AFAR NOTES

PARTNERSHIP
Definition of Partnership

• It consists of 2 or more persons

• Bind themselves to contribute money, property, or service to a common fund
• Intention is to divide the profits

❑ Partnership Formation
o How will the contributed asset be recorded in the new partnership books?
1. AGREED value
2. In the absence of Agreed value, use Fair/Appraised Value
3.) Book value / carrying value
o How will the liabilities of the existing sole proprietors be included in the new partnership books?
➢ When those liabilities are assumed by the partnership
➢ SILENT: NOT assumed by the partnership
ASSET – LIABILITY = CAPITAL

• INCREASE in ASSET = INCREASE in CAPITAL

• DECREASE in ASSET = DECREASE in CAPITAL
• INCREASE in LIABILITY = DECREASE in CAPITAL
• DECREASE in LIABILITY = INCREASE in CAPITAL

Contributed asset (Agreed/FMV/Appraised) xx

Liabilities assumed by partnership (xx)
Contributed Capital xxx
Total Agreed capital XX
Capital Interest Ratio x XX
Capital Credit xxx

Capital of each partner after formation

Always based on the Agreed Capital
Silent: Contributed Capital = Capital Credit

Sir Ronald M. Valix Discussion CPM NOTES

❑ Partnership Operation
o Distribution of profit is ALWAYS based on AGREEMENT
1. P/L ratio
2. Income distribution table (never considered as expense)
a. Salaries Changes on Capital
Pro rate
b. Interest
Capital, beginning xx
c. Bonus
Add: Additional Investment (xx)
d. Remainder
Less: Drawings (Temp/Perm) xx
Total NI
± Share in NI/(NL) xx(xx)
Capital, end xx
Drawings
1. Permanent 2. Temporary / Regular
Capital xx Drawing xx
Cash xx Cash xx
-directly affects capital balance
Capital xx
Drawing xx

❑ Partnership Dissolution
o Change in the relationship of the partnership:
1. Admission
➢ Purchase of Interest
i. Partnership
ii. Partner
➢ Investment
2. Retirement

o Whether Admission/Retirement always 2 scenarios:

1. Asset revaluation
- Before admitting/retiring a partner, the partnership must adjust first all assets needed to be
revalued

2. No asset revaluation
➢ Purchase of Interest
o Simple transfer of capital
o TCC = TAC
➢ Investment
o Bonus method
o TCC = TAC
➢ Retirement
o Bonus method

o Bonus method (Investment):

1. Bonus to new partner
→ Capital of new partner increases, capital of old partners decreases
2. Bonus to old partners
→ Capital of new partner decreases, capital of old partners increases

Sir Ronald M. Valix Discussion CPM NOTES

 o Bonus method (Retirement):
1. Bonus to retiring partner
→ The amount paid of the partnership is greater than the interest of the retiring partner and the
capital of remaining partners decreases
2. Bonus to remaining partners
→ The amount paid of the partnership is less than the interest of the retiring partner and the capital
of remaining partners increases

o REMAINDERS
- As a General Rule: Before admission/retirement
1. Distribute any undistributed NI/(NL)
2. Adjust any assets/liabilities needed to be revalued
3. Retirement – only include to the retiring partner

o Loan balances:
1. Admission – IGNORE

❑ Partnership Liquidation
o Realization of the noncash assets, paying the outside creditors and distributing the remaining cash to
the partners
1. Lump-sum
2. Installment

o Process of Liquidation
1. Convert any noncash assets into cash
2. Pay liquidation expenses
3. Pay outside creditors
4. Pay partner’s interest

o Interest of the partner:

▪ Capital Balance + Loan from partner
▪ Capital Balance – Loan to partner

o Before a partner receives his share in the final distribution of cash, he must absorb TOTAL
GAIN/LOSS
1. Actual Gain/Loss on realization
2. Actual Liquidation Expenses
3. Possible Maximum POSSIBLE Book value of unrealized noncash assets
4. Possible loss Cash withheld for future liquidation expense
5. Gain on condoned liability (if any)
6. Deficiency

o Formulas:

Total interest of the partners xx Interest of partners PRIOR installment xx

Gain/Loss on realization xx/(xx) Gain/Loss on realization xx/(xx)
Liquidation expenses (xx) Liquidation expenses (xx)
Maximum Possible Loss (MPL) (xx) Gain on Condoned Liability xx
Condoned Liability xx Cash paid to partner (xx)
Total Cash Paid to Partners xx Interest of partner’s next installment xx

Sir Ronald M. Valix Discussion CPM NOTES

 CORPORATE LIQUIDATION
❑ Insolvency
o When a corporation is unable to pay its debt as they come due
o Section 1045 of Insolvency Law: The sum of all its debts is greater than all its assets at fair valuation

❑ Financial reports
o Statement of Affairs
▪ In this report, it shows the available assets and debts of the debtor corporation

o Statement of Realization and Liquidation

▪ In this report, it shows how the receiver or trustee managed the assets of the debtor
corporation on behalf of the creditors

❑ Statement of Affairs
o Assets
1. Assets pledged to fully secured creditors
➢ These assets are pledged to a particular liability and have estimated realizable values
greater than the amount of liability
➢ Ex. The inventory with estimated realizable value of P150,000 was pledged to secure the
accounts payable in the amount of P80,000.

2. Assets pledged to partially secured creditors

➢ These assets are pledged to a particular liability and have estimated realizable values less
than the amount of liability
➢ Ex. The inventory with estimated realizable value of P60,000 was pledged to secure the
accounts payable in the amount of P80,000.

3. Free Assets
➢ These are the assets that were not pledged to any particular liability
➢ Included also as free assets are the excess assets from the assets pledged to fully
secured creditors (150,000 – 80,000 = 70,000)
o Liabilities
1. Fully Secured Liabilities
➢ Estimated realizable value of the assets pledged ≥ Liability
➢ Ex. The inventory with estimated realizable value of P150,000 was pledged to secure the
accounts payable in the amount of P80,000.

2. Partially Secured Liabilities

➢ Estimated realizable value of the asset pledged < Liability
➢ Ex. The inventory with estimated realizable value of P60,000 was pledged to secure the
accounts payable in the amount of P80,000.

3. Unsecured Liabilities with Priority [Financial Rehabilitation and Insolvency Act (FRIA) of
2010] Employee benefits
a. Salaries And wages
b. Administrative / Liquidation Expenses Covered by FREE ASSETS
c. Taxes
Legal fees
4. Unsecured Liabilities without Priority
➢ These are liabilities that have no assets pledged to them
➢ Included also in the unsecured liabilities without priority are the excess liabilities from the
partially secured liabilities (80,000 – 60,000 = 20,000)

Sir Ronald M. Valix Discussion CPM NOTES

 Statement of Affairs
Free Assets xx
Unsecured Liabilities with Priority (xx)
Net Free Assets xx
Total Unsecured Liabilities without Priority
(UL w/o Priority + Excess Liabilities from Partially Secured Liabilities) (xx)
Estimated Deficiency (xx)

Net Free Assets xx

Total UL w/o Priority ÷ xx To determine up to what extent
Estimated Recovery Percentage xx.xx% can UL w/o Priority be paid

Statement of Realization and Liquidation (SORAL)

BV of NCA expected to sold/collected Assets to be realized Assets realized NCA sold/collected
Unrecorded assets/interest received Increase in assets Assets not realized NCA not yet sold/collected
Liabilities paid Liabilities liquidated Liabilities to be liquidated Payments of BV of liabilities
Liabilities not paid Liabilities not liquidated Increase in liabilities Unrecorded liabilities/Interest expense
Expenses Supplementary charges Supplementary credits Income/Profit

DR > CR = Loss – closed to CR side

DR < CR = Gain – closed to DR side
Must ALWAYS be EQUAL

Sir Ronald M. Valix Discussion CPM NOTES

 LONG-TERM CONSTRUCTION CONTRACTS
❑ IFRS 15 (Revenue Recognition) ❑ Performance Obligation
1. Identify the contract from customer o Must be separate and distinct
• Long-term Construction Contract o
❑ Variable Consideration
2. Identify the Performance Obligation (PO) o May increase or decrease the CP
• Construction Project o Incentive bonus or penalties

3. Determine the Transaction Price (TP) ❑ If the outcome of the construction contract can
• Contract Price (CP) be estimated reliably → percentage of
i. Incentive Bonus - ↑CP completion;
ii. Penalties - ↓CP Otherwise → zero profit method
4. Allocate Transaction Price to Performance Obligation
• N/A

5. Recognize the revenue when Performance Obligation is satisfied

• Over a period of time (% of Completion) Contract Asset
An entity's right to consideration in exchange for goods or ser vices that
the entity has transterred to a customer when that right is conditioned
on something other than the passage of time (for example, the entity's
❑ All cost directly related to the construction/contract are capitalized future performance).
o Capitalize all reimbursable cost Contract Liability
o Not reimbursable, expense outright An entity's obligation to transfer goods or services to a customer for
which the entity has received consideration (or the amount is due) from
the customer.

