Financial Accounting PDF

FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING shall classify all other assets not classified as Land...

FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING shall classify all other assets not classified as Land current as noncurrent assets. Land, also called real property, is the earth on Under this module, we will be diving into the which the company’s office buildings or following subtopics: manufacturing facilities sit. Land is a special type of Plant Property and Equipment PPE's because it does not depreciate over time Intangible Assets because of its scarcity, but rather it appreciates in Wasting Assets value. Depreciation Biological Assets/ Agriculture Cost of Land Investments The following items constitutes the cost of land; Original Purchase Price Brokers Commission Cost of closing & obtaining title Property Plant and Equipment Title Search & Insurance Property, Plant and Equipments (PPEs) are Cost of Demolition fees less proceeds from tangible items that: salvage to prepare the land for the intended Are held for use in the production or supply use other than construction of new building FINALS of goods or services, for rental to others, or Legal Fees for administrative purposes; and Cost of relocating squatters MODULE 4 Are expected to be used during more than Local government & special assessment one period. taxes Non-Current Assets Recognition Survey, Clearing, leveling, grading and -Items of property, plant, and equipment should be landfill - Non-current assets are a company's recognized as assets when it is probable that: Mortgage & property taxes assumed The future economic benefits associated Landscaping & other enhancements if long-term investments for which the full with the asset will flow to the enterprise; and deemed permanent value will not be realized within the The cost of the asset can be measured Option Money of Land if FINALLY Acquired accounting year. reliably. (RESERVATION FEE) Rules on Cost of Demolition Noncurrent assets are also referred to as long- Measurement The cost of demolition will depend on the term assets. - An item of property, plant and equipment classification of the land and the new building TO that qualifies for recognition, as an asset BE CONSTRUCTED, see table below for the shall be measured at its cost. summary; Noncurrent assets are capitalized rather than Specific Items of PPE expensed, meaning that the company allocates the The following items are specific items of PPE's but cost of the asset over the number of years for not limited to: which the asset will be in use instead of allocating Land the entire cost to the accounting year in which the Land Improvements asset was purchased. Depending on the type of Buildings asset, it may be depreciated, amortized, or Leasehold Improvements depleted. Equipment Natural Resources The caption "noncurrent assets" is a residual definition. The standard simply states that "an entity Classification of Land 41 42 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING The classification of land in the statement of ○ These are treated as part of the cost Theses are assets that are depreciable over the The following items constitutes the cost of financial position depends on the NATURE AND of land because public SHORTER of; equipment; PURPOSE of the land. improvements increase the value of Purchase Price Land used as a plant site - Shall be treated the land Taxes & Import Duties on Purchase as PPEs Real Property Tax (RPT) Freight Land held for currently undetermined use - ○ Is kind of tax levied by the local Insurance while in Transit shall be treated as an Investment Property government on properties and Installation Charges, including site Land held definitely for future plant site - should be paid by property owners preparation and assembling Shall be treated as PPEs ○ As a rule RPTs are treated as Cost of Trial Runs and testing, and other Land held for long-term capital appreciation outright expense cost necessary in preparing the machinery - Shall be treated as Investment Property ○ However, if UNPAID RPTs are for its intended use Land held for current sale by a real estate assumed by the buyer in acquiring Treatment of Expenditures Initial estimate of cost of dismantling and developer - Shall be treated as current the land, the taxes are capitalized removing the machinery and restoring the A question often arises as to the treatment of assets as part of inventory but only up to the date of acquisition site on which it is located, and for which the expenditures for; entity has a present obligation Sidewalks, Fee paid to consultants for advice on the Land Improvements Payments, acquisition of the machinery Parking Lot and These are “Site Enhancements” that are NOT Cost of safety rail and platform surrounding Driveways PERMANENT and it is Depreciable over USEFUL machine Whether such expenditures mentioned should be LIFE Buildings Cost of water device to keep machine cool charged to land improvements or part of the cost of “Site Enhancements” that are NOT Buildings is a non-current or long-term asset the building PERMANENT Subsequent Cost account which shows the cost of a building The following rules were set for uniformity in the Depreciable over USEFUL LIFE Generally, the following expenditures are incurred (excluding the cost of the land) standard: Examples of Land Improvements during ownership of existing PPE's Cost of Building If the such expenditures are part of the The following are examples of Land improvements Additions The following items constitutes the cost of building; blueprint for the construction of a new Fences Improvements or betterments Original Purchase Price building, these are charged to the building Water Systems Replacements Broker’s Commissions account Sidewalks Repairs Legal Fees On the other hand, if the expenditures are Driveways Rearrangement Cost Title & Escrow Fees occasionally made or incurred not in Parking lots Reconditioning Cost connection with the construction of a new Landscaping Additions Alteration & Improvement Cost building, these are charged as land Additions are modifications or alterations which Permits for Renovation or Construction improvements Note: Permanent landscaping is included in the increase the physical size or capacity of the assets. cost of land while temporary landscaping is Architect Fees Such expenditures are of two types, namely; reported separately as land improvements which