ACC203-Conceptual Framework and Accounting Standards

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module for ACC203 Conceptual Framework and Presentation of Financial Statements

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 1 Conceptual Framework and Presentation of Financial Statements Week We ek 2 - 3 Introduction

This module tackles the new Conceptual Framework for Financial Reporting and PAS 1 for the Financial Statements Presentation. This discusses the concepts that underlies the preparation and presentation of financial statements. The Conceptual Framework sets the concepts and objectives of the general purpose financial reporting. PAS 1 Presentation of Financial Statements discusses the specific accounting standards that are provided by the IASB in presenting the financial statements.

Learning Objectives

 After studying studying this module, students students should should be able to: 1. Understand Understand the purpose purpose and and content content of the Conceptua Conceptuall Framework Framework for Financial Financial Reporting. 2. Acquire the the knowledge knowledge and concepts concepts about the the Philippine Philippine Accounting Accounting Standards Standards (PAS) 1 - Presentation Presentation of Financial Financial Statements. Statements. Discussion: The Conceptual Framework for Financial Reporting

The Conceptual Framework for Financial Reporting is a basic document that sets objectives and the concepts for general purpose financial reporting. Its predecessor, Framework for the preparation and presentation of the financial statements was issued back in 1989. Then in 2010, IASB published the new document, Conceptual Framework for Financial Reporting. Content of Conceptual Framework for Financial Reporting 1. The Objec Objective tive of Genera Generall Purpos Purpose e Financ Financial ial Rep Reporti orting. ng. 2. Qualitativ Qualitative e Characteris Characteristics tics of Useful Useful Financia Financiall Information. Information. 3. Fina Financia nciall Statemen Statements ts and the the Reportin Reporting g Entity. Entity. 4. The Elem Elements ents of Financ Financial ial State Statement ments. s. 5. Reco Recognit gnition ion and Der Derecog ecogniti nition. on. 6. Me Meas asur urem emen entt 7. Pre Prese senta ntatio tion n and Disclo Disclosur sure e

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8. Conc Concepts epts of of capital capital and and capital capital mainten maintenanc ance. e.

Is the Framework equivalent to the Standard?

Let me please make one point clear: clear: Framework Framework is NOT a Standard itself. Thus if you wish to decide on the–financial of certain transaction, you need to look into the appropriate appropri ate standard IFRS or reporting IAS. Sometimes, Sometime s, it may even happen that the rules in that IFRS or IAS standard will be contrary to what the Framework says. In this case, you need to apply the standard, not the Framework. When should you apply the Framework? In most cases, when there are no specific rules for your transaction and you need to develop your accounting policy, then you would look to the Framework as you cannot depart from its basic principles and definitions.

The objective of general purpose financial reporting

The main objective of general purpose financial reports is to provide the financial information about the reporting entity that is useful to existing and potential: ● Investors, ● Lenders, and ● Oth the er cre cred dit ito ors to help them make various decisions (e.g. about trading with debt or equity instruments of a reporting entity). The objective is NOT about the financial statements itself, instead, this describes more general purpose reports that should contain the following information about the reporting entity: ● Economic Economic resou resources rces and and claims claims (this (this refers refers to the financ financial ial positio position); n); ● The changes changes in economic resource resources s and claims resulting from the entity's financial performance and from other events. This puts an emphasis on accrual accounting to reflect the financial performance of an entity. It means that the events should be reflected in the reports in the periods when the effects of transactions occur, regardless of the related cash flows. However, the information about past cash flows is very important to assess management’s ability to generate future cash flows. Qualitative characteristics of useful financial information

The Framework describes 2 types of characteristics for financial information to be useful:

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

1. Fund Fundam amen enta tal, l, an and d 2. Enh nha ancin ing g. Fundamental qualitative characteristics ● Relevanc Relevance: e: capable capable of making a difference difference in the users’ decisions decisions.. The financia financiall information is relevant when it has predictive value, confirmatory value, or both. is closely related to relevance. ● Materiality Faithful represen representation: tation: The information informatio n is faithfully represen represented ted when when it is complete, neutral and free from error. Enhancing qualitative characteristics ● Comparab Comparability: ility: Informatio Information n should should be be comparable comparable between different entities or time time periods; ● Veri Verifiab fiability ility:: Indepe Independen ndentt and know knowledg ledgeab eable le observ observers ers are able able to verify verify the information; ● Time Timeline liness: ss: Informa Information tion is availa available ble in time to influe influence nce the the decisions decisions of users; users; ● Understa Understandability ndability:: Information Information shall shall be classified, classified, presente presented d clearly clearly and concisely concisely.. Financial Statements and the Reporting Entity Financial Statements The financial statements should provide the useful information about the reporting entity: 1. In the stateme statement nt of financia financiall position, position, by recog recognizi nizing ng ○ Assets, ○ Liabilities, ○ Equity 2. In the the statements statements of financial financial performa performance, nce, by recognizin recognizing g ○ Income, and ○ Expenses 3. In other statement statements, s, by presentin presenting g and disclosin disclosing g information information about about ○ reco recogniz gnized ed and unreco unrecogniz gnized ed assets, assets, liabiliti liabilities, es, equity, equity, income income and expenses, their nature and associated risks; ○ Cash flows; ○ Con Contrib tributio utions ns from from and distri distributi butions ons to equi equity ty holder holders, s, and and ○ Meth Methods, ods, assum assumptio ptions, ns, judgem judgements ents used, used, and and their their changes. changes. Financial statements are always prepared for a specified period of time, or the reporting period. Normally, the financial statements st atements are prepared on the going concern assumption. It means that an entity will continue continue to operate for the foreseeable foreseeable future future (usually 12 months after the reporting date). Reporting Entity

 Although the term “reportin “reporting g entity” has been used throughout IFRS for some time, the Framework introduced it and “made it official” only in 2018. Reporting entity is an entity who●must or chooses prepare the financial statements. It can be: A sing single le ent entity ity –tofor exampl exa mple, e, one o ne co compa mpany ny;;

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

● A portio portion n of an entit entity y – for exa example mple,, a divi division sion of one one compa company; ny; ● More than than one one entity entity – for exampl example, e, a parent parent and its its subsidi subsidiarie aries s reporti reporting ng as a group.  As a result, result, we have have a few types of financial statement statements: s: ● Con Consoli solidate dated: d: a parent parent and subsidia subsidiaries ries repor reportt as a single reporti reporting ng entity; entity; ● Unco nsolida lidated: ted: e.g. e .g. arting pagrent parent aty lone provides provi des reports, repor ts,more or  entiti ● Unconso Combined Comb ined: : e.g. repo reportin entialone entity comp comprise rises s two or entities es not linked linked by parent-subsidiary relationship. Elements of the financial statements

This extensively deals with the definitions of individual elements of the financial statements. There are five basic elements: 1. Asset = a present present economic economic resource resource controlled controlled by the entity as a result of of past events; 2. Liability = a present obligatio obligation n of the entity to transfer transfer an an economic resource as a result of past events; 3. Equity = the the residual residual interest in the assets assets of the entity after after deducting deducting all its liabilities; 4. Income = increases increases in assets assets or decreases decreases in liabilities resulting in increases increases in equity, other than contributions from equity holders; 5. Expense Expenses s = decreases decreases in assets assets or increases increases in liabilities liabilities resulting resulting in decreas decreases es in equity, other than distributions to equity holders; The Framework then discusses each aspect of these definitions and provides wide guidance on how to decide what element you are dealing with. Recognition and derecognition Recognition Simply speaking, recognition means including an element of financial

statements in the financial statements. In other words, if you decide on recognition, you decide on whether to show this item in the financial statements. Recognition process links the elements in the financial statements according to the following formula: Please let me stress here that not all items that meet the definition of one of the elements listed above are recognized in the financial statements. The Framework requires requires recogniz recognizing ing the elements only when the recognition recognition provides useful information – relevant with faithful representation. Then, the Framework discusses the relevance, faithful representation, cost constraints and other aspects in a detail. Derecognition. it means removal of an asset or liability from the statement of financial position and normally it happens when the item no longer meets the definition of an asset or a liability. Again, the Framework discusses the derecognition in a greater detail.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Measurement

Measurement means in what amount to recognize asset, liability, piece of equity, income or expense in your financial statements. Thus, you need to select the measurement basis, or the method of quantifying monetary amounts for elements in the financial statements. The1.Framework basic measurement basis: Historicall discusses Historica cost – thistwo measurement measurement is based based on the transactio transaction n price at the time of of recognition of the element; 2. Curr Current ent value value – it measur measures es the the element element upd updated ated to reflec reflectt the cond conditio itions ns at at the measurement date. Here, several methods are included: ○ Fair value; ○ Value in use; ○ Current co cost. Each of these measurement bases is discussed in a greater detail. The Framework then gives guidance on how to select the appropriate measurement basis and what factors to consider (especially relevance and faithful representation). What I personally find really useful is the guidance on measurement of equity. The issue here is that the equity is defined as “residual after deducting liabilities from assets” and therefore total carrying amount of equity is not measured directly. Instead, it is measured exactly by the formula: ● To Total tal car carryi rying ng amou amount nt of of all ass assets ets,, less less ● To Total tal car carryi rying ng amoun amountt of all all liabil liabiliti ities es.. The Framework points out that it can be appropriate to measure some components of equity directly (e.g. share capital), but it is not possible to measure total equity directly.

Presentation and disclosure

The main aim of presentation and disclosures is to provide an effective communication tool in the financial statements. Effective communication of information in the financial statements requires: ● Focus on objectives objectives and principles principles of presentation presentation and disclosure disclosure,, not on the the rules; ● Grou Group p similar similar item items s and and separa separate te dissi dissimila milarr items; items; ● Aggregat Aggregate e information, information, but do not provide provide unneces unnecessary sary detail detail or or the opposite – excessive aggregation to obscure the information. The Framework discusses classification of assets, liabilities, equity, income and expenses in greater detail with describing offsetting, aggregation, distinguishing between profit or loss and other comprehensive comprehensive income and other related areas. areas. Concepts of capital and capital maintenance

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

The Framework explains two concepts of capital: 1. Financial capital – this is synonymo synonymous us with with the net assets assets or or equity equity of the entity. entity. Under the financial maintenance concept, the profit is earned only when the amount of net assets at the end of the period is greater than the amount of net assets in the beginning, after excluding contributions from and distributions to equity holders. Thea.financial capital maintenance Nomin No minal al moneta mon etary ry unit units, s, or  or can be measured either in b. Uni Units ts of cons constant tant purc purchas hasing ing powe power. r. 2. Phys Physical ical capit capital al – this is is the produc productive tive capac capacity ity of the the entity entity based based on, for example, units of output per day. Here the profit is earned if physical productive capacity increases during the period, after excluding the movements with equity holders. The main difference between these concepts is how the entity treats the effects of changes in prices in assets and liabilities. PAS 1: Presentation of Financial Statements

Statement of Financial Position 1. Statement of Profit Profit or Loss and Other Other Comprehen Comprehensive sive Income Income 2. Stat Statemen ementt of of Chang Changes es in Equi Equity ty 3. Sta Statem temen entt of of Cash Cash Flo Flow w 4. Note Notes s to the Fina Financia nciall State Statement ment

Terms to Remember: 1. Financial Statemen Statements ts are written written records records that convey the business business activities activities and the financial performance of a company. 2. General Purpose Purpose Financial Financial Statement Statements s are those those intended intended to meet meet the needs needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. 3. Obje Objectiv ctive e of Financia Financiall Statemen Statements ts is to provide provide infor informati mation on abo about ut the financ financial ial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. 4. Frequenc Frequency y of Reporting Reporting states states that financial statements statements shall be be presented presented at least least annually. 5. Judgemen Judgementt is used used to determine determine the best best method of presenting presenting information information.. 6. Statement of of Financial Financial Position Position is a formal formal statement statement showing the three elements comprising financial position, namely assets, liabilities and equity. It is used to evaluate such factors as liquidity, solvency and the need of the entity for additional financing. Asset

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is a presen presentt economi economic c resource resource cont controll rolled ed by the the entity entity as a resu result lt of past past events events..  An economic resourc resource e is a right that has the potential to produce economic benefits.

Classification of assets Current Assets 1. Ca Cash sh and and cas cash h equiv equivale alents nts 2. Financial assets assets at fair fair value such such as trading trading securities securities and other other investment investment in quoted equity instruments 3. Tra Trade de and and other other rece receiva ivable bles s 4. In Inve vent ntor orie ies s 5. Pr Prep epai aid d ex expe pens nse e Non-Current Assets 1. Prop Property erty,, plant plant and equi equipmen pmentt 2. Lon Long-t g-term erm inv inves estme tments nts 3. In Inta tang ngib ible le ass asset ets s 4. De Defe ferr rred ed tax tax ass asset ets s 5. Oth Other er nonnon-cu curre rrent nt ass assets ets Liabilities - are presen presentt obligati obligations ons of of the entity entity to trans transfer fer an econo economic mic resour resource ce as a result result of past events. An obligation is a duty of responsibility that the entity has no practical ability to avoid.

Classification of liabilities Current 1. 2. 3. 4. 5.

Liabilities Trade and other payables Current provisions Short-term borrowing Current portion of long-term debt Current tax liability

Non-current Liabilities 1. Non-current portion of long-term debt 2. Finance lease liability 3. Deferred tax liability 4. Long-term obligations to company officers 5. Long-term deferred revenue Currently maturing long-term debt

The original term was for a period longer than twelve months.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

refinance or to reschedule payment  An agreement to refinance payment on a long-ter long-term m basis is completed after the reporting period and before the financial statement are authorized for issue. Discretion to refinance - Or roll roll over an an obligati obligation on for for at least least twelve twelve months months after after the the reportin reporting g period period under under an existing loan facility, the obligation is classified as noncurrent. Covenants - is often often attache attached d to borrowi borrowing ng agreem agreements ents which which repre represent sent unde undertak rtakings ings by the borrower. - Ac Actu tual al res restr tric icti tion on on on the the borr borrow ower er.. Effect of breach of covenant

IAS 1, paragraph 74: The liability is classified as current even if the lender has agreed, after the reporting period and before the statements are authorized for issue, not to demand payment as a consequence of the breach. Equity

is the residual interest in the assets of the enterprise after deducting all its liabilities. IAS 1, paragraph 7: The holders of instruments classified as equity are simply known as owner. Shareholders’ equity is the residual interest of owners in the assets of a corporation measured by the excess of assets over liabilities.

The Statement of Profit or Loss and Other Comprehensive Income

Profit or Loss 1. Revenue 2. Fi Fina nanc nce e co cost st 3. Share of profits profits and losses losses of associates associates and joint ventures ventures accounted accounted for for using the equ equity ity meth method od 4. A single single amount amount for the the total total of disconti discontinued nued oper operation ation 5. Tax ex exp pense Other 1. 2. 3. 4. 5. 6. 7.

Comprehensive Income Unrealized Unrealize d gain/loss gain/loss on equity equity investment investment measured measured at fair fair value through OCI OCI Unrealized Unrealize d gain/loss gain/loss on debt debt investment investment measure measure at fair value through through OCI Gain/Loss Gain/Los s from translation translation of of the financial financial statements statements of a foreign operatio operation n Revaluat Reva luation ion surpl surplus us durin during g the year  Unrealized Unrealize d gain/loss gain/loss from derivative derivative contracts contracts designat designated ed as cash cash flow hedge hedge “Remeasurements” “Remeasu rements” of defined defined benefit benefit plan, plan, including including actuarial actuarial gain/loss gain/loss Change in fair value attributab attributable le to credit credit risk of a financial liability liability designated designated at at fair value through profit/loss

Statement of Changes in Equity

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Comprehensive income for the period 1. The effects effects of changes in accounting accounting policies and corrections corrections of error  error  2. A reconciliation reconciliation between between carrying carrying amount amount at the the beginning beginning and end end of the period Notes to the Financial Statement

Present information about the basis on which the financial statements were prepared and which specific accounting policies were chosen and applied to significant transaction 1. Disc Disclose lose any any informat information ion which which is requir required ed by IFRSs IFRSs 2. Show any any additional additional information information that that is relevant relevant to understa understanding nding which which is not not shown elsewhere in the financial statement

Assessments  Answer the the following following requirements: requirements: 1. Describe the Conceptual Conceptual Framework Framework for Financial Financial Reporting Reporting 2. Enumerate the Objectives Objectives of a general general purpose financial financial reporting? reporting?

3. Identify the Qualitative Qualitative characteristics characteristics of a useful useful financial financial statement, statement, 4. Find the relationship relationship between between financial financial statements statements and reporting reporting entity entity 5. Enumerat Enumerate e the element elements s of financia financiall statement statements. s. 6. Explain the concept concept of recognition, recognition, derecognition derecognition and measuremen measurementt 7. Explain Explain the the pres presenta entation tion of financ financial ial 8. Explain Explain the conce concept pt of capital capital and capita capitall maintenanc maintenance. e. 9. Enumerat Enumerate e the complete complete set set of financial financial statem statement ents. s. 10. Define the elements elements of financial statements. statements. 11.Explain 11. Explain the classification classification of assets and liabilities/ 12.Identify 12. Identify the content of statement of comprehensive comprehensive income 13.Explain the importance of notes to financial statements.

References  APA style style

Source: Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial  Accounting  Accounti ng Volume Two. Manila, Manila, Philippines. Philippines. GIC GIC Enterprises Enterprises & Co.,Inc. Co.,Inc.  Asuncion, Darrell Joe O. CPA,MBA,  Asuncion, CPA,MBA, Escala, Raymund Raymund Francis Francis A. A. CPA, MBA, MBA, Ngina, Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora Hill, Baguio City. Real Excellence Publishing and Nation’s Foremost CPA Review Inc.

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Silvia.M.,2019.https://www.ifrsbox.com/ifrs-conceptual-framework2018/#:~:text=The%20Conceptual%20Framework%20for%20the,was%20issued%20ba ck%20in%201989. IFRS Community (2018). Retrieved From: https://ifrscommunity.com/knowledge-base/ifrs-16-recognition-and-measurement-of-l eases/#link-subsequent-measurement-of-the-lease-liability

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 2 Reporting Financial Performance and Statement of Cash Flows Week We ek 4 - 5 Introduction

This module discusses the events that affect the reporting of financial performance and the presentation of Statement of cash flows. In reporting the financial performance, the accountant must consider the following events: change in accounting policies; change in accounting estimates, and prior period error, and analyse the effects of the aforementioned events on the financial statements. The presentation of the Statement of Cash flow, on the other hand, includes the identification and analysis of the operating activities, investing activities and financing activities. Learning Objectives

 After studying studying this module, students students should should be able to: 1. Understand Understand the events events that affects the the reporting reporting of financial financial performance performance and its required adjustments 2. Apply the the concept concept on presenting presenting the Statement Statement of Cash Cash Flows. Flows. Concept to Review

1. Accounting Accounting Policies Policies - The specific principles, principles, bases, bases, conventions, conventions, rules, and practices adopted by an entity in preparing and presenting financial statements. 2. Change in in Accounting Accounting Estimate. Estimate. An adjustment adjustment of the carrying carrying amount amount of an asset or a liability or the amount of the periodic consumption of an asset. 3. Material . Omissions Omissions or misstatements misstatements of items are are material material if they they could influence the economic decision that users make on the basis of the financial statements. 4. Prior Period Period Errors. Errors. Are Are omissions omissions from, from, and misstatemen misstatements ts in, the entity’s entity’s financial statement for one or more prior periods arising from a failure to use, or misuse of, reliable information 5. Retrospective Retrospective Application Application . Applying a new accounting accounting policy to transactions, transactions, other events and conditions as if that policy had always been applie d. 6. Retrospective Retrospective Restatemen Restatementt . Correcting Correcting the recognition, recognition, measurement, measurement, and disclosure of amounts of elements of financial statements as if a prior period error had never occurred. 7. Prospective Prospective Application Application . Application Application of a change change in accounting accounting policy policy and and recognizing the effect of a change in an accounting estimate. Impracticable . It is

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impracticable when an entity cannot apply a requirement after making every reasonable effort to do so.  Accounting policies  Accounting policies are determined determined by by applying applying the relevant relevant IFRS IFRS and considering considering any any relevant implementation Guidance issued by the IASB for that IFRS. When there is no applicable IFRS interpretation, use itsthat judgment in developing and applying an or accounting policymanagement that results inshould information is relevant and reliable.  An entity must select select and apply apply its accounting accounting policies for a period period consistently consistently for for similar transactions, other events and conditions. The same accounting policies are usually adopted from period to period, to allow users to analyze trends over time in profit, cash flows, and financial position. When can changes be applied?