Cost incurred TO DATE (CTD) xx As of/To date balance; cumulative Construction in Progress
Add: Estimated Cost to Completion (ECTC) xx Cost incurred to date
+ Gross profit to date
Total Estimated Cost (TEC) xx

a. CTD xx b. CIP xx • True only if CP>TEC or there is

÷ TEC xx ÷ CP xx estimated GP
% Completed xx % Completed xx • Alternative/ 2nd Priority

IAS 11 par 36
CP xx When it is probable that the
Less: TEC (xx) To Compute Revenue:
contract cost EXCEEDS
Est. GP/(GL) xx/(xx) contract revenue, the Contract Price xx
x % Completed xx% expected loss shall be x PoC (current year) xx
GP/(GL) TO DATE xx(xx) expensed immediately Const. Rev. as of current year xx
Less: Prior Year GP(GL) xx(xx) regardless of the outcome Const. Rev. prior years (xx)
GP(GL) for the year xx(xx) (recognized 100%) Contract Revenue FTY XX

Asset
CIP > Progress Billings = Excess CIP, DR Note: The progress billings Note: If GL TD, then it
are composed on AR and means that the TEC > total
CIP < Progress Billings = Excess Billings, CR CP resulting to an Est. GL.
Liability Contract Retention
At the end of the contract:
Note: The construction
CIP = PB = CP
COS and the actual cost
incurred will NOT be equal
Note: Under IAS 11 par Note: Under IAS 11 par 17, the cost
when the result is an Est.
11b, other than the initial may be reduced by any incidental
GL during the year.
contract price, incentives income that is not included in contract
payments and claims are revenue, Ex. Income from sale of Mobilization fee - protect the seller / construction company
included as contract surplus materials and disposal of plant Contract retention - protect the buyer
revenue. and equipment at end of contract.

Sir Ronald M. Valix Discussion CPM NOTES

 FRANCHISE ACCOUNTING
❑ IFRS 15
Should possess ALL of the following:
1. Identify the contract • Rights of each party are identifiable
• Commercial substance is present
➢ Contract between the Franchisor and the Franchisee • Payment terms are identifiable
• Approved by the parties
• Collection is probable
2. Identify the performance obligation
Distinct
➢ Goods or services that are separate and distinct from each other the customer can benefit from the good or ser vice either on its own or
together with other resources that are readily available to the
• a series of distinct goods or services that are substantially the same and that have the same pattern customer
of transfer to the cusotmer AND
3. Determine the transaction price the entity's promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract

➢ Initial Franchise Fee (IFF) NOTE!

Not distinct if g/s:
• is integrated with other g/s in the contract;
• modifies or customizes another good or ser vice in the contract; or
4. Allocating the transaction price to performance obligation • depends on or relates to other goods or services promised in the
contract.

➢ Based on the stand-alone selling prices (SASP) (it is the price at which the entity would sell
the promised goods or service separately to the customer)

➢ If the stand-alone selling prices are not directly observable:

a. Adjusted market assessment approach
b. Expected cost plus margin approach
c. Residual approach (can be used if one of the following is met): Base: IFF
i. The entity sells the same goods or services to different customers for a broad
range of amounts or it is highly variable.
ii. The entity has not yet established a price for that good or service and that good
or service has not previously sold on a stand-alone basis.

5. Satisfaction of performance obligation

➢ An entity shall recognize revenue when the performance obligation is satisfied by transferring a
promised good or service to the customer. An asset is transferred when the customer obtains
control over the asset. Spread out Entity will undertake activities
a. Satisfaction over a period of time (if one of the criteria is met): Right to access that significantly affect the
intellectual property

i. The customer simultaneously receives and consumes the benefits provided by

the entity’s performance as the entity performs
ii. The entity’s performance creates or enhances an asset that the customer
controls as the asset is created or enhanced (work-in-progress)
iii. The entity’s performance obligation does not create an asset with an alternative
use to the entity and the entity has the enforceable right to payment for
performance completed to date.

Initial Services:
b. Satisfaction at a point in time Right to use
• Rights to Trademark/Tradename ➢ At the specific point in time, the customer already obtains control of the
• Setup / Construction/ Interior Design
• Training / Orientation promised asset
• Delivery of Merchandise

Down Payment (DP) xx

PV of Note xx Initial Franchise Fee (IFF) xx
Initial Franchise Fee (IFF) xx Direct Cost of Franchise (xx)
Gross Profit xx
Initial Franchise Fee (IFF) xx Continuing Franchise Fee (CFF) xx
Continuing Franchise Fee (CFF) xx Interest Income xx
Revenue from Franchise Fees xx Indirect Cost (xx)
Net Income xx
Initial Franchise Fee (IFF) xx
Continuing Franchise Fee (CFF) xx
Interest Income xx
Total Revenue xx

Sir Ronald M. Valix Discussion CPM NOTES

 CONSIGNMENT SALES
Consignor consignee
❑ It is where the owner (consignor) of the goods want to sell his goods through an intermediary (consignee)
o Therefore, the consigned goods are NOT the inventory of the consignee

❑ The consignor ships his goods to the consignee and the consignee sells them to the final customer.

❑ Revenue is recognized by consignor when the consigned goods is sold to the final customer
o At a point in time Upon sale
Not upon remittance

Any directly related costs to the consigned goods The following are considered outright expensed
are inventoriable or capitalized costs 1. Commission POV of consignor Costs relating
to customer
1. Freight from consignor to consignee 2. Delivery & Installation
Relating to 2. Cartage cost Freight but short distance 3. Advertising
consignee 3. Insurance freight 4. Reconditioning on delivered units to customer
4. Packaging cost 5. Insurance transit to customer
6. Freight from consignee to customer
Any cost from consignor to consignee is 7. Freight from consignee to consignor – other
capitalized. expense Returning of consigned inventory Separate line item
Freight return
Any cost from consignee to customer is expensed.

1. Commissions
o Consignor – Expense
o Consignee – Income

Net Income of Consignor

Sales xx
Less: COS (xx)
Gross Profit xx
Less: Expenses (xx)
Commission Expense xx
Net Income xx

Cash/Net Credit Collections from Sale xx

Less: Sales Commission (xx) Commission of consignee
Proceeds, net of sales commission xx
Less: Payment of behalf of consignor (xx) Payment made by consignee on behalf of the consignor
Net Remittance xx

Sir Ronald M. Valix Discussion CPM NOTES

 HOME OFFICE AND BRANCH ACCOUNTING
1. Investment in Branch / Branch Current 2. Home Office Current
1. Home Office Books 1. Branch Books
2. Debit 2. Credit
3. Asset 3. Equity Of the home office in the branch books

❖ At the end of the year, the Investment in Branch and Home Office Current accounts must be EQUAL.
Home Office Branch @BP
HO
Beg Inventory. xx Beg Inventory. xx Outside Purchase
Purchases xx Purchases xx @Cost

Ship to Branch (xx) Should be @cost Ship from HO 3(

(xx) Billed Price Not @cost anymore

End Inventory xx End Inventory xx HO @BP

COS xx COS xx Outside Purchase @Cost
Is the cost of goods sold reported by the Home Office true and correct? YES Is the cost of goods sold reported by the Branch in the separate book true and correct? YES
Is the cost of goods sold reported by the Home Office true and correct in the combined statements? YES Is the cost of goods sold reported by the Branch in the combined statements true and correct? NO

Billed Price Cost OA

Recorded in Branch Combined
Beg Inventory. xx xx xx Beg Inventory. xx
Ship from HO xx xx xx Purchases xx
End Inventory (xx) (xx) (xx) End Inventory (xx)
COS xx xx xx COS xx
from Home Office from Outside

2. Over-allowance Br Inventory / Unrealized Br Inventory

o Excess BP over Cost BP 150
COST 100
o Home Office OA 50 overallowance
IIB xx 150
Ship to Br xx 100 Beginning

OA xx 50 Additional Branch Income SfrHO increase in OA

decrease in OA

o Branch
Ship from HO xx 150
HOC xx 150 Ending Required balance OA

3. At the end of the year, a portion is realized to adjust the reported NI of the branch:
Over-Allowance xx 50
Branch Income xx 50
reason

4. As per combined statement:

1. COS reported by Branch is OVERSTATED
2. NI reported by Branch is UNDERSTATED
3. All at COST

Concept of Prudence:
If unsure there is loss, better to record the loss
If unsure there is gain, better not record the gain

Choose the lower between: There is ALWAYS a loss if:

1. Actual Freight Should be < Actual
2. Should be freight

Sir Ronald M. Valix Discussion CPM NOTES

 ❑ Transactions

Transaction Home Office Branch

Branch Current (BC)
IIB Investment in branch xx Asset xx
Asset Transfer Asset xx HOC xx

IIB xx ShipfrHO xx
Merchandise Transfer ShiptoBR xx HOC xx

Purchase of asset by
Branch, where the policy HOC xx
Asset xx
is the Home Office will Cash xx
IIB xx
record the asset

Purchase of asset by Asset xx

IIB xx
Home Office, where the HOC xx
Cash xx
policy is the Branch will
record the asset

Recording the depreciation

where the asset will be
HOC xx
used by the Home Office Dep’n Exp xx
Acc. Dep’n xx
and the policy is the IIB xx
Branch will record the asset

Recording the depreciation

where the asset will be
Dep’n Exp xx
used by the Branch and IIB xx
HOC xx
the policy is the Home Acc. Dep’n xx
Office will record the asset

Cash remittance by the HOC xx

Cash xx
Branch to the Home Office Cash xx
IIB xx

Collection by Branch of Cash xx

IIB xx
Home Office’s customer HOC xx
AR xx

Collection by Home Office HOC xx

Cash xx
of Branch’s customer AR xx
IIB xx

Closing of Branch Net Inc Sum xx

IIB xx
Income HOC xx
Br Inc/RE xx

HOC xx
Br Loss/RE xx
Closing of Branch Net Loss Inc Sum xx
IIB xx

Home Office allocated expenses to the branch IIB xx Expenses xx

Expenses xx HOC xx
Sir Ronald M. Valix Discussion CPM NOTES
 JOB ORDER COSTING
Cost flow

Procurement → Production → Warehousing → Sale

Procurement

• It is an act of obtaining goods from a certain supplier

• This is where we acquire the materials
• We keep track of the Raw Material Inventory account

Raw Material Inventory

Beginning balance
Direct Materials
Purchases Raw Materials Used
Indirect Materials