is Capitalized Borrowing Cost Equipment An entirely new unit depreciated Other cost incurred – put the building its An expansion, enlargement or extention of current condition The following items are examples of equipment: the old asset Machinery Taxes that involves Land The construction of a new building is an addition of Office Equipment Special Assessment the first type but the addition of a wing to a building Store Equipment Leasehold Improvements Vehicles or the construction of a third storey on a two-storey ○ Taxes paid by the land owner as a building is an addition of the second type. In either These are Improvements made by the lessee to Furnitures & Fixtures contribution to the cost of public case, the cost is CAPITALIZED in the usual leased property,If agreed-upon, will revert to the improvements manner. lessor at the termination of the lease. Cost of Equipment Improvement or betterments 43 44 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING These are modification or alternations which This is the relocation or redeployment of an existing The period over which an asset is expected increase the service life or the capacity of the asset property, plant and equipment Depreciation Period to be available for use by an entity; or Improvements may represent replacement of an 1. Depreciation of asset begins when it is The number of production or similar units asset or part thereof with one of a better or superior available for use expected to be obtained from the asset by quality. Such expenditures are normally capitalized PPEs except Land, normally are usable for a 2. Depreciation of asset ceases when the an entity. The improvements that do not involve replacement number of years after which the assets have asset is derecognized or when asset is Accordingly, the useful life of an asset can be of parts are simply added to the cost of the existing relatively little value either for service or for reclassified as held for sale or transferred to expressed by either: asset sale. inventory Time Period (in years) 3. Depreciation continues even if the asset Units of output (# of units (kgs, pcs, liters The difference between the original cost of a Replacements becomes idle or retired from active use etc) property and any remaining value when it is retired Replacements also involve substitution but the (except when fully depreciated) Service hours or working hours or worn out is an expense that should be distributed new asset is NOT BETTER than the old asset Factors considered in determining the useful life of to the periods during which the assets is used. when acquired. an asset The basic difference between improvement and Factors of Depreciation The portion that is allocated to expense replacement is that; In order to properly compute the amount of 1) Physical Factors an improvement is a substitution of a better in a particular period is referred to by depreciation, the following factors are necessary: ○ Expected usage (capacity or output) or superior quality, whereas three different terms namely: 1. Carrying Amount ○ Expected physical wear and tear replacement is a substitution of an equal or 2. Depreciable Amount ○ Passage of time lesser quality Depreciation 3. Residual Value 2) Functional or Economic Factors Replacement may be classified into three: Depletion 4. Useful Life ○ Technical Obsolescence 1. Replacement of the old asset by a new one. Carrying amount (Book Value) ○ Inadequacy Amortization This is the replacement contemplated The amount at which an asset is recognized after ○ Legal or similar limits 2. Replacement of major parts or extraordinary The three terms are similar in meaning. deducting any accumulated depreciation and repairs accumulated impairment losses. 3. Replacement of minor parts or ordinary The only difference lies in the type of Other Terminologies repairs assets involved; Depreciable amount Accumulated Depreciation The cost of an asset, or other amount substituted Accumulated depreciation is the total Repairs Depreciation - PPEs for cost, less its residual value. depreciation for a fixed asset that has been Repairs are those expenditures used to restore Depletion - Wasting Assets charged to expense since that asset was assets to good operating condition upon their Amortization Intangible Residual value acquired and made available for use breakdown or replacement of broken parts. The estimated amount that an entity would The accumulated depreciation account is an Repairs may be classified as Assets asset account with a credit balance (also currently obtain from disposal of the asset, after Extraordinary repairs deducting the estimated costs of disposal, if the known as a contra asset account); this ○ Material replacement of parts, asset were already of the age and in the condition means that it appears on the balance sheet involving large sums and normally Depreciation expected at the end of its useful life. as a reduction from the gross amount of extended the useful life of the asset Depreciation is defined as the systematic allocation fixed assets reported ○ The cost are capitalized to the asset of the depreciable amount of an asset over the The residual value of an asset shall be reviewed at Ordinary repairs useful life. least at each financial year-end and is the ○ These are minor replacement of Depreciation is not so much a matter of valuation expectation differs from previous estimate. Depreciation Method parts, involving small sums and are but rather a matter of cost allocation. Useful life The depreciation method used shall reflect the frequently encountered As cost allocation is recognize the exhaustion of pattern in which the asset’s future economic ○ Normally charges to expense when the useful life of an item of PPE's The useful life of an asset can be measured by benefits are expected to be consumed by the incurred "The objective of depreciation is to have each either: entity. Rearrangement cost period benefiting from the use of the asset bear an equitable share of the asset cost." 45 46 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING A variety of depreciation methods can be used to amount of depreciation reduces as the life of the Assumes that depreciation is more of a allocate the depreciable amount of an asset on a asset progresses. function of use rather than passage of time systematic basis over its useful life. The accelerated depreciation is on the philosophy Also known as Activity or Use factor method These method include the; that new assets are generally capable of producing Two Types Variable Charge Method Time Factor Method more revenue in the earlier years than in the later 1. Service hours Method Variable Charge Method years. the amount of depreciation 3. Multiple Assets Method Multiple Asset depreciation method Two Types of Diminishing Balance Method charged to expense varies in This depreciation method is used when enterprises direct proportion to the adopted multiple PPEs subject to depreciation. 