The change is required by an IFRS; the change will result in a more appropriate presentation of events or transactions in the financial statements of the entity. The standard highlights two types of event w/c do not constitute changes: 1. Adopting an accounting accounting policy policy for a new type of transaction transaction or event event not dealt dealt with previously by the entity, 2. Adopting a new accounting accounting policy for for a transaction transaction or event which which has not not occurred in the past or which was not material. In the case of tangible noncurrent assets, a policy of a revaluation adopted for the first time is not treated as a change in policy under IAS 8, but as a revaluation under IAS 16 Property. Plant, and Equipment. Where a new IFRS is adopted, resulting in a change of accounting policy, IAS 8 requires any transitional provisions in the new IFRS itself to be followed. If none are given, provisions of IAS 8 shall be followed. 1. Reasons Reasons for for the the change change/nat /nature ure of of change change 2. Reasons why new new policy policy provides provides more relevant/r relevant/reliable eliable information information 3. Amount of the adjustment adjustment for the current current period and for each each period period presented presented 4. Amount of of the adjustmen adjustmentt relating relating to periods periods prior prior to those those included included in the comparative information 5. The fact that comparative comparative information information has has been restated or that it is impractica impracticable ble to do so.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

6. Estimates arise in relation relation to business business activities activities because of of the uncertainties uncertainties inherent within them. Examples are: debt allowance, useful lives of depreciable assets, and obsolescence of inventory. The rule here is that the effect of a change in an accounting estimate should be included in the proper loss in oneaffects 1. determination The period period of of thenet change, cha nge, iforthe change change afof: fects that that period period only 2. The period period of of the change change and and the future future period periods, s, if the change affects both Prior Period Errors

Nature of the prior period error: For each prior period, to the extent practicable, the amount of the correction. The amount of the correction at the beginning of the earliest prior period presente. If retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. Subsequent periods need not repeat these disclosures. IFRS 5: Non-current Asset held for Sale

IFRS 5 requires assets "held for sale" to be recognized separately in the statement of financial position. It sets out the criteria for recognizing a discontinued operation. Noncurrent Asset is an asset that does not meet the definition of a current asset. Noncurrent Asset Held for Sale - IFRS 5, paragraph Noncurrent paragraph 6, provides that a noncurrent noncurrent asset or disposal group is classified as held for sale if the carrying amount will be recovered principally through a sale transaction rather than through continuing use.

Conditions for classification as held for sale. 1. The asset asset or disposal disposal group is available available for immediate immediate sale in the present present con con ditio/n. 2. The sale must be highl highly y probab probable. le. PAS 7: Statement of Cash Flows

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Is a component of financial statements summarizing the operating, investing and financing activities of an entity? The primary purpose of a statement of cash flows is to provide relevant information about cash receipts and cash payment of an entity during a period. An entity shall prepare a statement of cash flows and present it as an integral part of the financial statements for each period for which financial statements are presented. Benefits of Cash Flow Information

Users can gain further appreciation of the change in net assets, of the entity’s financial position (liquidity (liquidi ty and solvency) and the entity’s ability to adapt to changing circumstances by affecting the amount and timing of cash flows. Statements of cash flows enhance comparability as they are not affected by differing accounting policies used for the same type of transaction. The statement of cash flows is designed to provide information about the change in an entity's cash and cash equivalents. Cash compromises cash on hand and demand deposit Cash Equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.  According  Accordin g to IAS 7, paragraph paragraph 7: An investment normally qualifies qualifies as a cash equivalent only when it has a short maturity of three months or less from date of acquisition. In other words, the investment must be acquired three months or less before the date of maturity. Examples of Cash Equivalents 1. Three-mo Three-month nth BSP treasury treasury bill 2. Three-year Three-year BSP treasury bill purchased purchased three months months before before date date of maturity maturity 3. Three-mo Three-month nth money money market market instrument instrument or commerci commercial al paper  paper  4. Three Three-mo -mont nth h time time dep deposi ositt

Indirect Method versus Direct Method

The direct method is encouraged where the necessary information is not too costly to obtain, but IAS 7 does not require it. In practice the indirect method is more commonly used, since it is quicker and easier  There are different ways in which the information about gross cash receipts and payments can be obtained:

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

1. Using the Direct Direct Method. Method. This This is the most most obvious obvious way because because it is is obtained by simply extracting information from the accounting records, which may be a laborious task. 2. Using the the Indirect Method. This method method is undoubtedly undoubtedly easier from from the point point of view of the preparer of the statement of cash flows. The net profit or loss for the period is adjusted for: Changes during the period in inventories, operating receivables and payables Non-cash items, e.g. depreciation, provisions, profits/losses on the sales of assets Other items, the cash flows from which should be classified under investing or financing activities Cash flow from Investing Activities

Cash flow from investing activities is one of the sections on the cash flow statement that reports how much cash has been generated or spent from various investment related activities in a specific period. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets. Negative cash flow is often indicative of a company's poor performance. performance. However, However, negative cash flow from investing activities might be due to significant amounts of cash being invested in the long term health of the company, such as research and development. Cash flows from investing activities provide an account of cash used in the purchase of non current assets or long term assets that will deliver value in the future. Investing activity is an important aspect of growth and capital.  A change change to property, property, plant, and equipment equipment (PPE), (PPE), a large large line item on the the balance balance sheet, is considered an investing activity. When investors and analysts want to know how much a company spends on PPE, they can look for the sources and uses of funds in the investing section of the cash flow statement. Capital expenditures (CapEx), also found in this section, is a popular measure of capital investment used in the valuation of stocks.  An increase increase in capital expend expenditures itures means means the company company is investing investing in future operations. operations. However,, capital expenditures However expenditures are a reduction in cash flow. Typically, Typically, companies with a significant amount of capital expenditures are in a state of growth. Below are a few examples of cash flows from investing activities along with whether the items generate negative or positive cash flow. 1. Purchase Purchase of of fixed fixed assets–c assets–cash ash flow flow negativ negative e 2. Purchase of investments investments such as stocks or securities–ca securities–cash sh flow negative 3. Lending Lending money–c money–cash ash flow negative negative 4. Sale of fixed fixed asse assets–c ts–cash ash flow flow posit positive ive 5. Sale of invest investment ment securi securities ties–ca –cash sh flow positi positive ve

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

6. Collection Collection of loans and insurance insurance proceeds–cash proceeds–cash flow positive positive Cash flow from Financing Activities

Financing Activities are the activities that result in change in size and composition of the equity capital and the entity. Include from the transaction involving nontrade liabilities and borrowings equity of theofentity. Financing Activities are the cash flow that result from the transactions: 1. Between Between the the entity entity and the the owners owners equity equity financ financing ing 2. Between Between the the entity entity and the the creditor creditors s debt finan financing cing Cash flow from financing activities in IAS 7, paragraph 43, provides that investing and financing transactions that do not require use of cash or cash equivalents shall be excluded from the statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statement either in the notes to the financial statement or in a separate schedule or in a way that provides information about the transactions. The following noncash transactions are disclosed separately: 1. Acquisition Acquisition of asset by assuming assuming directly related liability 2. Acquisit Acquisition ion of asset asset by by issuing issuing share share capita capitall 3. Acquisit Acquisition ion of asset asset by by issuing issuing bonds bonds payab payable le 4. Conversi Conversion on of bonds bonds payabl payable e into share share capita capitall 5. Conversi Conversion on of preferen preference ce share share into ordina ordinary ry shares shares

Interest

In IAS 7, paragraph 33, provides that Interest paid and interest received shall be classified as operating cash flows because they enter into the determination of net income or loss.  Alternatively,  Alternati vely, interest interest paid paid may may be classifi classified ed as financing cash flow because it is a cost cost of obtaining financial resources. Alternatively, interest received may be classified as investing cash flow because it is return on investment. For a financial institution, interest paid and interest received are usually classified as operating cash flows. Dividends

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

IAS 7, paragraph 33, provides that dividends received shall be classified as operating cash flow because it enters into the determination of net income. Alternatively, dividend received may be classified as investing cash flow because it is a return on investment. IAS 7, paragraph 34 , provides that dividends paid shall be classified as financing cash flow because it is the cost of obtaining financial resources. Alternatively, dividend paid may classified operating cash flow in order assist users to determine the ability of thebe entity to payas dividends out of operating cashtoflows Income Taxes

IAS 7, paragraph 35, provides that cash flow arising from income taxes shall be separately disclosed as a cash flows from operating activities unless they can be specifically identified with investing and financing activities. Example of Cash Flows from Financing Activities Inflow: 1. Cash receipt from issuance issuance of ordinary ordinary and and preference preference shares 2. Cash receipt receipt from issuing issuing debentures, debentures, loans notes, bonds, bonds, mortgages, mortgages, and and other short or long-term borrowings Outflow: 1. Cash payment payments s for amounts amounts borro borrowed wed 2. Cash payment payment by a lease for the reduction reduction of the outstanding outstanding principal principal lease lease liability. 3. Cash payment payment for for dividen dividends ds to share sharehold holders ers 4. Cash payment payments s to acquire acquire treas treasury ury share shares s Assessments

Exercises: 1. Explain change change in accounting accounting policies, policies, change change in accounting accounting estimates estimates and and prior periods. Cite examples for each. 2. Discuss the required required adjustments adjustments and disclosures disclosures for change change in accounting accounting policies, change in accounting estimates and prior period error, respectively. 3. Expound on how to account account for a non-current non-current asset asset held held for sale. sale. 4. Explain Explain the presen presentati tation on of the stateme statement nt of cash flows. flows. 5. Expound the difference difference between cash and and cash cash equivalents equivalents.. 6. Give examples examples of of the operating operating activities, activities, investing investing activities activities and and financing financing activities presented in the statement of cash flows. 7. Differentiate Differentiate between between indirect indirect and direct direct of presentatio presentation n the net net cash flows flows from operating activities.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

8. Discuss the presentation presentation of interest, interest, dividends dividends and and income income taxes on the statement of cash flows.

References

Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial  Accounting  Accounti ng Volume Two. Manila, Manila, Philippines. Philippines. GIC GIC Enterprises Enterprises & Co.,Inc. Co.,Inc.  Asuncion, Darrell Joe O. CPA,MBA,  Asuncion, CPA,MBA, Escala, Raymund Raymund Francis Francis A. A. CPA, MBA, MBA, Ngina, Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora Hill, Baguio City. Real Excellence Excellence Publishing and Nation’s Foremost Foremost CPA Review Inc. Silvia.M.,2019.https://www.ifrsbox.com/ifrs-conceptual-framework2018/#:~:text=The%20Conceptual%20Framework%20for%20the,was%20issued%20ba ck%20in%201989.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 3 Revenues from Contracts with Customers and Government Grants Week 6 Introduction

This module discusses the accounting for Revenues from Contract with Customers and for Government Grants. It sets out rules for the recognition of revenue based on the transfer of control to the customers from the entity. This also tackles the step by step process on accounting for revenues from contracts with customers and the identification of the point of time in which revenues must be recognized. Additionally, this discusses the recognition of government grants and disclosure for government assistance. Learning Objectives

 After studying studying this module, students students should should be able to: 1. Understand Understa thethe recognition recognition of revenues revenues based based on the the transfer transfer of control control to the the customernd from entity. 2. Demonstr Demonstrate ate the proce process ss on how to accoun accountt for the revenue revenues s from contrac contracts ts with customers. 3. Identify the different different points points of time in the recognition recognition of revenues. revenues. 4. Explain the the recognition recognition of government government grants and disclosure disclosure for for government government assistance. Revenues from Contracts with Customers Core Principle 1. Entity should should recognize recognize revenue revenue in a manner manner that that depicts the the pattern pattern of transfer transfer of goods or services to a customer. 2. Amount recognized recognized as revenue should should reflect reflect the consideratio consideration n to which which the entity entity expects to be entitled in exchange for good or service.

Things to remember: 1. Income Income - increas increases es in econom economic ic benefit benefits s during during the the accounti accounting ng period period in in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity instruments. 2. Revenue Revenue - income income arising arising from from course course of entity entity's 's ordinar ordinary y activitie activities s 3. Contract - agreement between two or or more more parties parties that that creates creates enforceable enforceable rights and obligations

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

3. Contract Contract Asset Asset - entity's entity's right right to payme payment nt for goods goods and and services services that that entity entity has has transferred to a customer if that right is conditioned on something other than the passage of time. 4. Receivab Receivable le - entity's entity's right right to consid considerat eration ion that that is uncondi uncondition tional al 5. Contract Liability - entity's obligation obligation t o transfer transfer goods and and services services to a customer customer for which the entity has received consideration 6. Customer - party that has contracted contracted with an entity entity to obtain goods goods or services that are an output of the entity's ordinary activities in exchange for consideration 7. Performance Performance obligation obligation promise promise in a contract contract with with a customer customer to deliver deliver either: a. good good or service service that that is is distinc distinct; t; or  b. series of of distinct goods or services that are substantially substantially the same same and that that have the same pattern of transfer to the customer  8. Stand alone alone Selling Price price price at which which an entity entity would sell a promised promised good or service separately to a customer  9. Transaction Transaction Price amount amount of consideration consideration to which which entity expects expects to be entitled in exchange for transferring promised goods or services to a customer  Five-Step Model Step 1. Identify the contract with the customer. Contract Criteria: 1. Approval of contract contract in writing, writing, orally orally or in accordance accordance with customary business practice 2. Identific Identificatio ation n of rights rights and obliga obligation tions s of the partie parties s and payment payment terms. terms. 3. Contract has has commercial commercial substance substance and the collection collection of considera consideration tion is probable Contract Criteria (Exception to Separate Contracts): 1. If the contr contracts acts are are treate treated d as a single single packa package. ge. 2. Consideration Consideration in one one contract contract depends depends upon upon the good good or service service of another contract. 3. Goods or services in the contract contract relate relate to a single performance performance obligation. obligation. Step 2. Identify the performance obligation in the contract. Distinct Good or Service Criteria: 1. The custom customer er can benefi benefitt from the the good or or service. service. 2. The entity 's promise promise to transfer the good or service to the customer customer is separately identifiable from other promises in the contract. Distinct Good or Service: 1. Sale of of finished finished goods goods produ produced ced by a manufa manufactur cturer  er  2. Sale of of merchan merchandise dise inve inventor ntory y by a retail retailer  er 

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

3. Constructing, Constructing, manufacturing manufacturing or developing developing assets assets on behalf of customers, customers, as in long term construction contracts. 4. Granting Granting license license or franchis franchise. e. 5. Performing a contractually contractually agreed agreed upon upon task for for a customer, customer, as in bookkeeping bookkeeping service or payroll processing service. Step 3. Determine the transaction price Factors that Affect Transaction Price: 1. Variab Variable le con consid sidera eratio tion n 2. Time Time va valu lue e of of mon money ey 3. Non-c Non-cash ash Consi Consider derati ation on 4. Consider Consideratio ation n payab payable le to a custom customer  er  Step 4. Allocate the transaction price to the performance obligations in the contract. If not directly observable, it must be estimated using these Methods:

1. Adju Mark Assess As ment Approac App roach h 2. Adjusted Expected Expested ctedMarket Cost CostetPlus Plu ssessment Margin Margin Approach Appr oach 3. Resi Residu dual al App Appro roac ach h Step 5. Recognize revenue when or as the entity satisfies a performance obligation. 1. Revenue shall shall be recognized recognized when an entity entity transfers transfers control control of the good good or service to a customer. 2. Control of an Asset is the ability ability to direct direct the use of the asset and and obtain substantially all of the benefits from the asset. 3. Revenue can be recognized recognized either either at point point in time or over time. time. Revenue Recognition at point of time

1. The entity has has the right right to receive receive payment payment for the asset asset and for for which the the customer customer is obliged to pay. 2. The custo customer mer has has legal legal title title to the asset asset.. 3. The entity entity ha s transferred transferred physical possession possession of the asset to customers. customers. 4. The customer customer has has significant significant risks risks and rewards of ownership ownership of the asset. asset. 5. The customer customer has accepte accepted d the asset. asset. Revenue Recognition over time 1. Customer simultaneou simultaneously sly receives receives and consumes the benefits benefits provided provided by the the entity's performance as the entity performs.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

2. Entity's Entity's perfor performanc mance e creates creates or enhances enhances an asset asset that that custome customerr controls controls as the asset is created or enhanced. 3. Entity's performance performance does not create create an asset with alternative alternative use to the the entity and and the entity has the enforceable right to receive the payment for performance completed to date. Performance Obligation Satisfied Over Time

This meets the criteria in Step 5 and, if it entered into more than one accounting period, would previously have been described as a long term contract; depending when a performance performan ce obligation is fulfilled in a contract. Revenu Revenue e is recognized recognized "over time" when an any of the following is satisfied: 1. The customer customer "simultaneously "simultaneously"" receives receives and consumes consumes the the benefits benefits provided provided by the entity’s performance as the entity performs.

This criteria, according to the Financial Standards Board (FASB), is mainly for services that are consumed byAccounting customers continuously over a period of time. However, many service providers may have difficulty in determining whether or not their customers consume benefits as they perform each obligation; this is due to the subjectivity in determining determ ining what the “benefits” are. To address this issue, the new standard requires the service provider to assess, in a hypothetical situation, if another provider would need to substantially re perform the work completed to date. If another provider does not need to substantially re perform the work done, then the original service provider should establish that control is transferred over time; consequently, the customer is assumed to receive and consume the benefit as the service provider performs an obligation. 2. The entity’s entity’s performance performance "creates "creates or or enhances enhances an asset" asset" (for example, work in process) that the customer controls as the asset is created or enhanced. 3. The entity’s entity’s performance performance does not create create an asset asset with an alternativ alternative e use to the the entity, and the "entity has an enforceable right to payment for performance completed to date." Alternative Use. To assess if an asset has an alternative use, the entity should consider practical limitations as well as contractual restrictions. This assessment should be made at the inception of the contract; nevertheless, should a modification in the contract arise at a future date and that modification substantially changes the performance obligation in the contract, then the entity should make a subsequent assessment.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Practical Limitations . In considering practical limitations limit ations of directing an as set to another use, the entity should consider whether the asset is designed and produced to fit unique specifications of the customer. This could be determined by evaluating whether or not (a) the entity would incur a significant cost to rework the asset for a different purpose or (b) the entity would only be able to sell the asset at a significant loss. Moreover, an entity

should complete this evaluation based on the asset’s expected final form, not the asset’s form while in production. Contractual Restrictions . Practical limitations may not always be a viable method to prove that an asset has no alternative use; hence, contractual restrictions may be more relevant than practical limitations (e.g. some real estate contracts). Criterion 3 requires the contractual contractual restrictions restrictions be substantive. substantive. It means means that an asset asset must not not be fundamentally interchangeable with other assets that the vendor owns; additionally, the vendor should not be able to transfer that asset to another customer without incurring significantt loss or breaching the significan the contract with the customer. customer.

