㕆 4. Share-split – ex. 2-for-1 2. ÿăĉĊ = 㔼Ā 㕐ÿÿÿÿĀāĀ āĀ 㕊 㔴ýþ 㕆 5. Bonus issue – or stock dividend BEPS > Test →dilutive 6. Preemptive stock rights –or right issue BEPS≤ Test →anti-dilutive - issuer is obliged to offer it to the existing Test for options/warrants shareholder before offering it to the public MV of shares>option price→dilutive Āā ąĄ ĉ/ÿĈăĉ Ĉÿą/Ċ ąĄ MV of shares ≤ option price →anti- ýĂĀ. ĄÿāĊąĈ = Āā ąĄ ĉ/ÿĈăĉ ăĎ 2 Ĉÿą/Ċ dilutive 3. Adding potential OS is based on the ranking: 29 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes Āā ąĄ ĉ/ÿĈăĉ Ā㥹Ĉă ăĎ. ąĄĈĊĉ 1. Options/Warrants + ĆĈąāăăĂĉ ÿĄĊăĈ ăĎ. ąĄ ĈĊĉ 2. PS ăĎĈÿą/Ċ = ąċĊĉĊÿĄĂÿĄą ĉ/ÿĈăĉ ÿĄĊăĈ ăĎ. ąĄ ĈĊĉ 3. BP Adj. factor is multiplied to Ave. outs. OS Entity with dilutive potential shares presents DEPS in addition to BEPS. If no dilutive, a BEPS is okay. Question: Why are outstanding shares computed using no. of outstanding OS divided by 12 months? PAS 34 INTERIM FINANCIAL REPORTING No entity are mandated for interim financial reporting Applicable if entity choses to or required by gov9t Securities and Exchange Commission (SEC) and Philippine Stock Exchange (PSE) quarterly and issued within 45 days after end of interim period Publicly listed entities are encouraged; at least semi-annual issued within 60 days after end of interim period Interim Financial Report contains either: Complete FS; or Condensed FS, compose of: 1. Condensed Statement of Financial Position 2. Condensed Statement of P/L and OCI 3. Condensed Statement of Changes in Equity 4. Condensed Statement of Cash Flows 5. Selected explanatory notes For lesser cost and to avoid repetition of information, PAS 34 is better than using PAS 1. Condensed FS Minimum Focus on providing info on significant events and transactions occurred since the latest annual period Discloses compliance with PFRS, and other information that is relevant for the interim period If highly seasonal, discloses latest and comparatives 12-month period in addition to interim financial report Presented in cumulative basis (year-to-end) Comparatives Statement of financial position – latest annual financial report Other FS – year-to-date period Ex. Current Comparative SFP June 30, 2021 Dec. 31, 2020 Other FS Sept. 30, 2021 Sept, 30, 2020 Materiality Interim measurements may rely on estimates to greater extent than measurement of annual financial data. Recognition and measurement Same accounting policies as annual, except if there is changes Measurement is on year-to-date basis Two views of interim period: 1. Integral view – a part of annual report is included 2. Discrete view – only for the period Gains and losses are recognized immediately (discrete view) ex. write-downs, gov9t grants, dividends Cost and expenses (income) needs allocation (integral view) ex. depreciation, taxes 30 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes PAS36 IMPAIRMENT OF ASSETS Applies to non-current assets: a. PPE b. Investment property measured at cost model c. Investment in associates, joint ventures, and subsidiaries d. Intangible assets e. Goodwill Observation: Measured for impairment because they are measured at cost. CORE PRINCIPLE If CA of asset > recoverable amount, impaired Recoverable amount (higher of FVLCD or VIN) xx Less: Carrying Amount xx Impairment Loss xx Assets are tested for impairment individually Indications of Impairment Assess at the end of each reporting period, whether there is indication of impairment Indications: External sources: 1. Significant decline in asset value 2. Significant change factors that affect recoverable amount (ex. increase in market interest rates) 3. CA of net asset > market capitalization Internal sources: 1. Obsolescence or physical damage for an asset 2. Significant change in use of assets that affect recoverable amount (ex. discontinuance) 3. Evidence that asset9s economic performance is worse than expected If there is indication, it signify to review and adjusted remaining useful life, depreciation or amortization method, or the residual value even if no impairment loss is recognized Exercise: What is your generalization for indications of impairment? Required testing for impairment annually, whether there is indication or not: a. Intangible asset with definite useful life b. Intangible asset not yet available for use c. Goodwill acquired in a business combination Exercise: Why they are tested annually? MEASURING RECOVERABLE AMOUNT No need to measure both FVLCD and VIU if one exceeds CA If FVLCD is undeterminable, use