CFAS - Lesson 3 - Statement of Cash Flow and other PASs PDF

Dr. M. Jens Calma Martensson 2 PAS 7 : Statement of Cash Flows Dr. M. Jens Calma Martensson 3 Learning Objectives At the end of the lesson, the student should be able to: 1.Describe...

Dr. M. Jens Calma Martensson 2 PAS 7 : Statement of Cash Flows Dr. M. Jens Calma Martensson 3 Learning Objectives At the end of the lesson, the student should be able to: 1.Describe the statement of cash flows 2.Differentiate between the following : (1) Operating activities (Investing Activities, and (3) Financing Activities 3.State the classification of the following in a statement of cash flows: (a) dividends received, (b) dividends paid, (c ) interest paid and (d) interest received, Dr. M. Jens Calma Martensson 4 DISCUSSIONS OF PAS 7 Dr. M. Jens Calma Martensson 5  Introduction Statement of Cash Flows – provides information about the sources and utilization (i.e., historical changes) of cash and cash equivalents during the period. Dr. M. Jens Calma Martensson 6  Definition of Terms  Cash  Cash Equivalents  Cash Flows Dr. M. Jens Calma Martensson 7  Classification of cash flows 1.Operating Activities 2.Investing Activities 3.Financing Activities Dr. M. Jens Calma Martensson 8  Key points to remember: 1. Operating activities – affect profit or loss 2. Investing activities – affect non-current assets and other investments 3. Financing activities – affect borrowing and equity Dr. M. Jens Calma Martensson 9  Cash flows excluded from the activities section  Cash flows on movements between “cash” and “cash equivalents” are not presented separately because these are part of the entity’s cash management rather than its operating, investing and financing activities.  Bank overdraft that cannot be offset to cash are presented as financing activities.  Cash flows denominated in a foreign currency are translated using the spot exchange rate at the date of the cash flow. Dr. M. Jens Calma Martensson 10 General Concept in the preparation of Statement of Cash Flows The statement of cash flows is prepared using cash basis. Under the cash basis of accounting, income is recognized only when collected and expenses are recognized only when paid, rather than when these items are earned or incurred. only transactions that affected cash and cash equivalents are reported in the statement of cash flows, non cash transactions are excluded and disclosed only. Dr. M. Jens Calma Martensson 11  Interest and Dividends Cash Flows Option 1 Option 2 1. Interest income received Operating activity Investing activity 2. Interest expense paid Operating activity Financing activity 3. Dividend income received Operating activity Investing activity 4. dividend paid to owners Financing activity Operating activity Dr. M. Jens Calma Martensson 12  Option 1 Option 2  Interest income, interest expense  Interest income and dividend income and dividend income are classified are classified as investing activities as operating activities because they because they result from investments. enter into the determination of  Interest expense is classified as profits or loss (i.e., income and financing activity because it results expenses) from borrowing.  Dividend paid is classified as  Dividend paid is classified as operating financing activity because it is a activity in order to assist users in transaction with the owners and assessing the entity’s ability to pay alters the equity structure dividends out of operating cash flows. Dr. M. Jens Calma Martensson 13  Presentation a. Direct Method – shows each major class of gross cash receipts and gross cash payments b. Indirect Method – profit or loss is adjusted for the effects of non – cash items and changes in operating assets and liabilities Note : PAS 7 does not require any particular method, both methods are acceptable, however, PAS 7 encourage the use of direct method because it provides information that maybe useful in estimating future cash flows which is not available under the indirect method. The choice is only applicable for operating activities. Dr. M. Jens Calma Martensson 14  Changes in ownership interest in subsidiaries cash flows arising from acquisitions and disposals of subsidiaries or other business units resulting to loss or obtaining of control are classified as investing activities. Those that do not results to loss or obtaining of control are classified as financing activities Dr. M. Jens Calma Martensson 15  Disclosure a. Components of cash and cash equivalents and a reconciliation of amounts in the statement of cash flows