Ending balance

Raw Materials Inventory xx Work-in-process xx

Cash/AP xx Raw material inventory xx

Production

• It is where the Direct Materials, Direct Labor, Manufacturing Overhead costs of the goods are
accumulated in the Work-in-Process account
• The direct materials, direct labor, and manufacturing overhead are needed to generate the cost of
production report

Work-in-process Inventory

Beginning
balance
Total Direct Materials Cost of goods
Manufacturing Direct Labor manufactured
Cost Overhead Applied
Added during the year
Ending balance

Work-in-process xx Work-in-process xx
Raw material inventory xx MOH xx

Work-in-process xx Finished Goods xx

Payroll xx Work-in-process xx

Sir Ronald M. Valix Discussion CPM NOTES

Warehousing

• This is when the goods are already complete and will be stored in the warehouse
• We keep track of the Finished Goods Inventory account

Finished Goods Inventory

Beginning
balance
Cost of goods Cost of goods
manufacture sold

Ending balance

Finished Goods xx Cost of goods sold xx

Work-in-process xx Finished goods xx

Key Formulas in the cost flow

Raw materials inventory, beg xx Direct Materials xx

Net Purchases xx Direct Labor xx
Raw materials inventory, end (xx) Manufacturing Overhead -applied (xx)
Raw materials used xx Total Manufacturing Cost xx

Work-in-process, beg xx Finished goods, beg xx

Total manufacturing cost xx Cost of goods manufactured xx
Work-in-process, end (xx) Finished goods, end (xx)
Cost of goods manufactured xx Cost of goods sold normal costing xx
Add: Underapplied OH/Deduct: Overapplied OH
CGS, actual costing I

Costing Systems
If silent
Actual Costing Normal Costing Standard Costing
Direct Materials ACTUAL ACTUAL STANDARD RATE

Direct Labor ACTUAL ACTUAL STANDARD RATE

Overhead ACTUAL PREDETERMINED STANDARD RATE

OH RATE
Estimate

Sir Ronald M. Valix Discussion CPM NOTES

Normal Costing

• Predetermined Overhead Rate

➢ It is an estimated rate based on an estimated cost driver (ex. Direct labor hours, machine hours,
etc.)
Estimated / Budgeted Overhead xx
Estimated / Budgeted Cost Driver ÷ xx
Predetermined Overhead Rate xx

• How to apply the Predetermined Overhead rate into production?

MOH Control
Predetermined Overhead Rate xx
ACTUAL Cost Driver x xx ACTUAL APPLIED
Applied Overhead xx

Applied to Production
Work-in-process xx
MOH -applied xx

To record the actual OH: NOTE:

MOH -control xx 1. Actual > Applied or MOH Debit balance: UNDERAPPLIED
Various Accounts xx 2. Actual < Applied or MOH Credit balance: OVERAPPLIED

• How to close the under / over applied overhead?

➢ If the under / over applied OH is MATERIAL, then allocate using the WIP, end; FG, end; Cost of
goods sold as allocation bases
➢ If the under / over applied OH is IMMATERIAL, then close it to the Cost of goods sold only.
NOTE:
1. UNDERAPPLIED OH will be ADDED to adjust the necessary accounts because under application of
OH means that the OH transferred into production is understated.
2. OVERAPPLIED OH will be DEDUCTED to adjust the necessary accounts because over application of
OH means that the OH transferred into production is overstated.

Beginning Inventory cost xx

(DM│DL │OH)
Direct Materials xx
Direct Labor xx
Manufacturing OH xx
Total cost of a specific job xx

Sir Ronald M. Valix Discussion CPM NOTES

Spoilage in Job Order Costing
1. Spoiled Goods
➢ Goods which are already destroyed and cannot be reworked, thus will be EXCLUDED from the
good units

Total units xx
Spoiled units (xx)
Good units xx

2. Defective Goods
➢ Goods which can still be reworked, thus will be INCLUDED in the good units

Total units = Good units

Accounting for Spoiled Goods

Burden: LOSS
Net realizable value of Spoiled Goods xx
Cost of Spoiled Goods (xx)
LOSS (xx)

If Charge to company │ “all jobs” │ due to internal failure:

➢ Loss will be charged to MOH and will be an additional Actual OH
➢ To adjust the total cost transferred to FG, we will deduct the cost of the spoiled goods from the total
cost initially recorded in the WIP

Total initial cost of goods WIP xx

Cost of spoiled goods (xx) Adjusting entry:
Cost transferred to FG xx Cash / Spoiled Goods Inventory (NRV) xx
Good Unit ÷ xx MOH (Loss) xx
Cost per good unit xx WIP xx

If Charge to customer │ “exacting specifications” │ due to specific job:

➢ Loss will be included in the cost transferred to FG
➢ To adjust the total cost transferred to FG, we will deduct the NRV of the spoiled goods only from the
total cost initially recorded in the WIP, leaving the loss which will be transferred also to FG

Total initial cost of goods WIP xx

NRV of spoiled goods (xx) Adjusting entry:
Cost transferred to FG xx Cash / Spoiled Goods Inventory (NRV) xx
Good Unit ÷ xx WIP xx
Cost per good unit xx

Sir Ronald M. Valix Discussion CPM NOTES

Accounting for Defective Goods
Burden: Rework Cost
Direct Materials xx
Direct Labor xx
Manufacturing OH xx
Rework Cost xx

If Charge to company │ “all jobs” │ due to internal failure:

➢ Rework cost will be charged to MOH and will be an additional Actual OH
➢ No adjustment needed for the cost transferred to FG because the rework cost has no effect in the WIP

Total initial cost of goods xx Adjusting entry:

Good Units ÷ xx MOH (Rework Cost) xx
Cost per good unit xx RMI xx
Payroll xx
MOH xx

If Charge to customer │ “exacting specifications” │ due to specific job:

➢ Rework cost will be included in the cost transferred to FG
➢ To adjust the total cost transferred to FG, we will add the rework cost to the total cost initially recorded
in the WIP

Total initial cost of goods xx Adjusting entry:

Rework Cost (xx) WIP xx
Cost transferred to FG xx RMI xx
Good Unit ÷ xx Payroll xx
Cost per good unit xx MOH xx

Summary:
Company Customer
Initial Cost (WIP) xx xx
Cost of Spoiled (xx) Spoiled Goods
NRV of spoiled (xx)
RW Cost xx Defective Goods
Cost transferred to FG xx xx
-

Sir Ronald M. Valix Discussion CPM NOTES

 JUST-IN-TIME AND BACKFLUSH COSTING
Backflush Costing
Is a streamlined cost accounting method that speeds up, simplifies, and minimizes accounting effort in the
environment. • It accounts the company's inventories backward by calculating the cost of products after they are sold, finished or shipped to
customers rather than accounting it before and during the production process
• It delays the costing process until the production of the good or service is completed
• The detailed tracking of costs is eliminated
• This allows the company to simplify its expense tracking processes, thus saving accounting and process costs
ILLUSTRATION
Uses Trigger points on when to account the transaction
ABC Manufacturing Company’s standard production cost per unit shows: 1. purchase
2. completion
Direct Materials ₱20.00; Conversion ₱30.00 3. sale

No beginning inventories exists:

1. Purchased ₱405,000 direct materials in January (20,250 units)

Materials & In-Process Inventory 405,000

Accounts Payable 405,000

2. Incurred ₱603,000 conversion costs for the month: (Actual)

Conversion Costs 603,000

Various Accounts 603,000

3. Applied conversion costs to MIP for 20,000 units completed:

Materials & In-Process Inventory 600,000

Conversion Cost 600,000
20,000 units x ₱30.000

4. Transferred 20,000 completed units during the month:

Finished Goods Inventory 1,000,000

Materials & In-Process Inventory 1,000,000
20,000 units x ₱50.00

5. Sold 19,800 units on account for ₱75 each.

Accounts Receivable 1,485,000

Sales 1,485,000
19,800 units x ₱75

Cost of Goods Sold 990,000

Finished Goods Inventory 990,000
19,800 units x ₱50

Ending Inventories
Materials & In-Process Inventory ₱5,000
Finished Goods Inventory 10,000
In addition, there is an under-applied conversion cost of ₱3,000.

Sir Ronald M. Valix Discussion CPM NOTES

Alternative entries to record the above transactions:
A. Production is the trigger point – the production time was extremely short, and the purchase of
materials should not be journalized. (Entries 1, 3, and 4 are combined).
Point of Completion [purchase – completion --------- sale]

2. Incurred ₱603,000 conversion costs for the month:

Conversion Costs 603,000

Various Accounts 603,000

Materials & In-Process Inventory 5,000

Finished Goods Inventory (20,000 x 500) 1,000,000
Accounts Payable 405,000
Conversion Costs (20,000 x 30) 600,000

5. Sold 19,800 units on account for ₱75 each.

Accounts Receivable 1,485,000

Sales 1,485,000
19,800 x ₱75

Cost of Goods Sold 990,000

Finished Goods Inventory 990,000
19,800 x ₱50

B. Sale is the trigger point – the goods were shipped immediately to customer upon completion.
(Entries 3, 4, and 5 are combined). Point of sale [purchase --------------- completion – sale]

1. Purchased ₱405,000 direct materials in January (20,250 units)

Materials & In-Process Inventory 405,000

Accounts Payable 405,000

2. Incurred ₱603,000 conversion cost for the month:

Conversion Costs 603,000

Various Accounts 603,000

Finished Goods Inventory 10,000

Cost of Goods Sold (19,800 x 50) 990,000
Materials & In-Process Inventory (20,000 x 20) 400,000
Conversion Costs (20,000 x 30) 600,000

Accounts Receivable 1,485,000

Sales 1,485,000
19,800 units x ₱75

Sir Ronald M. Valix Discussion CPM NOTES

 C. If only one entry (other than No. 2) is made and it reflects the ultimate JIT system. (Entries 1, 3, 4, and
5 are combined)

Materials & In-Process Inventory 5,000

Finished Goods Inventory 10,000
Cost of Goods Sold 990,000
Accounts Payable 405,000
Conversion Costs 600,000

Just-in-Time (JIT) System

• It is a process that seeks substantially higher efficiency by producing components and goods at the
precise time they are needed by either the next production station or the consumer. Thus a significant
amount of idle time is eliminated.