VIU If doubtful of VIU exceeding FVLCD, use FVLCD Fair Value less Cost of Disposal (FVLCD) FV is based in PFRS 13 Fair Value Measurement Cost of disposal excludes recognized liabilities Value in Use (VIU) PV of the future cash flows expected to be derived from an asset/CGU Computation: 1. Estimate future cash flows expected from continuing the use of assets to its final disposal Included any residual value and disposal cost, but excludes cash flows from future enhancement Cash flow project cover max. of 5 yrs. 31 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes Projects beyond 5 yrs. are extrapolated 2. Then, apply the appropriate discount rate Discount rate → pre-tax rate that reflects current market assessment RECOGNIZING AND MEASURING IMPAIRMENT LOSS Recognized in P/L Unless, asset is carried at revalued amount, revaluation surplus is decrease first and any excess is recognized in P/L Subsequent depreciation uses new CA Used also in reversal CASH-GENERATING UNIT (CGU) Smallest group of asset that generates cash inflows independent from cash inflows of other asset If impossible to calculate recoverable amount of individual asset, include it in CGU Consistency of included items is needed Recoverable amount is the higher of CGUs FVLCD and VIU GOODWILL Goodwill = Purchase price – net assets FV Does not generate cash flow but contributes to cash flows of multiple CGUs Hence, tested for impairment only once allocated to the CGU expected to benefit from combination Goodwill from business combination is allocated to each of the acquirer9s CGU Impairment loss of CGUs CGUs CA including goodwill > recoverable amount, impaired Impairment loss of CGU is: 1. Deducted to any goodwill included in the CGU; then 2. The excess is to the CGUs other assets carrying amount, pro rata Corporate Assets Assets other than goodwill contributing to future cash flows of both CGU under review and other CGU Testing for impairment is same to goodwill Exercise: Differentiate corporate asset from goodwill. REVERSAL OF IMPAIRMENT Reversal shall not exceed d. recoverable amount Recoverable amount of impaired asset > CA Indication of reversal is opposite of impairment c. CA if no impairment loss Limitations of reversal: has been recognized 1. Increase of CA shall not exceed to CA after regular depreciation b. CA on date of reversal 2. Never reserve impairment loss of goodwill d – c = reversal recognized in OCI, of revalued amount c – b = reversal recognized in P/L 32 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes PAS 37 PROVISIONS, CONTIGENT LIABILITIES AND CONTINGENT ASSETS Exemption: Executory contracts, unless onerous Those covered by other standards PROVISIONS a liability of uncertain timing or amount Estimated Ex. Warranty, restructuring cost, environmental damages (define restructuring) Presented in balance sheet separately from other types of liabilities (trade payables, accruals, contingent liabilities Reviewed at end of each reporting period Recognition: a. Present obligation→obligating event (legal or constructive) b. Probable (more likely than not) outflow of resources; and c. Reliably estimated Do not recognize future operating cost CONTINGENT – do not meet all recognition criteria; not recognized Contingent Liabilities – disclosed only, except the possibility of outflow is remote Contingent Assets – disclosed only, if the inflow is probable EXERCISE: Why is asset disclosed when probable unlike liabilities that only disclosed when possible? MEASUREMENT Nature of the outflow Measurement Basis General rule Best estimate Involves a large population of items Expected value → probability weighted ave. Each possible outcome in a range is Mid-point of the range as likely as any other RECORDING THE PROVISION Provision is debited to expense and credit to estimated liability account But sometimes, provision form part of the asset9s cost Changes in provisions → Prospective Use of provision → only for expenditure it was originally intended for 33 | P a g e Downloaded by Mikee Siapno ([email protected])  lOMoARcPSD|21441027 Conceptual Framework and Accounting Standards Notes PAS 38 INTANGIBLE ASSETS Intangible assets – identifiable non-monetary assets without any substance 1. Identifiable 2. Control 3. Future economic benefits If asset has both intangible and tangible elements, use judgment to asses which is more significant If integral part to asset, PPE (ex. OS in computer); if not, intangible asset (ex. app software) Aggregately presented in balance sheet under