EXTERNAL AND INTERNAL

CHAPTER 1
TRANSACTIONS
THE ACCOUNTANCY PROFESSION Economic Activities - The transactions that
may be classified as external and internal.
DEFINITION OF ACCOUNTING
Accounting Standards Council - Accounting External Transactions - Economic activities
is a service entity. Its function is to provide that involve one entity and another.
quantitative information that is financial in
nature to be useful in making economic Internal Transactions - Economic activities
decisions. that take place within the entity only.
➢​ Production - Resources are
Committee on Accounting Terminology - transformed into products
Accounting is the art of recording, ➢​ Casualty - Unanticipated loss
summarizing, and classifying in a significant
manner in terms of money, events, or Measuring - Assigning peso amounts to
transactions. accountable events.
➢​ Historical Cost - The original
American Accounting Association - acquisition cost.
Accounting is the process of identifying, ➢​ Current Value - The fair value or
measuring, and communicating economic current cost.
information.
Communicating - Preparing and distributing
Keep in note that Accounting is: accounting reports to potential users of
●​ About quantitative information financial information.
●​ Likely to be financial in nature ➢​ Recording/Journalizing - Process of
●​ Useful in decision making keeping a systematical records of all
business transactions
Accounting also has a number of ➢​ Classifying - Sorting of interrelated
components, namely: accounts and is accomplished
●​ Identifying as the analytical through the ledger
component ○​ Ledger - Group of accounts
●​ Measuring as the technical ➢​ Summarizing - Preparation of
component financial statements
●​ Communicating as the formal
component OVERALL OBJECTIVE OF ACCOUNTING
Accounting’s objective is to provide
Identifying - The recognition/non-recognition quantitative financial information about a
of business activities as accountable business useful to statement users.
events.
Accounting - Is an information system that
Keep in mind that a business activity can measures business activities, processes
only be accountable if it affects the assets, information into financial reports, and
liabilities, and equity. communicates the reports.
 ➢​ Auditing - The primary service
Financial Reports - Tells how well an entity offered by most public accounting
is performing. practitioners and deals with the
examination of financial statements.
THE ACCOUNTING PROFESSION ➢​ Taxation - Includes the preparation
Republic Act No. 9298 - Also called as the of annual income tax returns and
Philippine Accountancy Act of 2004, is the determination of tax consequences
law regulating the practice of Accountancy of business endeavors
in the Philippines. ➢​ Management Advisory Services

The Board of Accountancy - Is the body Private Accounting - Assists management in

authorized by law to promulgate rules and planning and controlling the entity’s
regulations affecting the accounting practice operation by maintaining records, producing
in the Philippines. the financial reports, preparing the budgets,
➢​ Responsible for preparing and and controlling the resources of the entity
grading the CPALE Some of the capacities in private accounting
○​ CPALE - A computer based are:
examination offered twice a ➢​ Accounting Staff
year. ➢​ Chief Accountant
➢​ Internal Auditor
Keep in mind that single practitioners and ➢​ Controller - Highest accounting
partnerships who practice public officer
accountancy shall be registered Certified
Public Accountant in the Philippines and Government Accounting - Encompassess
that the Securities and Exchange the process of analyzing, classifying,
commission shall not register any communicating, and summarizing all
corporation organized of public transactions involving the receipt and
accountancy. disposition of government funds and
property
The registrant should acquire at least 3
years of meaningful experience in any areas CONTINUING PROFESSIONAL
of public accounting (including taxation) for DEVELOPMENT
them to be accredited and it can be Republic Act No. 10912 - The law
renewed every 3 years as well. mandating and strengthening the continuing
program for all regulated professions.
Areas of practice for CPAs:
●​ Public Accounting Continuing Professional Development -
●​ Private Accounting Acquisition of advanced skill, knowledge,
●​ Government Accounting and proficiency.

Public Accounting - Composed of individual CPD Credit Units - Credit hours required for
practitioners, small accounting firms, and the renewal of CPA License and
large multinational organizations that render accreditation of CPA practice.
3 kinds of services to the public:
 ➢​ Requires 120 CPD Credit Units for GENERALLY ACCEPTED ACCOUNTING
accreditation while only 15 CPD PRINCIPLES
Credit units are required for renewal. GAAP - Represents the rules, procedures,
➢​ A CPA shall be permanently practice, and standards followed in the
exempted from CPD requirements preparation and presentation of financial
upon reaching the age 65. statements.
➢​ The process of establishing of GAAP
Accounting vs. Auditing is political

Accounting Auditing Accounting Standards - Create a common

understanding between preparers and users
Embraces Auditing One of the areas of
of financial statements.
Accounting
specialization
FINANCIAL AND SUSTAINABILITY
Constructive Analytical REPORTING STANDARDS COUNCIL
FSRSC - The Accounting standard setting
Accounting vs. Bookkeeping body created by the PRC upon the
recommendation of the BOA
Accounting Bookkeeping ➢​ Replaced the Accounting Standards
Council
Concerned with the Concerned with the ➢​ The highest hierarchy of generally
why development of
accepted accounting standards in
Accounting records
the Philippines
Conceptual Procedural
The function of the FSRSC is to establish
Accounting vs. Accountancy and improve accounting standards that will
be generally accepted in the Philippines
Accounting Accountancy
Note: Development of generally accepted
Reference only to a The profession of accounting principles is formalized initially
particular field accounting through the creation of the ASC

Financial vs. Managerial Accounting Philippine Accounting Standards (PAS) &

Philippines Financial Reporting Standards
Financial Managerial (PFRS) - approved statements of the
FSRSC
Concerned with the Accumulation and
recording of preparation of
business financial reports PIC - Prepare interpretations of PFRS for
transactions the approval by the FSRSC and provide
timely guidance of financial reporting issues.
Internal & External Internal ➢​ Replaces the Interpretations
Committee by the ASC in May 2000
➢​ Was formed by the FSRSC in
August 2006
IFRIC - Counterpart of PIC in the
CHAPTER 2
International Accounting Standards
Committee. CONCEPTUAL FRAMEWORK
INTERNATIONAL ACCOUNTING
STANDARDS COMMITTEE Conceptual Framework - A complete,
IASC - An independent private sector body, comprehensive and single document
with the objective of achieving uniformity in promulgated by the IASB.
the accounting principle. ➢​ A summary of the terms and
➢​ Was formed in June 1973 through concepts that underlie the
an agreement preparation and presentation of
financial statements.
It aims to (1.) formulate and publish in the ➢​ Underlying theory for the
public interest accounting standards and development of accounting
(2.) work generally for the improvement and standards
harmonization of accounting standards and
procedures Conceptual Framework provides foundation
for standards that:
INTERNATIONAL ACCOUNTING ●​ Contribute to transparency
STANDARDS BOARD ●​ Strengthens accountability
IASB - Publishes standards in a series of ●​ Contribute to economic efficiency
pronouncements called International
Financial Reporting Standards (IFRS) PURPOSES OF REVISED CONCEPTUAL
➢​ Replaced the IASC FRAMEWORK
➢​ Adopted the body standards issued A.​ To assist the IASB to develop IFRS
by the IASC Standards
B.​ Assist preparers to develop
PHILIPPINE FINANCIAL REPORTING consistent accounting policy when
STANDARD no standard applies to a particular
A.​ PFRS are numbered the same as transaction
their counterpart in IFRS C.​ To assist preparers to develop
B.​ PAS are numbered the same as consistent accounting policy when a
their counterpart in IAS standard allows a choice
C.​ Philippine Interpretations which D.​ To assist all parties to understand
corresponds to interpretations of the and interpret the IFRS
IFRIC and interpretations developed
by the PIC AUTHORITATIVE STATUS OF
CONCEPTUAL FRAMEWORK
In the absence of a standard or an
interpretation that specifically applies to a
transaction, management shall consider the
applicability of the Conceptual Framework.
USERS OF FINANCIAL INFORMATION SPECIFIC OBJECTIVES OF FINANCIAL
A.​ Primary Users REPORTING
B.​ Other Users A.​ To provide information useful for
decision making
Primary Users - Existing and potential B.​ To provide information useful in
investors, lenders, and other creditors. To assessing the cash flow prospects of
whom general purpose financial reports are the entity
primarily directed C.​ To provide information of the entity’s
➢​ Existing and potential investors - resources and its changes.
Concerned with the risk inherent in
and return provided by their ECONOMIC RESOURCES AND CLAIMS
investments General Purpose Financial Reports -Provide
➢​ Lenders and other creditors - information about the financial position of a
Interested in information which reporting entity
enables them to determine whether
their loans will be paid when due. Financial Position - Information about the
entity’s economic resources
Other Users - Includes employees, ➢​ Economic Resources - The assets
customers, governments and their and the claims are the liabilities and
agencies, and the public. equity of the entity.
➢​ Employees - Interested in
information about the stability and Liquidity - The availability of cash in the
profitability of the entity. near future to cover current maturing
➢​ Customers- Interested in information obligations
about the continuance of an entity
especially when they have a Solvency - The availability of cash over a
long-term involvement. long term to meet financial commitments
➢​ Governments and their agencies - when they fall due.
Interested in the allocation of
resources. CHANGES IN ECONOMIC RESOURCES
➢​ Public AND CLAIMS
General Purpose Financial Reports -
OBJECTIVE OF FINANCIAL REPORTING Provide information about the effects of
The objective of financial reporting forms transaction
the foundation of the Conceptual
Framework. It aims to provide financial Financial Performance - Also known as the
information about the reporting entity that is results of operations, is the level of income
useful to existing primary users. earned by an entity.