1. Time Factor Method 1.2.1 Sum of The Years’ Digits Method (SYD) amount of productive hours Large entities own individual depreciable assets. This depreciation method, uses time to determine The SYD method is used to accelerate the used For these entities making detailed computation for the useful life in years of an asset. recognition of depreciation. Under service hours method, each individual asset referred to as unit The following time factor methods are: the formula to get the depreciation, is time consuming and costly. Straight-line Method The method is more appropriate than the more depreciation rate of the asset Therefor, large entities find it more practical to Diminishing Balance Method commonly-used straight-line depreciation if an is; compute depreciation by treating many individual ○ Sum of the Years Digits Method asset depreciates more quickly or has greater assets as though they were a single asset. (SYD) production ca- pacity in its earlier years than it The two methods of depreciating various individual ○ Declining Balance Method does as it ages assets as a single assets are the following: SYD method provides for depreciation that is 3.1 Group Depreciation Method 1.1 Straight line method (STL) computed by multiplying the depreciable amount by ○ Under this method, all assets that Straight line depreciation is the default method a series of fractions whose numerator is the digit in Units of output method are similar in nature and in used to gradually reduce the carrying amount of a the useful life of an asset and whose denominator the amount of depreciation charged to estimated useful life are grouped fixed asset over its useful life. is the sum of the digits in the useful life of the asset. expense varies in direct proportion to the and treated as a single unit. It recognizes depreciation expense evenly or For Example if the useful life of an asset is 4 years, amount of asset usage ○ The composite rate is determined by equally over the estimated useful life of an asset the SYD is 1+2+3+4 or 10 or the formula stated Under units of output method, the formula to dividing the total annual depreciation In other words, STL is a constant depreciation below can be used to get SYD; get the depreciation rate of the asset is; (STL) by the total cost charge over the useful life of an asset ○ The composite life of an asset is The formula for the computation of the annual determined by dividing the total depreciation of STL is as follows: depreciable cost by the total annual depreciation 1.2.2 Declining Balance Method 3.2 Component Depreciation The declining balance depreciation method is an Under this method, assets that are dissimilar in accelerated depreciation method that counts twice Illustration for Time Factor and Variable Charge nature or asset that have different physical as much of the asset’s book value each year as an Method. characteristics and vary widely in useful life, are expense compared to straight-line depreciation grouped and treated as a single unit. Note: Depreciation rates used in the declining balance Let us assume an asset acquired for 2,200,000 with An entity allocated the amount initially recognized 1. The STL approach considered depreciation method could be as 200% (double), 150% or 250% a residual value of 400,000 at the end of its 5 year in respect of an item of PPE to its significant part as a function of time rather than as a the straight-line rate. useful life and is expected to produce 100,000 and depreciates separately each part. function of usage units of output at 15,000 (year 1), 20,000 (Y2), 2. The STL method is widely used in practice 30,000 (Y3), 25,000 (Y4) and 10,000 (Y5). because of simplicity Depreciation each year shall be computed as Wasting Assets 1.2 Diminishing Balance Method follows: Reducing Balance Method charges depreciation at WASTING ASSETS are natural resources property a higher rate in the earlier years of an asset. The in the form of land containing mineral deposits, 2. Variable Charge Method precious stones and metals or trees to be 47 48 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING harvested as logs and lumber with a limited life and wasting asset rather as other items of PPE and Goodwill It is often referred to as the most intangible asset of will be subject to depletion using the production depreciated separately, like equipment, machinery all intangible assets method. and processing facilities. Patents It is part of Intangible Asset but does not posses (d) Restoration cost - Future cost to be paid to These are Exclusive LEGAL RIGHT granted by the the characteristic of being identifiable Total Cost of Wasting Asset restore the property back to its original condition government for an INVENTION. Factors for the result of Goodwill The following items are the components of the cost but recorded as a provision (liability that is It prevents others to use the invention (technology) ○ High employee morale of the wasting asset: estimated) at its present value. from; ○ Superior management team (a) Acquisition cost – Purchase price of the Depletion of Natural Resources Making ○ Advantage in geographic location property. Depletion is the allocation of depletable cost of the Using ○ Promotions (b) Exploration cost - Cost incurred to locate the natural resources to the periods in which benefits Selling ○ Quality products minerals and other resources beneath the surface are received. Distribution How is goodwill recognized? of the property. The Basis of its computation is the activity method Without the permission from the patentee Recognized if acquired by purchase and takes Incurred by an entity in connection with the or Productive output Method Under the World Trade Organization’s Agreement places when business is acquired by another entity exploration for and evaluation of mineral resources; on Trade Related Aspects of Intellectual Property for an amount greater than Fair Market Value in the ○ BEFORE