• JIT primary goals are:

1. Elimination of any production process or operation that does not add value to the product or service
2. Continuous improvement in production/performance efficiency
3. Reduction in the total cost of production/performance while increasing quality

Sir Ronald M. Valix Discussion CPM NOTES

 JOINT COST ALLOCATION, ACCOUNTING OF BY-PRODUCTS AND SERVICE COST ALLOCATION
Joint Products

• Joint products are products that are created from a single raw material and undergo a joint process.
• After the joint process is complete, it is now the point where the joint products are created and this point
is called the split-off point.

Separable
Cost

Joint Further
Cost Raw Process Final
Product A Product A
Joint
Raw Process
Material
Split-off
Further
Point
Raw Process Final
Product B Product B

Allocation of Joint Costs

1. Physical Measure
➢ Any unit of measurement as long as it is a common characteristic of the joint products

2. Sales value at split-off point

➢ (Sales value at split-off per unit x Physical Measure)

3. Net realizable value at split-off point

➢ [(Sales value at split-off per unit – Disposal Cost at split-off point per unit) x Physical Measure]

4. Approximate Net realizable value

➢ [(Final sales price per unit – Disposal Cost after split-off point per unit – Separable cost per unit)
x Physical Measure] Further processing cost

Sir Ronald M. Valix Discussion CPM NOTES

 Accounting for By-Products

• A by-product is an incidental output of the joint process

• Joint costs shall not be allocated to it because a by-product is not considered a main product of the joint
process.

• Methods of accounting By-Products

1. Cost reduction method “during the point of production”
➢ The NRV of the by-product is a reduction in the joint cost
➢ NRV is expected to be significant

2. Realizable value method “during the point of sale “

➢ The NRV of the by-product can be accounted as
i. Other income
ii. Additional sales revenue of the main product

➢ NRV is expected to be insignificant

Note:
If the problem is silent regarding the number of units sold, number of units products equals the
number of units sold.

Service Cost Allocation

1. Direct Method
➢ Service department OH cost is directly allocated to the revenue producing departments only.

2. Step Method
➢ Service department OH cost is allocated not only to the revenue producing department, but also
to other service departments with the following conditions:
i. Use of benefit provided ranking table
ii. If the OH cost of the service department is already exhausted, then that service
department will not receive any allocation from other service department.
Opposite
3. Algebraic / Reciprocal Method
➢ Service department OH cost is allocated not only to the revenue producing departments, but
also to other services departments with the following conditions:
i. No use of benefit provided ranking table
ii. Even if the OH cost of the service department is already exhausted, that service
department will still receive any allocation from other service departments.

Sir Ronald M. Valix Discussion CPM NOTES

 PROCESS COSTING
Formulas: If multiple departments
The transferred out from the previous department
D
Beginning Inventory units xx
Start / Transferred-In units xx
Ending Inventory unit (xx)
Lost Units (Normal and Abnormal (xx)
Completed / Transferred-out units xxx
Last year and this year

No beginning included last year

Start / Transferred-In units xx Alternatively:
Ending Inventory units (xx) Completed / Transferred-out units xx
Lost units (Normal and Abnormal) (xx) Beginning Inventory units (xx)
Started and Completed Units xxx Started and Completed units xxx
This year only
this yr; no beg inventory

Percent complete as to: ** % to complete = % incomplete

** % complete + % incomplete = 100%

➢ Beginning Inventory – LAST YEAR
➢ Ending Inventory – THIS YEAR % complete % to complete / incomplete
BI LY CY
EI CY NY - irrelevant
Placement of Materials: • LY - last year
• CY - current year
1. START – 100% complete as to: % complete
• NY - next year
% to complete / incomplete
➢ Beginning Inventory – LAST YEAR BI 100% LY 0% CY
➢ Ending Inventory – THIS YEAR EI 100% CY 0

2. END – 0% complete as to: % complete % to complete / incomplete

➢ Beginning Inventory – LAST YEAR BI 0% LY 100% CY
EI 0% CY 0
➢ Ending Inventory – THIS YEAR

3. Materials were added at 50% of conversion

(BI: 60% complete as to CC and EI: 40% complete as to CC) % complete % to complete / incomplete
BI 100% LY 0% CY
➢ As to BI: 100% complete as DM LAST YEAR EI 0% CY 0
➢ As to EI: 0% complete as to DM THIS YEAR

4. Materials were added at 70% of conversion

(BI: 60% complete as to CC and EI: 80% complete as to CC) % complete % to complete / incomplete
BI 0% LY 100% CY
➢ As to BI: 0% complete as DM LAST YEAR EI 100% CY 0
➢ As to EI: 100% complete as to DM THIS YEAR

Equivalent Units of Production (EUP):

Completed / Transferred-out xx
EI EUP (EI units x % complete) xx
LY
Weighted Average EUP xxx CY
BI EUP LY (BI units x % Complete) (xx)
FIFO EUP xxx CY

Percent complete as to:

➢ Beginning Inventory – LAST YEAR
➢ Ending Inventory – THIS YEAR

Sir Ronald M. Valix Discussion CPM NOTES

Cost of goods completed or Transferred-out: WEIGHTED AVERAGE
Completed or Transferred-out COGM xx
Total Cost per EUP DM + CC x xx
Cost of goods completed or Transferred-out xxx

Cost of goods completed or Transferred-out: FIFO

BI cost Given xx
BI cost to complete (THIS YEAR)
(BI units x % TO complete / % incomplete x cost per EUP) xx
BI completed Cost xx
Started and completed cost
(Started and completed x total cost per EUP) xx
Cost of goods completed or Transferred-out xx

Ending Inventory Cost: WEIGHTED AVERAGE and FIFO

DM + CC
Ending Inventory EUP xx
Cost per EUP x xx
Ending Inventory Cost xx

LOST UNITS: EUP SCHEDULE In terms of conversion process

1. Discrete: Normal / Abnormal – there is an inspection point

DM:
a. If placement FIRST then 100%
b. If inspection FIRST then 0%
If the inspection and placement happens at the same time, inspect first.
Example: inspection 60%, material added 60% CC
CC
Lost Units x % Inspection

2. Continuous – no inspection point

a. Normal
 “Method of neglect” DO NOT account in EUP
 No extension in EUP
 Always ZERO

b. Abnormal
 Account 100% on EUP

If the problem is silent – no inspection point; continuous

Inspection point % - in terms of conversion process

 when conversion process reached a certain %, that is the time to inspect the units

Sir Ronald M. Valix Discussion CPM NOTES

Cost Assignment
1. Discrete: Normal Capitalized
 If the following passed the inspection point, then normal spoilage must be accounted to it.

WAVE % complete is always 100%

a. Completed
% Complete as to CC ≥ % Inspection
b. EI
still varies w

give normal spoilage cost

FIFO last year this year

this year
did it pass the inspection point this year?
A
a. BI = THIS YEAR? % Inspection > % Complete as to CC 40% complete 50% IP
% complete is always 100%
b. Started & Completed
% Complete as to CC ≥ % Inspection
c. END INVENTORY

Normal Spoilage is allocated on an EUP Basis

WAVE
Completed = Completed Units (100%) 1 .
500
Allocate
EO = EI units x % Complete E
-
1 500
,

FIFO
A
BI = BI units x % to complete 200

SC = SC units (100%) 1 ,
000
Allocate
EI = EI units x % Complete 888
-

2 ,
000

2. Abnormal: Period Cost / Expense

 Discrete / Continuous
 Abnormal Lost Units x Cost per EUP

Sir Ronald M. Valix Discussion CPM NOTES

 IFRS 3: BUSINESS COMBINATION
Definition

• IFRS 3 defines a business combination as a transaction or other even in which an acquirer obtains
control of one or more businesses.
IFRS 3
1. Acquirer
➢ The one who purchases

2. Acquiree
➢ The one who is being purchased

3. Merger no consolidation FS
➢ The acquirer purchases the assets and liabilities / net assets of the acquiree
➢ Acquirer company will be the surviving company while the acquiree company will be dissolved.

4. Stock Acquisition yes to consolidation FS @ 51% shares of stock

➢ The acquirer purchases more than 50% of the shares of stock of the acquiree
➢ Both acquirer company and acquiree company will be existing
➢ Acquirer company will be the Parent / Controlling Interest while the acquiree company will be
the Subsidiary / Non-controlling Interest.