with the equivalent items in the statement of financial position. b. Significant cash and cash equivalents held by the entity that are not available for use by the group, together with a management commentary Dr. M. Jens Calma Martensson 16 PAS 8 : Accounting Policies, Changes in Accounting Estimates and Errors Dr. M. Jens Calma Martensson 17 Learning Objectives: 1. Define the following and give examples: (1) change in accounting policy; (2) change in accounting estimate, (3) error 2. Differentiate between the accounting treatment of the following : change in accounting policy, change in accounting estimate and correction of prior period errors. Dr. M. Jens Calma Martensson 18 DISCUSSIONS OF PAS 8 Dr. M. Jens Calma Martensson 19  Introduction PAS 8 prescribes the criteria for selecting, applying and changing accounting policies and the accounting and disclosure of changes in accounting policies, changes in accounting estimates and correction of prior period errors. These are intended to enhance the relevance, reliability and comparability of the entity’s financial statements. Dr. M. Jens Calma Martensson 20  Accounting policies -are the specific principles, bases, conventions, rules and practice applied by an entity in preparing and presenting financial statements Dr. M. Jens Calma Martensson 21  Hierarchy of reporting standards 1. PFRSs 2. Judgment: when making the judgment  management shall consider the following’ a. requirements in other PFRSs dealing with similar transactions b. conceptual framework  Management may consider the following: a. pronouncements issued by other standard setting bodies b. other accounting literatures and industry practices Dr. M. Jens Calma Martensson 22  Changes in Accounting Policies PAS 8 requires the consistent selection and application of accounting policies. Permits a change in accounting policy only if the change: a. Is required by the PFRSs or b. Results in reliable and more relevant information Dr. M. Jens Calma Martensson 23 Examples of Changes in Accounting Policies a. Change from FIFO to Weighted average cost formula for inventories b. Change from cost model to the fair value model of measuring investment property c. Change from cost method to revaluation model of measuring PPE and intangible assets. d. Change in business model for classifying financial assets e. Change in the method of recognizing revenues from long- term construction contracts f. Change to a new policy resulting from the requirement of a new PFRS. g. Change in the financial reporting framework, such as from PFRSs for SMEs to full PFRSs Dr. M. Jens Calma Martensson 24 Accounting for Changes in Accounting Policies 1. Transitional provision in a PFRS, if any, 2. Retrospective application, in the absence of a transitional provision 3. Prospective application, if retrospective application is impracticable Dr. M. Jens Calma Martensson 25  Changes in Accounting Estimates Examples that requires necessary estimation: a. Net realizable value of inventories b. Depreciation c. Bad debts d. Fair value of financial assets or financial liabilities and e. Provisions - Is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with assets and liabilities Dr. M. Jens Calma Martensson 26  Change in Accounting Policy vs. Change in Accounting Estimates  Normally results from a  Normally results from changes change in measurement on how the expected inflows or basis (e.,g., FIFO to Weighted outflows or economic benefits Average, cost to fair value, are realized from assets or etc.,) incurred liabilities Dr. M. Jens Calma Martensson 27  Examples of changes in accounting estimates: a. Change in depreciation method b. Change in estimated useful life or residual value of a depreciable asset c. Change in the required balance of allowance for uncollectible accounts or impairment losses d. Change in estimated warranty obligations and other provisions Dr. M. Jens Calma Martensson 28 Accounting for Changes in Accounting Estimates changes in accounting estimates are accounted for by prospective application. Prospective application means recognizing the effects of the change in profit or loss, either in: a. The period of change; or b. The period of change and future periods, if both are affected. Under prospective application, the beginning balance of retained earnings and the previous financial statements are not restated. Dr. M. Jens Calma Martensson 29  Errors include misapplication of accounting policies, mathematical mistakes, oversights or misinterpretations of facts, and fraud. TYPES of ERRORS 1. Current period errors 2. Prior period errors Dr. M. Jens Calma Martensson 30  Retrospective Restatement a. Restating the comparative amounts for the prior period (s) presented in which the error occurred or b. If the error occurred before the earliest prior period presented, restating the opening balances of assets. Liabilities and equity for the earliest prior period presented. Dr. M. Jens Calma Martensson 31 PAS 10 : Events after the Reporting Period Dr. M. Jens Calma Martensson 32 Learning Objectives 1. Define events after the reporting period. 