the technical feasibility & Rights, the protection of a pantentee is for a Net Identifiable Asset commercial viability of extracting of MINIMUM PERIOD of 20 Years mineral resource are demonstrable. Intangible Assets ○ AFTER the entity has obtained legal Copyrights Biological Assets right to explore in a specific area. INTANGIBLE ASSETS are Identifiable non- These are Intellectual property right granted to an Two methods of accounting for exploration and monetary assets WITHOUT PHYSICAL author of A biological asset is a living animal or plant evaluation SUBSTANCE Literary 1) Successful effort method They must be controlled by the entity as a result of Musical Key Definitions: ○ If there is a successful discovery, past event and from which future economic benefits Artistic work Agricultural activity is the management by an entity cost of exploration are Capitalized are expected to flow to the entity. For the publication, distribution and adaptation of of the biological transformation of biological assets ○ Id there is an Unsuccessful Criteria to qualify as an Intangible Asset that work. for sale, into agricultural produce, or into additional discovery, cost of exploration is Identifiability Protection is generally a period of 50 years after the biological assets. expensed ○ Must be Identifiable to distinguish it DEATH OF AUTHOR, after which the work Agricultural produce is the harvested product of the 2) Full Cost method from goodwill and it is separable ENTERS THE PUBLIC DOMAIN entity’s biological assets. Whether successful or unsuccessful, cost of ○ Arises from Contractual or legal exploration is Capitalized rights trademark / Trade-name Biological transformation comprises the processes Both methods are acceptable & used in practice. Control These are words, names, symbols or other devices of growth, degeneration, production, and ○ Power to obtain the future economic used in trade to indicate the SOURCE OF A procreation that cause qualitative or quantitative (c) Development cost - Cost incurred for the benefits from the assets and restricts PRODUCT Or the BRAND of a Product changes in a biological asset. actual production or extraction of the minerals and the access of other to those benefits Protected legally through registration with other resources. Future Economic Benefits Philippine Patent Office and legally valid as long as A group of biological assets is an aggregation of Notes: Arise from; the original owner continues to use it similar living animals or plants. 1. Development cost is the cost incurred to extract ○ Sale of Products or services Franchise Harvest is the detachment of produce from a the natural resource that has been located through ○ Cost Savings Right granted by one party (franchisor) to another biological asset or the cessation of a biological successful exploration. ○ Other benefits resulting from the use party (franchisee) to operate outlets using the same asset’s life processes. 2. Development cost is naturally incurred multiple of the asset business concepts, property, trademarks and trade Bearer plant is a living plant that: number of times during the period of production Examples of Intangible Assets names for a specific period. a. Is used in the production process of agricultural and will usually cause the recomputation of the Patents produce, rate. Copyright Goodwill b. Is expected to bear produce for more than one 3. Development cost related to other tangible Trademarks / Trade-name Goodwill is undeniably a unique asset presented in period assets should not be capitalized as part of the Franchise the financial statements 49 50 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING c. Has a remote likelihood of being sold (except as presumption can be rebutted for a biological asset redemption fund, plant expansion fund, and At fair value, plus for those financial assets and part of incidental scrap sales). that, at the time it is initially recognized in financial other noncurrent fund. liabilities not classified at fair value through profit or statements. In such a case, For protection as in the case of interest in loss, directly attributable transaction costs. Initial Recognition The asset is measured at cost less accumulated life insurance contract in the form of cash Fair value - is the price that would be An enterprise should recognize a biological asset or depreciation and impairment losses if the asset surrender value. received to sell an asset or paid to transfer agriculture produce only when the enterprise does not have a quoted market price in an active a liability in an orderly transaction between controls the asset as a result of past events, it is market and for which other methods of reasonably Examples of Investments: market participants at the measurement probable that future economic benefits will flow to estimating fair value are determined to be clearly The following investments will be discussed in the date the enterprise, and the fair value or cost of the inappropriate or unworkable. next pages: Directly attributable transaction costs - asset can be measured reliably. Trading securities or financial assets at Fair incremental costs that are directly But the enterprise must still measure all of its other Value through Profit or Loss (FA@FV - P/L) attributable to the acquisition, issue or Measurement biological assets at fair value. If circumstances Financial assets at fair value through Other disposal of a financial asset or financial Biological assets should be measured on initial change and fair value becomes reliably Comprehensive Income (FA@FV - OCI) liability. recognition and at subsequent reporting dates at measurable, a switch to fair value less disposal Investment in non-trading equity securities In other words transaction cost would immediately fair value less costs of disposal, unless fair value costs is required. Investment in bonds or Financial Assets at be recognized as an expense if the financial asset cannot be reliably measured. Amortized Cost ( FA@AC) or liability is classified at fair value through profit or Investment in Associate loss. Agricultural produce should be measured at fair Investment in Subsidiary value less costs of disposal at the point of harvest. Investments Investment Property SUBSEQUENT CLASSIFICATION AND Because harvested produce is a marketable Investments are assets held by an entity for the MEASUREMENT OF FINANCIAL ASSETS commodity, there is no 'measurement reliability' accretion