Acquisition Method

• An entity shall account for each business combination by applying the acquisition method.
1. Identify the acquirer
2. Determine the acquisition date
➢ This is the date wherein the acquirer obtains control over the acquiree

3. Recognizing and measuring the identifiable assets acquired and liabilities assumed and any
non-controlling interest in the acquiree
➢ Measured at the acquisition date Fair Value

4. Recognizing and measuring goodwill or gain from bargain purchase

Result of the Business Combination Step Acquisition - par. 42

• Remeasure to FMV on the date of acquisition
any previously held shares and any difference
• Aggregate of: bet ween CA and FMV will go to P/L.
1. The Consideration Given if MERGER, only consider this
a. Cash
b. Issued Shares (FMV) ** related to APIC
c. Issued Bonds (FMV)
FMV
d. Contingent Consideration settled in a future date
i. Liability – if silent “additional cash consideration “ - to be paid in a future date
ii. Equity Component “in the form of shares”
2. FMV Non-controlling Interest (NCI) **in the acquisition in the shares of stock
3. FMV Previously held equity interest if achieved in stages step acquisition
initial purchase was not yet 50%

1. given
2. compute (include control premium)

Sir Ronald M. Valix Discussion CPM NOTES

 versus
asset that can be sold
• FMV IDENTIFIABLE net assets of Acquiree
➢ Exclude any existing Goodwill of the Acquiree
➢ It can be computed as follows:
vs.
a. FMV Identifiable Assets – FMV Liabilities
b. Net Assets = Asset – Liabilities
➢ Increase in Asset, Increase in Net Asset Asset, Net Asset
➢ Decrease in Asset, Decrease in Net Asset Asset, Net Asset
➢ Increase in Liabilities, Decrease in Net Asset Liabilities, Net Asset
➢ Decrease in Liabilities, Increase in Net Asset Liabilities, Net Asset

• Aggregate > FMV Identifiable Net Assets of Acquiree, result is GOODWILL subject to impairment

• Aggregate < FMV Identifiable Net Assets of Acquiree, result is GAIN ON BARGAIN PURCHASE P/L

IF =, NO BUSINESS COMBINATION

Fair Value of Non-Controlling Interest (NCI)

1. Given
2. Assumed / Compute

• Reminder: Whether it is given or assumed, ALWAYS check, it must be ≥ the Proportionate Share:
1. FMV Identifiable net assets Acquiree x NCI ratio
2. Minimum amount of NCI Proportionate Share

• EX. FMV NCI Proportionate Share

1. 100,000 50,000
2. 80,000 120,000

Acquisition Costs
1. Stock Issuance Costs (SIC) never an expense
a. SEC registration fee
b. Documentary stamp tax
c. Newspaper publication fee
d. Printing stock certificate

• Philippines Interpretation Committee (PIC)

a. Exhaust SIC up to the resulting APIC
b. Any excess will be debited to “stock issuance” account and will be a contra-account in
order of the following:
i. Previous related APIC / APIC Acquirer priority
ii. Retained Earnings Acquirer
Ex. SIC ₱50,000 SIC 50,000
Resulting APIC ₱ 20,000 Resulting APIC (20,000)
Excess SIC 30,000
APIC 20,000
Cash 20,000
Stock Issuance 30,000
Cash 30,000

Sir Ronald M. Valix Discussion CPM NOTES

 2. Acquisition Related Costs (ARC) any cost that is not part of SIC
a. Accounting fee
b. Legal fee
EXPENSE
Finders Fee c. Brokers fee
d. Listing fee
Parent Subsidiary
always correct Invest. in Subsidiary XX
Conso FS as 1
Cash XX

FORMULAS: MERGER & ACQUISITION OF STOCKS

Asset Acquirer (BV) xx Liability Acquirer (BV) xx

Identifiable Asset Acquiree (FMV) xx Liability Acquiree (FMV) xx
Goodwill xx Contingent consideration (Liab) xx
Cash Payments (xx) Issued Bonds (FMV) xx
Investment in Subsidiary Account (xx) Bond issue cost (Amortized Cost) (xx)
Total Asset xxx “incurred”Unpaid Costs (ARC / SIC) xx if silent, paid
Total Liabilities xxx
Share Capital Acquirer xx
Issued shares (par) xx RE Acquirer xx
Total Share Capital xx Gain on bargain purchase xx
ARC (xx)
if silent,
APIC Acquirer xx Bond issue cost (FVPL) (xx) amortized
Resulting APIC xx Excess SIC (Priority 2 under PIC rule) (xx)
SIC up to resulting APIC only (xx) Total RE xxx
Excess SIC (Priority 1 under PIC rule) (xx)
Retained Earnings
Total APIC xxx

Total Share capital xx

Total APIC xx
Total RE xx
Contingent consideration (Equity) xx
FMV NCI xx in conso FS
Total SHE xx

o Control Premium temporarily exclude when computing NCI

➢ It is the excess paid by a buyer over the market price of a target company in order to gain
control.
➢ It is ALWAYS part of the purchase price ALWAYS of consideration given and aggregate
➢ When assuming the Non-Controlling Interest, EXCLUDE
When to exclude only?

NOTE (IFRS 3 par. 23):

In contrary to IAS 37, an acquirer can assume a contingent liability at the acquisition date if it is measured reliably
and not probable that an outflow of resources embodying economic benefits will be required to settle the
obligation.

Full Goodwill: both parent & subsidiary receives goodwill

Partial Goodwill: only parent receives goodwill

Sir Ronald M. Valix Discussion CPM NOTES

 WORKING PAPER ENTRIES: Never recorded the books of parent and subsidiary
• PURPOSE: For consolidation
WP1 Elimination of the BV SHE of Subsidiary WP1: ELIMINATE the BV SHE of Acquirer and any existing GW

SHE (BV) – Subsidiary xx Investment in Subsidiary (% Parent) xx

Investment in Subsidiary (% Parent) xx Non-controlling Interest (% NCI) xx
Goodwill xx
Non-controlling Interest (%NCI) xx

WP2 Update to Fair Value Assets and Liabilities of Subsidiary

Undervalued Asset xx
Overvalued Liability xx
Overvalued Asset xx
Undervalued Liability xx
Investment in Subsidiary (%Parent) xx
Non-controlling Interest (%NCI) xx

WP3 Allocation of the Result of Business Combination

Goodwill xx
Investment in Subsidiary xx Based on allocation of GW schedule
Non-controlling Interest xx
Investment in Subsidiary xx
Gain on acquisition xx

Concept
1. To eliminate the Investment in Subsidiary account in the consolidated FS.
2. To setup the SHE of the subsidiary, which is the NCI, in the consolidated FS.

Measurement Period (MP)

Period after the date of acquisition and the duration is exactly 12 months or 1 year
a. Change in contingent consideration / provisional FV are w/n the MP Due to existing
➢ Adjustment is made through the result of BC information at the date of
liability
acquisition
b. Change in contingent consideration / provisional FV as outside the MP Apply if contingent
➢ Adjustment is made through P/L consideration is a Liability
issuance of additional shares
c. If the contingent consideration is an equity instrument, subsequent settlement will be made through
equity no remeasurement

Exception: par 58
not existing BUT
1. Meeting the target share price Not a MP adjustment (new information)
2. Meeting the target NI
3. Reaching milestone in R&D project Adjustment is through P/L

Sir Ronald M. Valix Discussion CPM NOTES

 IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS
Consolidation
➢ it is a process in which the assets, liabilities, equity, income, expenses and cash flows of the parent and
its subsidiaries are presented as those of single economic entity.

➢ Consolidated Financial Statements

Consolidated Net Income

CNI-P NCI-NI
NI Parent per books xx ⎯
NI Subsidiary per books xx xx starting point / per books
* Amortization Excess xx / (xx) xx / (xx)
if partial GW, all impairment
Impairment Loss (xx) (xx) → use allocation of GW Schedule loss to parent only
Intercompany Dividends (xx) ⎯
Gain on Acquisition xx ⎯ → only in the year of acquisition; only once
XXX XXX
deduct because it’s already in the per books of parent

Consolidated Net Income

Non-controlling Interest in Net Assets

NCI, beginning xx
NCI-NI xx NOTE: The NCI, beginning is equal to the initial
Div Declared by Subs (% NCI) (xx) measurement of NCI on the date of acquisition if it is in the
NCI, ending xx year of acquisition.

Consolidated Retained Earnings

CRE, beginning xx NOTE: The CRE, beginning is equal to the Retained
CNI-P xx Earnings of Parent if it is in the year of acquisition.
Div Declared by Parent (xx)
CRE, ending xx
RE of Parent
Beginning
Alternative: Dividend
RE Parent per books, end xx Declared Net Income
CNI-P (excluding NI of Parent per books) xx End
CRE, ending xx

Consolidated SHE
Share Capital Parent xx
Share Premium Parent xx SHE of Parent in the Conso FS
CRE xx
NCI, ending xx SHE of Subsidiary in the Conso FS
Consolidated SHE xx

Sir Ronald M. Valix Discussion CPM NOTES

# Amortization of Excess:
1. Excess fair value over book value = UNDERSTATED
2. Excess book value over fair value = OVERSTATED
NOTE: This is to adjust the items affecting the consolidated net income.
Expense xx
Various Accounts xx If the assets of the acquiree are UNDERSTATED

Various Accounts xx
If the assets of the acquiree are OVERSTATED
Expenses xx

Excess Expenses Net Income

UNDERSTATED UNDERSTATED OVERSTATED
OVERSTATED OVERSTATED UNDERSTATED

Intercompany Sale of Inventory

• It is where both Parent Co. and Subsidiary Co. sells merchandise inventory to each other.

• If the parent is the seller, Downstream sale

• If the subsidiary is the seller, Upstream sale

• Unrealized Profit Ending Inventory (UPEI) Always true and correct

➢ Profit realized by the seller in his separate books, but must be excluded in the Consolidated FS
because the buyer did not sell yet the inventory to outsiders.

• Realized Profit Beginning Inventory (RPBI)

➢ Realized profit that must be included in the Consolidated FS because the buyer already sold the
inventory to outsiders.

• To compute UPEI:
➢ EI of Buyer x GP Rate (based on sales) of Seller
➢ GP of Seller x % Unsold to outsiders of Buyer

• RPBI: UPEI this year will be RPBI next year/ ** UNSOLD THIS YEAR, SOLD NEXT YEAR

• Example:
Parent Co. sold merchandise costing ₱80,000 for ₱100,000 to Subsidiary Co. in 2024. Subsidiary Co.
only sold 60% of the said merchandise to outsiders in 2024 for ₱150,000.
issue is here !!
Parent Co Books Subsidiary Co. Books
Sales 100,000 Sales 150,000
COS (80,000) COS (100,000 x 60%) (60,000)
GP 20,000 GP 90,000
always true and correct always true and correct in conso and separate if sold to outsiders
but different in conso
NI of Parent and Subsidiary per books 110,000 → 20,000 + 90,000
UPEI in 2024 (20,000 x 40%) unsold (8,000) COS 8,000
Inventory 8,000
Consolidated NI in 2024 102,000

Sir Ronald M. Valix Discussion CPM NOTES

 In 2025, Parent Co. had a net income per books of ₱130,000 and Subsidiary Co. had a net income per
books of ₱80,000.