Right totoPayment. 25 29 states state the seller should assess asses s whether is entitled payment ASC from 606 the 10 customer for sitsthat performance to date if the contractit is terminated. Since the seller is creating an asset that has no alternative use to the seller, the seller is creating the asset on behalf of the customer. Therefore, the seller’s right to payment indicates that the customer is receiving benefit from the seller’s performance, hence control is transferred to the customer. Performance Obligations Satisfied at a Point in Time. This will be the point in time at which the customer obtains control of the promised asset and the entity satisfies a performance obligation. The following factors would indicate revenue recognition of a point in time: 1. The entity has the "right "right to receive receive payment" payment" for the the asset and for which the the customer is obliged to pay. This exist ex ist only if goods or services have been deliver delivered ed to the point that the entity has the right to ask for the payment. 2. The customer customer has a "legal "legal title" title" to the asset. asset. If the asset is already already under under the name name of the customer, if not, for example is the long term rent called, lease. 3. The entity has "transferred "transferred physical physical possessio possession" n" of the asset asset to the customer. customer. It inferred to other arrangements or contractual stipulations (e.g., consignment 4. The customer customer has the "significant "significant risks and and rewards" rewards" of ownership ownership of of the asset. asset. This requires judgment, for example, an entity sold goods to a customer and it (entity) has the responsibility to deliver it, thus, it still has control of the goods. However, the entity still need to determine the risks to the ownership of the asset

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

that can separate performance obligation (e.g., maintenance services for products), and the risks should not have an impact on the transfer of control. 5. The custo customer mer "has "has accep accepted ted the the asset” asset” Common Types of Transaction

1. Warranties . If a customer has the option to purchase a warranty separately from the product to which it relates, it constitutes a distinct service and is accounted for as a separate performance obligation. This would apply to a warranty which provides the customer with a service in addition to the assurance that the product complies within agreed upon specifications. If the customer does not have the option to purchase the warranty separately, for instance if the warranty is required by law, that does not give rise to a performance obligation and the warranty is accounted for in accordance with IAS 3 7. 2. Principal Versus Agent.  An entity must must establish in any any transaction transaction whether whether it is acting as a principal or agent. a. Principal. Principal. It is a principal principal if it controls controls the promised promised good good or service service before itit transferred b. is Agent. It is acting actitongthe ascustomer. agent agent if its performance performance obligation obligation is to arrange arrange for the provision of goods and services by another party. 3. Repurchase Agreements.  An entity sells an asset and promises, or has the option to repurchase it. Repurchase agreements generally come in three forms: a. An entity entity has an obligation to repurchase repurchase the asset (a forward contract). contract). b. An entity entity has the right right to repurchase repurchase the asset asset (a call option) option) c. An entity entity must repurchas repurchase e the asset if requested requested to do so so by the customer customer (a put option). 4. Consignment Arrangement: Consignment . It is a method of marketing goods in which the entity called "consignor" transfers physical possession of certain goods to a dealer or distributor called that sellsupon the goods on behalf of the consignor. The consignor shallthe not"consignee" recognize revenue delivery of the goods to the consignee until the goods are sold by the consignee REASON: The product is controlled by the consignor and the consignee does not have an unconditional obligation to pay for the product. When consigned goods are sold by the consignee, a report called "account sales" is given to the consignor together with a cash remittance for the amount of sales minus commission and other expenses chargeable against the consignor.

5. Bill and Hold Arrangement. A contract contract under which which an entity entity bills a customer customer for a product but the entity retains the possession of the product. For example, a customer may request an entity to enter such a contract because of space for the

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

product or because of delays in the customer's production schedule. Depending on the terms of the contract, contract, revenue revenue shall be be recognized recognized "when the customer customer obtains control or takes title of the product" even though the product remains in an entity's physical possession.

 All of the following following criteria must be met for the recognition recognition of revenue revenue in a bill and hold arrangement: a. The custo customer mer reques requested ted for for the arrang arrangemen ement. t. b. The product product must must be "identified "identified separately separately as belonging belonging to the the customer." customer." c. The product product "must "must be ready for physical physical transfer transfer to the customer customer anytime." anytime." d. The entity cannot have have the ability ability to use the the product product or to direct direct it to another another customer. IAS 20 20 - GOVERN GOVERNMEN MENT T GRANTS GRANTS AND AND DISCLO DISCLOSUR SURE E OF GOVERN GOVERNMEN MENT T ASSISTANCE

The treatment of government grants isAssistance. covered byIAS IAS2020 Accounting for Government Grants and Disclosure of Government does not cover: 1. Accounting Accounting on government government grants in financial financial statements statements reflecting reflecting the effects effects of changing prices 2. Governme Government nt assistan assistance ce given given in the form of ‘tax ‘tax breaks’ breaks’ 3. Governme Government nt acting acting as partpart-own owner er of the the entity entity 4. Grants Grants covere covered d by IAS 41 41 Agricu Agricultur lture e Terms to Remember: Government. Government, government agencies and similar bodies whether local, national or 

international. Government Assistance. Action by government designed to provide economic benefit specific to an entity or range of entities qualifying under certain criteria. Government Grants. Assistance in government in form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. An entity should not recognize government grants until it has reasonable assurance that: 1. The entity entity will comply with any any conditions conditions attached attached to to the grant. grant. 2. The entity entity will will actual actually ly receive receive the the grant. grant.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Non monetary Government Grants.  A non monetary asset may be transferred transferred by government to an entity as grant, for example, piece of land, or other resources. Grants Related to Assets . Government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire non-current assets. Presentation of Grants Related to Assets

There are two choices for how government grants related to assets should be shown in the statement of financial position: 1. Set up grant grants s as deferred deferred income. income. 2. Deduct the grant grant in arriving arriving at at the carrying amount of of an asset. asset. Presentation of Grants Related to Income Choice in method of disclosure:

1. Present as a separate credit or under under a general heading. 2. Deduct Deduct from from the related related expense expense.. Repayment of Government Grants 1. Repayment Repayment of Grant related to income: Apply Apply first first against any unamortized unamortized deferred income set up in respect of the grant. Repayment of Grant related to asset: Increase the carrying amount of the asset or reduce the deferred income balance by the amount repayable. Government Assistance 1. Some forms of govern government ment assistance assistance cannot cannot reasonably reasonably have have a value placed placed on

2. them. There are transactions transactions with the government government which which cannot cannot be distinguished distinguished from from the entity’s normal trading transactions. Disclosure required of the following: 1. Accounting Accounting policy policy adopted, including method of presentati presentation. on. 2. Nature and extent of government government grants recogniz recognized ed and other other forms of of assistance received. 3. Unfulfill Unfulfilled ed conditions conditions and other other contingenc contingencies ies attached attached to recogniz recognize e government government assistance. SIC 10 - GOVERNMENT GOVERNMENT ASSISTA ASSISTANCE NCE No Specific Relation to Operating Activities.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

-

Examples Examples of such such assista assistance nce are are transfer transfers s of resourc resources es by govern government ments s to entities entities which: 1. Operate Operate in a parti particula cularr indus industry try 2. Continu Continue e operating operating in recently recently privati privatized zed Industr Industries ies 3. Start or or continue continue to run their their business business in underdeveloped underdeveloped areas.

Government assistance to entities meets the definition of government grants in IAS 20, even if there are no conditions specifically relating to the operating activities of the entity other than the requirement to operate. Assessments Tasks: 1. Differen Differentiat tiate e between between Income Income and Revenue Revenue.. 2. Discuss on how to identify identify contracts contracts with customers and the performance performance obligation in a contract. 3. Illustrate the transaction transaction price in the contract with customers customers

4. Explain the recognition recognition of revenue revenue from from contracts contracts with customers. customers. 5. Expound the the difference difference between between the revenue revenue recognition recognition at point of time and revenue recognition over time. 6. Identify the examples examples of common transactio transactions ns with contracts contracts with customers. 7. Discuss the the accounting accounting for for government government grants and disclosures disclosures for government government assistance. References

Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial  Accounting  Accounti ng Volume Two. Manila, Manila, Philippines. Philippines. GIC GIC Enterprises Enterprises & Co.,Inc. Co.,Inc.  Asuncion, Darrell Joe O. CPA,MBA,  Asuncion, CPA,MBA, Escala, Raymund Raymund Francis Francis A. A. CPA, MBA, MBA, Ngina, Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora Hill, Baguio City. Real Excellence Publishing and Nation’s Foremost CPA Review Inc.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 4 Inventories and Agriculture Week 7 Introduction

This module discusses the concept of recognition and measurement of inventories and those items related to agriculture, e.g. biological assets and agricultural produce. This tackles the different costs associated with inventories, the techniques in measuring the cost of inventories, the accounting for inventory write down, and recognition and measurement of biological assets and agricultural produce. Learning Objectives

 After studying studying this module, students students should should be able to: 1. Understand Understand the concept concept of recognition recognition and and measurement measurement of inventories inventories and accounting for the cost of inventories. 2. Explain the the standards standards that govern govern with with the accounting accounting for for biological biological assets and and agricultural produce. Inventories Inventories (PAS 2) are assets: 1. held for for sale sale in the the ordinar ordinary y course course of busin business' ess' 2. in the process process of of produc production tion for such such sale sale 3. in the form of of materials materials or supplies supplies to be consumed consumed in in the production production process process or in the rendering of services Net Realizable Value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Fair Value is the price that would be received to sell an asset or pa id to transfer a liability in an orderly transaction between market participants at the measurement date.

Inventories can include any of the following:

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

1. Goods Goods purchas purchased ed and held held for for resale, resale, (e.g. (e.g. goods goods held for for sale sale by a retail retailer, er, or land) and buildings held for resale 2. Finish Finished ed good goods s produ produce ced d 3. Work in in progr progress ess bei being ng prod produce uced d 4. Materials and and supplies supplies awaiting awaiting use in in the production production process process (raw materials) materials) Measurement of Inventories

The standard states that “Inventories should be measured at the lower of cost and net realizable value”. Cost of Inventories: 1. Cost Cost of Purc Purcha hase se 2. Cost Costs s of conv conver ersi sion on 3. Other costs costs incurred incurred in bringing bringing the inventories inventories to their their present present location location and condition Cost of Purchase

The standard lists the following as comprising the costs of purchase of inventories: 1. Purc Purcha hase se pri price ce plu plus s 2. Import duties duties and other other taxes plus plus transport, transport, handling handling and any other cost directly directly attributable to the acquisition of finished goods, services and materials less trade discounts, rebates, and other similar amounts Costs of Conversion

Costs of conversion of inventories consist of two main parts: 1. Costs Costs directly directly relate related d to the units units of produ productio ction n 2. Fixed and and variable production production overheads overheads that are incurred incurred in converting converting materials into finished goods, allocated on a systematic basis. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, (e.g. the cost of factory management and administration) Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production. (e.g. indirect materials and labor)

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

The standard emphasizes that fixed production overheads must be allocated to items of inventory on the basis of the normal capacity of the production facilities. Important Points:

1. Normal capacity capacity is the expected achievable achievable production production based based on the average over over several periods/seasons, under normal circumstances. 2. The above above figure should should take account of the capacity capacity lost through planned maintenance. 3. If it approximates approximates to the normal normal level of activity, then the actual level level of productio production n can be used. 4. Low production production or idle idle plants plants will not not result in a higher fixed fixed overhead overhead allocation allocation to each unit. 5. Unallocated Unallocated overheads overheads must be recognized recognized as an expense in the the period in which they were incurred. 6. When production production is abnormally high, the fixed production production overhead overhead allocated allocated to each unit will be reduced, so avoiding inventories being stated at more than cost. 7. The allocation allocation of variable variable production production overheads overheads to each each unit is based on on the actual actual use of production facilities. Other Costs

The standard lists types of cost which would not be included in cost of inventories. Instead, they should be recognized as an expense in the period they are incurred. 1. Abnormal amounts of wasted wasted materials, materials, labor labor or other production production costs. 2. Storage costs costs (except (except costs costs which are necessary necessary in the productio production n process process before a further production stage.) 3. condition Administrative Administrative overheads overheads not not incurred to bring inventories inventories to their location and and 4. Sell Sellin ing g Cos Costs ts Techniques for the Measurement of Costs Standard costs - are set up to take account account of normal production production values: Amount Amount of raw materials used, labor time etc. They are reviewed and revised on a regular basis. Retail method: this is often used in the retail industry where there is a large turnover of inventory items, which nevertheless have similar profit margins. The only practical method of inventory valuation may be to take the total selling price of inventories and deduct an

overall average profit margin, thus reducing the value to an approximation of cost. The

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

percentage will take account of reduced price lines. Sometimes different percentages are applied on a department basis. Cost Formula

There are different methods in determining the cost of inventories, inventor ies, these are the following: 1. Firs Firstt-In In – Firs Firstt-Ou Outt Meth Method od 2. Last Last-I -In n – Firs Firstt-Ou Outt Meth Method od 3. Weighte Weighted d Aver Average age Metho Method d 4. Specif Specific ic Ide Identi ntific ficati ation on First-In-First-Out Method

 Assumes that “the goods goods first purchased purchased are first sold”. The invento inventory ry is thus expressed expressed in terms of recent or new prices while the cost of goods sold is representative of earlier or old prices. Last-In – First-Out First-Out Method Method

The standard does not permit anymore the use of LIFO method. Assumes that “the goods last purchased are first sold.” The inventory is thus expressed in terms of earlier or old prices and the cost of goods sold is representative of earlier or old prices. Weighted Average Method

Cost of the beginning inventory plus the total cost of purchases during the period is divided by the total units produced plus those in the beginning inventory to get the weighted average unit cost.

Specific Identification

Cost of inventories should be assigned by specific identification of their individual cost for items that are not ordinarily interchangeable and goods or services produced and segregated for a specific project Net Realizable Value (NRV)

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

The estimated selling price in the ordinary course of business less the estimated cost of completion completio n and the estimated cost of disposal disposal - as a general rule, assets assets should not be carried at amounts greater than those expected to be realized from their sale or use.

Situations in which NRV is likely to be less than cost, i.e. when there has been: 1. an increa increase se in cost or fall fall in selli selling ng pr price ice 2. physical physical deteri deteriora oration tion in the condit condition ion of invento inventory ry 3. obsole obsolesc scenc ence e of prod produc ucts ts 4. a decision as part of the company’s marketing strategy to manufacture manufacture and and sell products at a loss 5. errors errors in in produ productio ction n or purchas purchasing ing Inventories are usually written writt en down to net realizable value on an item by item or individual basis.

ACCOUNTING FOR INVENTORY WRITE-DOWN

1. The cost cost is is lower lower than than net net realiza realizable ble value value 2. The net net realizab realizable le value value is lower lower than than cost. cost. The following treatment is required when inventories are sold: 1. The carrying carrying amount amount is recognized recognized as as an expense expense in the period in in which the related revenue is recognized. 2. The amount amount of any any write-down write-down of inventories inventories to NRV and all losses losses of of inventories are recognized as an expense in the period the write-down or loss occurs. 3. The amount amount of any reversal reversal of any write-down write-down of of inventories inventories arising arising from an increase in as NRV, is recognized as a in reduction the number recognized an expense in the period which theinreversal occurs.of inventories

Different Cost Formulas for Inventories

Two cost formulas allowed by IAS 2 1. Firs Firstt IInn- Firs Firstt Out Out (F (FIF IFO) O) 2. Weig Weight hted ed Aver Averag age e IAS 2 provides that an entity should should use the same cost formula for for all inventories inventories having similar nature and use to the entity.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

IAS 41: AGRICULTURE

IAS 41 applies the requirements of IFRS to the treatment of Biological Assets. It was issued in February 2001, it seeks to harmonize practice in accounting for agriculture, which demonstrates fundamental differences in its nature and characteristics to other business activities. Terms to remember: 1. Agricultural Agricultural activity activity is the managemen managementt by an entity of the biological biological transformatio transformation n of biological assets for sale, into agricultural products or into additional biological assets. 2. Agricultural Agricultural produce produce is the harvested harvested product product of an entity’s entity’s biological biological assets assets 3. Biologic Biological al assets assets are are living living animals animals or plants. plants. 4. Biological Biological transformation transformation compromises compromises the processes processes of growth, growth, degeneratio degeneration, n, production and procreation that cause qualitative changes in a biological asset. 5. A group of of biological biological assets is an aggregation aggregation of similar living living animals animals or plants. plants.