2. State the accounting requirements for events after the reporting period Dr. M. Jens Calma Martensson 33 DISCUSSIONS OF PAS 10 Dr. M. Jens Calma Martensson 34  Introduction PAS 10 prescribes the accounting for, and disclosure of, events after the reporting period, including disclosures regarding the date when the financial statements were authorized for issue. Dr. M. Jens Calma Martensson 35  Events after the Reporting Period - are those events, favorable and unfavorable, that occurs between the end of the reporting period and the date when financial statements are authorized for issue Dr. M. Jens Calma Martensson 36  Two types of events after the reporting period 1.Adjusting events after the reporting period 2.Non – adjusting events after the reporting period Dr. M. Jens Calma Martensson 37 Adjusting events after the reporting period Adjusting events, as the name suggests, require adjustments of amounts in the financial statements. Examples of adjusting events: 1. The settlement after the reporting period of a court case that confirms that the entity has a present obligation at the end of reporting period. 2. The receipt of information after the reporting period indicating that an asset was impaired at the end of reporting period. 3. The determination after the reporting period of the cost of asset purchased, or the proceeds from asset sold , before the end of reporting period. Dr. M. Jens Calma Martensson 38  Non – adjusting events after the reporting period Non – Adjusting events do not require adjustments of amounts in the financial statements. However, they are disclosed if they are material. Examples: 1. Changes in fair values, foreign exchange rates, interest rates or market prices after the reporting period. 2. Casualty losses occurring after the reporting period but before the financial statements were authorized for issue. 3. Litigation arising solely from events occurring after the reporting period. Dr. M. Jens Calma Martensson 39  Dividends Dividends declared after the reporting period are not recognized as liability at the end of reporting period because no present obligation exists at the end of reporting period. Dr. M. Jens Calma Martensson 40  Going Concern PAS 10 prohibits the preparation of financial statements on a going concern basis of management determines after the reporting period either that it intends to liquidate the entity or to cease trading or that it has no realistic alternative but to do so. Dr. M. Jens Calma Martensson 41 PAS 24 : Related Party Disclosures Dr. M. Jens Calma Martensson 42  Learning Objectives 1. Enumerate examples of related parties. 2. Describe the disclosure requirements for related parties Dr. M. Jens Calma Martensson 43 DISCUSSIONS OF PAS 24 Dr. M. Jens Calma Martensson 44  Introduction PAS 24 prescribes the guidelines in identifying related party relationships, transactions, outstanding balances and commitments and the necessary disclosures for these items. Related party disclosures are necessary to indicate the possibility that an entity’s financial position and performance might have been affected by the existence of such relationship. Dr. M. Jens Calma Martensson 45  Related Parties - parties are related if one party has the ability to affect the financial and operating decisions of the other party through control, significant influence or joint control. Dr. M. Jens Calma Martensson 46  Examples of related parties 1. Parent and its subsidiary 2. Fellow subsidiary with a common parent 3. Investor and its associate; and the associate subsidiary 4. Venturer and the joint venture; and the joint venture’s subsidiary 5. A joint venture and an associate of a common investor 6. Key management personnel of the reporting entity or of the reporting entity’s parent. 