NI of Parent and Subsidiary per books 210,000 → 130,000 + 80,000

RPBI in 2025 (UPEI in 2024: 20k x 40%) 8,000 automatic sold na this ff yr RE 8,000
exclude COS 8,000 BI
Consolidated NI in 2025 218,000 Purchases
(EI)
COS
EI COS NI
CNI-P NCI-NI
Down UPEI (xx) UPEI OVER UNDER OVER
Down RPBI xx
Up UPEI (xx) (xx)
Up RPBI xx xx BI COS NI
RPBI OVER OVER UNDER

Sales per books (Parent and Sub) xx

Intercompany sale of Inventory during the year (xx)
Consolidated Sales xx

Cost of sales per books (Parent and Sub) xx

Intercompany sale of Inventory during the year (xx)
UPEI xx
RPBI (xx)
Amort excess UNDER inventory xx
Amort excess OVER inventory (xx)
Consolidated cost of sales xx

Example:
Parent Co. sold merchandise costing ₱80,000 for ₱100,000 to Subsidiary Co. in 2024. Subsidiary Co.
only sold 60% of the said merchandise to outsiders in 2024 for ₱150,000.

Parent Co Books Subsidiary Co. Books

Sales 100,000 Sales 150,000 Conso Sales 150,000
COS (80,000) COS (100k x 60%) (60,000) Conso COS (48,000) (140-40+8)
GP 20,000 GP 90,000 Conso GP/NI 102,000

NI of Parent and Subsidiary per books 110,000 → 20,000 + 90,000

UPEI in 2024 (20,000 x 40%) (8,000)
Consolidated NI in 2024 102,000

Sir Ronald M. Valix Discussion CPM NOTES

Intercompany Sale of Fixed Assets

• Parent and Subsidiary sells fixed assets (Land and Depreciable assets) to each other.
Land

• Gain or Loss arising from intercompany sale must be excluded in the Consolidated FS (Unrealized
Gain (URG) / Unrealized Loss (URL)) if the buying affiliate did not sell the Land to outsiders.

• Gain or Loss arising from intercompany sale can be included in the Consolidated FS (Realized Gain
(RG) / Realized Loss (RL)) if the buying affiliate already sold the Land to outsiders.
DO NOT ASSUME THAT IT WILL BE SOLD THE FOLLOWING YEAR
• Example:
Parent Co. sold Land costing ₱800,000 for ₱1,000,000 to Subsidiary Co. on August 1, 2024. Subsidiary
Co. sold the Land to outsiders on March 31, 2025 for ₱1,500,000.

Parent’s Books Subsidiary’s Books 2024 Parent Co. Sub. Co

Gain on Sale 500,000 600,000
August 1, 2024: August 1, 2024: NI per books 2,500,000 1,200,000
Cash 1,000,000 Land 1,000,000
Land 800,000 Cash 1,000,000 Land Gain
Gain 200,000
URG OVER OVER

Gain on sale of Parent and Subsidiary per books 1,100,000 → 500,000 + 600,000
URG in 2024 (200,000) URG WP URL WP
Gain 200k Land xx
Consolidated Gain in 2024 900,000 Land 200k Loss xx

NOTE: The Land is overstated because the buyer, Sub. Co. recorded the land at selling price,
₱1,000,000, which is greater than the original cost of ₱800,000.

NI of Parent and Subsidiary per books 3,700,000 → 2,500,000 + 1,200,000

URG in 2024 (200,000) NI
Consolidated NI in 2024 3,500,000
URG OVER
Subsidiary’s Books 2025 Parent Co. Sub. Co.
Gain on Sale 1,000,000 700,000
March 31, 2025: NI per books 1,500,000 900,000
Cash 1,500,000
Land 1,000,000 Gain
Gain 500,000
RG UNDER
Gain on sale of Parent and Subsidiary per books 1,700,000 → 1,000,000 + 700,000
o
URG in 2024 200,000 RG WP RG WP
RE 200k Loss 200k
Consolidated Gain in 2024 1,900,000 Gain 200k RE 200k

NOTE: The URG in 2024 in the amount of 200,000 will be RG in 2025 because the buyer, Sub. Co.
already sold the land to outsiders.

NI of Parent and Subsidiary per books 2,400,000 → 1,500,000 + 900,000 NI

RG in 2025 200,000
Consolidated NI in 2024 2,600,000 RG UNDER

Sir Ronald M. Valix Discussion CPM NOTES

 Land Gain NI NOTE: The Land is overstated because the buyer, recorded the Land
URG OVER OVER OVER at the selling price, which is greater than the original cost.

Land Loss NI NOTE: The Land is understated because the buyer, recorded the
URL UNDER OVER UNDER Land at the selling price, which is less than the original cost.

Gain NI
RG UNDER UNDER

Loss NI
RL UNDER OVER

Depreciable Asset

• Gain or Loss arising from intercompany sale must be excluded in the Consolidated FS (Unrealized Gain
(URG) / Unrealized Loss (URL)) and it will be realized (Realized Gain (RG) / Realized Loss (RL)) over
the remaining life of the depreciable asset as it is used by the buying affiliate.
RG RL
• Reason for the RG / RL is to adjust the overstatement / understatement of the depreciation expense.

• Example:
Parent Co. sold an equipment with carrying amount ₱200,000 for ₱300,000 to Subsidiary Co. on October
1, 2024. The equipment has a remaining life of 5 years.

Parent’s books Subsidiary’s books 2024 Parent Co. Sub. Co.

Gain on Sale 150,000 200,000
Oct. 1, 2024: Oct. 1, 2024: NI per books 1,200,000 800,000
Cash 300,000 Equip 300,000
Equip, net B
300,000 Cash 300,000 Depr Asset Gain
Gain 100,000 URG OVER OVER

Gain on sale of Parent and Subsidiary per books 350,000 → 150,000 + 200,000
URG in 2024 (100,000)
Consolidated Gain in 2024 250,000

NOTE: The Depreciable Asset is overstated because the buyer, Sub. Co. recorded the Depreciable
Asset at the selling price, ₱300,000, which is greater than the original CA of ₱200,000

Depreciation of the equipment based on the Depreciable of the equipment based on the
buyer’s CA due to intercompany sale original CA

Depreciation expense 10/1/24 to 12/31/24: Depreciation expense 10/1/24 to 12/31/24:

(300,000 ÷ 5) x 3/12 =15,000 (200,000 ÷5) x 3/12 =10,000

NOTE: In the consolidated FS, the depreciable asset should equal the original CA, therefore the
depreciation expense, should be based on the original CA.

RG: (100,000 ÷ 5) x 3/12 = 5,000 Depr Exp NI

RG OVER UNDER

Sir Ronald M. Valix Discussion CPM NOTES

 NI of Parent and Subsidiary per books 2,000,000 → 1,200,000 + 800,000
URG in 2024 (100,000)
Depr Asset Gain NI
RG in 2024 5,000
Consolidated NI in 2024 1,905,000 URG OVER OVER OVER
Depr Exp NI
RG OVER UNDER
Summary analysis for Fixed Assets

LAND DEPRECIABLE ASSET

Land Gain NI Depr Asset Gain NI
URG OVER OVER OVER URG OVER OVER OVER

Land Loss NI Depr Asset Loss NI

URL UNDER OVER UNDER URL UNDER OVER UNDER

Gain NI Depr Exp NI

RG UNDER UNDER RG OVER UNDER

Loss NI Depr Exp NI

RL UNDER OVER RL UNDER OVER

CNI-P NCI-NI
Down URG (xx)
Down RG xx LAND / DEPRECIABLE ASSET
Down URL xx
Down RL (xx) Gain NI
Up URG (xx) (xx) URG OVER OVER
Up RG xx xx Loss NI
Up URL xx xx URL OVER UNDER
Up RL (xx) (xx)

LAND Gain NI
ADDITIONAL FORMULA:
RG UNDER UNDER
OPEX per books (P/S) xx Consolidated OPEX xx
Amort. Excess DA Under xx Consolidated COS xx Loss NI
Amort. Excess DA Over (xx) Consolidated Expenses xx
RG (xx) RL UNDER OVER
RL xx
Consolidated OPEX xx

DA Depr Exp NI
RG OVER UNDER
RL UNDER OVER

Sir Ronald M. Valix Discussion CPM NOTES

 FOREIGN CURRENCY TRANSACTIONS, HEDGING AND DERIVATIVES
DEFINITION

• Foreign Currency Transaction

➢ A transaction that is denominated or requires settlement in a foreign currency
➢ A foreign currency is a currency other than the functional currency.
➢ Examples: currency of the entity in his operations
1. Buy or sell goods or services at a price denominated in a foreign currency
2. Borrow or lend funds such that the amounts payable or receivable are denominated in a
foreign currency
3. Acquire or dispose of assets, or incur or settle liabilities, denominated in a foreign
currency.