6. Harvest is the detachment detachment produced produced from a biological biological asset asset or the cessation of a biological asset’s life processes. 7. Fair value value is the price that would be received received to sell an an asset or paid paid to transfer transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 8. Carrying Amount is the amount at which which an asset is recognized recognized in the statement statement of financial position. Important points: 1. Biological: Biological: relates to life phenomena phenomena‟, ‟, living animals and and plants with an innate capacity of biological transformation which are dependent upon a combination of natural resources. 2. Transformation: Transformation: involves involves physical physical transformation, transformation, whereby whereby animals and and plants plants undergo a change in biological quantity overtime 3. Manageme Management: nt: biologic biological al transform transformatio ation n is managed. managed. 4. Conditions Conditions are stabilized stabilized or enhanced. enhanced. The The transparency transparency of the relationsh relationship ip between input and outputs is determined by the degree of control (intensive vs. extensive). a. It is different different from from exploitation exploitation through through extraction, extraction, where where no attempt attempt is made to facilitate the transformation. b. Biological Biological assets are managed managed in groups groups of plant or animal animal classes, classes, using using individual assets to ensure the sustainability of the group. D. Produce: diverse and may require further processing before ultimate consumption

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Biological Assets

-

Agricu Agricultu ltural ral produ produce ce at at the the point point of harv harves estt Government gr grants

The standard does not apply to agricultural land or intangible assets related to agricultural activity.  After harvest, IAS 2 is applied. The core income-producing income-producing assets of agricultural agricultural activities, activities, held for their transformative capabilities that leads to various outcomes: Asset changes: - Growt Growth: h: Incr Increa ease se in qua quanti ntity ty and and or or qual quality ity - Degenera Degeneration tion:: Decrea Decrease se in quan quantity tity and and or quality quality Creat Creation ion of of new assets: assets: - Producti Production: on: produ producing cing separ separable able nonnon-livi living ng product product -Proc -Procreat reation: ion: produ producing cing separable living animals. Two broad categories of agricultural production system:

1. Consumab Consumable: le: animals/p animals/plant lants s themselves themselves are harves harvested ted 2. Bearer: Bearer: animals animals/pla /plants nts bear bear produce produce for harves harvestt Biological assets are usually managed in groups of animals or plant classes, with characteristics which allow sustainability in perpetuity. Land often forms an integral part of the activity itself in pastoral and other land-based agricultural activities. Bearer Biological Assets

 Amendment to IAS 41 regarding regarding plant-based plant-based bearer biological biological assets including trees grown in plantations, such as grape vines, rubber trees, and oil palms are used solely to produce crops over several periods and are not in themselves consumed. The fair value was not an appropriate measurement for these assets as, once they reach maturity, the only economic benefit they produce comes from the agricultural produce they create. Biological Assets. These assets have been removed from the scope of IAS 41

and shouldatbe accounted costs for under 16 Property, Plantsubject and Equipment. They and are measured accumulated until IAS maturity and are then to depreciation

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

impairment charges. Agricultural produce from these plants continues to be recognized under IAS 41/IAS 2. 1. The entity controls the assets assets as a result result of IAS IAS events.The events.The entity entity controls controls the assets as a result of IAS events. 2. It is probable probable that that the future future economic economic benefits benefits associated associated It is probable probable that that the future economic benefits associated with the asset will flow to with the asset will flow to the entity.the entity. 3. The fair value value or or cost of the the asset asset to the entity entity can can be The The fair value value or or cost of of the asset to the entity can be measured reliably.measured reliably. Presentation and disclosure In the statement statement of financial position, biological assets assets should be classified as a separate separate class of assets falling under neither current nor noncurrent classifications. This reflects the view of such assets as having an unlimited life on a collective basis; it is the total exposure of the entity to this type of asset that is important. Biological asset should also be sub-classified either in statement of financial position or as a note to the accounts: 1. Class Class of animal animal or plan plantt 2. Nature Nature of activi activities ties ((con consuma sumable ble or or bearer) bearer) 3. Maturity Maturity or immatu immaturity rity for iinten ntended ded use use Agricultural Produce

It is recognized at the point of harvest. Agricultural produce is either incapable of biological biologic al process or such processes remain dormant. Recognition ends once the produce enters trading activities or production processes within integrated agribusinesses, although processing activities that are incidental to agricultural activities and that do not materially alter the form produce are not counted as processing. Measurement and Presentation

The IAS states that agricultural produce should be measured at each year end at fair value less estimated point of sale cost, the extent that is sourced from an entity’s urced from an entity’s biological assets. This is logical that when you consider that, until harvest, the agricultural produce was valued at fair value, anyway as part of the biological asset. The change in carrying amount of the agricultural produce held at year end should be recognized or expense in profit or within loss. This willtime be rare as such produce is usually soldas or income processed within a short time. a short

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Presentation in the Statement of Financial Position

 Agricultural produce should be classified  Agricultural classified as inventory inventory in the statement of financial position and disclosed separately separately either in the statement statement of financial position or in the notes.

Assessments

 Answer the the following following requirements: requirements: 1. Defin Define e inven inventor tories ies.. 2. Give example examples s of inve inventor ntories. ies. 3. Explain Explain the the measure measurement ment for for invento inventories ries.. 4. Illustra Illustrate te the costs costs attribut attributable able to inven inventori tories. es. 5. Discuss Discuss the differe different nt costing costing methods methods for invento inventories ries.. 6. Expound Expound the the proper proper valuatio valuation n of inventor inventories. ies. 7. Discuss Discuss the accoun accounting ting treatm treatment ent for agricu agricultur lture e 8. Differen Differentiat tiate e the two categorie categories s of biological biological assets. assets. 9. Explain Explain the recogni recognition tion princip principle le for biologica biologicall assets. assets. 10.Define the proper valuation for biological assets and agricultural produce

References Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial  Accounting  Accounti ng Volume Two. Manila, Manila, Philippines. Philippines. GIC GIC Enterprises Enterprises & Co.,Inc. Co.,Inc.

 Asuncion, Darrell Joe O. CPA,MBA,  Asuncion, CPA,MBA, Escala, Raymund Raymund Francis Francis A. A. CPA, MBA, MBA, Ngina, Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora Hill, Baguio City. Real Excellence Publishing and Nation’s Foremost CPA Review Inc.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 5 FINANCIAL INSTRUMENTS Week 5 Introduction

The modern globalized financial market, along with the new technologies accessible to every person, became an integral part of everyday life and activities of both physical persons and businesses. Financial instruments are a part of this financial market and the relevant legal knowledge about them ensures greater financial security and additional financial capabilities. Taking into account the importance of these instruments in the modern economy and their complexity, the information analysed during the course is particularly valuable. This module covers the related standards PAS 32 Financial Instruments: Presentation; PFRS 7 Financial Instruments: Disclosure; PFRS 9 Financial Instruments; and IFRIC 2 Members’ shares in Cooperative Entities and Similar Instruments.

Learning Objectives  After studying studying this module, students students should should be able to: 1. Define Define financia financiall instrume instruments nts.. 2. Give examples examples of financial financial assets and financial financial liabilities. liabilities. 3. Differentiate Differentiate between between a financial financial liability and an an equity instrument. instrument. 4. State the requirements requirements for offsetting offsetting financial financial assets assets and and financial financial liabilities. liabilities. 5. State the classificat classifications ions of financial financial assets and their their initial and subsequent subsequent measurements . 6. State the classificat classifications ions of financial financial liabilities and their initial and subsequent subsequent measurements.

Financial Instruments PAS 32 prescribes the principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.

PAS 32 complements PFRS 9 Financial Instruments, which prescribed the recognition and measurement of financial assets and financial liabilities, and financial liabilities, and PFRS 7 Financial Instruments: Disclosures, which prescribes the disclosures for financial instruments. PAS 32 applies to all types of financial instruments except the following for which other Standards apply: a. investments investments in subsidiaries, subsidiaries, associates associates and and joint joint ventures ventures b. employer’s rights and obligations obligations under employee benefit plans

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

c. In Insu sura ranc nce e contr contrac acts ts PAS 32 applies to instruments designated to be measured at fair value through profit or loss and contracts for the future purchase of delivery of a commodity or other nonfinancial items that can be settled. PAS 32 defines a financial instrument as a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial asset is any asset that is:

cash; an equity instrument of another entity; a contractual right to receive cash or another financial asset from another entity; a contractual right to exchange financial instruments with another entity under conditions that are potentially favorable to the entity; or  e. a contract that will or may be settled in the entity's own equity instruments and is not classified as the entity’s own equity instrument.

a. b. c. d.

Examples of and financial a. Cash an d cashassets equivalen equivalents ts (e.g. (e.g. cash on on hand, in banks, shor-term shor-term money money  placements, and cash funds) b. Receivables Receivables such such as accounts, accounts, notes, notes, loans, loans, and and finance lease lease receivabl receivables es c. Investments Investments in equity or debt instrument instruments s of other entitie entities s such as held held for trading securities, investments in subsidiaries, associates, joint ventures, investments in bonds, and derivative assets d. Sinking Sinking fund and and other long-term long-term funds funds composed composed of cash cash and other other financial assets.

The following are NOT financial assets: - Physical Physical assets, assets, such such as as invento inventories ries,, biologi biological cal asse assets, ts, PPE PPE and and investment property -

Intangible as assets Prepa Prepaid id exp expen enses ses and and adva advance nces s to suppli suppliers ers The entity’s entity’s own equity equity instrume instrument nt (e.g. (e.g.,, treas treasury ury shares) shares)

Financial liability is any liability that is: a. a contractual obligation to deliver cash or another financial asset to another entity; b. a contractual obligation to exchange financial assets or financial liabilities with

another entity under conditions that are potentially unfavorable to the entity; or  c. a contract that will or may be settled in the entity's own equity instruments and is not classified as the entity’s own equity instrument. Examples Exampl es of financial financial liabilitie liabilities s

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

a. b. c. d. e.

Payables Payables such such as accounts accounts,, notes, notes, loans loans and and bonds bonds payable payable Leas Lease e li liabi abili liti ties es Held for trading trading liabiliti liabilities es and derivative derivative liabil liabilities ities Redeem Redeemabl able e prefer preference ence share shares s issued  issued  Security Security deposit deposits s and and other other returnab returnable le deposits deposits

The following are NOT financial liabilities: - Unearne Unearned d revenue revenues s and warrant warranty y obliga obligation tions s that that are to be settled settled by by future delivery of goods or provision of services - Taxes Taxes,, SSS, SSS, Philhe Philhealt alth h and PagPag-IBI IBIG G (HD (HDMF MF)) payab payables les - Cons Constr truc ucti tive ve obl oblig igat atio ions ns PAS 32 defines an equity instrument as any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Presentation The issuer classifies a financial instrument, or its component parts, as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contract (rather than its legal form) and the definitions of a financial asset , a financial

liability and an equity instrument. When determining whether whether a financial instrument instrument is a financial liability or an equity instrument, the overriding consideration is whether the instrument meets the definition of a financial liability. Financial Liability

Equity Instrument

The entity has a contractual obligation to pay cash or another financial asset or to exchange financial instruments under potentially unfavorable conditions.

The entity has no obligation to pay cash or another financial asset or to exchange financial instruments under potentially unfavorable conditions.

 A contract is not an equity instrument instrument merely because it is to be setted in the entity’s own equity instruments. The following guidance applies when a contract requires settlement in the entity’s own equity instruments: Financial Liability

Equity Instrument

The contract requires the delivery* of a (a) variable number of the entity’s own equity instruments in exchange for a fixed amount of cash or another financial asset or (b) a fixed number of the entity’s own equity instruments in exchange for a

The contract requires delivery (receipt) of a fixed number of the entity’s own equity instruments in exchange for a fixed aount of cash or another financial asset. Example: a share option that gives the holder a right to buy a fixed number of the

variable financial amount asset. of cash or another

issuer’s shares for a fixed price.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Examples: - Vari Variab able le numb number er for for a fixe fixed d amount: a contract to deliver as many shares as are quail to the value of a fixed amount of cash or a fixed number of units of a commodity - Fixe Fixed d num numbe berr for for a var varia iabl ble e amount: a contract contract to deliver own equity instruments in exchange for an amount of cash * a contract to rec receive eive (rather than to deliver) is a financial asset

Notes: For a financial asset/financial liability - Vari Variab able le numb number er for for a fixe fixed d amo amoun untt - Fixe Fixed d num numbe berr for for a var varia iabl ble e amo amoun untt For equity instruments - Fixe Fixed d num numbe berr for for a fix fixed ed amou amount nt  An essential essential feature of an equity instrument instrument is the absence of a contractual contractual obligation to pay cash or another financial asset. This sistrue even if the holder of the instrument is entitled to pro rata share in dividends or of the net assets of the entity in case of liquidation. Legal form is also irrelevant when determining if a financial instrument is a financial liability or an equity instrument. Some instruments are in the form of shares of stocks but the issuer classified them as financial liabilities if they meet the definition of a financial liability. Redeemable preference shares ● Ar Are e pref preferr erred ed stocks stocks whic which h tthe he holder has the right to redeem at a set date ● Ar Are e class classifi ified ed as financ financial ial liabil liability ity because when the holder exercises its right to redeem, the issuer is mandatorily obligated to pay for the redemption price

Callable preference shares ● Are prefe preferre rred d st stoc ocks ks iin n whic which h the the issuer has the right to call at a set date ● Are Are clas classi sifi fied ed a as s equi equity ty ins instr trum umen entt because the right to call is at the discretion of the issuer and therefore has no obligation to pay unless it chooses to call on the shares

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

IFRIC 2 Members’ shares in Cooperative Entities and Similar Instruments addresses the classification of members’ shares in cooperatives. IFRIC 2 uses the same principles as those of PAS 32. Members’ shares in cooperative entities and similar instruments are equity if: a. The entity entity has an unconditional unconditional right to refuse redemption redemption of the the members’ shares or b. Redemption Redemption is unconditio unconditionally nally prohibited prohibited by law or relevant relevant regulation. regulation. Puttable instrument  A puttable puttable instrument instrument is one that that gives the the holder the right to return (put (put back) the the instrument to the issuer in exchange for cash or another financial asset or is automatically automaticall y put back to the issuer upon the occurrence of a specified future event, e.g. death of the holder. It includes includes a contractual contractual obligation for the issuer issuer to redeem or repurchase repurchase the instrument. Accordingly, it is classified as a financial liability except when the instrument also represents a residual interest in the net assets of the issuing entity.

 As an exception exception to the definition definition of a of a financial financial liability , a puttable puttable instrument is classified as an equity instrument if it has the features of an equity instrument such as entitlement to pro rata share in case of liquidation, non-priority over other instruments, no other contractual obligations similar to those of a financial liability, and total cash flows based substantially on profit or loss and changes in net assets. In addition to these features, the issuer must have no other instrument that has total cash flows based substantially on profit or loss and changes in net assets and the effect of substantially restricting or fixing the residual return to the puttable instrument holders. Compound Financial Instruments

 A compound financial instrument is a financial instrument that , from the issuer’s perspective, contains both a liability and an equity component. These components are classified and accounted for separately.  An example of a compound compound instrument instrument is convertible convertible bonds. Convertible Convertible bonds are bonds that can be converted into shares of stocks of the issuer. When a n entity issues convertible convertib le bonds, bonds, in effect, effect, it is issuing issuing tow tow instruments instruments - (1) a debt debt instrument instrument for the bonds payable and (2) an equity instrument for the equity conversion feature. These two components are presented separately in the statement of financial position. Equity is defined as a residual amount. Therefore, to separate the debt and equity component of a compound instrument, the entity simply deducts from the fair value of the whole instrument the fair value of the debt component without the equity feature; the remaining amount represents the equity component. This procedure follows the basic

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

accounting equation “Assets = Liabilities + Equity” transposed to “Equity = Assets Liabilities”. Equity component

=

Equi Eq uity ty co comp mpon onen entt equa equals ls

Assets

-

Cash Cash proc procee eeds ds from from issuance of compound instrument less

Liabilities Fair value of debt component without the equity feature

is the amount amount for which an asset asset could be exchanged, exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. The sum of the carrying amounts allocated to the liability and equity components is always equal to the fair value of the whole instrument. No gain on the initial recognition of the components. The separate classifications of the components are not revised for subsequent changes in the likelihood that the conversion option will be exercised. Fair value

Treasury Shares Treasury shares (treasury stocks) are an entity’s own shares that were previously issued but were subsequently reacquired but not retired. Treasury shares are presented separately either in the statement of financial position or in in the notes as deduction from equity. equity. No gain or loss arises from the purchase, sale, issue or cancellation of the entity’s own equity instruments. The consideration paid or received from such transactions is recognized directly in equity. Interest Dividends, Losses and Gains The classification of a financial instrument as a financial liability or an equity instrument determines determin es the accounting for the related interest, dividends, losses and gains. Those that relate to financial financial liability are recognized as income or expense expenses s in profit

or loss. While those that relate to equity instruments are recognized directly in equity. For example, dividends on redeemable preference shares (financial liability) are recognized as expense (e.g., interest expense) in profit or loss while dividends on callable preferences and other equity instruments are recognized directly in equity as a deduction from retained earnings. Premium or discount on financial liabilities is included in the carrying amount of the financial liability liability and and subsequently subsequently amortized to to profit or or loss while premium premium or discount discount on equity instruments are recognized directly in equity. Gains and losses on redemptions or refinancings of financial liabilities are recognized in profit or loss while redemptions or refinancings of equity instruments are recognized as changes in equity. Changes in the fair value of a financial liability are generally not recognized unless the financial liability is measured at fair value through profit or loss. Changes in fair value of an equity instrument are not recognized.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Transaction costs Transaction costs on issuing equity instruments (e.g., stock issuance costs, such as legal fees, registration costs and stock certificate printing costs), to the extent taht tey are avoidable costs, are accounted for as a deduction from equity while transaction costs on issuing financial liabilities (except liabilities measured at fair value through profit or loss) are included in the carrying amount of the financial liability and subsequently

amortized to profit or loss. Because of the varying treatments, transaction costs on issuing compound financial instruments are allocated to the debt and equity components based on their assigned values. Likewise, transactions that relate jointly to more than one transaction are allocated to those transactions using a rational basis of allocation. The costs of an abandoned equity transaction are recognized as expenses. Offsetting a financial asset and a financial liability  A financial financial asset and a financial liability are offset and only the net amount is presented in the statement of financial position. When the entity has both: a. A lega legall right right of set set o off ff and and b. An intention intention to settle the the amounts amounts on a net basis basis or simultaneously. simultaneously.

Both of the conditions above must be met before offsetting is permitted. PAS 32 requires presenting financial assets and financial liabilities on a net basis when doing so reflects an entity’s expected future cash flows from settling two or more separate financial financial instruments. instruments. When the entity has both the legal right to net settlement and intention to do so, it has, in effect, only a single financial asset or financial liability. Neither a legal right alone nor an intention warrants offsetting. ➢  A mere intention to settle net without the right to do so is not sufficient sufficient to justify offsetting because the rights and obligations associated with the individual financial asset and financial liability remain unaltered. ➢ Conversely, a legal right to settle net without the intention to do so is also not sufficient to justify offsetting because this does not reflect the entity’s expected future cash flows from settling two or more separate financial instruments. Offsetting is inappropriate inappropriate for (a) financial financial asset or other assets assets that are pledged as collateral for non-recourse financial liabilities and (b) sinking fund and the related financial liability for which the fund was established. Scope of PFRS 9 Financial Instruments PFRS 9 establishes the financial reporting principles for financial assets and financial liabilities, particularly their classification and measurement. It applies to all financial instruments except those that are dealt with under other Standards, such as: ➢ interest in subsidiaries (PFRS 10 Consolidated Financial Statements); ➢ investment in associates and joint ventures (PAS 28); ➢ those arising from employee benefit plans (PAS 19);

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______  ➢ ➢ ➢ ➢

leases (PFRS 16 Leases) share-based payment transactions (PFRS 2) those that are required to be classified as equity instruments (PAS 32) those arising from contracts with customers (PFRS 15 Revenue from Contracts with Customers)

Initial Recognition Financial assets and financial liabilities are recognized only when the entity becomes a party to the contractual provisions of the instrument. Classification of Financial Assets Financial assets are classified as subsequently measured at: a. amor amorti tize zed d cost cost;; b. fair value value through through other comprehensive comprehensive income (FVOCI); (FVOCI); or  c. fair value value throug through h profit profit or or loss loss (FVPL (FVPL)) Basis for classification

Financial assets, except those that are designated, are classified on the basis of both: a. The entity’s entity’s business business model model for managing the financial financial assets; assets; and and b. The contractual contractual cash flow flow characteristic characteristics s of the the financial financial asset. asset. Classification at Amortized cost  A financial financial asset is measured at amortized amortized cost if both both of of the the fo following llowing conditions conditions are met: a. The asset is is held within within a business business model model whose whose objective objective is to hold hold financial financial assets in order to collect contractual contractual cash flows (“hold to collect” business business model); and b. The contractual contractual terms terms of the financial financial asset asset give rise rise on specified specified dates dates to cash flows that are solely payment of principal and interest on the principal amount

outstanding Classification at Fair Value through Other Comprehensive Income  A financial financial asset asset is measured at fair fair value value through through other other comprehensiv comprehensive e income income (FVOCI) (FVOCI) if both of the following conditions are met: a. The financial financial asset is is held within within a business business model model whose objective objective is is achieved achieved by both collecting contractual cash flows and selling financial assets (“hold to collect and sell” business model); and b. The contractual contractual terms terms of the financial financial asset asset give rise rise on specified specified dates dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Classification at Fair Value through Profit or Loss 8

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

 A financial asset that does not meet the conditions for measurement measurement at amortized cost of FVOCI is measured at fair value through profit or loss (FVPL). This is normally the case for “held for trading” securities.