TARGET USERS ACCRUAL ACCOUNTING

Financial Reporting - Directed primarily to Accrual Accounting - Depicts the effects of
the existing and potential primary users. transactions and other events and
➢​ These primary users provide circumstances on an entity’s economic
resources and capital to the entity. resources.
Accrual Basis - Effects of transaction and Relevance - The capacity of the information
other events are recognized when they to influence a decision.
occur and not as cash is received or paid. ➢​ The information should be related or
pertinent to the economic decision
LIMITATIONS OF FINANCIAL
REPORTING INGREDIENTS OF RELEVANCE
A.​ General purpose financial report do Financial information is capable of making a
not and cannot provide all of the difference in a decision if it has predictive
information value and confirmatory value
B.​ General purpose financial reports ●​ Predictive Value - Helps increase the
are not designed to show the value likelihood of correctly or accurately
of an entity predicting outcome of events.
C.​ General purpose financial reports ●​ Confirmatory Value - Enables users
are intended to provide common to confirm or correct earlier
information to the users. expectations.

Management Stewardship - Is the Materiality - A practical rule in accounting

responsibility of management in efficiently which dictates strict adherence to GAAP is
and effectively using the economic not required when the items are not
resources of the entity. significant enough to affect the financial
statements.
➢​ Also known as the doctrine of
convenience
CHAPTER 3
➢​ The nature or magnitude or both of
QUALITATIVE CHARACTERISTICS the items
➢​ Depends on relative size rather than
Qualitative Characteristics - These are absolute size
qualities or attributes that make financial ➢​ Could reasonably be expected to
accounting information useful to the users. influence - The information is
➢​ Classified into two: Fundamental capable of influencing economic
Qualitative Characteristics and decisions of financial users
Enhancing Qualitative ➢​ Obscuring Information - Presentation
Characteristics. of financial information ot readily
understood
Its objective is to ensure that the information ➢​ Primary Users - Users to whom the
is useful to the users in making economic general purpose financial statements
decisions. are primarily directed.

FUNDAMENTAL QUALITATIVE Keep in mind that an item may only be

CHARACTERISTICS considered a material if it could affect or
Relate to the content or substance of influence the economic decision of the
financial informations that is composed of 2: primary users of the financial statements.
➢​ Relevance
➢​ Faithful Representation
Faithful Representation - The actual effects information by its intention rather
of the transaction shall be properly than its form.
accounted for and reported in the financial
statements. ENHANCING QUALITATIVE
CHARACTERISTICS
INGREDIENTS OF FAITHFUL Intended to increase the usefulness of
REPRESENTATION financial information that is relevant and
●​ Completeness faithfully represented.
●​ Neutrality
●​ Free from error Comparability - Ability to bring together for
the purpose noting points of likeness and
Completeness - Relevant information difference. It enables users to identify the
should be presented in a way that facilitates similarities and dissimilarities among items.
understanding and acids erroneous
implications. Consistency - The use of the same method
➢​ Standard of adequate disclosure - for the same item.
All significant and relevant
information leading to the
COMPARABILITY CONSISTENCY
preparation of financial statements
shall be clearly reported. Application of It is the application
accounting method of accounting
Neutrality - The preparation or presentation between and method from period
of the financial statements must be from any across entities in
to period within an
the same industry
bias. entity.
➢​ Prudence - Exercise of care and
caution when dealing with the
Understandability - Requires that financial
uncertainties in the measurement
information must be comprehensible if it is
process.
to be most useful.
➢​ Conservatism - When alternatives
exist, the alternative which has the
Verifiability - Different and independent
least effect on equity should be
observers could reach similar conclusions
chosen.
based on the information.
○​ Contingent Loss -
Recognized in the financial
TYPES OF VERIFICATION
statement if the loss is
●​ Direct Verification - Verifying an
probable
amount through direct observation
●​ Indirect Verification - Checking the
Free from error - There should be no errors
inputs using the same methodology.
or commissions in the description
➢​ Measurement Uncertainty - arises
Timeliness - Financial information must be
when monetary amounts in financial
available or communicated early enough.
reports cannot be observed directly
➢​ Substance over form - You
recognize an item, transaction, or
Cost - A pervasive constraint on the ➢​ Can be a single entity or a portion of
information that can be provided by financial an entity
reporting. ➢​ Not necessarily a legal entity

Cost Constraint - Consideration of the cost Reporting Period - Period when financial
incurred in generating financial informations statements are prepared for general
purpose financial reporting
➢​ May be prepared on an interim basis

CHAPTER 4
UNDERLYING ASSUMPTIONS
GENERAL OBJECTIVE OF FINANCIAL Accounting Assumptions - The basic
STATEMENTS notions or fundamental premises on which
the accounting process is based.
Financial Statements - Provide information ➢​ Serves as the bedrock of accounting
about economic resources of the reporting Going Concern (Continuity Assumption) -
entity. Means that in the absence of evidence to
➢​ Assess future cash flows the contrary, the accounting entity is viewed
➢​ Asset management stewardship as continuing in operation indefinitely.

ELEMENTS OF A FINANCIAL Accounting Entity - The entity is separate

STATEMENT: from the owners, managers, and employees
●​ Assets who constitute the entity.
●​ Liabilities
●​ Equity Time period - Requires that the indefinite life
●​ Revenue of an entity is subdivided into accounting
●​ Expenses periods which are of equal length.
➢​ One-year period - traditionally the
TYPES OF FINANCIAL STATEMENTS: accounting period.
●​ Consolidated Financial Statements -
Prepared when the reporting entity The accounting period may be a:
comprises both the parent and its ●​ Calendar Year - A 12-month period
subsidiaries that end on December 31
●​ Unconsolidated Financial ●​ Natural Business Year - A 12-month
Statements - Prepared when the period that ends on any month when
reporting entity is the parent alone the business is at its lowest.
●​ Combined Financial Statements -
Prepared when the reporting entity Monetary Unit - Has two aspects namely:
comprises two or more entities that ➢​ Quantifiability aspect - Assets,
are not linked by a parent and liabilities, equity, income, and
subsidiary relationship expenses should be stated in terms
if a unit of measure
Reporting Entity - An entity that is required ➢​ Stability of the Peso - The
to choose or prepare financial statements purchasing power of the peso is
stable or constant
 ➢​ Constructive Obligations - arise from
CHAPTER 5
normal business practice custom
ELEMENTS OF FINANCIAL and a desire to maintain good
STATEMENTS business relations.