• Import Transaction
➢ It is a transaction wherein the entity acquires or buys goods outside its country of origin
➢ Account payable / payable is exposed to the changes in the exchange rate
➢ We use the selling rate to record the transaction and to compute the foreign currency
exchange gain or loss
➢ Entries:

Transaction Date
Purchases xx
Accounts Payable xx
offer rate
To record the purchase, use the selling spot rate at the date of transaction

Analysis:
FOREX gain or loss
Accounts payable xx ➢ Increase in exchange rate; increase in
Forex gain xx payable → FOREX LOSS

Forex loss xx ➢ Decrease in exchange rate; decrease in

Accounts payable xx payable → FOREX GAIN

To compute the FOREX gain or loss, get the change in the selling spot rate then multiply to
the foreign currency denominated payable

Settlement Date
Accounts payable xx
Cash xx

Cash paid is equal to the selling spot rate on the settlement date

Summary Analysis:
Exposed Rate Analysis
Import Payable Selling a. rate, pay - loss
b. rate, pay - gain
Export Receivables Buying a. rate, rec - gain
b. rate, rec - loss

Sir Ronald M. Valix Discussion CPM NOTES

 • Export Transaction
➢ It is a transaction wherein the entity sells goods outside its country of origin
➢ Accounts receivable / receivable is expose to the changes in the exchange rate
➢ We use the buying rate to record the transaction and to compute the foreign currency
exchange gain or loss
➢ Entries:

Transaction Date
Accounts receivable xx
Sales xx
bid rate
To record the sales, use the buying spot rate at the date of transaction

FOREX gain or loss Analysis:

Accounts receivable xx ➢ Increase in exchange rate; increase in
Forex gain xx receivable → FOREX GAIN

Forex loss xx ➢ Decrease in exchange rate; decrease in

Accounts receivable xx receivable → FOREX LOSS

To compute the FOREX gain or loss, get the change in the buying spot rate then multiply to
the foreign currency denominated receivable

Settlement date
Cash xx
Accounts receivable xx

Cash received is equal to the buying spot rate on the settlement date

• Hedging
➢ It is a risk management technique that involves using derivatives to offset the risk in the hedge
item.

• Hedge Item
➢ An asset, liability, firm commitment, highly probable forecast transaction, or net investment in a
foreign operation
➢ Import / Export transactions
➢ Exposed account (Payable or Receivable)

• Hedging Instrument
➢ A derivative that will offset the risk in the hedge item
➢ Forward Contract transactions (FC Rec / FC Pay)

Sir Ronald M. Valix Discussion CPM NOTES

 • Forward Contract no FV on day 1; no investment
➢ It is a derivative used to hedge or minimize the risk in the hedge item
➢ It is also called a hedging instrument
➢ Entries:

Date when you entered into a Forward Contract

Forward Contract Receivable xx
Forward Contract Payable xx

The Forward Contract Receivable and Payable are initially recorded at the forward rate on the
date when you entered the contract.

FC BUY: Forex gain or loss in Forward Contract FC SELL:

Exposed Account: FC Rec Exposed Account: FC Pay
Fixed Account: FC Pay
FC Rec xx FC Pay xx
Fixed Account: FC Rec
Forex gain xx Forex gain xx

Forex Loss xx Forex loss xx

FC Rec xx FC Pay xx

 To compute the forex gain or loss in the forward contract, we get the changes in the
Transaction to bank
forward rate

 If the exposed account in the hedge item is a liability, therefore the FC Receivable may
increase or decrease due to the changes in the forward rate whereas the FC Payable will
remain unchanged or fixed

 If the exposed account in the hedge item is an asset, therefore the FC Payable may
increase or decrease due to the changes in the forward rate whereas the FC Receivable
will remain unchanged or fixed

Hdg Item H Inst. Analysis (H. inst.)

Analysis:
Import Pay $ FC Rec $ F. rate, FC Rec = gain
F. rate, FC Rec = loss ➢ Increase in forward rate; increase in FC Rec → FOREX GAIN
Export Rec $ FC Pay $ F. rate, FC Pay = loss ➢ Decrease in forward rate; decrease in FC Rec → FOREX LOSS
F. rate, FC Pay = gain

➢ Increase in forward rate; increase in FC Pay → FOREX LOSS

➢ Decrease in forward rate; decrease in FC Pay → FOREX GAIN

Settlement Date
Cash xx ➢ If the exposed account in the hedge item is a liability,
FC Rec xx therefore to compute the cash received, use the
selling spot rate whereas the cash paid is the amount
of the fixed FC Pays
FC Pay xx
Cash xx ➢ If the exposed account in the hedge item is an asset,
therefore to compute the cash paid, use the buying
spot rate whereas the cash received is the amount of
the fixed FC Pays

Sir Ronald M. Valix Discussion CPM NOTES

Forward Contract

Hedge Item Hedging Instrument Analysis

➢ Increase in forward rate; increase in FC Rec →
FOREX GAIN
Liability FC Receivable ➢ Decrease in forward rate; decrease in FC Rec →
FOREX LOSS

➢ Increase in forward rate; increase in FC Pay →

FOREX LOSS
Asset FC Payable ➢ Decrease in forward rate; decrease in FC Pay →
FOREX GAIN

Firm Commitment
➢ Contract or agreement to purchase / sell goods to foreign entity in the future
➢ To be settled in foreign currency
➢ Settlement will be not be made until the passage of title of goods
➢ Temporary account whose purpose is to record any gain or loss in foreign exchange

➢ FV Hedge: Hedging Activity is always ZERO

o Perfect hedge

➢ Balance:
o Asset = Debit
o Liability = Credit
o As of balance

Fair Value Hedge (if silent)

➢ There is already a binding contract to buy/sell goods even if the passage of title is in a future date
➢ There is an underlying asset / liability in the Hedge Item, thus there will be Forex gain or loss in the
Firm Commitment
hedge item
➢ Amount of purchase / sale = Forward rate at the date of transaction

Cash Flow Hedge “forecasted”

“anticipated” clue as CFH

➢ No binding contract because it is a hedge of a highly probable forecasted cash flow

o Ex. Anticipated purchase / sale clue as CFH
➢ No underlying asset / liability in Hedge Item, thus no Forex gain or loss in Hedge Item
➢ Hierarchy
1. No gain or loss in the hedge item
2. Gain or loss instrument → OCI
3. Amount of purchase & sale = Buying / selling spot rate at settlement date

Sir Ronald M. Valix Discussion CPM NOTES

 FLEXIBLE; FV on Day 1 is the premium little investment
Option Contract Hedging Instrument like a For ward Contract ONE-SIDED; a right; holder has LIMITED LOSS but UNLIMITED GAIN

➢ Call = Buy; Put = Sell

➢ It is a derivative that provides the holder of the contract the right to buy/sell in the future for a price set
today

exercised price
Strike Price price set today / agreed price
➢ Option price to buy / sell
➢ Always fixed all throughout the contract

Intrinsic Value “in the money”

➢ Difference between strike price and market price (spot rate)

➢ Difference must be favorable to the holder of the contract
o Buy = SP < MP selling spot rate
o Sell = SP > MP buying spot rate
➢ Effective Portion asset to the holder
pays a premium always a liability to the writer UNLIMITED LOSS
LIMITED GAIN
can exercise any time

Time Value
➢ Difference between FMV of option and Intrinsic Value
➢ Ineffective Portion exercise spot CALL OPTION if PUT OPTION “reverse”
option rate
➢ SP > MP = “out of the money” <
o Not favorable
Hedge Item gain or loss
➢ Changes in the market / spot rate ➢ SP < MP = “in the money” >
o Favorable

➢ SP = MP = “at the money”

Hedging Instrument gain or loss
➢ Changes in the FMV of option
➢ At the settlement date, FMV of option = Intrinsic Value
Initial Subsequent
1. Monetary
 received / paid a fixed amount of cash Historical / Transaction Closing

2. Non-monetary Historical / Transaction Historical / Transaction

 do not receive / pay a fixed amount of cash

Sir Ronald M. Valix Discussion CPM NOTES

 PROBLEM REGARDING SPECULATION:
• APPLY concept of FORWARD CONTRACT
• NO Hedge ITEM
PAS 21: FINANCIAL STATEMENTS TRANSLATION • ONLY Hedge INSTRUMENT

PAS 21 par. 39-40

➢ Assets and Liabilities: Closing or current rate

➢ Income and Expense: Transaction or Average rate (Assumption: evenly throughout the year)

➢ Ordinary / Preference shares:

1. Rate at the date of issuance
2. Historical rate

➢ Dividends: Retained Earnings: Do not translate using single rate

1. Rate at the date of declaration Translate using components
2. Historical rate

REMEASUREMENT from Foreign Currency to Functional Currency:

Initial Subsequent
Monetary Historical / Transaction rate Closing Rate
Non-monetary Historical / Transaction rate Historical / Transaction rate

TRANSLATION from Functional currency to Presentation currency

I
Consolidated FS translate Separate FS convert
> assets & liabilities: translated > monetary items: remeasured
> non monetary items: NOT remeasured

** Only translate FS of FOREIGN SUBSIDIARY entity ** ONLY CONVERT FOREIGN CURRENCY DENOMINATED TRANSACTIONS
NOT the FS of the group

“remeasurement”
(temporal method) local currency not remeasure sales;
DOMESTIC FUNCTIONAL TRANSLATE ONLY Conso

“translation” only remeasure AR

~ using closing rate method
PRESENTATION
“Translation” any currency “Remeasurement”

CLOSING RATE METHOD TEMPORAL METHOD

1. Asset / Liability closing rate 1. Monetary A/L closing rate
2. Equity Non-Monetary A/L historical
• SC / SP historical rate 2. Equity
• RE not directly translated • SC / SP historical rate
• RE not directly translated
TOTAL EQUITY Beg., RE Prior Yr Bal

NI/NL Transaction date

Average rate
Beg., RE Prior Yr Bal Transaction date
Monetary
Div. Declared Historical NI/NL Average rate
Non- Monetary Historical
End, RE Div. Declared Historical

End, RE
3. Translation G/L
• OCI P/L 3. Remeasurement G/L
• P/L

Sir Ronald M. Valix Discussion CPM NOTES

 JOINT ARRANGEMENT
Joint Arrangement ** if sole control, business combination

• Joint arrangement is an arrangement where two or more parties have joint control over the arrangement

• Joint control is the contractually agreed sharing of control over the arrangement which exists only when
the decisions about the relevant activities require the unanimous consent of the parties sharing control.
Parties called: Joint Operators / Venturers
• Joint arrangement can be considered as Joint Operation or Joint Venture

• Joint Operation is an arrangement where the parties that have joint control over the arrangement have
the rights to the assets and obligation for the liabilities related to the arrangement

• Joint Venture is an arrangement where the parties that have joint control over the arrangement have
the rights to the net assets of the arrangement.