Assessments  Answer the the following following questions: questions: 1. What are financia financiall instr instrumen uments? ts? 2. What are the the differences differences between financial financial assets and financial financial liabilities? liabilities? Explain. 3. What are the classifications classifications of financial financial assets? Explain each. 4. What are the classifications classifications of financial financial liabilities? liabilities? Explain Explain each. each. 5. What are the proper measuremen measurementt for financial financial assets, assets, and for financial financial liabilities, liabilities, respectively?

References

Millan, Zeus Vernon B. ( 2019) Conceptual Framework and Accounting Standards . Bandolin Enterprise. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-financial-instruments/ https://www.iasplus.com/en/standards/ias/ias32 https://www.iasplus.com/en/standards/ifrs/ifrs7 https://www.iasplus.com/en/standards/ifrs/ifrs9

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 6 Accounting for Tangible Non-current Assets Week 11 Introduction

This module tackles the recognition and measurement of the tangible non-current assets. This primarily discusses the accounting for property, plant and equipment under PAS 16 and investment property under PAS 40. This also illustrates the accounting for depreciation and derecognition of property, plant and equipment and investment property. Learning Objectives

 After studying studying this module, students students should should be able to: 1. Understand Understand the concept concept of recognition recognition and measurement measurement of property, plant and equipment and investment property. 2. Explain the the accounting accounting for depreciat depreciation ion of property, property, plant plant and equipment equipment and and investment property. 3. Discuss the requirements requirements for disclosure disclosures s for property, property, plant plant and equipment equipment and investment property. Property, Plant and Equipment IAS 16 Property, plant and equipment Objective The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information informa tion about an entity’s investment in its property, plant and equipment and the changes in such investment.

The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them. Scope This Standard shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment.

This Standard does not apply to: (a) property, plant and equipment classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

(b)

(c) (d)

biological assets related to agricultural activity other than bearer plants (see IAS 41 Agriculture). This Standard applies to bearer plants but it does not apply to the produce on bearer plants. the recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources ). mineral rights and mineral reserves such as oil, natural gas and similar nonregenerative resources.

However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)–(d).  An entity using the cost model for investment investment property in accordance accordance with IAS 40 Investment Property shall use the cost model in this Standard for owned investment property. Effective date  An entity shall apply apply this this Standard Standard for for annual annual periods periods beginning beginning on or after 1 January January 2005. Earlier application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact. Defined terms  A bearer plant is a living plant that:

(a) is used in the production or supply of agricultural produce; (b) is expected to bear produce for more than one period; and (c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. The carrying amount of an asset is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment impairm ent losses. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given tothe acquire an attributed asset at the timeasset of itswhen acquisition construction or, where applicable, amount to that initiallyorrecognised in accordance with the specific requirements of other IFRSs. The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

The entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Useful life is defined as:

(a) (b)

the period over which an asset is expected to be available for use by an entity; or  the number of of production or similar similar units expected to be obtained obtained from the asset by

an entity. Property, Plant and Equipment are held for use in production or supply of goods or services, for rental to others other s , or for administrative purposes, and are expected to be used during more than one period. Their major characteristics are: 1. Tang Tangib ible le Asse Assets ts 2. Used Used in Busi Busine ness ss 3. Expected Expected to to be used used over over a period period of more more than than

Examples of property, plant and equipment: 1. Land 2. Land Land Impr Improv ovem emen ents ts 3. Build uildin ing g 4. Mac Machin hiner ery y 5. Ship 6. Aircraft 7. Furnit Furniture ure and and Fixt Fixture ures s 8. Of Offi fice ce Equi Equipm pmen entt 9. Patter Patterns, ns, Molds, Molds, and and Dies Dies 10.Tools 11.Bearer Plant Recognition of Property, plant and equipment:

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

 An item of property, property, plant, and and equipment equipment shall be recognized recognized as asset when: when: 1. It is probable probable that future economic economic benefits benefits associated associated with with the asset will flow to the entity. 2. The cost cost of the the asset asset can be be measured measured relia reliably. bly. Measurement at Recognition

 An item of property, property, plant and equipment that qualifies for recognition recognition as an asset shall be measured at cost. Cost - amount of cash or cash equivalent equivalent paid and the fair value of the other other consideration consideration given to acquire an asset at the time of acquisition Element of Cost

1. Purc Purcha hase se Pric Price e 2. Cost directly directly attributable attributable to bringing bringing the the asset to the location location and condition condition necessary for it to be capable of operating in the manner intended by management. 3. Initial estimate estimate of the cost of dismantling dismantling and removing the item and restoring restoring the site on which it is located for which an entity has present obligation. Directly Attributable Cost 1. Cost of Employee Employee Benefit Benefit arising arising directly for the construction construction or acquisition acquisition of an item of property, plant and equipment 2. Cost Cost of of site site prep prepara aratio tion n 3. Initial Initial delivery delivery and handlin handling g cost cost

4. Installa Installation tion and assembl assembly y cost cost 5. Prof Profes essi sion onal al Fee Fee 6. Cost of testin testing g whether whether the asset asset is function functioning ing properl properly y Cost not Qualifying for Recognition 1. Cost Cost of open opening ing a new new facili facility ty 2. Cost of of introdu introducing cing a new new produc productt or service service 3. Cost of conducting conducting business in a new location or with a new class class of customer, customer, including cost of staff training 4. Administ Administrati ration on and other other genera generall overhea overhead d cost 5. Cost incurred incurred while an item capable capable of operating operating in the manner manner intended intended has yet yet to be brought into use or is operated at less than full capacity 6. Initia Initiall o ope pera ratin ting g loss loss

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

7. Cost of relocating relocating or reorganizi reorganizing ng part or all of of an entity’s entity’s operation operation Initial recognition of indirect costs

Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing increasin g the future economic benefits benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets. Such items of property, plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired Subsequent Subsequ ent recognition recognition of indirect indirect costs

Day to day servicing: · An entity does not recognise in the carrying amount of an item of property, plant and equipment the costs of the day-to-day servicing of the item. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ are primarily the costs of labour and consumables, and may include the cost of small parts. These costs are expensed through profit and loss. Replacement parts: · Parts of some items of property, plant and equipment may require replacement at regular intervals or acquired to make a less frequently recurring replacement, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred provided that the recognition criteria are met Major inspections: · Costs incurred for major inspections for faults regardless of whether parts of the item are replaced are recognised to the carrying amount of the item of property, plant and equipment. · Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is derecognised. This occurs regardless of whether the cost of the previous inspection was identified in the transaction in which the item was acquired or constructed. Measurement at recognition  An item of property, property, plant and equipment equipment that qualifies for recognit recognition ion as an asset shall be measured at its cost. The cost of a self-constructed self-con structed asset is determined using the same principles as for an acquired asset. Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are 5

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

in the location and condition necessary to be capable of operating in the manner intended by management The cost of an item of property, plant and equipment comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. (c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Cash price equivalent

The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest interes t over the period of credit unless such interest is capitalised in accordance with IAS 23 Borrowing Costs. Asset exchange

One or more items of property, plant and equipment may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The following discussion refers simply to an exchange of one non-monetary asset for another, but it also applies to all exchanges described in the preceding sentence. The cost of such an item of property, plant and equipment is measured at fair value unless: (a) the exchange transaction lacks commercial substance or  (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired item is measured in this way even if an entity cannot immediately derecognise the asset given up. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.  An entity determines determines whether whether an exchange exchange transaction transaction has has commercial commercial substance substance by considering the extent to which its future futur e cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration configurati on of the cash flows of the asset transferred; or  (b) the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange; and (c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged. For the purpose of determining whether an exchange transaction has commercial substance, the entity-specific value of the portion of the entity’s operations affected by the transaction shall reflect post-tax cash flows. The result of these analyses may be clear without an entity having to perform detailed calculations. The fair value of an asset is reliably measurable if: (a) the variability in the range of reasonable fair value measurements is not significant for that asset; or  (b) the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value. If an entity is able to measure reliably the fair value of either the asset received or the asset given up, then the fair value value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident.

Government assistance

The carrying amount of an item of property, plant and equipment may be reduced by Government Grants and government grants in accordance with IAS 20 Accounting for Government Disclosure of Government Assistance. Measurement after recognition  An entity shall choose either the cost model or the revaluation revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. Cost model

 After recognition recognition as an asset, an item of property, property, plant and equipment equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Revaluation model 7

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

 After recognition recognition as an asset, an item of of property, plant and equipment equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. When an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways: (a) the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The gross carrying amount may be restated by reference to observable market data or it may be restated proportionately to the change in the carrying amount. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses; or  (b) the accumulated depreciation is eliminated against the gross carrying amount of the asset. Revaluation changes shall be accounted for as follows: The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in accordance with IAS 12 Income Taxes. The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

Acquisition of PPE: 1. Cash Basi asis 2. On Accoun ount 3. On Instal Installme lment nt Ba Basis sis DERECOGNITION

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

The cost of the property, plant, and equipment together with the related accumulated depreciation shall be removed from the balance sheet. IAS 16, Paragraph 67, provides that the carrying amount of an item of property, plant and equipment shall be derecognized on disposal or w hen no future economic benefits are expected from the use or disposal. Fully Depreciated Property

When the carrying amount is equal to zero, or the carrying amount is equal to residual value. In such a case, the asset account and the related accumulated depreciation accounts are closed and the residual value is set up in a separate account. The cost of fully depreciated asset remaining in service and the related accumulated depreciation ordinarily shall not be removed from the accounts. Some ideas how long the non current assets useful life will be and how the entity might decide what to do with it: 1. Keep on using the the non current asset until until it becomes completely completely 2. worn out, useless useless and worthles worthless. s. 3. Sell off the non current current asset asset at the end end of its useful life, life, either by selling selling it as a second hand item or as scrap. DEPRECIATION ACCOUNTING Depreciation - It is define defined d as the syste systemati matic c allocat allocation ion of a depre depreciab ciable le amount amount of of an asset asset over over the useful life.

-

Its object objective ive is to to have have each each period period benefi benefittin tting g from from the use use of the the asset asset bear bear an equitable share of the asset cost. Deprecia Depreciation tion for for the acco accounti unting ng period period is is charged charged to to net profi profitt or loss loss for the the period period either directly or indirectly.

Depreciation in the Financial Statements - It is an expense. - It may be part part of the the cost cost of good goods s manufac manufacture tured d or an an operati operating ng expens expense. e. - The depre depreciat ciation ion charge charge for each each period period shall shall be reco recogniz gnized ed as expen expense se unless unless it is included in the carrying amount of another asset. Depreciation Period

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

-

The depre depreciab ciable le amount amount of an an asset asset shall shall be alloca allocated ted on a systemat systematic ic basis basis over over the useful life. Deprecia Depreciation tion of an as set set only only begin begins s when when it is avail available able for use. Depre Deprecia ciatio tion n cease ceases s when when the ass asset et is dere dereco cogni gnized zed..

Depreciable Assets - Are expe expected cted to be used during during more more than one account accounting ing perio period d - Have Have a lim limit ited ed usef useful ul life life - Are held held by an an entity entity for for use in the the product production ion or or supply supply of goods goods and and service services, s, for rental to others, or for administrative purposes

Useful life - The period period ove overr which which a depreci depreciable able asset asset is expec expected ted to be used used by the entit entity; y; or  - The number number of of producti production on or similar similar units units expec expected ted to be obtain obtained ed from from the asset asset by the entity Factors in Determining Useful Life 1. Expected usage of the asset asset Usage is assessed assessed by reference reference to to the asset’s asset’s expected capacity or physical output 2. Expected physical physical wear and and tear This This depends depends on the operational operational factors factors such as as the number of shifts the asset is used, the repair and maintenance program and the care and maintenance of the asset while idle. 3. Technical Technical or commercial commercial obsolescence obsolescence This arises arises from changes changes or improvemen improvements ts in production or change in the market demand for the product output of the asset. 4. Legal limits Legal limits limits for the use use of the asset, such such as the expiry date of the related lease. Residual Period - It is the estim estimated ated net amount amount current currently ly obtai obtainable nable if the asset asset is is at the the end end of of the useful life. - If there’s there’s any any change changes, s, it should should accou account nt for as as a change change in an an accounti accounting ng estima estimate. te. - It may increase increase to an amount amount equal equal to to or great greater er than than the the carryin carrying g amount. amount. - Deprecia Depreciation tion is is recogniz recognized ed even even if the fair fair value value of the the asset asset exceeds exceeds the the carryin carrying g amount as long as the residual value does not exceed the carrying amount Depreciable Amount - The deprec depreciabl iable e amount amount of a depre depreciab ciable le asset asset is the the histor historical ical cost cost or other other

amount substituted substituted for cost in the financial statements, less the estimated res residual idual value.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

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Each part part of an item item of prope property, rty, plant plant and and equipme equipment nt with a cost that that is signif significan icantt in relation to the total cost of the item shall be depreciated separately. The entit entity y also also depreci depreciates ates separ separatel ately y that that remaind remainder er of the the item item and the remainder consists of the parts of the item that are individually not significant.

Depreciation Methods 1. Strai Straigh ghtt lin line e Met Metho hod d - The annua annuall deprecia depreciation tion charge charge is calcul calculated ated by alloca allocating ting the the deprecia depreciable ble amount equally over the number of years of useful life. - It is a con consta stant nt char charge ge over over the the usefu usefull life life of th the e asse asset. t. - It is ado adopte pted d when when the the princ principa ipall cause cause of of depre deprecia ciatio tion n - It is is a passage age of of tim time e. - The strai straight ght line line appro approach ach consi considers ders depreci depreciatio ation n a functi function on of time time rather rather than as a function of usage. 2. Redu Reduci cing ng Bala Balanc nce e Metho Method d - It provide provides s higher higher deprec depreciati iation on in the the earlie earlierr years years and lower lower deprecia depreciation tion in the later years of the useful life of the asset. - This method method results results in a decrea decreasing sing deprecia depreciation tion charg charge e over over the useful useful life. life. 3. Mach Machin ine e Hou Hourr Meth Method od - It is also also simi similar lar to produ producti ction on metho method d - It assumes assumes that depreciat depreciation ion is mor more e a functi function on of of use rathe ratherr than passage passage of time. - The usefu usefull life of the the asset asset is considere considered d in terms terms of of the output output it produc produces es

-

or the number of hours it works. The depr deprecia eciation tion is relate related d to the estimate estimated d produc production tion capa capabili bility ty of th the e asset and is expressed in a rate per unit of output or per hour of use. It is is adopte adopted d if the principa principall cause cause of depre depreciat ciation ion is usag usage e

4. Sum Sum of the the dig digit its s Metho Method d - Togethe Togetherr with with Double Double Decli Declining ning Metho Method d , sum of the digi digits ts method method is is one of the accelerated methods of depreciation - It beg begins ins by add adding ing up the the year years s of expe expecte cted d life. life.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

The depreciation charge for each period shall be recognised in profit or loss unless it is included in the carrying amount of another asset. The depreciable amount of an asset shall be allocated on a systematic basis over its useful life and shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.  A variety of depreciation depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include: 1. straight-line straight-line method, method, the diminishing diminishing balance method and and the units units of production production method. Straight-line 2. depreciation depreciation results results in a constant constant charge charge over the the useful life if the asset’s residual residual value does not change. 3. diminishing diminishing balance method results results in a decreasing decreasing charge charge over the the useful life. life. 4. units of production production method result result in a charge charge based based on the the expected expected use or output. output. The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. That method is applied consistently from to period unlessbenefits. there is a change in the expected pattern of consumption of period those future economic The depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount. Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) and the date that the asset is derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production. The residual value and the useful life and depreciation method of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8  Accounting Policies, Changes in Accounting Estimates and Errors.  A depreciation method that is based on revenue that is generated generated by an activity that includes the use of an asset is not appropriate. The revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

of the economic benefits of the asset. For example, revenue is affected by other inputs and processes, selling activities and changes in sales volumes and prices. The price component of revenue may be affected by inflation, which has no bearing upon the way in which an asset is consumed. Impairment

To determine whether an item of property, plant and equipment is impaired, an entity applies IAS 36 Impairment of Assets. That Standard explains how an entity reviews the carrying amount of its assets, assets, how it determines the recoverabl recoverable e amount of an asset, and when it recognises, or reverses the recognition of, an impairment loss. Compensation for impairment

Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable. Derecognition The carrying amount of an item of property, plant plan t and equipment shall be derecognised:

(a) (b)

on disposal; or  when no future economic benefits are expected from its use or disposal.

The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. The gain or loss shall be included in profit or loss when the item is derecognised (unless IFRS 16 Leases requires otherwise on a sale and leaseback). Gains shall not be classified as revenue. However, an entity that, in the course of its ordinary activities, routinely sells items of property, plant and equipment that it has held for rental to others shall transfer such assets to inventories at their carrying amount when they cease to be rented and become held for sale. The proceeds from the sale of such assets shall be recognised as revenue in accordance with IFRS 15 Revenue from Contracts with Customers. IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories. Presentation and disclosure  An entity shall present and disclose information information that enables users of the financial statements about the entity’s investment in its property, plant and equipment and the changes in such investment.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

In the Notes to the financial statement: (a) The financial statements shall disclose, for each class of property, plant and equipment: (i) the measurement bases used for determining the gross carrying amount;

(ii) the useful depreciation used; (iii) the lives ormethods the depreciation rates used; (iv) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and (v) a reconciliation of the carrying amount at the beginning and end of the period showing: ➔ additions; ➔ assets classified as held for sale or included in a disposal group classified as held for sale and other disposals; ➔ acquisitions through business combinations; ➔ increases or decreases resulting from revaluations and from impairment losses recognised or reversed in other ➔ ➔ ➔ ➔

➔

(b)

comprehensive income; impairment losses recognised in profit or loss; impairment losses reversed in profit or loss; depreciation; the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and other changes.

The financial statements shall also disclose: (i) the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities; (ii) the amount of expenditures recognised in the carrying amount of an item of property, plant and equipment in the course of its construction; (iii) the amount of contractual commitments for the acquisition of property, plant and equipment; and (iv) if it is not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for items of property, plant and equipment that were impaired, lost or given up that is included in profit or loss.

(c) If items of property, plant and equipment are stated at revalued amounts, the following shall be disclosed in addition to the disclosures required by IFRS 13 Fair Value Measurement  : (i) the effective date of the revaluation;

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(ii) whether an independent valuer was involved; (iii) for each revalued class of property, plant and equipment, the carrying amount that would have been recognized had the assets been carried under the cost model; and (iv) the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders. Users of financial statements may also find the following information relevant to their needs: (a) the carrying amount of temporarily idle property, plant and equipment; (b) the gross carrying amount of any fully depreciated property, plant and equipment that is still in use; (c) the carrying amount of property, plant and equipment retired from active use and not classified as held for sale; and (d) when the cost model is used, the fair value of property, plant and equipment when this is materially different from the carrying amount.