Financial Statements - Portray the financial Income - increase in assets or decrease in

effects of transactions and other events. liabilities that result in increase in equity that
encompasses both:
Elements of Financial Statements - Refer to ➢​ Revenue - Arises in the course of
the quantitative information reported in the the ordinary regular activities
statement of financial position and income ➢​ Gains - Represent other items that
statement. meet the definition of income
➢​ These are building blocks from
which financial statements are STATEMENT OF FINANCIAL
constructed. PERFORMANCE
Refers to the income statement and a
Equity - The residual interest in the assets statement representing other
of the entity comprehensive income.

Asset - A present economic resource Income statement - Primary source of

controlled by the entity as a result of aost information about an entity’s financial
events. performance.
➢​ Economic Resource - a right that
has the potential to produce Expense - Decrease in asset or increase in
economic benefits. liability that results in decrease in liability
that encompasses both:
Essential characteristics of asses: ➢​ Expenses that arises in the course
A.​ It is a present economic resource of ordinary regular activities
B.​ The economic right has the potential ➢​ Losses - Do not arise in the course
to produce economic benefit of ordinary regular activities
C.​ Controlled by the entity

Control - The ability to prevent others from CHAPTER 6

using such asset and therefore preventing
others from obtaining the economic benefit RECOGNITION AND MEASUREMENT
➢​ May arise if an entity enforces legal
rights Recognition - The princess for capturing for
inclusion in the financial statements an item
Liability - A present obligation of an entity to that meets the definition of an asset, liability,
transfer an economic resource as a result of and equity.
past events
Carrying Amount - The amount at which an
Obligation - a duty or responsibility that an asset, a liability, or equity is recognized.
entity has no practical ability to avoid.
Keep in mind that an item is only recognized Measurement - Quantifying in monetary
when their recognition provides users with terms the elements in a financial statement
financial informations that is both relevant and is measured into two:
and faithfully represented ➢​ Historical Cost
➢​ Currents Value
RECOGNITION CRITERIA
Point of sale income and expense Historical Cost - The original acquisition
recognition cost of an asset.
➢​ The entry price or entry value
Principle of Principle of
Income Expense Current Value - The exit price or exit value
(except Current cost) that includes 4 factors:
Income is Expense is ➢​ Fair Value
recognized when recognized when ➢​ Value in Use
earned incurred ➢​ Fulfillment Value
➢​ Current Cost
Matching Principle - Cost and expenses
incurred in earning a revenue should be Fair Value - The price that would be
reported in the same period received/paid to sell/transfer an asset or
liability,
Cause and Effect Association - The
expense is recognized when the revenue is Value in Use - The present value of the
already recognized. cash flow that an entity expects to derive
➢​ Involves the simultaneous or from the use of an asset.
combines recognition of expense
and revenue. Fulfillment Value - The present value of
cash that an entity expects to transfer in
Systematic and Rational Allocation - Some settling a liability.
costs are expensed by simply allocating
them over the periods benefited. Current Cost - Based on the entry price or
entry value but reflects market conditions on
Immediate Recognition - The cost incurred measurement dates.
is expensed outright because of uncertainty
of future economic benefits.

Derecognition - The removal of all or part of

CHAPTER 7
a recognized asset or liability from the PRESENTATION AND DISCLOSURE
statement of financial position.
➢​ Occurs when an item no longer Presentation and disclosure can be an
meets the definition of asset or effective communication tool about the
liability information in the financial statements.
Through effective communication,
information in the statements can be more
understandable and comprehensible.
Classification - Sorting of assets, liabilities, productive capital at the beginning of the
equity, income, and expenses on the basis year.
of shared similar characteristics.

Aggregation - Adding together of assets,

PAS 1
liabilities, equity, income, and expenses that
have similar or shared characteristics. PRESENTATION OF FINANCIAL
STATEMENTS (financial position)
CAPITAL MAINTENANCE
The financial performance of a business is Financial Statements - Are the means by
determined using 2 approached: which the information accumulated and
●​ Transaction Approach processed in financial accounting is
●​ Capital Maintenance Approach periodically communicated to the users
➢​ The end product or main output of
Transaction Approach - The traditional the financial accounting process.
preparation of Income Statement ➢​ Structured financial representation of
the financial performance and
Capital Maintenance Approach - The net position of an entity
income occurs only after the capital used
from the beginning of th period is General Purpose Financial Statements - Are
maintained. the financial statements intended to meet
the needs of users who do not require an
Financial Capital - The monetary Amount of entity to prepare reports.
the net assets contributed by shareholders
and the amount of the increase in net COMPONENTS OF FINANCIAL
assets. STATEMENTS
●​ Statement of Financial Position
Keep in mind that under the target financial ●​ Income Statement
capital concept, net income occurs when ●​ Statement of Cash Flow
the nominal amount of the net asset at the ●​ Statement of Changes in Equity
end of the year exceeds the amount of the ●​ Notes to Financial Statement
nominal net asset at the beginning of the
year. OBJECTIVES OF FINANCIAL
STATEMENTS
Physical Capital - The quantitative measure Its objective is to provide information about
of the physical productive assets to produce the financial position and performance and
goods and services. the cash flow of an entity.
➢​ Requires that productive assets
must be measured at current cost Note that financial statements must be
presented at least annually
Keep in mind that under the physical capital
concept, net income occurs when the Statement of Financial Position - A formal
physical productive capital of the entity at statement showing the asset, liability, and
the end of the year exceeds the physical equity.
 ➢​ Primary users uses this statement to production of supplies, goods, or services
evaluate liquidity, solvency, and for rental or administrative purposes.
need of the entity for additional
financing. Long-term Investments - IASC Defines
long-term investments as an asset held by
CLASSIFICATION OF ASSETS an entity for the accretion of wealth through
Assets are classified into 2: capital distribution.
●​ Current Assets
●​ Non-current Assets Intangible Assets - Identifiable
non-monetary asset without physical
Operating Cycle - The time between the substance.
acquisition of assets and their realization in
cash. Other non-current Asset - Assets that do not
➢​ The normal operating cycle is fit into the definition of non-current assets
assumed to be 12 months.
CLASSIFICATION OF LIABILITIES
CURRENT ASSETS Liabilities are classified into 2:
According to PAS 1, Paragraph 66, an asset ●​ Current Liabilities
shall be classified as current when: ●​ Non-current Liabilities

A.​ The asset is cash or cash equivalent CURRENT LIABILITIES

B.​ The entity holds the asset for the According to PAS 1, Paragraph 69, a liability
primary purpose if trading is to be considered current if:
C.​ The entity expects to realize the
asset within 12 months after the A.​ The entity expects to settle the
reporting period. liability within the entity’s normal
D.​ The entity expects to realize the operating cycle
asset within the entity’s normal B.​ The entity hold the liability for the
operating cycle. purpose of trading
C.​ The liability is due to be settled
NON-CURRENT ASSETS within 12 months after the reporting
According to PAS 1, Paragraph 66, An period
asset is classified as non-current if it D.​ The entity does not have the right to
excludes the definition of current assets. defer the settlement
➢​ Property, Plant and Equipment
➢​ Long-term Investments NON-CURRENT LIABILITIES
➢​ Intangible Assets According to PAS 1, Paragraph 69, a liability
➢​ Deferred Tax Assets can only be non-current if the liabilities are
➢​ Other non-current assets not classified as current
➢​ Non-current Portion of Long-term
Property, Plant and Equipment - PAS 16, Debt
Paragraph 6 defines PPE as tangible assets ➢​ Finance Lease Liability
which are held by an entity for use in ➢​ Deferred Tax Liability
 ➢​ Long-term Obligations to Company FORMS OF STATEMENT OF FINANCIAL
Officers POSITION
➢​ Long-Term Deferred Revenue A.​ Report Form - Sets forth the 3 major
sections in a downward sequence of
DEFINITION OF EQUITY assets, liabilities, and equity
Equity - The residual interest in the assets B.​ Account Form - Assets are shown
of an entity after deducting all of its on the left side and the liabilities and
liabilities. equity are on the right side
➢​ The reporting of an entity’s equity
depends on the forms of business PRESENTATION OF FINANCIAL
organization. STATEMENTS (income statement)
○​ Owner’s Equity in a
Proprietorship Income statement - A formal statement
○​ Partner’s Equity in a showing the financial performance of an
Partnership entity for a given period of time.
○​ Shareholder’s Equity in a
Corporation Financial Performance - Primarily measured
in terms of the level of income earned by an
CURRENTLY MATURING LONG-TERM entity
DEBT ➢​ Known as the results of operations
A liability which is due to be settled within
12 months is considered current even if: Transaction Approach - Traditional
●​ The period is longer than 12 months preparation of the income statement in
●​ An agreement to reschedule the conformity with accounting standards.
payments is completed after the
reporting period and before the SOURCES OF INCOME
financial statements are issued ●​ Sale of merchandise to customers
●​ Rendering of services
Note that when the agreement is ●​ Use of entity resources
rescheduled on or before the end of the ●​ Disposal of resources other than
reporting period, the liability is non-current. products