• Joint arrangement can be structured through a separate vehicle or can be structured without a separate
vehicle

• Separate vehicle is a separate identifiable financial structure such as separate legal entities.

• Joint arrangement not structured through a separate vehicle is Join Operation. ALWAYS TRUE

• Contractual arrangement is the parties that have joint control over the arrangement have the rights to
the assets and obligations to the liabilities related to the arrangement, and also rights to the corresponding
revenues and obligations for the corresponding expenses.

• Joint arrangement structured through a separate vehicle can either be Joint Operation or Joint
Venture

• To determine whether it is Joint Operation or Joint Venture, we need to assess:

1. The legal form of the separate vehicle
2. The terms of the contractual arrangement
3. Relevant other facts and circumstances

• Step 1: Is the Joint Arrangement Structured through a separate vehicle?

➢ If NO, then JOINT OPERATION ALWAYS TRUE
no separate vehicle

➢ If YES, then Step 2

• Step 2: Assess the legal form of the separate vehicle. (Does the legal form of the separate vehicle give
the parties rights to the assets and obligations for the liabilities related to the arrangement?)
➢ If YES, then JOINT OPERATION
➢ If NO, then Step 3

• Step 3: Assess the terms of the contractual arrangement. (Do the terms in the contractual arrangement
specify that the parties have rights to the assets and obligation to the liabilities relating to the
arrangement?)
➢ If YES, then JOINT OPERATION
➢ If NO, then Step 4

Sir Ronald M. Valix Discussion CPM NOTES

 • Step 4: Assess the other facts and circumstances. (Did the parties design the arrangement so that its
activities primarily aim to provide the parties with an output (i.e., the parties have the rights to
substantially all of the economic benefits of the assets held in the separate vehicle) and when
settling the liabilities relating to the activity conducted through the arrangement is dependent on
the parties in a continuous basis?)
➢ If YES, then JOINT OPERATION
➢ If NO, then JOINT VENTURE

• How to account a JOINT OPERATION?

o The joint operator shall account for its interest by recognizing its assets, liabilities, revenue,
expenses, and its share in the jointly controlled assets, liabilities, revenues, expenses in
accordance with the contractual arrangement

• How to account a JOINT VENTURE?

o Equity method

Joint Venture
Initial Share in NL
investment
Share in
Share in NI Dividends
End

Joint Venture (SME)

• Under PFRS for SMEs, the joint venturer may account his investment in Joint Venture using:
o Equity Model
o Cost Model
o Fair Value Model

• If there is NO PUBLIC PRICE QUOTATION

o Equity Model
o Cost Model
o Fair Value Model

• If there is a PUBLIC PRICE QUOTATION

o Equity Model
o Fair Value Model

• Special Rules:
o If there is no public price quotation and the entity elected to use the Fair Value Model, however
it was impracticable to determine the fair value of the investment in joint venture without
S
undue cost or effort, the entity will account the investment in joint venture using Cost Model.

o If there is a public price quotation and the entity elected to use the Cost Model, the entity will
S not allowed
account the investment in joint venture using the Fair Value Model

**Equity: whether quoted or non, still use Equity method

Sir Ronald M. Valix Discussion CPM NOTES

 Initial Subsequent
Cost less any accumulated impairment
Transaction Price +
1. Cost losses
Transaction Cost
 Share in the NI/(NL)
Transaction Price + - Share in dividends declared
2. Equity
Transaction Cost - Impairment losses, if any

Transaction Price only Fair value at year-end

3. Fair Value (Transaction Cost is (no test for impairment and any changes in
considered as an expense) the fair value will go to profit / loss)

Sir Ronald M. Valix Discussion CPM NOTES

 GOVERNMENT ACCOUNTING
2016 onwards
Government Accounting Manual (GAM) Old: New GAS (New Govt Acctng System) 2015 below

➢ Encompasses the process of analyzing, recording, classifying, summarizing and communicating all
transactions involving the receipt and disposition of government funds
➢ Prescribed by COA

Commission on Audit
➢ Exclusive authority to:
a. Define the scope of its audit and examination
b. Establish techniques and methods required
c. Promulgate accounting and auditing rules and regulations

Financial Reporting System

1. Accrual basis for accounting system
2. Budget basis for budget reporting

GAM Accounting Policies:

➢ In accordance with Philippine Public Sector Accounting Standards (PPSAS)
➢ Includes the following:
a. Revised Chart of Accounts
b. Accounting Procedure
c. Accounting books, registries, records, forms, reports and financial statements

➢ It shall be used by all National Government Agencies:

a. Preparation of Financial Statements
b. Reporting of budget, revenues or expenses

Complete Set of FS
1. Financial Position
2. Financial Performance
3. Changes in Equity
4. Cash Flows
A 5. Comparison of Budget and Actual Amounts
6. Notes

Sir Ronald M. Valix Discussion CPM NOTES

Books
1. Journals General
a. Cash receipts
b. Cash disbursements
c. Check disbursements

2. Ledgers
a. General
b. Subsidiary

3. Registries
a. Revenue and Other Receipts (RROR)
• Recognizing estimated revenue or other receipts
• Recognizing collections of receipts
• Expect – Collect – Remit

b. Appropriations and Allotment (RAPAL)

• Monitor appropriation and allotment
• Amount of allotment must not exceed authorized appropriation

c. Allotments, Obligations and Disbursements (RAOD)

• Regular Disbursements actual disbursement & recording

• Personnel Services (PS)

 Compensation of NGAs / payroll

• Maintenance & Other Operating Expenses (MOOE)

 Insurance, rent, petty cash fund

• Financial Expense (FE)

 Bank charges

• Capital Outlay (CO)

 All allotment fixed asset

d. Budget Utilization and Disbursements (RBUD)

• Records the approved special budget and the corresponding utilization and
disbursements
• Special disbursements

Books shall be maintained by Fund Cluster

1. Regular Agency
2. Foreign Assisted Project Fund
3. Special Account – Locally Funded / Domestic Grant
4. Special Account – Foreign Assisted / Foreign Grant
5. Internally Generated or Revolving Fund
6. Business related
7. Trust receipts

Sir Ronald M. Valix Discussion CPM NOTES

Process
1. Appropriation
→ Authorization to allocate funds
Authorization to use Govt Funds

2. Allotment no money yet

→ Authorize to incur obligations
→ Also referred to as obligation authority

3. Allocation
→ Receipt of Notice of Cash Allocation (NCA) actual money
Modified Disbursement System

Cash-MDS, Regular xx
Subsidy Income National Government (SING) xx

Budgetary Procedures:
❑ Budget Preparation “Call”
❑ Budget Legislation or Authorization “Bill”
❑ Budget Execution “Implementation”
❑ Budget Accountability

Sir Ronald M. Valix Discussion CPM NOTES

 NON-PROFIT ORGANIZATION
Contributions: considered as Contribution Revenue

1. Cash
2. Non-cash (Fair Value)
3. Promise / Pledge
a. Unconditional – upon receipt of promise (recognition of contribution as revenue)
b. Conditional – upon fulfillment of condition (recognition of contribution as revenue)

Pledge Receivable xx Cash xx

Contributed Revenue xx Pledge Receivable xx

4. Service (Fair Value)

a. Create or enhance a non-financial asset
OR
b. Requires specialized skill

Service Expense xx
Contributed Revenue xx
Expenses
1. Program
➢ Directly related to the fulfillment of the purpose of the NPO

2. Support
➢ Not directly related (admin and fund-raising)
Net Assets
Endowment Fund Investment
1. Unrestricted 1.) Regular
a. No donor restriction • Principal = non expendable (Permanent)
• Interest = expendable (Unrestricted )
b. “Board Designated” restriction Board of Trustees
2.) Term
• Principal = non expendable (Temporary)
2. Temporary • Interest = expendable (Unrestricted )

a. Time 3.) Quasi

• Principal expendable (unrestricted)
b. Specific Purpose • In
With donor restriction **PRINCIPAL DIFFERS

3. Permanent
a. “Indefinite” Agency Fund NOT considered as contribution revenue

• NPO acts as CUSTODIAN

• NO financial benefit

Formulas: Cash xx
Liability xx
1. Unrestricted Contribution xx
Release from restriction (Temp/Perm) xx <

Expense / Income (xx) / xx

Increase in Unrestricted Net Assets xx

2. Temp/Perm Restricted Contribution xx

Release from restriction (xx) if you want to use a retricted contribution, reclassify as unrestricted

Increase in Temp/Perm Restricted NA xx

Sir Ronald M. Valix Discussion CPM NOTES

Cash Flow
1. Operating
➢ All unrestricted contributions / expenses

2. Investing
➢ Acquisition and disposition of non-cash assets

3. Financing
➢ All restricted contributions (Permanent / Temporary) and bank borrowings

Gross Patient Service RENDERED xx

Less: Charity Care (xx)
Gross Patient Service REVENUE xx
Less: Contractual Adjustment (xx)
Courtesy Allowance (xx)
NET Patient Service Revenue xx

Gross Tuition Revenue xx

Less: Scholarship granted for academic scholars (xx)
Less: Refunds (xx)
Net Tuition Revenue xx

NOTE:
1. With employment relationship = EXPENSE
2. Without employment relationship = DEDUCTION in Tuition Fee

Sir Ronald M. Valix Discussion CPM NOTES