7. A person who has control, significant influence or joint control over the reporting entity 8. Close family members of the persons referred in number 6 and 7 9. Post employment benefit plan of the employee of either the reporting entity or an entity related to the reporting entity. Dr. M. Jens Calma Martensson 47  Not related parties a. Two entities simply because they have one director or key management personnel in common. b. Two joint venture simply because they have co-venturers in a joint ventures. c. Financers, trade unions, public utilities and government agencies that do not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings with the entity, even though they may place some restrictions on the entity or participate it its decision –makings. d. A customer, supplier or other business that the entity does significant transactions with, simply because of economic dependence. Dr. M. Jens Calma Martensson 48  Disclosure  Relationships between parents and subsidiaries  Key Management Personnel Compensation  Related Party Transactions  Government related entities Dr. M. Jens Calma Martensson 49 PAS 2 : Inventories Dr. M. Jens Calma Martensson 50 Learning Objectives 1. Define Inventories 2. Measure inventories and apply the cost formulas 3. State the accounting for inventory write – down and the reversal thereof Dr. M. Jens Calma Martensson 51 DISCUSSIONS OF PAS 2 Dr. M. Jens Calma Martensson 52  INTRODUCTION PAS 2 prescribes the accounting treatment for inventories. PAS 2 recognizes that a primary issue in the accounting for inventories is the determination of cost to be recognized as asset and carried forward until it is expensed. Accordingly, PAS 2 provides guidance in the determination of cost of inventories, including the use of cost formulas, and their subsequent measurement and recognition as expense. Dr. M. Jens Calma Martensson 53  PAS 2 applies to all inventories except for the following:  Assets accounted for under other standards  Assets not measured under the lower of cost or net realizable value (NRV) under PAS 2 Dr. M. Jens Calma Martensson 54  Inventories a. Held for sale in the ordinary course of business (finished goods) b. In the process of production for such sale (work in process) c. In the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials and manufacturing supplies) Dr. M. Jens Calma Martensson 55  Examples of Inventories a. Merchandise purchased by a trading entity and held for resale. b. Land and other property held for sale in the ordinary course of business c. Finished goods, goods undergoing production, and raw materials and supplies awaiting use in the production process by a manufacturing entity. * Ordinary course of business refers to the necessary, normal or usual business activities of an entity. Dr. M. Jens Calma Martensson 56  Measurement Inventories are measured at the lower of cost and net realizable value. Cost The cost of inventories comprises the following: a. Purchase cost b. Conversion cost c. Other costs necessary in bringing the inventories to their present location and condition Dr. M. Jens Calma Martensson 57 The following are excluded from the cost of inventories and are expected in the period in which they are incurred: a. Abnormal amounts of wasted materials, labor or other production costs; b. Storage costs, unless those costs are necessary in the production process before a further production stage (e.g. the storage costs of partly finished goods may be capitalized as cost of inventory, but the storage costs of completed goods are expensed); c. Administrative overhead that do not contribute to bringing inventories to their present location and conditions; and d. Selling cost Dr. M. Jens Calma Martensson 58 Illustration: Entity A acquires inventories and incurs the following costs: Purchase price, gross of trade discounts 100,000 Trade discount 20,000 non – refundable purchase tax, not included in the purchase price above 5,000 freight in (transportation costs) 15,000 Commission to broker 2,000 Advertisement costs 10,000 Requirement : How much is the cost of the inventories purchased? Dr. M. Jens Calma Martensson 59  Solution Purchase price, gross of trade discount P100,000 Trade discount (20,000) Non-refundable purchase tax 5,000 Freight – in (Transportation costs) 15,000 Commission to broker 2,000 Total cost of inventories P 102,000 ======== * The advertisement costs are selling costs. These are expensed int the period in which they are incurred. Dr. M. Jens Calma Martensson 60  Cost Formulas 1.Specific Identification 2.First – In , First – out (FIFO) 3.Weighted Average PAS 2 does not permit the use of a last – in, first – out (LIFO) cost formula. Dr. M. Jens Calma Martensson 61  Illustration Date Transaction Units Unit Cost Total Cost Jan-01 Beginning Inventory 100 P10 