Covenants - Restrictions in the borrower as COMPONENTS OF AN EXPENSE

to undertaking further borrowings ●​ COGS
●​ Selling Expenses
Shareholder’s Equity - The residual interest ●​ Administrative Expenses
of owners in the net assets of a corporation ●​ Other Expenses
measured by the excess of assets over ●​ Income Tax Expense
liabilities.
CLASSIFICATION OF EXPENSES
Notes to Financial Statement - Provide Distribution/Selling Expenses - Costs
narrative description or disaggregation of directly related to selling of goods
items presented in the financial statements. ➢​ Salesmen’s Salaries
➢​ Salesmen’s Commission
 ➢​ Travelling & Marketing Expense FORMS OF INCOME STATEMENT
➢​ Advertising & Publicity PAS 1, Paragraph 99 states that an entity
➢​ Freight Out shall present an analysis of expenses using
➢​ Depreciation of delivery/store a classification based on either the function
equipment of expenses or their nature within the entity
➢​
Administrative Expenses - Costs of ➢​ The income statement may be
administering the business presented into 2:
➢​ Doubtful Accounts ○​ Functional Presentation
➢​ Office Salaries ○​ Natural Presentation
➢​ Expenses of General Executives
➢​ Expenses of General Accounting Functional Presentation - Classifies
and Credit Department expenses according to their function as part
➢​ Office Supplies Used of COGS, distribution cost, administrative
➢​ Certain Taxes expense, or other expenses
➢​ Contribution ➢​ Known as the COGS Method
➢​ Professional Fees
➢​ Depreciation of office building & Natural Presentation - Expenses are o
equipment longer classified as COGS, distribution cost,
➢​ Amortization of Intangible Assets administrative expense, or other expenses
➢​ Known as the Nature of Expense
Other Expenses - Expenses not directly Method
related to the selling and administrative
function Profit or Loss - The total income less
➢​ Loss on sale of trading investments expenses. It is the bottom line in the
➢​ Loss of disposal of PPE traditional income statement.
➢​ Loss on sale of non-current ➢​ Uses net income/loss to describe
investments profit/loss
➢​ Casualty Loss
Other Comprehensive Income - comprises
NO MORE EXTRAORDINARY TERMS items of income and expenses that are not
According to PAS 1, Paragraph 87, an entity recognized in profit or loss
shall not represent ag items of income and ➢​ Unrealized gains/losses
expense as extraordinary. ➢​ Unrealized gains/losses
➢​ Gain or loss from the translation of
The following shall be disclosed on the face financial statements
of the income statement and OCI ➢​ Revaluation Surplus
statements: ➢​ Remeasurement of benefit plan
➢​ Change in fair value
A.​ Net income or net loss for the period
B.​ Total OCI for the period Statement of OCIs - Prepared to show the
total comprehensive income.
 ●​ Trade discounts and other similar
PAS 2
items are deducted
INVENTORIES
EXCLUDED FROM COST OF INVENTORY
1.​ Abnormal amount of wasted
Inventories - are assets held for sale in the
materials
ordinary course of business, in the process
2.​ Storage cost (unless necessary for
of production, or materials to be consumed
the process of production)
in the production process or rendering of
-​ Storage cost on goods in
services.
process is capitalized;
Storage cost on finished
Trading Concern - one that buys and sells
goods is expensed
goods in the same form purchased
3.​ Administrative Overhead
(merchandising).
4.​ Distribution or Selling Cost
Manufacturing Concern - buys goods which
COST FORMULAS
are converted into another form.
PAS 2, Paragraph 35 provides that the cost
of inventories shall be determined by using
INVENTORIES OF A MANUFACTURING
either:
CONCERN
a.​ First in, First Out
-​ Finished Goods
b.​ Weighted Average
-​ Goods in Process
i.​ Periodic
-​ Raw Materials
ii.​ Moving
-​ Factory Supplies

First in, First Out - assumes that the goods

Cost of Inventory - comprises cost of
first purchased are first sold and
purchase, cost of conversion, and other
consequently the goods remaining in the
directly attributable cost incurred in bringing
inventory at the end of the period are those
the inventory to the present location or
most recently purchased or produced.
condition.
●​ Cost of Conversion - costs directly
Weighted Average - computed by dividing
related to the units of production
the total cost of goods available for sale by
(direct labor).
the total number of units available for sale.
-​ Includes a systematic
allocation of fixed and
Specific Identification - specified costs are
variable production overhead
attributed to identified items of inventory.
●​ Directly Attributable Cost - cost
-​ Determined by simply multiplying the
incurred in bringing the inventory to
units on hand by the actual unit cost
the present condition and location.

PAS 2, Paragraph 23 provides that Specific

Cost of Purchase - comprises the purchase
Identification is appropriate for inventories
price, import duties, and irrecoverable
that are segregated for a specific project.
taxes, freight, handling and other costs
Measurement of Inventory
directly attributable to the acquisition of the
finished goods.
PAS 2, Paragraph 9, provides that inventory CASH AND CASH EQUIVALENTS
shall be measured at the Lower Cost and Cash - Comprises cash on hand and
Net Realizable Value (LCNRV). demand deposits

While the cost of inventory is determined Cash Equivalents - Short-term high liquid
using the FIFO cost or Average cost. investments that are readily convertible
➢​ 3 month BSP bill
Net Realizable Value - estimated selling ➢​ 3 year BSP treasury bill purchased 3
price in the ordinary course of business less months before date of maturity
estimated cost of completion and disposal ➢​ 3 month time deposits
(cost of sale) ➢​ 3 month money market instrument