IAS 40: INVESTMENT PROPERTY Investment property is a property (land or a building or part of a building or both) held (by the owner or by the lessee as a right of use asset) to earn rentals or for capital appreciation or both, rather than for: use in the production or supply of goods or services or for administrative purposes, or sale in the ordinary course of business Investment Property Examples: 1. Land Land held held for lon long g term term capita capitall 2. A building owned by the reporting reporting entity and leased leased out under under an operating operating lease lease 3. A building building held held by a parent parent and and leased leased to a subsidi subsidiary ary

4. Property being constructed constructed or developed developed for future use as an investment investment property that is being Type of Non-Investment Property 1. Property intended for sale in the ordinary course of business business 2. Property being constructe constructed d or developed developed on behalf behalf of third parties parties 3. Owner-occupied Owner-occupied property property (property (property held held by the owner owner (or by by the lessee as as a rightrightof-use asset) for use in the production or supply of goods and services or for administrative purposes.) Recognition Principle 1. When it is probable that future future economic economic benefits benefits that are associated associated with with the investment property will flow to the entity

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2. The cost cost of the investme investment nt property property can can be measured measured reliably reliably Measurement subsequent to initial recognition 1. Fair Fair valu value e mod model el

-

The price price at which which the the prope property rty could could be exchang exchanged ed betwe between en knowledgeable, willing parties in an arm’s length transaction without deducting transaction cost. 2. Cost Cost valu value e mode modell (PAS (PAS 16) 16) - Cost Cost less less accumu accumulate lated d deprec depreciati iation on and and any any accum accumulat ulated ed impair impairment ment losses Terms to remember: 1. Changing Models. Once the entity has chosen the fair value or cost model, it should apply it to all its investment property. It should not change from one model to the other unless the change will result in a more appropriate presentation.

2. Transfers. Transfer to or from investment property should only be made when there is a change in use. 3. Disposal . Derecognize (eliminate from the statement of financial position) an investment property on disposal or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal. PAS 23: Borrowing cost

1. Borrowing Costs - interests and other costs incurred by an entity in connection with the borrowing of funds. 2. Qualifying Asset - an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The standard lists what may be included in borrowing costs: 1. Interest on bank bank overdrafts overdrafts and and short term and long term term borrowings borrowings 2. Amortization Amortization of discounts discounts or premiums relating to borrowings borrowings 3. Amortization Amortization of ancillary ancillary costs costs incurred incurred in connection connection with the arrangement arrangement of of borrowings 4. Finance charges charges in in respect respect of leases leases recognized recognized in accordanc accordance e with IFRS IFRS 16 5. Exchange Exchange differences differences arising arising from foreign foreign currency currency borrowings borrowings to the extent extent that they are regarded as an adjustment to interest costs Qualifying Asset

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Depending on the circumstances, any of the following may be qualifying assets: 1. In Inve vent ntor orie ies s 2. Manufa Manufactu cturin ring g plants plants 3. Power Power genera generatio tion n facilit facilities ies 4. In Inta tang ngib ible le Ass Asset ets s 5. Invest Investmen mentt pro proper pertie ties s Capitalization

Only borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset can be capitalized as part of the cost of that asset Asset Financed by Specific Borrowing

PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of acquiring a qualifying asset, the amount of capitalizable borrowing cost is the actual borrowing cost incurred during the period less any investment income from the temporary investment of those borrowings. Asset Financed by General Borrowing

PAS 23, paragraph 11, provides that if the funds are borrowed generally and used for acquiring a qualifying asset, the amount of capitalizable borrowing cost is equal to the average carrying amount of the asset during the period multiplied by a capitalization rate or average interest rate. However, the capitalizable borrowing cost shall not exceed the actual interest incurred.

Assessments  Answer the the following following questions: questions: 1. What is is propert property, y, plant plant and and equip equipment ment? ? 2. What are the examples of assets assets classified classified as property, property, plant plant and equipment? equipment? 3. When should should an asset be be recognized recognized as as property, property, plant plant and equipment? equipment? 4. What is the the initial initial measurement measurement for property, property, plant and equipment? equipment? 5. How would would property, property, plant and equipment equipment be measured measured subsequen subsequently tly after its

initial recognition? 6. How would would you account account for depreciation depreciation of property, property, plant plant and equipment? equipment?

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

7. What are the the methods methods of of depreciat depreciation? ion? Expla Explain in each. each. 8. What What is inves investme tment nt prope property rty? ? 9. How would would you you recogni recognize ze an investm investment ent proper property? ty? 10.What is borrowing costs as described in the PAS 23? 11.How would you account for borrowing cost as part of the tangible asset? References Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial  Accounting  Accounti ng Volume Two. Manila, Manila, Philippines. Philippines. GIC GIC Enterprises Enterprises & Co.,Inc. Co.,Inc.

 Asuncion, Darrell Joe O. CPA,MBA,  Asuncion, CPA,MBA, Escala, Raymund Raymund Francis Francis A. A. CPA, MBA, MBA, Ngina, Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora Hill, Baguio City. Real Excellence Publishing and Nation’s Foremost CPA Review Inc.

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Module 7 Accounting for Property, Plant and Equipment, Intangibles and Impairment of Assets Week 12-13 Introduction

This module discusses the standards which relate to tangible and intangible Assets and Impairment of Assets. It also presents the standard related to non-current assets held for sale and discontinued operations. IAS 38 Intangible Assets IAS 36 Impairment of Assets IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations Learning Objectives

 After studying studying this module, students students should should be able to: 1. Defin Define e an intan intangib gible le asse asset. t. 2. State the initialgenerated. measurement measurement of intangible intangible assets assets that are are externally externally acquired acquired and internally 3. State the subsequent subsequent measurement measurement of intangible assets that that have a finite useful useful life and indefinite useful life. 4. State State the the core core princi principle ple of IAS IAS 36. 36. 5. Describe Describe the the criteria criteria for held held for sale class classific ificatio ation. n. 6. State the the initial and subsequent subsequent measurement measurement of held for sale assets. assets. 7. State the presentatio presentation n requirements requirements of a discontinued discontinued operation. operation. IAS 38 Intangible Assets

Objective

The objective of this Standard is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Standard. This Standard requires an entity to recognise an intangible intangibl e asset if, and only if, specified criteria are met. Scope

This Standard shall be applied in accounting for intangible assets, except: (a) intangible assets that are within the scope of another Standard; (b) financial assets, as defined in IAS 32 Financial Instruments: Presentation; (c) the recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources); and

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

(d) expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources. If another Standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard instead of this Standard. For example, this(a) Standard doesassets not apply intangible heldto:by an entity for sale in the ordinary course of business (see IAS 2 Inventories). (b) deferred tax assets (see IAS 12 Income Taxes). (c) leases that are within the scope of IAS 17 Leases. (d) assets arising from employee benefits (see IAS 19 Employee Benefits). (e) financial assets as defined in IAS 32 Financial Instruments: Presentation. The recognition and measurement of some financial assets are covered by IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures. (f) goodwill acquired in a business combination (see IFRS 3 Business Combinations). (g) deferred acquisition costs, and intangible assets, arising from an insurer’s contractual contractual rights under under insurance contracts contracts within the scope of IFRS 4 Insurance Contracts. IFRS 4 sets out specific disclosure requirements for those deferred acquisition costs but not for those intangible assets. Therefore, the disclosure requirements in this Standard apply to those intangible assets. (h) non-current intangible assets classified as held for sale (or included in in a disposal group that is classified as held for sale) in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Defined terms

 An intangible asset is an identifiable, non-monetary item without physical substance, which is within the control of the entity and is capable of generating future economic benefits for the entity.  An active market is a market in which the items traded are homogenous, willing buyers and sellers can be found at any time and prices are available to the public.  An asset is identifiable identifiable if it is either: (a) separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged,

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or  (b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable separabl e from the entity or from other rights and obligations. Residual value is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Useful life is either: (a) the period period over which which an asset is expected to be available available for use by an entity; or  (b) the number of production or similar units expected to be obtained from the asset by an entity. Research is the original planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is the application of research findings or other knowledge kno wledge to a plan or design for the production of new or substantially improved materials, devices, products, processes or services before the start of commercial production.  Amortisation refers to the systematic allocation of the depreciable amount of an intangible intangibl e asset over its useful life. Recognition and initial measurement

 An intangible intangible asset asset shall be be recognised recognised if, and and only if: (a) it is probable that future economic benefits that are attributable to the asset will flow to the entity; and (b) the cost of the asset can be measured reliably.  An entity shall assess the probability probability of expected expected future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.  An intangible intangible asset asset shall be be measured measured initially at cost. Separate acquisition

The cost of a separately separately acquired intangible intangible asset can usually be measured reliably reliably.. This is when the purchase consideration is in the form of cash or other monetary assets.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

The cost of a separately acquired intangible asset comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and (b) any directly attributable cost of preparing the asset for its intended use. Directly attributable costs are: (a) costs of employee benefits (as defined in IAS 19 Employee benefits) arising directly from bringing the asset to its working condition; (b) professional fees arising directly from bringing the asset to its working condition; and (c) costs of testing whether the asset is functionin functioning g properly. properly. Subsequent expenditure on an acquired in-process research and development project

Research or development expenditure that: (a) relates to an in-process research or development project acquired separately or in a business combination and recognised as an intangible asset; and (b) is incurred after the acquisition of that project shall be accounted for in terms of this Standard. Exchange of assets

Intangible assets may be acquired in exchange for a non-monetary asset or asset. The cost is measured at fair value. If  the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up. Intangible asset acquired in a business combination If an intangible asset acquired in a business combination is separable or arises from contractual or other legal rights, sufficient information exists to measure reliably reliably the fair fair value of the asset.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

 An intangible asset acquired in a business combination combination might be separable, but only together with a related contract, identifiable asset or liability. In such cases, the acquirer recognises the intangible asset separately from goodwill, but together with the related item. Government grant

Initially recognition at either fair value or normal value plus direct expenses to prepare for use. Internally generated goodwill

Internally generated goodwill shall not be recognised as an asset. Internally generated intangible assets

To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into:

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets.

Measurement after recognition

 An entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Cost model

 After initial recognition, recognition, an intangible asset shall be carried at its cost less any accumulated amortisation and any accumulated impairment losses. Revaluation model

 After initial recognitio recognition, n, an intangible asset asset shall be carried carried at a revalued revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value. When an intangible asset is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways: (a)

the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. (b) the accumulated accumulated amortisation amortisation is eliminated eliminated against against the gross carrying carrying amount amount of the asset and the amount of the adjustment of accumulated amortisation forms part of the increase or decrease in the carrying amount. If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset shall be carried at its cost less any accumulated amortisation and impairment losses. If the fair value of a revalued intangible asset can no longer be measured by reference to an active market, the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less any subsequent accumulated amortisation amortisati on and any subsequent accumulated impairment losses. The fact that an active market no longer exists for a revalued intangible asset may indicate that the asset may be impaired and that it needs to be tested in accordance with IAS 36 Impairment of Assets. Revaluation changes shall be accounted for as follows:

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in accordance with IAS 12 Income Taxes. Useful life

 An entity shall assess assess whether the useful useful life of an intangible asset is finite or indefin indefinite ite and, if finite, the length of, or number of production or similar simil ar units constituting that useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. The useful life of an intangible asset asset that arises from contractual contractual or other legal legal rights shall not exceed the period of the contractual or other legal rights, but may be shorter depending on the period over which the entity expects expec ts to use the asset. If the contractual contractua l or other legal rights are conveyed for a limited term that can be renewed, the useful life of the intangible asset shall include the renewal period(s) only if there is evidence to support renewal by the entity without significant cost. The useful life of a reacquired right recognised as an intangible asset in a business combination is the remaining contractual period of the contract in which the right was granted and shall not include renewal periods. Factors to be considered when determining the useful life of an intangible asset: (a) the expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team; (b) typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way; (c) technical, technological, commercial or other types of obsolescence;

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(d) the stability of the industry in which the asset operates and changes in the market demand for the products or services output from the asset; (e) expected actions by competitors or potential competitors; (f) the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity’s ability and intention to reach such a level; (g) the period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases; and (h) whether the useful life of the asset is dependent on the useful life of other assets of the entity. Intangible assets with indefinite useful lives An intangible asset with an indefinite useful life shall not be amortised.

In accordance with IAS 36 Impairment of Assets, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount: (a) annually, and (b) whenever there is an indication that the intangible asset may be impaired. Review of useful life assessment: The useful life of an intangible asset that is not being amortised shall be reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Account Policies, Changes in Estimates and Errors. Intangible assets with finite useful lives

 Amortisation  Amortisat ion period period and amortisation amortisation method: The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

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 Amortisation shall cease  Amortisation cease at the earlier of the date date that the asset is cla classified ssified as held for sale (or included in a disposal group that is classified as held for sale and the date that the asset is derecognised. The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. The amortisation charge for each period shall be recognised in profit or loss unless this or another Standard Standard permit or requires it to be included in the carryin carrying g amount of another asset. Residual value: The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless: (a) there is a commitment by a third party to purchase the asset at the end of its useful life; or  (b) there is an active market for the asset and: (i) residual value can be determined by reference to that market; and (ii) it is probable that such a market will exist at the end of the asset’s useful life. Review of amortisation period and amortisation method: The amortisation period and the amortisation method for an intangible asset with a finite useful life shall be reviewed at least at each financial year-end. If the expected useful life of the asset is different from previous estimates, the amortisation period shall be changed accordingly. If there has been a change in the expected pattern of consumption of the future economic econom ic benefits embodied in the asset, the amortisation method shall be changed to reflect the changed pattern. Such changes shall be accounted for as changes in accounting estimates in accordance with IAS 8 Account Policies, Changes in Estimates and Errors. Retirement and disposals

 An intangible intangible asset asset shall be be de-recognised: de-recognised: (a) on disposal; or  (b) when no future economic benefits are expected from its use or disposal. The gain or loss arising from the de-recognition of an intangible asset shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset. It shall be recognised in profit or loss when the

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asset is de-recognised (unless IAS 17 Leases requires otherwise on a sale and leaseback). Gains shall not be classified as revenue. Presentation and disclosure

 An entity shall disclose the following for each class of intangible intangible assets, distinguishing between internally generated intangible assets and other intangible assets: In the Notes to the financial statement: (a) The financial statements shall disclose, for each intangible asset: (i) the whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortisation rates used; (ii) the amortisation methods used for intangible assets with finite useful lives; (iii) the gross carrying amount and any accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of the period; (iv) the line item(s) of the statement of comprehensive income in which any amortisation of intangible assets is included; (v) a reconciliation of the carrying amount at the beginning and end of the period showing: additions, indicating separately those from internal development, those acquired separately, and those acquired through business combinations; •

•

assets classified as held for sale or included in a disposal group classified as held for sale in and other disposals; increases or decreases during the period resulting from revaluations and from impairment losses recognised or reversed in other comprehensive income; impairment losses recognised in profit or loss during the period; impairment losses reversed in profit or loss during the period; any amortisation recognised during the period; net exchange differences arising on the translation of the financial statements into the •

•

•

•

•

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•

presentation currency, and on the translation translati on of a foreign operation into the presentation currency of the entity; and other changes in the carrying amount during the period.

(b)

The The fina financi ncial al stat stateme ements nts shall shall also also disc disclos lose: e: (i) for an intangible asset assessed as having an indefinite useful life, the carrying amount of that asset and the reasons supporting the assessment of an indefinite useful life. In giving these reasons, the entity shall describe the factor(s) that played a significant role in determining that the asset has an indefinite useful life. (ii) a description, the carrying amount and remaining amortisation period of any individual intangible asset that is material to the entity’s financial statements. (iii) for intangible assets acquired by way of a government grant and initially recognised at fair value: the fair value initially recognised for these assets; their carrying amount; and whether they are measured after recognition under the cost model or the revaluation model. (iv) the existence and carrying amounts of intangible assets whose title is restricted and the carrying amounts of intangible assets pledged as security for liabilities. (v) the amount of contractual commitments for the acquisition of •

•

•

intangible assets. (c) If intangible assets are accounted for at revalued amounts, an entity shall disclose the following: (i) by class of intangible assets: the effective date of the revaluation; the carrying amount of revalued intangible assets; and the carrying amount that would have been recognised had the revalued class of intangible assets been measured after recognition using the cost model; and (ii) the amount of the revaluation surplus that relates to intangible assets at the beginning and end of  •

•

•

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the period, indicating the changes during the period and any restrictions on the distribution of the balance to shareholders.  An entity is encouraged, encouraged, but not required, required, to disclose the following following information: (a) a description of any fully amortised intangible asset that is still in use; and (b) a brief description of significant intangible assets controlled by the entity but not recognised as assets because they did not meet the recognition criteria in this Standard or because they were acquired or  generated before the version of IAS 38 Intangible  Assets issued issued in 1998 was effective.  An entity shall disclose the aggregate aggregate amount of research research and development expenditure recognised as an expense during the period.

IAS 36 Impairment of Assets

Objective

To prescribe the procedures that an entity applies to ensure that its assets are carried at no more than its recoverable amount. An asset is carried at more than their recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is descri described bed as impaired and the entity is required to recognize an impairment loss.

Scope

This Standard shall be applied in accounting for the impairment of all assets, other than: (a) (b) (c)

Inventories;  Assets arising arising from construction construction contracts; contracts; Deferred tax assets;

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______  (d)

 Assets arising arising from employee benefits; benefits;

Financial assets within the scope of IAS 39 Financial Instruments: Recognition and Measurement ; (e)

(f)

Investment property that is measured at fair value;

Biological assets related to agricultural activity within the scope of IAS 41  Agriculture that are measured at fair value less costs to sell; (g)

Deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights under  (h)

insurance contracts within the scope of IFRS 4 Insurance Contracts; and Non-current assets (or disposal groups) classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

(i)

Effective date

 An entity shall apply apply this Standard: Standard:

to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004; and

(a)

to all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004

(b)

Defined terms

 An impairment loss is the amount by which the carrying amount of an asset or a cash generating unit exceeds its recoverable amount.  A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. The carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. The recoverable amount is the higher of an asset’s or cash generating generat ing unit fair value less costs of disposal and its value in use.

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 An assets value in use is t he he present value of the future cash flows expected to be derived from an asset or cash generating unit.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Useful life is:

(a)

the period of time over which an asset is expected to be used by an entity; or 

the number of production or similar units expected to be obtained from the asset by an entity.

(b)

Identifying when as asset may be impaired

 An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.

Irrespective of whether there is any indication of impairment, an entity shall also:

test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount

(a)

(b)

test goodwill acquired in a business combination for impairment annually.

 As a minimum, minimum, the following following indicators indicators shall be considered considered::

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Measuring recoverable amount

 As stated, the recoverable recoverable amount is the higher of an asset’s or cash-ge cash-generating nerating unit’s fair value less costs of disposals and its value in use.

It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. The recoverable amount is determined for an individual asset, unless the asset does not generate arerecoverable largely independent those fromfor other or groups of assets.cash If thisinflows is the that case, amount isofdetermined the assets cash-generating unit to which the asset belongs unless either:

(a)

the asset’s fair value less costs of disposal is higher than its carrying amount; or 

(b) the asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair value less costs of disposal can be measured. Fair value less costs of disposal - This is the the amount obtainable obtainable from the sale of an asset asset or cash cash generating generating unit unit (CGU) in an arm’s length transaction between knowledgeable, willing parties, less the cost of disposal.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

- The best best evide evidence nce of an an assets assets fair fair value value less less cost cost to sell sell is a price price in a bindin binding g sale agreement in an arm’s length transaction, adjusted for incremental costs that are directly attributable to the disposal of o f the asset. If there is no binding sale agreement, but an asset is traded in an active market, the asset’s market price less costs of disposal would provide the best evidence of fair value less cost to sell. If there there is no no sale sale agree agreement ment or activ active e marke markett for an asset asset,, fair fair value value less costs costs to sell is determined based on the best information available to reflect the amount that an entity could obtain, at reporting date, from the disposal of the asset through an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. - Cost of of disposal disposals s include include legal legal costs, costs, stamp stamp duty duty and and similar similar transac transaction tion taxes, taxes, costs costs of removing the asset and direct incremental costs to bring an asset into condition for its sale. Value in use

Estimate the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal and apply the appropriate appr opriate discount rate to those future cash flows: Composition of estimates of future cash flows Estimates of future cash flows shall include: (a) projections of cash inflows from the continuing use of the asset; (b) projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and (c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life. Basis for estimates estimates of future future cash flows flows In measuring value in use an entity shall: (a) base cash flow projections on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions (b) base cash flow projections projection s on the most recent financial budgets/forecasts approved by management. (c) estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years.