of wealth through distribution such as Statement Classification Debt instruments shall be classified at exception for produce. interest, royalties, dividends and rentals, for capital Investments are classified either as current or Amortized Cost (AC), Fair Value through The gain on initial recognition of biological assets at appreciation of for other benefits to the investing noncurrent Other Comprehensive Income (FVOCI) or fair value, and changes in fair value of biological entity such as those obtained through trading Current investments - are investments that are by Fair Value through Profit or Loss (FVPL). assets during a period, are reported in net profit or relationships. their very nature readily realizable and are intended Equity instruments shall be classified at Fair loss. Actually, investments are assets not directly to be held for not more than one year Value through Other Comprehensive A gain on initial recognition of agricultural produce identified with the operating activities of an entity For example, trading securities are normally Income (FVOCI) or Fair Value through Profit at fair value should be included in net profit or loss and occupy an auxiliary relationship to the central classified as current assets because these or Loss (FVPL). for the period in which it arises. revenue producing activities of the entity investments are expected to be realized within twelve (12) months after the end of reporting period Other Terms All costs related to biological assets that are Purpose of Investments: Non current or long-term investments - are 12-month expected credit losses measured at fair value are recognized as expenses Investments are held for diverse reasons such as: investments other than current investments The portion of lifetime expected credit losses that when incurred, other than costs to purchase For accretion of wealth or regular income This residual definition means that the noncurrent represent the expected credit losses that result biological assets. through interest, dividends, royalties and investments are intended to be held for more than from default events on a financial instrument that Bearer plants are accounted for under PAS 16 rentals one year are not expected to be realized within are possible within the 12 months after the using the cost model, or the revaluation model. For capital appreciation as in the case of twelve (12) months after the end of the reporting reporting date. Before bearer plants are able to bear agricultural investments in land and real estate held for period. produce (i.e. before maturity), they are accounted appreciation and direct investments in gold, Amortized cost of a financial asset or financial for as self-constructed items of property, plant and diamonds and other precious commodities INITIAL RECOGNITION OF FINANCIAL ASSETS liability equipment. The agricultural produce of the bearer For ownership control as in the case AND FINANCIAL LIABILITIES The amount at which the financial asset or financial plant remains within the scope of PAS 41 and is investments in subsidiaries and associates When the entity becomes party to the liability is measured at initial recognition minus the therefore accounted for at fair value. For meeting business requirements as in contractual provisions of the instrument. principal repayments, plus or minus the cumulative the case of sinking fund, preference share amortisation using the effective interest method of PAS 41 presumes that fair value can be reliably INITIAL MEASUREMENT OF FINANCIAL ASSETS any difference between that initial amount and the measured for most biological assets. However, that AND FINANCIAL LIABILITIES 51 52 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING maturity amount and, for financial assets, adjusted Equity Investments policy decisions of the investee but is not for any loss allowance. Bond Certificates control or joint control over those policies. The terms "Equity Security" encompasses any Issued by a company or government agency Equity method - Is a method of accounting Derecognition instrument representing ownership shares and guaranteeing payment of principal amount + whereby the investment is initially The removal of a previously recognised financial rights, warrants or options to acquire or dispose of periodic interest at a specified future date recognized at cost and adjusted thereafter asset or financial liability from an entity’s statement ownership shares at a fixed or determinable price. Notes: Bonds may sell at a price different from the for the post acquisition change in the of financial position. In simple language, equity securities represent an face value investor’s share of net assets of the ownership interest in an entity. Factors influence the market price investee. The profit or loss of the investor Effective interest method Ownership shares include ordinary shares, Results of variety of forces; includes the investor's share of the profit or The method that is used in the calculation of the preference shares and rights or options to acquire Risk relating to the bonds loss of the investee. amortised cost of a financial asset or a financial ownership shares. Credit Image of Issuing Corporation liability and in the allocation and recognition of the The owners of equity securities are legally known Current Interest Rates Identification of Associates interest revenue or interest expense in profit or loss as shareholders. Expected Future Interest Rates A holding of 20% or more of the voting over the relevant period. A share is the ownership interest or right of a Stated Rate of Interest on the Investment power (directly or through subsidiaries) will shareholder in an entity. The share is evidenced by indicate significant influence unless it can Effective interest rate an instrument called share certificate. be clearly demonstrated otherwise. The rate that exactly discounts estimated future If the holding is less than 20%, the investor cash payments or receipts through the expected life will be presumed not to have significant of the financial asset or financial liability to the Debts Investments influence unless such influence can be gross carrying amount of a financial asset or to the clearly demonstrated. amortised cost of a financial liability. The existence of significant influence by an A "Debt Security" is any securities that represents a investor is usually evidenced in one or more creditor relationship with an entity