ACCOUNTING FOR LCNRV According to PAS 7, Paragraph 7, an

If the cost is lower than the NRV, the investment normally qualifies as cash
inventory is recognized at its cost equivalent when it has short maturity of 3
months or less from date of acquisition.
If the NRV is lower than the cost, the
inventory is measured at NRV. Cash flows - inflows and outflows of cash
and cash equivalents
ALLOWANCE METHOD (WRITE-OFF)
The inventory at cost and any loss on Operating Activities - Cash flows derived
inventory writedown is accounted primarily from the principal revenue
separately. producing activities of the entity
A.​ Cash receipts from sales of goods
It is also known as the loss method because and other revenue
a loss account “loss on inventory writedown” B.​ Cash Payments for expenses,
is debited and a valuation account returns and income taxes, and
“allowance for inventory writedown” is purchases
credited.
Investing Activities - Cash flows derived
from the acquisition and disposal of
long-term assets or other investments
PAS 7
A.​ Cash payment to acquire
STATEMENT OF CASH FLOWS non-current assets
B.​ Cash receipts from sales of land,
Summarizes the operating, investing, and repayments, or equity
financing activities of a business. C.​ Cash advances
➢​ Provides the cash receipts and
payments of a business Financing Activities - Cash flows derived
from the equity capital and borrowing of the
The primary objective of this statement is to entity
provide relevant information about an ➢​ Equity Financing - Between the
entity’s cash flow entity and owners
 ➢​ Debt Financing - Between the entity services, for rental to others, or for
and creditors administrative purposes and are expected
A.​ Cash receipts from shares to be used during more than one period.
B.​ Cash payments to acquire
shares, borrows, and CHARACTERISTICS OF A PPE
reduction of lease lability a.​ Tangible assets
b.​ Used in production or supply of
Note that non-cash financing and investing goods or services, for rental to
transaction shall be disclosed only in the others, or for administrative
notes to financial statement or in a separate purposes
schedule c.​ Expected to be used during more
A.​ Acquisition of asse by issues share than one period.
capital and bonds payable
B.​ Conversion of bonds payable INITIAL MEASUREMENT
C.​ Conversion of preference shares An item of PPE shall be measured initially at
cost.
INTEREST PAID AND INTEREST
RECEIVED Cost - the amount of cash or cash
According to PAS 7, paragraph 33, interest equivalent paid and the fair value of the
paid and received shall be classified as other consideration given to acquire an
operating cash flows because it determines asset.
net income
➢​ Interest paid may be classified as ELEMENTS OF COST
financing cash flow a.​ Purchase price
➢​ Interest received may be classified b.​ Cost directly attributable to bringing
as investing cash flow the asset to the location and
condition
DIVIDENDS RECEIVED AND DIVIDENDS c.​ Initial estimate of the cost of
PAID removing the item
PAS 7, paragraph 34 states that dividend
paid shall be classified as operating cash DIRECTLY ATTRIBUTABLE COSTS
flow because it is a return or investment a.​ Cost of site preparation
b.​ Initial delivery costs
PAS 7, paragraph 34 provides that c.​ Installation costs
dividends paid shall be classified as d.​ Professional fees
financing cash flow e.​ Cost of testing

SUBSEQUENT MEASUREMENT
After initial recognition, an entity shall
PAS 16
choose whether the cost model or
revaluation model.
PROPERTY, PLANT, & EQUIPMENT

PPE - are tangible assets that are held for

use in production or supply of goods or
Cost Model - carried at cost less any ISSUANCE OF BONDS PAYABLE
accumulated depreciation and impairment PFRS 9, Paragraph 5.1.1 provides the asset
loss acquired by issuing bonds payable is
Revaluation Model - carried at revalued measured at:
carrying amount. a.​ FV of bonds payable
b.​ FV of asset received
Revalued Carrying Amount - Fair value at c.​ Face Amount of bonds payable
the date of revaluation less any subsequent
accumulated depreciation and impairment EXCHANGE
loss. PAS 16, Paragraph 24 provides that the
cost of an item of PPE acquired in
ACQUISITION ON CASH BASIS exchange for a non-monetary asset or a
The cost of an item of PPE is the cash price combination is measured at FV of the asset
equivalent at the recognition date. The cost given in exchange plus any cash payment.
of assets acquired on a cash basis simply
includes the cash paid plus directly HOWEVER, the exchange is recognized at
attributable costs. the carrying amount of the asset given in
exchange plus any cash payment.
ACQUISITION ON ACCOUNT
When an asset is acquired on account DEFINITION OF COMMERCIAL
subject to a cash discount, the cost of the SUBSTANCE
asset is equal to the invoice price minus the Commercial Substance - the event or
discount regardless whether the discount is transaction causing the cash flows of the
taken or not. entity to change significantly by reason of
the exchange.
ACQUISITION ON INSTALLMENT BASIS
An asset offered at a cash price and CASH FLOWS OF THE ASSET RECEIVED
installment price and is purchased at the DIFFER SIGNIFICANTLY FROM THE
installment price, the asset shall be CASH FLOWS OF THE ASSET
recorded at cash price. TRANSFERRED.

ISSUANCE OF SHARE CAPITAL CONSTRUCTION

GAAP provides that if shares are issued of The cost of self-constructed asset is
consideration other than actual cash, it determined using the same principles as for
should be measured by the fair value of the an acquired asset and it includes:
consideration received. 1.​ Direct Cost of materials
2.​ Direct Costs of labor
When a PPE is acquired through the 3.​ Indirect Costs and Incremental
issuance of share capital, the PPE shall be Overhead
measured at:
a.​ FV of the property received PAS 16, Paragraph 32 provides that the
b.​ FV of the share capital cost of abnormal amounts of wasted
c.​ Par Value or Stated Value of the material, labor, or overhead incurred is NOT
share capital included in the cost of asset.
DERECOGNITION Residual Value - the estimated net amount
Derecognition - the cost of the PPE together currently obtainable of the asset is at the
with the related accumulated depreciation end of the useful life.
shall be removed from the statement of
financial position. Useful life - either the period over which an
asset is expected to be available for use by
PAS 16, Paragraph 37 provides that the the entity OR the number of production or
carrying amount of an item of PPE shall be similar units expected to be obtained from
derecognized on disposal or when no future the asset.
economic benefits are expected from the
use or disposal. FACTORS IN DETERMINING THE
USEFUL LIFE:
CONCEPT OF DEPRECIATION a.​ Expected usage of the asset
Depreciation - the systematic allocation of b.​ Expected physical wear and tear
the depreciable amount of an asset over c.​ Technical obsolescence
useful life. d.​ Legal limit for the use of asset
-​ Not so much a matter of valuation
but rather a MATTER OF COST DEPRECIATION METHOD
ALLOCATION Straight Line - The annual depreciation
charge is calculated by allocating the
DEPRECIATION PERIOD depreciable amount equally over the
The depreciable amount of an asset shall number of useful life.
be allocated on a systematic basis over the
useful life. The depreciation of an asset Production Method - assumes that the
begins when it is available for use and depreciation is more of a function rather
ceases when the asset is than the passage of time.
DERECOGNIZED. -​ Useful life of the asset is considered
in terms of output it produces of the
TEMPORARY IDLE ACTIVITY DOES NOT number of hours it works.
PRELUDE DEPRECIATING THE ASSET as
future economic benefits are also consumed Diminishing Balance Method (acceleration
through wear and tear. method) - provide higher depreciation in the
earlier years and lower depreciation in the
FACTORS OF DEPRECIATION later years.
There are only three factors that are
necessary to compute the amount of THE ACCELERATED METHOD INCLUDE
depreciation: SUM OF YEARS’ DIGITS METHOD AND
a.​ Depreciable Amount DOUBLE DECLINING BALANCE
b.​ Residual Value METHOD.
c.​ Useful Life

Depreciable Amount - cost of an asset or

other amount substituted for cost less
residual value.
 b.​ Deducting the grant in
PAS 20
arriving at the carrying
amount of the asset.
GOVERNMENT GRANT
2.​ Government grant related to income:
a.​ Presented in the income
According to PAS 20, Paragraph 3,
statement either separately
Government Grant is an assistance by the
or “other income”
government in the form of transfer of
b.​ Grant is deducted from the
resources to an entity in return for part of
related expenses.
future compliance with certain conditions.

GOVERNMENT ASSISTANCE
RECOGNITION
Government Assistance - action by the
The Government Grant shall be recognized
government designed to provide an
if:
economic benefit specific to an entity.
a.​ The entity will comply with the
-​ Its essence is that there is NO
conditions of the grant
VALUE that can be placed upon it.
b.​ The grant will be received.