The discount rate(s) shall be a pre-tax rate(s) that reflect(s) current market assessments of:

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______  (a)

the time value of money; and

the risks specific to the asset for which the future cash flow estimates have not been adjusted. (b)

For foreign currency, denominated future cash flows an entity translates the present value using the spot exchange rate at the date of the value in use calculation. Recognizing an impairment loss

If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.  An impairment loss shall shall be recognised immediately immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard.  Any impairment impairment loss of a revalued asset shall be treated as a revaluation revaluation decrease in accordance with that other Standard. When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another Standard.  After the recognition recognition of of an impairment impairment loss, loss, the depreciation depreciation (amortisation) (amortisation) charge charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. Measuring recoverable amount of an intangible asset with an indefinite useful life

The recoverable amount of an intangible asset with an indefinite useful life or an intangible asset not yet available for use should be estimated annually irrespective of whether there is any indication of impairment in order to test the affected intangible asset for impairment.

Cash-generating units and Goodwill

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Identifying the cash-generating unit to which an asset belongs If there is any indication that an asset may be impaired, the recoverable amount shall be estimated for the individual individual asset. If it is not possible to estimate the recoverab recoverable le amount of the individual asset, an entity shall determine the recoverable amount of the cashgenerating generatin g unit to which the asset belongs (the asset’ asset’s s cash- generating generating unit). If an active market exists exists for the output produced by an as asset set or group of assets, assets, that asset or group of assets shall be identified as a cash-generating unit, even if some or all of the output is used internally.

If the cash inflows generated by any asset or cash-generating unit are affected by internal transfer pricing, an entity shall use management’s best estimate of future price(s) that could be achieved in arm’s length transactions in estimating: (a) the future cash inflows used to determine the asset’s or cash-generating unit’s value valu e in use; use; and and (b) the future cash outflows used to determine the value in use of any other assets or cash-generating units that are affected by the internal transfer pricing. Corporate assets

In testing a cash-generating unit for impairment, an entity shall identify all the corporate assets that relate to the cash-generating unit under review. If a portion of the carrying amount of a corporate asset: (a) can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the carrying amount of the unit, including the portion of the carrying amount of the corporate asset allocated to the unit, with its recoverable amount. Any impairment loss shall be recognised. (b) shall:

cannot be allocated allocated on a reasonable reasonable and consistent consistent basis to that unit, the entity (i)

compare the carrying amount of the unit, excluding the corporate asset, with its recoverable amount and recognise any impairment loss; (ii) identify the smallest group of cash-generating units that includes the cash-generating review and can to which a portion of carrying amount of unit the under corporate asset be allocated onthe a reasonable and consistent basis; and

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

(iii)

compare the carrying amount of that group of cash-generating units, including the portion of the carrying amount of the corporate asset allocated to that group of units, with the recoverable amount of the group of units.

Goodwill For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s cash-generating units, or groups of cash-generating units, that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.

Each unit or group of units to which the goodwill is so allocated shall: (a) represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and (b)

not be larger than an operating segment as defined by IFRS 8 Operating Segments

before aggregation. If goodwill has been allocated to a cash-generating unit and the entity disposes of an operation within that unit, the goodwill associated with the operation disposed of shall be: (a) included in the carrying amount of the operation when determining the gain or loss on disposal; and (b) measured on the basis of the relative values of the operation disposed of and the portion of the cash- generating generating unit retained, unless unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of.  A cash-generating cash-generating unit to which goodwill has been allocated shall be tested for impairment annually and whenever there is an indication that the unit may be impaired. Impairment loss for a cash-generating unit

 An impairment impairment loss loss shall shall be recognised recognised for a cash-generating cash-generating unit unit (the (the smallest smallest group of cash-generating units to which goodwill or a corporate asset has been allocated) if, and only if, the recoverable recoverab le amount of the unit (group of units) is les less s than the carrying amount of the unit (group of units).

The impairment lossinshall allocated to reduce the carrying amount of the assets of the unit (group of units) the be following order:

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

first, to reduce the carrying amount amount of any goodwill allocat allocated ed to the cash-generating cash-generating unit (group of units); and

(a)

then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in the unit (group of units).

(b)

In allocating an impairment loss an entity shall not reduce the carrying amount of an asset below the highest of: (a)

its fair value less costs of disposal (if measurable);

(b)

its value in use (if determinable); and

(c)

zero.

The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit (group of units).  A liability shall be recognised recognised for any remaining amount of an impairment loss for a cash-generating unit if, and only if, that is required by another IFRS. Reversing an impairment loss

 An entity shall assess at the end of each reporting period whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. decreased . If any such indication exists, the entity shall estimate the recoverable amount of that asset as follows: (a)

Reversing an impairment loss for an individual asset 

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years. (b)

Reversing an impairment loss for a cash-generating unit 

 A reversal reversal of an impairment loss for a cash-generating cash-generating unit shall be allocated to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets. These increases in carrying amounts shall be treated as reversals of impairment losses for the individual assets within the cash-generating unit. In allocating the reversal of the impairment, the carrying amount of an asset shall not be increased above the lower of: (i)

its recoverable amount (if determinable); and

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior periods.

(ii)

Reversing an impairment loss for goodwill  – An impairment impairment loss recognised recognised for goodwill shall not be reversed in a subsequent period.

(c)

In the Statement of Comprehensive Income

(a) For

an individual asset, for which an impairment loss has been recognised or reversed during the period: the events and circumstances that led to the recognition or reversal of the impairment loss; (i)

(ii)

the amount of the impairment loss recognised or reversed;

(iii)

the nature of the asset; and

if the entity reports segment information in accordance with IFRS 8 Operating Segments the reportable segment to which the asset belongs.

(iv)

(b) For a cash-generating unit, for which an impairment loss has been recognised or reversed during the period: (i) the events and circumstances that led to the recognition recognit ion or reversal of the impairment loss; (ii) the amount of the impairment loss recognised or reversed; (iii) a description of the cash-generating unit (such as whether it is a product line, a plant, a business operation, a geographical area, or a reportable segment; (iv) the amount of the impairment loss recognised or reversed by class of assets and, if the entity reports segment information in accordance with IFRS 8 Operating Segments, by reportable segment; and (v) if the aggregation of assets for identifying the cash-generating unit has changed since the previous estimate of the cash-generating unit’s recoverable amount (if any), a description of the current and former way of aggregating assets and the reasons for changing the way the cashgenerating unit is identified.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

(c) If the recoverable amount is: (i) fair value less costs of disposal, the entity shall disclose the following information: -

the leve levell of fair fair the the fair fair value value hier hierarc archy hy (see (see IFRS IFRS 13 Fair Value Measurement ) within which the fair value measurement of the asset (cash-generating unit) is categorised in its entirety (without taking into account whether the ‘costs of disposal’ are observable);

-

for fair value value measure measurements ments categori categorized zed withi within n Level Level 2 and and 3 of the fair value hierarchy, description of the valuation technique(s) used to measure fair value less costs of disposal; and each key assumption on which management has based its determination of fair value less costs of disposal; or  (ii) value in use , the discount rate(s) used in the current estimate and previous estimate (if any) of value in use and key assumptions used to which the asset’s (cash-generating unit’s) recoverable amount is most sensitive.

(d) An entity shall disclose the information required for each cash-generating unit (group of units) for which the carrying amount of goodwill goodwi ll or intangible assets with indefinite useful lives allocated to that unit (group of units) is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives: (i)

th the e carr carryin ying g amou amount nt of go goodw odwill ill all alloc ocate ated d to to tthe he unit unit (gr (group oup of un units its); );

(ii) (ii)

th the e carry carrying ing amount amount of int intang angibl ible e asse assets ts with with indef indefini inite te use useful ful lives lives

allocated to the unit (group of units); (iii) (iii) th the e basis basis on whic which h the unit’ unit’s s (group (group of of units units’) ’) rec recove overa rable ble amou amount nt has has been determined (i.e. value in use or fair value less costs of disposal). (iv)

if the the unit’ unit’s s (grou (group p of units’) units’) recovera recoverable ble amount amount is is based based on value value in use: use: • each each key key assu assump mpti tion on on whic which h man manag agem emen entt has has base based d its its cash cash flow projections for the period covered by the most recent budgets/forecasts. Key assumptions are those to which the unit’s (group of units’) recoverabl recoverable e amount is most sensitive. sensitive. •

a des descr crip ipti tion on of mana manage geme ment nt’s ’s appr approa oach ch to dete determ rmin inin ing g the the

value(s) assignedor,toifeach key assumption, whether those value(s) reflect past experience appropriate, are consistent with external sources of

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

information, and, if not, how and why they differ from past experience or external sources of information. • th the e per perio iod d ove overr whi which ch mana manage geme ment nt has has pro proje ject cted ed ca cash sh flow flows s bas based ed on financial budgets/forecasts approved by management and, when a period greater than five years is used for a cash-generating unit (group of units), an explanation of why that longer period is justified. • th the e gro growt wth h rate rate used used to extr extrap apol olat ate e cash cash flow flow proj projec ecti tion ons s bey beyon ond d the period covered by the most recent budgets/forecasts, and the  justification  justificat ion for using any growth rate that that exceeds exceeds the long-term long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit (group of units) is dedicated. • (v)

th the e dis disco coun untt rat rate( e(s) s) ap appl plie ied d to to the the cash cash flow flow proj projec ecti tion ons. s.

Or ifif the unit’ unit’s s (grou (group p of unit units’ s’)) recove recovera rable ble amoun amountt is base based d on fair value value

less of disposal, the valuation technique(s) usedthe to disclosures measure fairrequired value less costscosts of disposal. An entity is not required to provide by IFRS 13 Fair value measurement. If fair value less costs of disposal is not measured using a quoted price for an identical ident ical unit (group of units), an entit entity y shall disclose the following information: • each each key key assu assump mpti tion on on which hich mana manage geme ment nt has has base based d its its determination of fair value less costs of disposal. Key assumptions arethose to which the unit’s (group of units’) recoverable amount is most sensitive. • a desc descri ript ptio ion n of mana manage geme ment nt’s ’s appr approa oach ch to dete determ rmin inin ing g the the valu value e (or values) assigned to each key assumption, whether those values va lues reflect past experience if appropriate, are they consistent with external sources or of information, and,or, if not, how and why differ from past experience external sources of information. • th the e lev level el of the the fair fair valu value e hie hiera rarc rchy hy with within in whic which h the the fair fair valu value e measurement is categorised in its entirety (without giving regard to the observability of ‘costs of disposal’). • if ther there e has has be been en a cha chang nge e in in val valua uati tion on tech techni niqu que, e, the the cha chang nge e and and the reason(s) for making it. (vi) And if fair value value less less costs costs of disp disposal osal is measured measured using using disco discounte unted d cash cash flow projections, an entity shall disclose the following information: •

th the e per perio iod d ove overr whi which ch mana manage geme ment nt has has pro proje ject cted ed cash cash flow flows. s.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

•

th the e gro growt wth h rate rate us used ed to ex extr trap apol olat ate e cas cash h flow flow proj projec ecti tion ons s

•

th the e dis disco coun untt rat rate( e(s) s) ap appl plie ied d to to the the cash cash flow flow proj projec ecti tion ons. s.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

This outlines how to account for non-current assets held for sale (or for distribution to owners). In general (or disposal forless salecosts are not depreciated, are measured at theterms, lower assets of carrying amountgroups) and fairheld value to sell, and are presented separately in the statement of financial position. Specific disclosures are also required for discontinued operations and disposals of non-current assets. Held-for-sale classification

In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for sale: [IFRS 5.6-8] management is committed to a plan to sell the asset is available for immediate sale an active programme programme to locate a buyer buyer is initiated the sale sale is highly probable, probable, within within 12 months of classification as held for sale (subject to limited exceptions) the asset is being

24

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

actively marketed for sale at a sales price reasonable in relation to its fair value actions required to complete complete the plan indicate that that it is unlikely that plan will will be significantly significantly changed or withdrawn The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition (but may be classified as discontinued once abandoned). [IFRS 5.13]  An entity that is committed committed to a sale involving involving loss of control control of a subsidiary subsidiary that qualifies qualifies for held-for-sale classification under IFRS 5 classifies all of the assets and liabilities of that subsidiary as held for sale, even if the entity will retain a non-controllin non-controlling g interest in its former subsidiary after the sale. [IFRS 5.8A] Held for distribution to owners classification

The classification, presentation and measurement requirements of IFRS 5 also apply to a non-current asset (or disposal group) that is classified as held for distribution to owners. [IFRS 5.5A and IFRIC 17] The entity must be committed to the distribution, the assets must be available for immediate distribution and the distribution must be highly probable. [IFRS 5.12A] Disposal group concept

 A 'disposal 'disposal group' group' is a group of assets, possibly possibly with some associate associated d liabilities, liabilities, which which an entity intends to dispose of in a single transaction. The measurement basis required for non-current assets classified as held for sale is applied to the group as a whole, and any resulting impairment the carrying non-current assets in the disposal group in the loss orderreduces of allocation requiredamount by IAS of 36.the [IFRS 5.4] Measurement

The following principles apply:  At the time of classification classification as as held for sale. Immediately Immediately before before the initial classificatio classification n of the asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable IFRSs. Resulting adjustments are also recognised in accordance with applicable IFRSs. [IFRS 5.18] After classification as held for sale. Noncurrent assets or disposal groups that are classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell (fair value less costs to distribute

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

in the case of assets classified as held for distribution to owners). [IFRS 5.15-15A] Impairment.Impairment must be considered both at the time of classification as held for sale and subsequently:  At the time of classification classification as held for sale. Immediately prior to classifying an asset or disposal group as held for sale, impairment is measured and recognised in accordance with the applicable IFRSs (generally IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets, IAS IAS 38 Intangible Intangible Assets, Assets, and IAS 39 Financial Financial Instruments: Instruments: Recognition and Measurement/IFRS 9 Financial Instruments). Any impairment loss is recognised in profit or loss unless the asset had been measured at revalued amount under IAS 16 16 or IAS 38, in which case the impairment impairment is treated treated as a revaluation revaluation decrease. After classification as held for sale. Calculate any impairment loss based on the difference between the adjusted carrying amounts of the asset/disposal group and fair value less costs to sell. Any impairment impairment loss that arises by using the meas measurement urement principles in IFRS 5 must be recognised in profit or loss [IFRS 5.20], even for assets previously carried at revalued amounts. This is supported by IFRS 5 BC.47 and BC.48, which indicate the inconsistency with IAS 36.  Assets carried carried at fair value value prior to initial classification. classification. For such assets, assets, the requirement requirement to deduct costs to sell from fair value may result in an immediate charge to profit or loss. Subsequent increases in fair value. A gain for any subsequent increase in fair value less costs to sell of an asset can be recognised in the profit or loss to the extent that it is not in excess of the cumulative impairment loss that has been recognised in accordance with IFRS 5 or previously in accordance with IAS 36. [IFRS 5.21-22] No depreciation. Noncurrent assets or disposal groups that are classified as held for sale are not depreciated. [IFRS 5.25] The measurement provisions provisi ons of IFRS 5 do not apply to deferred tax assets, assets arising arisi ng from employee benefits, benefits , financial assets within the scope of IFRS 9 Financial Instruments, non-current assets measured at fair value in accordance with IAS 41 Agriculture, and contractual rights under insurance contracts. [IFRS 5.5] Presentation

 Assets classified classified as held held for sale, sale, and the assets assets and liabilities included included within within a disposal disposal group classified as held for sale, must be presented separately on the face of the statement of financial position. [IFRS 5.38] Disclosures

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

IFRS 5 requires the following disclosures about assets (or disposal groups) that are held for sale: [IFRS 5.41] description of the non-current asset or disposal group description of facts and circumstances of the sale (disposal) and the expected timing impairment losses and reversals,, if any, and where in the reversals the statement statement of comprehensiv comprehensive e income they they are recognised if applicable, the reportable segment in which the non-current asset (or disposal group) is presented in accordance with IFRS 8 Operating Segments Disclosures in other IFRSs do not apply to assets held for sale (or discontinued operations, discussed below) unless those other IFRSs require specific disclosures in respect of such assets, or in respect of certain measurement disclosures where assets and liabilities are outside the scope of the measurement requirements of IFRS 5. [IFRS 5.5B] Key provisions of IFRS 5 relating to discontinued operations Classification as discontinuing

 A discontinued discontinued operation operation is a component of of an entity that that either has been disposed disposed of of or is classified classified as held for sale, sale, and: [IFRS 5.32] represents either a separate major line of business or a geographical area of operations is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control. IFRS 5 prohibits the retroactive classification as a discontinued operation, when the discontinued criteria are met after the end of the reporting period. [IFRS 5.12] Disclosure in the statement of comprehensive income

The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognised on the measurement to fair value less cost to sell or fair value adjustments on the disposal of the assets (or disposal group) is presented as a single amount on the face of the statement of comprehensive comprehensiv e income. If the entity presents profit or loss in a separate statement, a section identified as relating to discontinued operations is presented in that separate statement. [IFRS 5.33-33A].

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is required either in the notes or in the statement of comprehensive income in a section distinct from continuing operations. [IFRS 5.33] Such detailed disclosures must cover both the current and all prior periods presented in the financial statements. [IFRS 5.34] Cash flow information

The net cash flows attributable to the operating, investing, and financing activities of a discontinued operation is separately presented on the face of the cash flow statement or disclosed in the notes. [IFRS 5.33] Disclosures

The following additional disclosures are required: adjustments made in the current period to amounts amount s disclosed as a discontinued operation in prior periods must be separately separately disclosed [IFRS [IFRS 5.35] if an entity ceases to classify classify a component as held for sale, the results of that component previously presented in discontinued operations must be reclassified and included in income from continuing operations for all periods presented [IFRS 5.36] Assessments References https://www.pkf.com/media/10033170/ias-16-property-plant-and-equipment-summary.pdf  https://www.pkf.com/media/10033172/ias-36-impairment-of-assets-summary.pdf  https://www.pkf.com/media/10031776/ias-38-intangible-assets-summary.pdf 

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 8 Accounting for Provisions; Revenue Contracts; Employee Benefits and Sharebased Payment Week 14 Introduction

This module discusses the accounting for provisions, revenue contracts, employee benefits and share based payment. It includes the recognition, measurement, presentation and disclosure in the financial statements. The standards and procedures to account and record these topics are also covered under this module. Learning Objectives

 After studying studying this module, students students should should be able to: 1. Define the the provision, provision, revenue revenue contracts, contracts, employee benefits and and share share based payments 2. Understand Understand the recognitio recognition, n, measurement, measurement, presentation presentation and disclosure disclosure in the the financial statements 3. Explain the application application of accounting accounting principles principles for for provision and revenue revenue contracts contracts 4. Differentiate Differentiate between between employees employees benefits benefits and and share share based based payments payments

Provision  A provision provision is an existing liability liability of uncertain timing or uncertain uncertain amount. Provisions Provisions are actually estimated liability because it is both probable and measurable. Recognition of Provision

 A provision provision is recognized recognized when:  A. An entity has a present obligation (legal or constructive) as a result of past event; B. It is probable that an outflow of resources embodying economic benefits will be required to settle obligation. C. A reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision shall be recognized.