Reclassification date of the following ways: The first day of the first reporting period following 1. Representation on the board of Characteristics of Debt Securities the change in business model that results in an Classification of Investment in Debt Securities or directors or equivalent governing Financial Instruments issued by a company should entity reclassifying financial assets. Bond Investments body of the investee; have the following: Financial Instruments, debt investments @ 2. Participation in the policy-making Maturity Value Solely payments of principal and interest (SPPI) Amortized Cost; process; Periodic Interest Payments (rate based on Returns consistent with a basic lending Fair Value through Profit or Loss; or 3. Material transactions between the instrument) arrangement, interest may include return not only Fair Value through Other Comprehensive investor and the investee; Maturity Date for the time value of money and credit risk but also Income 4. Interchange of managerial for other components such as a return for liquidity personnel; or Bonds risk, amounts to cover expenses and a profit 5. Provision of essential technical A bond is a formal unconditional promise made margin. information. under seal to pay a specified sum of money at a Investment in Associates determinable future date, and to make periodic Transaction costs Accounting for Associates interest payments at a stated rate until the principal Incremental costs that is directly attributable to the Key Definitions In its consolidated financial statements, an investor sum is paid. acquisition, issue or disposal of a financial asset or Associate- Is an entity, including an should use the equity method of accounting for A bond is a contract of debt whereby one party financial liability. An incremental cost is one that unincorporated entity such as a partnership, investments in associates, unless: called the issuer borrowers fund from another party would not have been incurred if the entity had not over which the investor has significant a) An investment in an associate that is acquired called the investor. acquired, issued or disposed of the financial influence and that is neither a subsidiary nor and held exclusively with a view to its disposal A bond is evidenced by a certificate and the instrument. an interest in a joint venture. within 12 months from acquisition should be contractual agreement between the issuer and Significant influence - Is the power to accounted for as held for trading under PFRS 9 investor is contained in another document known participate in the financial and operating (FVPL). as "bond indenture" 53 54 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING b) A parent that is exempted from preparing shares, whether or not the dividends have been this will have an effect in the associate’s new acquisition cost shall be consolidated financial statements by PAS 27 may declared on cumulative preference shares. reported net income. regarded as the total cost of the prepare separate financial statements as its b) However if the preference shares is non- investment classified as “associate”. primary financial statements. Use cost method or cumulative, adjustments for dividends are made 6. Transactions with associates ○ If the FVOCI was used to account PFRS 9. only if there is a declaration. ○ Unrealized profits and losses for the previously held investment, c) An investor need not use the equity method if all 4. Implicit goodwill and fair value adjustments - On resulting from upstream (associate any cumulative unrealized gain or of the following four conditions are met: acquisition of the investment any difference to investor) and downstream loss as OCI shall be reclassified to 1. The investor is itself a wholly owned between the cost of the investment and the (investor to associate) transactions retained earnings. subsidiary, or is a partially-owned subsidiary investor’s share of the net fair value of the should be eliminated to the extent of of another entity and its other owners, associate’s identifiable assets, liabilities and the investor's interest in the 9. Date of associate's financial statements including those not otherwise entitled to contingent liabilities is accounted for in accordance associate if the asset sold between ○ The investor should use the financial vote, have been informed about, and do not with PFRS 3 Business Combinations. Therefore: the associate and investor has not statements of the associate as of the object to, the investor not applying the ○ Goodwill relating to an associate is yet been sold to an unrelated party. same date as the financial equity method; included in the carrying amount of ○ However, realized profits and losses statements of the investor unless it 2. The investor's debt or equity instruments the investment. However, shall be recognized once the asset is impracticable to do so. are not traded in a public market; amortization of that goodwill is not is sold to an unrelated party or if the ○ If it impracticable, the most recent 3. The investor did not file, nor is it in the permitted and is therefore not asset is being consumed through available financial statements of the process of filing, its financial statements included in the determination of the depreciation. associate should be used, with with a securities commission or other investor’s share of the associate’s adjustments made for the effects of regulatory organization for the purpose of profits or losses. 7. Discontinuing the equity method - Use of any significant transactions or issuing any class of instruments in a public ○ Any excess of the investor’s share of the equity method should cease from the events occurring between the market; and the net fair value of the associate’s date that significant influence ceases. accounting period ends. 4. The ultimate or any intermediate parent of identifiable assets, liabilities and ○ The difference between the selling ○ However, the difference between the the investor produces consolidated financial contingent liabilities over the cost of price and carrying amount of the reporting date of the associate and statements available for public use that the investment investment sold shall be recognized that of the investor cannot be longer comply with PFRS. ○ Is excluded from the carrying in profit or loss. than three months. amount of the investment ○ The “retained investment” shall be Applying the Equity Method of Accounting ○ Included as income in the accounted for under PFRS 9 and 10. Losses in excess of investment 1. Basic principle – The equity investment is determination of the investor’s share shall be remeasured to fair value on ○ The investor’s share in the initially recorded at cost and is subsequently of the associate’s profit or loss in the the date significant influence ceases associates losses cannot exceed the adjusted to reflect the investor's share of the period in which the investment is and recognized in profit or loss. “interest in the associate” and shall net profit or loss of the associate. acquired. discontinue the application of the 2. Distributions and other adjustments to ○ This is more commonly known as 8. Application of the equity method achieved in equity method is this is the case. carrying amount - Distributions received “negative goodwill” or the “gain on stages ○ After the investor's interest is from the investee reduce the carrying bargain purchase” ○ The previously held interest that was reduced to zero, additional losses amount of the investment. Adjustments to accounted for under the cost or fair are recognized by a provision the carrying amount may also be required 5. Appropriate adjustments to the investor's value method shall be remeasured (liability) only to the extent that the arising from OTHER changes in the share of the profits or losses after to fair value on the date the investor investor has incurred legal or investee's equity (revaluation surplus and acquisition are made to account for gains significant influence. constructive obligations or made translation gains and losses). additional depreciation of the associate's ○ The difference between the fair payments on behalf of the associate. 3. An associate with outstanding preference depreciable assets based on the excess of value and the carrying amount of the ○ If the associate subsequently reports shares their fair values over their carrying amounts previously held investment shall be profits, the investor resumes a)The investor computes its share of profits or at the time the investment was acquired. recognized in profit or loss. recognizing its share of those profits losses after adjusting for the dividends on such This rule also applies to inventories since ○ The total of the fair value of the only after its share of the profits previously held investment and the 55 56 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING equals the share of losses not managed hotel), the property should be appropriate presentation. PAS 40 notes that recognized. classified as owner-occupied. this is highly unlikely for a change from a fair value model to a cost Other Classification Issues Intracompany rentals - Property rented to a parent, Property held under an operating lease subsidiary, or fellow subsidiary Investment Property A property interest that is held by a lessee under Not investment property in consolidated Investment property Land or a building or part of a an operating lease may be classified and financial statements that include both the Fair value model building or both held by the owner or by the lessee accounted for as investment property provided that: lessor and the lessee, because the property 1. Investment property is remeasured at fair under a finance lease to earn rentals or for capital The rest of the definition of investment is owner-occupied from the perspective of value, which is the amount for which the appreciation or both. property is met the property could be exchanged between The operating lease is accounted for as if it However, such property could qualify as knowledgeable, willing parties in an arm's were a finance lease in accordance with investment property in the separate financial length transaction. Gains or losses arising Examples of investment property: PAS 17 Leases statements of the lessor, if the definition of from changes in the fair value of investment Land held for long-term capital appreciation The lessee uses the fair value model set out investment property is otherwise property must be included in net profit or 1. Land held for undecided future use in this Standard for the asset loss for the period in which it arises. 2. Building leased out under an operating An entity may make the foregoing lease classification on a property-by-property 2. Fair value should reflect the actual market Recognition state and circumstances as of the end of the 3. Vacant building held to be leased out under an operating lease Partial own use - If the owner uses part of the Investment property should be recognized as an reporting period. The best evidence of fair 4. Property under construction as investment property for its own use, and part to earn rentals or asset value is normally given by current prices on property for capital appreciation When it is probable that the future economic an active market for similar property in the If the portions can be sold or leased out benefits that are associated with the same location and condition and subject to The following are not investment property and, separately, they are accounted for property will flow to the enterprise similar lease and other contracts. In the therefore, are outside the scope of PAS 40: separately. Therefore the part that is rented The cost of the property can be reliably absence of such information, the entity may 1. Property held for use in the production or out is investment consider current prices for properties of a supply of goods or services or for If the portions cannot be sold or leased out different nature or subject to different administrative purposes (Property, plant and separately, the property is investment conditions, recent prices on less active equipment) property only if the owner-occupied portion markets with adjustments to reflect changes 2. Property held for sale in the ordinary course is insignificant. Initial measurement in economic conditions, and discounted of business or in the process of construction Investment property is initially measured at cash flow projections based on reliable of development for such sale (Inventories) Ancillary services - If the enterprise provides cost, including transaction costs. estimates of future cash flows. 