GRANT IN RECOGNITION OF SPECIFIC

EXPENSES SHALL BE RECOGNIZED PAS 23
OVER THE PERIOD OF THE RELATED
EXPENSE. BORROWING COSTS

A Government Grant that becomes Under PAS 23, Paragraph 5, borrowing

receivable as a compensation for expenses costs are interests and other costs that an
or losses already incurred or for the purpose entity incurs in connection with borrowing
of giving immediate financial support shall funds.
be recognized as an INCOME. -​ Interest costs incurred as a result of
borrowing funds from financial
Grants related to depreciable assets shall institutions.
be recognized as INCOME.
BORROWING CAN BE CLASSIFIED AS
Grant related to non-depreciable asset SPECIFIC AND GENERAL BORROWING
requiring fulfillment of certain conditions
shall be recognized as INCOME. Specific Borrowing - intended specifically in
acquiring a qualifying asset
PRESENTATION OF GOVERNMENT
GRANT General Borrowing- intended partly in
1.​ Government grant related to asset acquiring qualifying assets and partly for
shall be presented to the statement general capital purposes.
of financial position in:
a.​ Setting the grant as deferred QUALIFYING ASSETS
revenue Qualifying Assets - assets that necessarily
takes a substantial period of time to get
ready for the intended use or sale.
PAS 23 requires that borrowing costs HOWEVER, the capitalizable borrowing
incurred in connection with acquisition of a cost shall not exceed the actual interest
qualifying asset should be capitalized as incurred.
cost of the qualifying asset,
Capitalization Rate = Total annual borrowing
EXCLUDED FROM CAPITALIZATION cost/Total general borrowings outstanding
PAS 23 does not require capitalization of during the period.
borrowing costs relating to the following:
a.​ Assets measured at fair value COMMENCEMENT OF CAPITALIZATION
b.​ Inventory that is manufactured in The capitalization of borrowing costs as part
large quantity of the cost of a qualifying asset shall
c.​ Asset that is ready for the intended commence when:
use or sale when acquired. a.​ The entity incurs expenditures for
the asset
ACCOUNTING FOR BORROWING COST b.​ The entity incurs borrowing costs
PAS 23, Paragraph 8, mandated the c.​ The entity undertakes activities that
following rules on borrowing costs: are necessary to prepare the asset
a.​ If the borrowing is directly for the intended use or sale.
attributable to the acquisition of a
qualifying asset, the borrowing cost CESSATION OF CAPITALIZATION
is required to be capitalized as cost Capitalization of borrowing costs shall
of the asset. cease when substantially all the activities
b.​ All other borrowing costs shall be necessary to prepare the qualifying asset
expensed as incurred for the intended use or sale are
COMPLETE.
ASSET FINANCED BY SPECIFIC
BORROWING *An asset is normally ready for the intended
PAS 23, Paragraph 12 provides that if the use or sale when THE PHYSICAL
funds are borrowed specifically for the CONSTRUCTION OF THE ASSET IS
purpose of acquiring a qualifying asset, the COMPLETE*
amount of capitalizable borrowing cost is
the ACTUAL borrowing cost incurred during
the period LESS any investment income.
PAS 28
ASSET FINANCED BY GENERAL
INVESTMENT IN ASSOCIATES
BORROWING
PAS 23, Paragraph 14, provides that if the
Associate - an entity over which the investor
funds are borrowed generally and used for
has a significant influence (investee).
acquiring a qualifying asset, the amount of
capitalizable borrowing cost is equal to the
Significant Influence - the power to
average carrying expenditures on the asset
participate in the financial and operating
during the period MULTIPLIED by a
policy decisions of the associate but not
capitalization rate.
control over those policies.
If the investor holds 20% or more (50% ●​ If the assets of the investee are fairly
max) of the voting power of the investee, it valued, the excess of cost of the
is assumed to have a significant influence. underlying asset is attributable to
●​ However, even if the percentage is goodwill.
lower than the 20%, as long as the ●​ If the excess is attributable to
investor meets certain criteria (E.G, under-evaluation of depreciable
part of the Board of Directors & assets, it is amortized over the
Interchange within the remaining life of the asset.
management), they are still ●​ If the excess is attributable to
considered to have a significant under-evaluation of land, it is not
influence. amortized.
●​ The excess amount is expensed
MEASUREMENT OF INVESTMENT IN when the land is sold.
ASSOCIATE ●​ If the excess is attributable to
Investment in Associate is measured inventory, the amount is expensed
through the Equity Method of Accounting: when the inventory is sold.
●​ If the excess is attributable to
1.​ Investment is initially recognized as goodwill, it is included in the carrying
cost. amount of the investment (not
2.​ The carrying amount is increased by amortized).
the investor’s share of the net
income of the investee and EXCESS OF FAIR VALUE OVER COST
decreased by the investor’s share of PAS 2, Paragraph 32 provides that any
the net loss of the investee. excess of the fair value of the associate’s
3.​ Dividends reduce the carrying net assets acquired over the cost of
amount of the investment (not an investment is included as income in
income). determining the investor’s share of the
4.​ Investments must be in ordinary associate's net income/loss.
shares.
5.​ If the investor has significant DISCONTINUANCE OF EQUITY METHOD
influence over the investee, the PAS 28, Paragraph 22 provides that:
investee is said to be an associate. -​ an investor shall discontinue the use
of equity method from the date it
EXCESS OF COST OVER CARRYING ceases to have significant influence
AMOUNT over an associate
Excess of Cost - If the investor pays more -​ on the date the significant influence
than the carrying amount of the net assets is lost, the investor shall measure
acquired. The excess may be attributed to any retained investment in associate
the following: at fair value.
a.​ Under-evaluation of the investee's
assets EQUITY METHOD NOT APPLICABLE
b.​ Goodwill PAS 28, Paragraph 17 provides that an
investment in associate shall not be counted
for using the equity method if the investor is
a parent that is exempt from preparing EXAMPLES OF NON-FINANCIAL ASSET
consolidated financial statements. a.​ Physical assets
b.​ Intangible assets
c.​ Prepaid expenses
PAS 32
FINANCIAL LIABILITY
Financial Liability - any liability that is a
FINANCIAL INSTRUMENTS
contractual obligation:
a.​ To deliver cash or other financial
PAS 32, Paragraph 11, defines financial
asset to an entity
instrument as any contract that gives rise to
b.​ To exchange financial instrument
both a financial asset of one entity and
with another entity under conditions
financial liability or equity instrument of
that are potentially unfavorable
another entity.

EXAMPLES OF FINANCIAL LIABILITIES

CHARACTERISTICS OF A FINANCIAL
a.​ Accounts payable
INSTRUMENT
b.​ Notes payable
1.​ There must be a contract
c.​ Loans payable
2.​ There are at least 2 parties to the
d.​ Bonds payable
contract
3.​ The contract shall give rise to an
EXAMPLES OF NON-FINANCIAL
entity’s financial asset and financial
LIABILITIES
liability or equity instrument of
a.​ Deferred revenue and warranty
another entity.
obligations
b.​ Income tax payable
FINANCIAL ASSET
c.​ Constructive obligations
A financial asset is any asset that is:
a.​ Cash
EQUITY INSTRUMENT
b.​ A contractual right to receive cash or
Equity Instrument - any contract that
another financial asset
evidences a residual interest in the asset of
c.​ A contractual right to exchange
an entity after deducting all of the liabilities.
financial instruments with another
entity under favorable conditions
EQUITY INSTRUMENTS INCLUDE:
d.​ An equity instrument of another
a.​ Ordinary share capital
entity
b.​ Preference share capital
c.​ Share options or share warrants
EXAMPLES OF FINANCIAL ASSETS
a.​ Cash or Currency
COMPOUND FINANCIAL INSTRUMENT
b.​ Cash deposit in bank
PAS 32, Paragraph 28 defines a compound
c.​ Accounts receivable
financial instrument as a financial
d.​ Notes Receivable
instrument that contains both a liability and
e.​ Loans Receivable
equity element from the perspective of the
f.​ Investment in shares or equity
issuer.
instrument
COMMON EXAMPLES OF COMPOUND through OCI shall be capitalized as cost of
FINANCIAL INSTRUMENTS: the financial asset.
a.​ Bonds payable issued with share
warrants IF THE FINANCIAL ASSET IS HELD FOR
b.​ Convertible bonds payable TRADING OR IS MEASURED AT FAIR
VALUE THROUGH PROFIT OR LOSS,
ACCOUNTING FOR COMPOUND TRANSACTION COSTS ARE EXPENSED
INSTRUMENT OUTRIGHT
If the financial instrument contains both a
liability and an equity instrument, PAS 32 SUBSEQUENT MEASURE
mandates that such components shall be PFRS 9, Paragraph 5.2.1 provides that after
accounted for separately. recognition an entity shall measure a
financial asset as:
This approach is known as split accounting. a.​ Fair Value through Profit or Loss
b.​ Fair Value through OCI
Split Accounting - the consideration c.​ Amortized Cost
received from the issuance of the
compound financial instrument shall be EQUITY AND DEBT INVESTMENTS
allocated between the liability and equity Equity Security/Equity Investment -
components. encompasses any instrument representing
ownership shares and right, warrant, or
THE FAIR VALUE OF THE LIABILITY options to acquire ownership shares
COMPONENTS IS FIRST DETERMINED -​ Represents an ownership interest in
an entity
The fair value of the liability components is
then deducted from the total consideration OWNERSHIP SHARES INCLUDE:
received from the issuance of the a.​ Ordinary shares
compound financial instrument. b.​ Preference shares
c.​ Rights or options to acquire
THE RESIDUAL AMOUNT IS ALLOCATED ownership shares
TO EQUITY COMPONENT
Debt Security/Debt Investments - any
security that represents a creditor
relationship with an entity.
PFRS 9
DEBT SECURITIES INCLUDE:
FINANCIAL INSTRUMENT
a.​ Corporate bonds
b.​ Treasury bills
PFRS 9, Paragraph 5.1.1 provides that at
c.​ Commercial papers and other debt
initial recognition, an entity shall measure a
instruments with maturity
financial asset at fair value.