P1,000 7 Purchase 300 12 3,000 12 Sale 320 21 Purchase 200 14 2,800 Dr. M. Jens Calma Martensson 62 Case 1 - FIFO Required: Compute for the ending inventory and cost of sales using the FIFO cost formula. Step 1 : Compute for ending inventory in units Step 3: Compute for cost of sales. Date Transaction Units Date Transaction Units Unit Cost Total Cost Jan-01 Beginning Inventory 100 Jan-01 Beginning Inventory 100 P10 P1,000 7 Purchase 300 7 Purchase 300 12 3,600 12 Sale -320 21 Purchase 200 14 2,800 21 Purchase 200 Total goods available for sale 600 7,400 Ending Inventory (in units) 280 Less : Ending Inventory -280 -3,760 Cost of sales 320 3,640 Step 2 : Compute for ending inventory at cost. Alternative computation: Units Unit Cost Total Cost Units Unit Cost Total Cost From Jan 21 purchase 200 P14 P2,800 From Beg, From Jan 7 purchase (300 - Inventory 100 10 1,000 220) 80 12 960 From Jan 7 purchase 220 12 2,640 Ending inventory at cost P3,760 Cost of sales 320 3,640 Dr. M. Jens Calma Martensson 63  Case 2.1 : Weighted Average Step 1 : Compute for the total goods available for sale in units and at cost Date Transaction Units Unit Cost Total Cost Jan-01 Beginning Inventory 100 P10 P1,000 7 Purchase 300 12 3,600 21 Purchase 200 14 2,800 Total goods available for sale 600 7,400 Step 2: Compute for the weighted average unit cost Step 4: Compute for cost of sales Total goods available for sale (TGAS) in Total goods available for sale (at cost) P7,400 Weighted Average Cost = pesos Less: Ending inventory (at cost) -3,452.40 Total goods available for sale (TGAS) in Cost of sales P3,947.60 units Weighted average unit cost = P7,400 / 600 =P12.33 Step 3 : Compute for ending inventory at cost Ending inventory (in units) - see computation in Case 1 280 Weighted Average unit cost P12.33 Ending inventory (at cost) P3,452.40 Dr. M. Jens Calma Martensson 64  Case 2.2 Weighted Average Compute for the ending inventory and cost of sales using the Weighted Average cost formula. The average is calculated as each additional purchase is made (also called ‘moving average’) Date Transaction Units Unit Cost Total Cost Jan-01 Beginning Inventory 100 P10 P1,000 7 Purchase 300 12 3,600 400 11.50 (a) 4,600 12 Sale -320 -3,680 21 Purchase 200 14.00 2,800 Less : Ending Inventory -280 P3,720 (a) Moving ave. cost =TGAS at cost / TGAS in units = P4,600 /400 = P11.50 Cost of sales = 320 units sold x P11.50 moving ave. cost = P3,680 Dr. M. Jens Calma Martensson 65  Case 3 -Net Realizable Value Illustration : Information on Entity’s A inventories is as follows: Product A Product B Cost 100,000 200,000 Estimated selling cost 140,000 220,000 Estimated cost to sell 20,000 30,000 Requirement : Compute for the valuation of Products A and B in Entity’s A’s statement of financial position. Product A Product B Solution: Cost 100,000 200,000 Estimated selling cost 140,000 220,000 Estimated cost to sell -20,000 -30,000 Net Realizable value 120,000 190,000 Lower 100,000 190,000 amount of write-down 10,000 Dr. M. Jens Calma Martensson 66  Recognition as an expense  the carrying amount of an inventory that is sold is charged as expense (i.e. cost of sales) in the period in which the related revenue is recognized. Likewise, the write –down of inventories to NRV and all losses of inventories are recognized as expense in the period the write – down or loss occurs.  “the amount of any reversal of any write down of inventories, arising from an increase in net realizable value, shall be recognized as a reduction in the amount of inventories recognized as an expensed in the period in which the reversal occurs.  Inventories that are used in the construction of another asset is not expensed but rather capitalized as cost of the constructed asset. Dr. M. Jens Calma Martensson 67  Disclosures a. Accounting policies adopted in measuring inventories, including the cost formula used; b. Total carrying amount of inventories and the carrying amount in classifications appropriate to the entity; c. Carrying amount of inventories carried at fair value less costs to sell. d. Amount of inventories recognized as an expense during the period; e. Amount of write – down of inventories recognized as an expense in the period; f. Amount of any reversal of write – down that is recognized as expense in the period; g. Circumstances or events that led to the reversal of a write down of inventories; and h. Carrying amount of inventories pledged as security for liabilities. Dr. M. Jens Calma Martensson 68 PAS 16 : Property, Plant and Equipment Dr. M. Jens Calma Martensson 69  