3. Property being constructed or developed on ancillary services to the occupants of a property Such cost should not include start-up costs, behalf of third parties (Construction held by the enterprise, the appropriateness of abnormal waste, or initial operating losses 3. There is a rebuttable presumption that Contracts) classification as investment property is determined incurred before the investment property the enterprise will be able to determine 4. Owner-occupied property (Property, Plant by the significance of the services provided. achieves the planned level of the fair value of an investment property and Equipment), including property held for reliably on a continuing basis. However, future use as owner-occupied property, If those services are a relatively insignificant Measurement subsequent to initial recognition - if, in exceptional circumstances, an property held for future development and component of the arrangement as a whole After initially recognizing the investment property at entity follows the fair value model but at subsequent use as owner- occupied (for instance, the building owner supplies cost, an enterprise may choose between the acquisition concludes that a property's property, property occupied by employees security and maintenance services to the Fair value model fair value is not expected to be reliably and owner-occupied property awaiting lessees), then the enterprise may treat the Cost model measurable on a continuing basis, the disposal property as investment One method must be adopted for all of an property is accounted for in accordance 5. Property leased to another entity under a Where the services provided are more entity's investment property. Change is with the benchmark treatment under finance significant (such as in the case of an owner- permitted only if this results in a more PAS 16, Property, Plant and Equipment 57 58 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING (cost less accumulated depreciation having no realistic alternative to settling that 1. It is expected to be settled in the normal course ○ The amount of the obligation cannot less accumulated impairment obligation. of the enterprise's operating cycle be measured with sufficient TYPES OF OBLIGATION 2. It is due to be settled within twelve months of the reliability. losses). 1.1. Legal Obligation Statement of Financial Position date. Contingent asset An obligation that derives from: Below are examples of Current Liabilities A possible asset that arises from past events and 4. Where a property has 1. A contract Accounts Payable - An obligation or debt to whose existence will be confirmed only by the previously been measured at 2. Legislation; or creditors for money borrowed or merchandise and occurrence or non-occurrence of one or more fair value, it should continue to 3. Other operation of law. other assets bought on credit. uncertain future events not wholly within the control Obligations may be legally enforceable as a Notes Payable - A promissory note issued by the of the entity. be measured at fair value until consequence of a binding contract or business to its creditors for money borrowed or disposal, even if comparable statutory requirements merchandise and other assets bought on credit Comparison of a Provision and Other Liabilities market transactions become 1.2. Constructive Obligation Accrued Interest Payable - the interest incurred in Provisions can be distinguished from other liabilities less frequent or market prices An obligation that derives from an entity’s actions the current period but not yet paid such as trade payables and accruals because there where: SSS Premium Payable - representative of the is uncertainty about the timing or amount of the become less readily available 1. By an established pattern of past practice, amount of employee and employer contribution to future expenditure required in settlement. By published policies or a sufficiently specific SSS which are not yet remitted to SSS contrast: current statement, the entity has indicated Withholding Tax Payable - the amount of income (a) Trade payables are liabilities to pay for goods or to other parties that it will accept certain tax withheld from the salary of employee in behalf services that have been received or supplied and Cost Model responsibilities of BIR that the employer has to remit to BIR on the have been invoiced or formally agreed with the 2. As a result, the entity has created a valid specified due date supplier; and After initial recognition, investment property is expectation on the part of those other Non-Current Liability is one that does not meet the (b) Accruals are liabilities to pay for goods or accounted for in accordance with the cost model as parties that it will discharge those criteria of a current liability. Generally, it comprises services that have been received or supplied but set out in PAS 16, Property, Plant and Equipment – responsibilities. the portion payable payable beyond one year of a have not been paid, invoiced or formally agreed cost less accumulated depreciation and less 2. Transfer an economic resource - Another term long-term liability. with the supplier, including amounts due to accumulated impairment for Settlement of Liability employees (for example, amounts relating to EXAMPLES OF WAYS TO SETTLE LIABILITY accrued vacation pay). Although it is sometimes 1. Payment of Cash necessary to estimate the amount or timing of 2. Transfer of Non-Cash Assets Provisions, Contingent Liabilities accruals, the uncertainty is generally much less MODULE 5 LIABILITIES AND SHAREHPLDER’S EQUITY 3. Provision of Services and Contingent Assets than for provisions. 4. Replacement of the obligation with Provision - A is a liability of uncertain timing or another obligation amount. 5. Conversion of Obligation to Equity Contingent liability Liabilities 3. Result of Past Event - A present obligation exists as a result of past a. A possible obligation that arises from past events Non-current Liabilities and whose existence will be confirmed only by the A present obligation of the entity arising from events only if; Long-term debt is ordinarily used by an enterprise occurrence or non-occurrence of one or more past events, the settlement of which is ○ The entity has already obtained as a more or less permanent means of financing to uncertain future events not wholly within the control expected to result in an outflow from the entity economic benefits and increase the earnings available to shareholders. If of the entity ○ As a consequence, the entity will minimizing income taxes were the only of resources embodying economic benefits. b. A present obligation that arises from past events transfer econom