Transaction Cost - directly attributable to the

acquisition of financial assets at fair value
MEASUREMENT OF EQUITY THE AMOUNT RECOGNISED IN OCI IS
INVESTMENTS NOT RECLASSIFIED TO P/L UNDER ANY
1.​ Held for trading - at fair value CIRCUMSTANCES. However, on
through P/L derecognition, the amount may be
2.​ Not held for trading - as a rule, at fair transferred to retained earnings.
value through P/L (any changes in
FV are shown in the income If the equity investment is held for trading,
statement) the election to present gain or loss in OCI is
3.​ Not held for trading - at fair value not allowed and subsequent changes in FV
through OCI by irrevocable election are always included in P/L or reported in the
4.​ All other investments in quoted income statement.
equity instrument - at FV through P/L
5.​ Investments in unquoted equity Under PFRS 9, Paragraph 5.1.1, financial
instruments - at cost asset measured at FV through OCI shall be
6.​ Investments of 20% to 50% - equity recognized initially at FV plus transaction
method of accounting cost

MEASUREMENT OF DEBT In accordance with PFRS 9, 5.7.1b, gain or

INVESTMENTS loss on disposal of equity investment
1.​ Held for trading - at FV through P/L measured at FV through OCI is recognized
2.​ Held for collection of contractual directly in retained earnings.
cash flows - at amortized cost
3.​ Held for collection of contractual Moreover, the cumulative gain or loss
cash flows - at FV through P/L by previously recognized in OCI is also
irrevocable designation or fair value transferred to retained earnings
option
4.​ Held for collection of contractual DEBT INVESTMENTS AT AMORTIZED
cash flows and for trading of the COST
financial asset - at FV through OCI PFRS 9, Paragraph 4.1.2 provides that an
5.​ Held for collection of contractual asset shall be measured at amortized cost
cash flows and for trading of the is both of the following conditions are met:
financial asset - at FV through P/L a.​ The business model is to hold
by irrevocable designation or fair financial asset in order to collect
value option contractual cash flows
b.​ The contractual cash flows are
FINANCIAL ASSET THROUGH FVOCI solely payments of principal or
PFRS 9, Paragraph 5.7.5 provides that an interest on the principal amount
entity my make an irrevocable election to outstanding.
present in OCI
THE BUSINESS IS TO COLLECT
Irrevocable Approach - designed to impose CONTRACTUAL CASH FLOW IF THE
discipline in accounting for non-trading CONTRACTUAL CASH FLOWS AR
equity investment. PAYMENT OF PRINCIPAL AND INTEREST.
DEBT INVESTMENTS AT FVOCI EXAMPLES OF COST OF DISPOSAL
PFRS 9, Paragraph 4.1.2A provides that a.​ Legal cost
financial asset shall be measured at FV b.​ Stamp duty and similar transaction
through OCI if both of the following tax
conditions are met: c.​ Cost of removing the asset
a.​ The financial asset is achieved both d.​ Direct cost of bringing the asset into
by collecting contractual cash flows condition for sale
and by selling or trading financial
assets VALUE IN USE
b.​ The contractual cash flows are Value in Use - measured as the present
solely payments of principal and value or discounted value of future net cash
interest on principal outstanding. flows expected to be derived from an asset.

On derecognition, the cumulative gain or The cash flows are pre-tax cash flows, and
loss recognized for debt investment at pre-tax discount rate is applied in
FVOCI shall be reclassified to P/L determining the present value. Estimated of
future cash flow includes:
a.​ Cash inflows from the continuing use
of asset
PAS 36
b.​ Cash outflows necessarily incurred
to generate cash inflows from the
IMPAIRMENT OF ASSETS
continuing use of the asset
c.​ Net cash flows received or paid on
Impairment - the carrying amount is higher
the disposal of the asset at the end
than the recoverable amount.
of the useful life in an arm’s length
transaction
AN ASSET SHALL NOT BE CARRIED AT
ABOVE THE RECOVERABLE AMOUNT
RECOGNITION OF IMPAIRMENT LOSS
The impairment loss shall be recognized
Recoverable Amount - the fair value less
immediately by reducing the asset’s
cost of disposal or the value in use
carrying amount to its recoverable amount.
(whichever is higher).

REVERSAL OF AN IMPAIRMENT LOSS

FAIR VALUE LESS COST OF DISPOSAL
PAS 36, Paragraph 114 provides that if the
Fair Value - the price that would be received
recoverable amount of an asset that has
to sell an asset in an orderly transaction
previously been impaired turns out to be
higher than the current carrying amount, the
FVLCD = selling price of an asset less cost
carrying amount of the asset shall be
of disposal
increased to a new recoverable amount.
Cost of Disposal - is an incremental cost
HOWEVER, PAS 36, Paragraph 117
directly attributable to the disposal of an
provides that the increased carrying amount
asset (excluding finance cost and income
of an asset due to reversal of an impairment
tax expense).
loss shall not exceed the carrying amount
that would have been determined if no
PAS 38
impairment loss had been recognized.
INTANGIBLE ASSETS
It should be recognized as gain on reversal
of impairment loss in the income statement.
Intangible Assets- is defined as an
identifiable non-monetary asset without
CASH GENERATING UNIT
physical substance.
CGU - the smallest identifiable group of
-​ It must be controlled by the entity as
assets that generate cash inflows that are
a result of past events and from
largely independent of the cash inflows from
which future economic benefits are
other assets.
expected to flow to the entity.
-​ Segment of business that generates
cash inflows and outflows
ESSENTIAL CHARACTERISTICS OF AN
independently
INTANGIBLE ASSET
1.​ Indentifiablitiy
A CGU may be a department, product line,
2.​ Control
or a segment of a business.
3.​ Future Economic Benefits