Learning Objectives 1. State the recognition criteria, initial measurement, and subsequent measurement of PPE 2. Apply the principles of PAS 16 in basic computation of a PPEs cost, depreciation, carrying amount, and revaluation surplus as well as the gain or loss on its disposal Dr. M. Jens Calma Martensson 70 DISCUSSIONS OF PAS 16 Dr. M. Jens Calma Martensson 71  Introduction PAS 16 prescribes the accounting treatment for PPE. It addresses the principal issued of recognition as assets, measurement of carrying amount and recognition of depreciation charges. Dr. M. Jens Calma Martensson 72  Exemptions from PAS 16 a. Assets held for sale (PFRS 5 Non – current assets held for sale and discontinued operations) b. Biological assets other than bearer plants (PAS 41 Agriculture) c. The recognition and measurement of exploration and evaluation assets (PFRS 6) d. Mineral rights and mineral reserves such as oil, natural gas and similar non- regenerative resources Dr. M. Jens Calma Martensson 73  Property, Plant and Equipment (PPE) a. Tangible assets (have physical substance); b. Used in business and c. Long – term in nature Dr. M. Jens Calma Martensson 74  Recognition recognized if a.It is probable that future economic benefits associated with the item will flow to the entity; and b.The cost of the item can be measured reliably Dr. M. Jens Calma Martensson 75  Initial Measurement an item of PPE is initially measured at cost. Cost comprises the following: a. Purchase price, including import duties, nonrefundable purchase taxes, less trade discounts and rebates b. Direct costs of bringing the asset to the location and condition necessary for it to be used in the manner intended by management. c. Initial estimate of dismantlement, removal and site restoration cost for which the entity incurs an obligation by acquiring or using the asset other than to produce inventories. Dr. M. Jens Calma Martensson 76  Examples of directly attributable costs: a. Costs of employee benefits arising directly from the construction or acquisition of PPE; b. Cost of site preparation c. Initial delivery and handling costs d. Installation and assembly costs e. Testing costs gross of disposal proceeds of sample produced during testing f. Professional fees Dr. M. Jens Calma Martensson 77 Examples of costs that are expensed outright: a. Costs of opening a new facility b. Costs of introducing a new product or service (including costs of advertising and promotional activities) c. Costs of conducting business in a new location or with a new class of customers (including cost of staff training) d. Administration and other general overhead costs Dr. M. Jens Calma Martensson 78  Incidental operations  Self – constructed assets  Bearer plants  Measurement of cost  Subsequent expenditures on recognized PPE  Subsequent measurement  Accounting for revaluation  Disclosure Dr. M. Jens Calma Martensson 79 PAS 20 : Accounting for Government Grants and Disclosure of Government Assistance Dr. M. Jens Calma Martensson 80  Learning Objectives 1. Explain the recognition and measurement of government grants 2. Explain the presentation of government grants in the financial statements. Dr. M. Jens Calma Martensson 81 DISCUSSIONS OF PAS 20 Dr. M. Jens Calma Martensson 82  Introduction PAS 20 prescribes the accounting and disclosure of government grants and the disclosure of other forms of government assistance. PAS 20 does not apply to: a. Accounting for government grants under hyperinflationary economies; b. Tax benefits such as income tax holidays, investment tax credits, accelerated depreciation allowances and reduced income tax rates; c. Government participation in the ownership of the entity; and d. Government grants covered by PAS 41 Agriculture. Dr. M. Jens Calma Martensson 83  Government Grants - sometimes called subsidies, subventions, or premiums are assistance received from the government in the form of transfers of resources in exchange for compliance with certain conditions. Example of government grants: a. Receipt of cash, land or other non- cash assets from the government subject to compliance with certain conditions b. Receipt of financial aid in case of loss from calamity c. Forgiveness of an existing loan from the government d. Benefit of a government loan with below – market rate of interest. Dr. M. Jens Calma Martensson 84  Forms of government assistance but are not government grants: 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 entity’s sales * If significant, these are disclosed but not recognized as government grants. Dr. M. Jens Calma Martensson 85  Reasons why the receipt of government assistance may be significant in the preparation of FS 1. If resources are received, an appropriate accounting method is necessary to account for the receipt; and 2. The indication of the extent to which the entity has benefited from the assistance during the period improves the comparability of its financial statements Dr. M. Jens Calma Martensson 86  Recognition a. The attached conditions will be complied with; and b. The grants will be received * The mere receipt of a grant is not a conclusive evidence that the attached condition has been or will be satisfied. Dr. M. Jens Calma Martensson 87  Types of Government Grants according to attached conditions 1. Grants related to assets 2. Grants related to income Measurement Monetary Non-Monetary (e.g., land and other resources) a. Amount of cash received; or a. Fair value of the non – monetary asset b. Fair value of amount receivable received; or b. Alternatively, at nominal amount Dr. M. Jens Calma Martensson 88 Approaches to the accounting for government grants Capital approach Income Approach Grant is recognized Grant is recognized in profit outside profit or loss or loss over one or more or in equity periods. Dr. M. Jens Calma Martensson 89  Accounting for Government Grants - Are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. - Simply stated, the accounting for government grant uses a matching concepts such that, if the related expenses is not yet recognized, income from government grant is also not yet recognized. Dr. M. Jens Calma Martensson 90  Repayment of Grants a government grant that becomes repayable, for example, due to failure to satisfy the attached condition, is treated as a change in accounting estimate and accounted for prospectively. the repayment of a grant related to income is deducted from the related deferred income balance, if any. Any excess is recognized immediately as in profit or loss. the repayment of a grant related to asset is treated as reduction in the deferred income balance or an increase in the carrying amount of the asset. The cumulative additional depreciation that would have been recognized in the absence of the grant is recognized immediately in profit or loss. Dr. M. Jens Calma Martensson 91  Disclosures a. Accounting policy and method of presentation b. Nature and extent of government grants and other forms of government assistance from which the entity has directly, benefited. c. Unfulfilled conditions and contingencies attached to the government grants. Dr. M. Jens Calma Martensson 92 PAS 23 : Borrowing Costs Dr. M. Jens Calma Martensson 93  Learning Objectives 1. State the core principle under PAS 23 2. Compute for the borrowing costs that are eligible for capitalization Dr. M. Jens Calma Martensson 94 DISCUSSIONS OF PAS 23 Dr. M. Jens Calma Martensson 95  Core Principle under PAS 23 Borrowing costs that are directly attributable to the acquisition, construction or production or a qualifying asset are capitalized as cost of that asset. Other borrowing costs are expensed when incurred. Dr. M. Jens Calma Martensson 96  Borrowing Cost Examples: a. Interest expense on financial liabilities or lease liabilities computed using the effective interest method; and b. Exchange differences on foreign borrowing that are regarded as an adjustment to interest costs. * Borrowing costs do not include actual or imputed cost of equity or capital Dr. M. Jens Calma Martensson 97  Qualifying Assets Examples of qualifying assets: a. Inventories that take a long period of time to produce b. Items of PPE (e.g., building,) that take a long period of time to construct or to get ready for their intended use. c. Intangible assets that take a long period of time to develop Dr. M. Jens Calma Martensson 98  The following are not qualifying assets: a. Financial assets b. Inventories that routinely produced over a short period of time or are mass produced on a repetitive basis. c. Assets that are ready for their intended use or sale when acquired. d. Assets measured at fair value Dr. M. Jens Calma Martensson 99  Capitalization of Borrowing Costs a. Expenditures for the assets are being incurred; b. Borrowing costs are being incurred; and c. Activities necessary t o prepare the asset for its intended use or sale are being undertaken Dr. M. Jens Calma Martensson 100  Disclosure a. The amount of borrowing costs capitalized during the period. b. The capitalization rate used to determine the capitalizable borrowing costs Dr. M. Jens Calma Martensson 101 Launch