The recoverable amount of an asset shall

An asset is identifiable when:
be determined individually. However, if it is
a.​ It is separable
not possible, an entity shall determine the
b.​ It arises from contractual or other
recoverable amount of a CGU to which the
legal right
asset belongs.
Control - the power of the entity to obtain
PAS 36, Paragraph 106 provides that in
the future economic benefits flowing from
recognizing the impairment loss, the
the intangible asset.
carrying amount of an asset shall not be
reduced below its FVLCD or value in use
THE CAPACITY OF AN ENTITY TO
(whichever is higher)
CONTROL THE FUTURE ECONOMIC
BENEFITS FROM AN INTANGIBLE ASSET
NORMALLY WOULD STEM FROM LEGAL
REVERSAL OF IMPAIRMENT LOSS ON
RIGHTS.
GOODWILL
Future Economic Benefits may include:
PAS 36, Paragraph 124 provides that an
a.​ Revenue from the sale of product
impairment loss recognized for goodwill
b.​ Cost savings
shall not be reversed in a subsequent
c.​ Other benefits resulting from the use
period.
of the asset

IDENTIFIABLE INTANGIBLE ASSETS

Identifiable Intangible Assets include:
a.​ Patent
b.​ Franchise
c.​ Copyright
 d.​ Trademark b.​ Training Costs
c.​ Advertising Costs
UNIDENTIFIABLE GROUP OF ASSETS d.​ Business Relocation Costs
An intangible is unidentifiable if it cannot be e.​ Selling and Administrative Overhead
sold, transferred, licensed, rented, or
exchanged separately. MEASUREMENT AFTER RECOGNITION
a.​ Goodwill 1.​ Cost Model - carried at cost less any
accumulated depreciation and
INITIAL MEASUREMENT OF INTANGIBLE impairment loss
ASSET 2.​ Revaluation Model - carried at
PAS 38 Paragraph 24 provides that an revalued amount OR fair value on
intangible asset shall be measured initially the date of revaluation.
at COST​
AN INTANGIBLE ASSET CAN ONLY BE
The cost of an acquired intangible asset CARRIED AT REVALUED AMOUNT IF
comprises: THERE IS AN ACTIVE MARKET FOR THE
a.​ Purchase Price ASSET.
b.​ Import Duties
c.​ Directly Attributable Costs
AMORTIZATION AND IMPAIRMENT OF
INTERNALLY GENERATED INTANGIBLE INTANGIBLE ASSETS
ASSET PAS 38 provides the following on the
The cost of an internally generated amortization and impairment of intangible
intangible asset comprises all directly assets:
attributable costs: a.​ Paragraph 97 states that intangible
a.​ Cost of materials and service used assets with limited life are amortized
b.​ Cost of employee benefit over their useful life.
c.​ Fee to register -​ They are tested for
impairment whether or not
PAS 38, Paragraph 63 EXPLICITLY there’s an indication
provides that internally generated brand b.​ Paragraphs 107 and 108 state that
shall NOT be recognized as intangible intangible assets with indefinite life
assets. are NOT amortized but are tested for
impairment at least ANNUALLY
PAS 38 Paragraph 48 provides that
internally generated goodwill shall NOT be DEFINITION OF AMORTIZATION
recognized as an asset. Amortization- the systematic allocation of
the amortizable amount of an intangible
EXPENDITURES EXPENSED WHEN asset over its useful life.
INCURRED
a.​ Start-up Costs- consists of The AMORTIZABLE AMOUNT is the cost of
organization costs incurred in the intangible asset less residual value.
establishing a legal entity to open a
new facility.
USEFUL LIFE ACTIVITIES NOT CONSIDERED
The useful life of an intangible asset must RESEARCH AND DEVELOPMENT
be assessed either indefinite or finite. Activities that relate to commercial
production do not result in research and
If FINITE - the useful life may be depressed development costs.
in terms of years or the number of units to
be produced ACCOUNTING FOR RESEARCH COST
PAS 38, Paragraph 54 provides that
The useful life of an intangible asset is expenditure on the research phase of an
INDEFINITE when there is no foreseeable internal product SHALL be recognized as
limit to the period. expense when incurred.
-​ At the research phase, the entity is
AMORTIZATION METHOD not certain that future economic
The method of amortization shall reflect the benefit will flow to the entity.
pattern in which the future economic benefit
from the assets are expected to be ACCOUNTING FOR DEVELOPMENT
consumed by the entity. COST
Development cost is incurred at a later
HOWEVER, if such a pattern cannot be stage in a project and the probability of
determined, the straight line method of success may be more apparent.
amortization SHALL be used.
Development cost MAY or MAY NOT be
RESEARCH AND DEVELOPMENT recognized as an intangible asset
PAS 38, Paragraph 53 provides that if an depending on very strict restrictions.
entity cannot distinguish the research phase
from the development phase, the entity However, it MAY be recognized as an
should treat the expenditure as if it were intangible asset is:
incurred in the RESEARCH PHASE ONLY. a.​ Technical feasibility in completing
the asset
Research- is an original and planned b.​ Intention to complete the asset
investigation undertaken with the prospect c.​ Ability to use or sell the asset
of gaining knowledge. d.​ The asset will generate probable
future economic benefit
Research Activity - undertaken to discover e.​ Availability of resources
new knowledge that will be useful in f.​ Ability to measure reliably the
developing new products. development expenditure

Development - the application of research CAPITALIZABLE EXPENDITURES

findings or other knowledge in a plan or Expenditures for research and
design for the production of new material. development, and cost incurred for
materials related to R&D can be
CAPITALIZED
Cost of materials, depreciation, &
amortization used in R&D should be GAIN ON BIOLOGICAL ASSET AND
charged to R&D expense. AGRICULTURAL PRODUCE
A gain or loss arising on initial recognition of
a biological asset at FVLCD and any
subsequent changes in FVLCD shall be
PAS 41
included in P/L
AGRICULTURE
A loss may arise on initial recognition of a
biological asset because cost of disposal is
Biological Assets - living produce and
deducted in determining the FVLCD of a
bearer animals and living produce plants.
biological asset.
Agriculture Produce - harvested product of
A gain may also arise on initial recognition
an entity’s biological assets.
of a biological asset.
Harvest - the detachment of produce from a
A gain may arise on initial recognition of a
biological asset.
biological asset as a result of harvesting.
AGRICULTURAL ACTIVITY
AGRICULTURAL LAND
Agricultural Activity - the management by an
Agricultural Land - may be classified as
entity of the biological transformation and
PPE or Investment of property and NOT a
harvest of biological assets for sale.
biological asset.
RECOGNITION OF BIOLOGICAL ASSET
BEARER PLANTS
AND AGRICULTURAL PRODUCE​
Bearer Plants - a living plant used in the
An entity shall recognise a biological asset
production of agricultural produce, expected
and agricultural produce when:
to bear produce for more that one period
a.​ An entity controls the asset as a
and has a remote likelihood of being sold as
result of past events
an agricultural produce.
b.​ It is probable that future economic
-​ It is used solely to grow agricultural
benefits will flow to the entity
produce and should be accounted
c.​ The fair value and cost of the asset
for in the same way as PPEs
can be measured reliably

A bearer plant that no longer produces is

MEASUREMENT
sold as scrap.
A biological asset shall be measured on
initial recognition and at the end of each
EXAMPLES OF BEARER PLANTS:
reporting period at FVLCD
a.​ Trees that produce fruits
.
b.​ Grape Vines
An agricultural produce harvested shall be
measured at FVLCD at the point of harvest
EXAMPLES OF NON-BEARER PLANTS:
a.​ Trees specifically grown to be
An agricultural produce growing on bearer
harvested and sold as log or lumber.
plant shall be measured at FVLCD
 b.​ Annual Crops

AGRICULTURAL PRODUCE GROWING

ON BEARER PLANTS
The agricultural produce growing on bearer
plants are considered a biological asset.
Once harvested, the agricultural produce is
measured at FVLCD at the point of harvest
and is deemed cost of inventory.

The harvested product is recorded as an

inventory and recognized as gain from
agricultural produce

BEARER ANIMALS
Bearer Animals - may be held solely for the
produce that they bear and is considered as
biological asset rather than PPE.

ANIMAL-RELATED RECREATIONAL
ACTIVITIES
Managing recreational activities are not
considered as an agricultural activity
because there is no management of the
biological assets but simply control over the
animals.

Animals that are related to recreational

activities should be considered as PPE