1

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Legal obligation is an obligation arising from a contract, legislation or other operation of law. Constructive obligation is an obligation that derives from an entity’s actions where:

• The entity has indicated to other parties (by a pattern of past practice, published policies or a current statement) that it will accept certain responsibilities; and • As a result, the entity has created in the other parties a valid expectation it will wi ll discharge those responsibilities. Obligating event  gives rise to a present obligation and an event that creates a legal or constructive obligation because the entity has no realistic alternative but to settle the obligation created by the event. Pro-forma  journal

entry: entry:

To record the recognition recognition of a provision: provision: Expense

xx

Estimated liability

xx

Definition of Contingent Liability

 A contingent liability either a:  A. possible possible obligation arising from past events whose existen existence ce will will be confirme confirmed d only by the occurrence or non-occurrence of some uncertain future event not wholly within the entity’s control, or  B. present obligation that arises from a past event but is not recognized because either: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or  (ii) the amount of the obligation cannot be measured with sufficient reliability.

Relationship between provision and contingent liability

2

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

In general sense, all provisions are contingent because they are uncertain in timing or amount. The term “contingent” is used for items that are not recognized because their existence will be confirmed by occurrence or non-occurrence of one or more uncertain future events not within the control of the entity. The “contingent liability” is used for liabilities that do not meet the recognition criteria. Specific Applications

l No provision should be made for future operating losses, including those relating to a restructuring, as they do not meet the definition of a liability at the end of the financial reporting period. l Provisions should be made for onerous contracts, being contracts where the unavoidable future costs under the contract exceed the expected future economic benefits (e.g. a leased property sub-let at a lower rent). l A restructuring is a sale or termination of a line of business, closure of business locations, changes in management structure or a fundamental re-organization of the company. No obligation arises for the sale of an operation until there is a binding sale agreement. l A provision for restructuring costs is recognized only when the general recognition criteria are met. More specifically, a constructive obligation only arises when a detailed formal plan is in place and it has begun or been announced to those affected by it. A board decision is not enough. Restructuring provisions should include only direct expenditures caused by the restructuring, not costs that associated with the ongoing activities of the entity.

Measurement of Provisions

The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the financial reporting date. Consideration in determining best estimate: 1. Risks and uncertainties that surround the underlying events. 2. Future events

3

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

 A. Forecast Forecast reasonable reasonable changes changes in applying existing technology technology B. Ignore possible gains on sale of assets C. Consider changes in legislation only if virtually certain to be enacted 3. Discounted present value using a pre-tax discount rate that reflects the current market assessments of the the value of money and the risks specific to the liability. 4. Reimbursement by another party. The reimbursement should be recognized as a separate asset provided it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognized as an asset should not exceed the the amount of the the provision and it should not be treated as a reduction of the required provision. 5. Gains on expected disposal of assets.  An entity recognizes recognizes gains gains on expected expected disposals disposals of of assets at the tome of of disposition disposition of assets. 6. Presence Presence of of onerous onerous contact If an entity has an onerous contract, the present obligation under the contract shall be recognized and measured as a provision. 7. Re-measurement of provisions The following shall be performed when measuring provisions subsequent to initial recognition.  A. Review Review and adjust adjust provisions provisions at each reporting reporting date. date. B. If an outflow no longer probable, provision is reversed. 8. Use of provisions If it is no longer probable that an outflow of resources will be required to settle the obligation, the provision should be reversed.

Revenue Contracts

IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial

4

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.  A contract contract with a customer may be partially partially within within the scope scope of IFRS IFRS 15 and partially within the scope of another standard. In that scenario:  A. If other standards specify how to separate and/or initially measure one or more parts of the contract, then those separation and measurement requirements are applied first. The transaction transaction price is then then reduced by the the amounts that are initially initially meas measured ured under other standards; B. If no other standard provides guidance on how to separate and/or initially measure one or more parts of the contract, then IFRS 15 will be applied. Contract an agreement between two or more parties that creates enforceable rights and obligations. Customer a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. Income increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity participants. Performance obligation a promise in a contract with a customer to transfer to the customer either a good or service (or a bundle of goods or services) that is distinct; or a series of distinct goods or services services that are substantially substantially the same and that have the same pattern of transfer to the customer. Revenue income arising in the course of an entity’s ordinary activities. Transaction price the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Recognition and Measurement of Revenue

Generally, revenue is recognized when entity entit y has transferred promised goods or services to the customer. IFRS IFRS 15 sets out five steps steps for the recognition recognition process: process:

5

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

1. 2. 3. 4. 5.

Identify Identify the the contra contract ct with with the the custome customer  r  Identify Identify the separa separate te performa performance nce obligat obligations ions Determin Determine e the the transac transaction tion price price Allocate the transactio transaction n price to the performance performance obligations obligations Recognize Recognize revenue revenue when when (or (or as) performance performance is satisfied

Employee Benefits

These are all forms of consideration consideration given by an entity in exchange exchange for services rendered or for the termination of employment. Classification of Employee Benefits 1. Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services.

Examples of short-term employee benefits:  A. Wages, Wages, salaries and social social security security contributions contributions B. Compensated absences(paid vacation and sick leave) C. Profit sharing and bonuses D. Non-monetary benefits

6

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

2. Post-employment benefits employee benefits payable after the completion of employment (excluding termination and short term benefits), such as:

 A. Retirement Retirement benefits benefits (e.g. pensions, pensions, lump sum sum payments) payments) B. Other post-employment benefits (e.g. post-employment life insurance, medical care). Two types of post-employment benefit plans

 A. Defined contribution contribution plan - are post-employment post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. B. Define Defined d benefit benefit plan plan - these these are post-e post-emplo mploymen ymentt plans plans other other than than defined defined contribution plans. These would include both formal plans and those informal practices that create a constructive constructive obligation to the entity’s entity’s employees. 3. Other long-term employee benefits include items such as the following, if not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service:

 A. Long term paid absences such as long long service service or sabbatical sabbatical leave leave B. Jubilee or other long service benefits C. Long term disability benefits D. Profit sharing and bonuses E. Deferred remuneration 4. Termination benefits an employee benefits provided in exchange for the termination of an employee’s employment, as a result of either:

 A. An entity’s decision to terminate an employee or group employee before the normal retirement date; or  B. An employee’s decision to accept an offer of benefits in exchange for the termination of employment. Recognition and Measurement

7

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

1. Short-term Short-term employee employee benefits When an employee has rendered service to an entity during an accounting period, the entity shall recognize the undiscounted amount of short term employee benefits expected to be paid in exchange for that service:  A. As a liability (accrued expenses), after deducting any amount paid. B. As an asset (prepaid expense) to the extent that the prepayments will lead to, for example, a reduction in future payments or a cash refund. C. As an expense, unless the benefit paid forms part of cost of an asset (I.e.,PPE,inventories). If the entity’s expectations of the timing of settlement change temporarily, it need not reclassify a short term employee benefit. 2. Post-employment benefits  A. Defined Defined Contribution Contribution Plans Plans When an employee has rendered service to an entity during a period, the entity shall recognize the contribution payable to a defined contribution plan in exchange for that service:  A. As a liability (accrued expenses), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period. B. As an asset (prepaid expense) to the extent that prepayment will lead to, for example, a reduction in future payments or a cash refund. C. As an expense, unless another PFRS requires or permits the inclusion of the contribution in the cost of an asset. B. Defined Benefit Plans May be unfunded, or they may be wholly or partly funded funde d by contributions by an entity, entity , and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from which the employees benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance performan ce of the fund but also on an entity’s ability, ability, and willingness, to make good an any y shortfall in the fund’s assets. Therefore, the entity is, in substance, underwriting the

8

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

actuarial and investment risks associated with the plan. Consequently, the expense recognized for a defined benefit plans not necessarily the amount of the contribution due for the period. 3. Other long-term employee benefits  Accounting for long term benefits is same with accounting  Accounting accounting for post employment employment benefits in that:  A. Actuarial gains and losses are recognized recognized immediately and no ‘corridor’ (as discussed above for post employment benefits) is applied; and B. All past service costs are recognized immediately. 4. Termination benefits Recognize liability and expense at the earlier of :  A. The date date the entity entity can no longer longer withdraw withdraw the benefit benefit or offer  offer  B. The date the entity recognizes restructuring costs under PAS 37.

 An entity shall measure measure termination termination benefits benefits on initial initial recognition, recognition, and and shall measure measure and recognize subsequent changes, in accordance with the nature of the employee benefit, provided that if the termination benefits are an enhancement to post employee benefits, the entity shall apply the requirements for post employment benefits. Otherwise:  A. If should termination settled wholly before 12 months from reporting date, liabilities not bebenefits discounted. B. If termination benefits are not settled wholly before 12 months from reporting date, they should be discounted.

Share-based Payments

 A share-based payment is a transaction in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options), or acquires goods or services for amounts that are based on the price of the entity’s shares shares or other equity instruments instruments of the entity. entity.

9

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Types of Share-based Payments Transactions 1. Equity settled

The entity issues equity instruments in consideration for services received, e.g., stock options. 2. Cash settled

The entity incurs a liability for services received and liability is based on the entity’s equity instruments, e.g., stock appreciation rights. 3. Share-based payments with cash alternatives

a. Originally equity-settled and cash settled was subsequently added, or  b. Granted simultaneously

Share option or stock option is a contract that gives the holder the right, but not the obligation, to subscribe to the entity’s shares at a fixed or determinable price for specified period of time. It is granted to officers and key employees, as an additional compensation, to enable them to acquire shares of stock of the entity during a specified period upon fulfillment of certain conditions at a specified price.

Recognition

In accordance accordance with paragraph paragraph 7 of PFRS 2,”an entity shall rec recognize ognize the goods goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received.” For  1. Equity-settled Equity-settled share share based payment payment transaction transaction - recognize recognize a corresponding corresponding increase in equity if the goods or services were received. 2. Cash-settled Cash-settled share based payment transaction transaction - recognize a liability liability if the goods or services were acquired.

10

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

When the goods or services received or acquired in a share based payment transaction do not qualify from recognition as assets, they shall be recognized as expenses. Cash-settled share based payment transaction

The entity shall measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity shall remeasure the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in profit or loss for the period.

Share-based payments with cash alternatives

1. Continue to recognized the original fair value of the instrument in the normal way. 2. Recognized the liability to settle in cash at the modification date based on the fair value of the shares at modification modification date and extent to which the specifie specified d services ha have ve been received. 3. Remeasure the fair value of the liability at each reporting date and at the date of settlement, which any changes in fair value recognized in profit or loss for the period. 4. Balance of the equity components should be the excess of the original fair value of the equity instruments, date of grant minus fair value of cash alternative, date of modification)x number of share options x the extent to which the specified services have been received.

Assessments Tasks: 1. Discuss on how to identify identify provisions provisions and revenue revenue contracts 2. Explain the recognition recognition and measurement measurement of provisions provisions and and revenue revenue contracts contracts 3. Differentiate Differentiate between between the employee benefits and share share based based payments payments 4. Discuss the the presentation presentation and disclosure disclosure of provision, provision, revenue revenue contracts contracts in the financial statements 5. Differentiate Differentiate between between employee benefits and share share based based payments

11

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

References Ballada, Win (2020), Conceptual Framework and Accounting Standards. Manila, Philippines. Domdane Publishers Co.

Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial  Accounting  Accounti ng Volume Two. Manila, Manila, Philippines. Philippines. GIC GIC Enterprises Enterprises & Co.,Inc. Co.,Inc.

12

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 9 Accounting for Leases Week 15 Introduction

This module discusses the accounting for Leases, its features, recognition, measurement, presentation and disclosure in the financial statements. It also includes Lessee Accounting, sale and leaseback. Learning Objectives

 After studying studying this module, students students should should be able to: 1. Define Define and and recogni recognize ze Lease Lease Accou Accountin nting g 2. Discuss the principles principles for for the recognition recognition,, measurement, measurement, presentat presentation ion and disclosure of leases 3. Differentiate Differentiate between between operating operating lease lease and and financial financial lease 4. Explain Explain Sale Sale and Leas Leasebac eback k concep conceptt

ACCOUNTING FOR LEASES Lease

Under Appendix A of IFRS 16, a lease is defined as a contract that conveys the right to use the underlying asset for a period of time in exchange for consideration.  Appendix B9 provides that to be a lease, a contract must conve  Appendix convey y the right to control the use of an identified asset. Types of Lease 1. Finance lease - is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred. 2. Operating lease - is a lease other than a finance lease.

Criteria for Classification of Lease as Finance Lease

1

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Major Criteria

Under PAS 17, among others, ANY of the following situations would normally lead to a lease being classified as finance lease: 1. Transfer of ownership The lease transfers ownership of the leased asset to the lessee at the end of the lease term. 2. Bargain purchase option The lease provides that the lessee has the option to purchase the leased asset at a price sufficiently lower than the fair value of the asset at the date of option becomes exercisable. And that at the inception of the lease, it is reasonably certain that the option will be exercised. 3. Major part of the economic life The lease term is for the major part of the economic life of the asset even if the title is not transferred. Under the US GAAP,”major part” means atleast 75% of the economic life of the asset. 4. Substantially all of the fair value of leased asset The present value of the minimum lease payment amounts to substantially all the fair value of the leased asset at the inception of the lease. Other Criteria

Other situations that individually or in combination could also lead to a lease being classified as finance lease are: 1. Specialized nature The leased asset is of such specialized nature that only the lessee can use it without major modification. 2. Losses are borne by the lessee If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee. 3. Gain or losses from changes in fair value accrue to the lessee

2

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee. 4. Extension of lease term at the option of the lessee The lessee has the ability ability to continue the lease for secondary secondary period at a rent that is substantially lower than market rent. Accounting for the Finance Lease: Book of the Lessee

IFRS 16, paragraph 22, provides that at the commencement date, a lessee shall recognize a right of use asset and a lease liability. This simply means that a lessee is required to initially recognize a right of use asset for the right to use the underlying asset over the lease term and a lease liability for the obligation to make payments. Initial measurement right of use asset

 A right of use asset is defined as an asset that represents the right of lessee to use an underlying asset over the lease term finance lease. IFRS 16, paragraph 23, provides that the lessee shall measure the right of use asset at cost at commencement date. Paragraph 24 provides that the cost of right of use asset comprises:  A. The amount of initial measurement measurement of the lease liability or the present value of lease payments. B. Lease payments made to lessor at or before commencement date, such as lease bonus, less any lease incentives received. C. Initial direct costs incurred by the lessee. D. Estimate of cost of dismantling, removing and restoring the underlying asset for which the lessee has a present obligation.

Subsequent measurement right of use asset

IFRS 16, paragraph 29, provides that a lessee shall measure the right of use asset applying the cost model.

3

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

To apply the cost model, the lessee shall measure the right use of an asset at cost less any accumulated depreciation and impairment loss. Moreover, the carrying amount of the right of use asset is adjusted for any remeasurement of the lease liability. Initial measurement of the lease liability

The lease liability should be initially recognized and measured at the present value of the lease payments. Lease payments comprise: 1. Fixed payments, less any lease incentives receivable 2. Variable lease payments that depend on an index or a rate 3. Amounts expected to be payable by the lessee under residual value guarantees, 4. The exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and 5. Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease. Subsequent measurement of the lease liability

 After the initial recognition recognition,, the measurement measurement of of a lease liability is affected by: 1. Accruing interest on the lease liability Lease liabilities are measured on an amortized cost basis using an effective interest method, similarly to other financial liabilities Interest is recognized in P/L unless it can be capitalized under IAS 23 23.. 2. Lease payments made Lease payments reduce the carrying amount of the lease liability. Variable lease payments not included in the measurement of the lease liability are recognized in P/L in the period in which the event or condition that triggers those payments occurs.

4

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

3. Remeasurements reflecting any reassessment or lease modifications. Remeasurements of the lease liability are treated as adjustments to the right-of-use asset. If the carrying amount is reduced to zero, any further reduction is recognized immediately in P/L. The lease liability is remeasured when:  A. there is a change change in the assessment assessment of a lease term, term, or  B. there is a change in the assessment of an option to purchase the underlying asset, or  C. there is a change in the amounts expected to be payable under a residual value guarantee, or  D. there is a change in future lease payments resulting from a change in an index or a rate used to determine those payments The remeasurements made under (a) and (b) should be made using a revised discount rate, and under (c) and (d) using an unchanged discount rate. However, remeasurements made under (d) should be made using a revised discount rate if they are caused by a change in floating interest rates. Accounting for the Finance Lease: Book of the Lessor  Finance Lease-Lessor 

 A. Direct Financing Financing Lease Does not involve a manufacturer’s or dealer’s profit. Initial direct cost is included in the initial measurement of the net lease receivable or net investment. If there is initial direct cost a new implicit rate will be computed using interpolation.

Gross investment in the lease is the total of the minimum lease payments receivable by the lessor under a finance lease plus any unguaranteed residual value accruing to the lessor. This figure is actually the amount debited to the lease receivable. Net investment in the lease is equal to the gross investment less unearned finance

income or the gross investment in the lease discounted at the interest rate implicit in the lease.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Manufacturer’s or dealer’s profit is the difference between the present value of the minimum lease payments and the cost of the leased asset.

B. Sales type lease Involves the recognition of a manufacturer’s or dealer’s profit or loss on the transfer of the asset to the lessee. Initial direct cost is expensed immediately (or added to the cost of sales account.) Gross investment this is equal to the gross rentals for the entire lease term plus the absolute amount of the residual value, whether guaranteed or unguaranteed. Net investment in the lease this is equal to the present value of the gross rentals plus the present value of the residual value, whether guaranteed or unguaranteed. Unearned interest income is the difference between the difference between the gross investment and net investment in the lease. Sales is the amount to the net investment in the lease or fair value v alue of the asset, whichever is lower. Cost of goods sold this is equal to the cost of the asset sold plus the initial direct cost paid by the lessor. Gross profit this is usual formula of sales minus cost of good sold. Accounting for the Operating Lease: Book of the Lessee

IFRS 16, paragraph 5, provides that a lessee is permitted to make an accounting policy election to apply the operating lease accounting and not recognize an asset and lease liability in two optional exemptions.  A. Short term lease  Appendix A defines a short term lease as a lease that has as term of 12 months or  Appendix less at the commencement date of the lease. B. Low value lease  Appendix B3 states  Appendix states that a lessee lessee shall shall assess the value value of of un underlying underlying asset asset based based on the value of the asset asset when it is new regardless regardless of the age of the asset being being leased.

6

 

ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Paragraph 6 provides that if the lease elects to apply the operating lease accounting under the two exemptions, the lessee shall recognize lease payments as an expense in either a straight line basis over the lease term or another systematic basis. Accounting for the Operating Lease: Book of the Lessor 

IFRS 16, paragraph 81, provides that a lessor shall recognize lease payments from operating lease as income either on a straight line basis or another systematic basis. The lessor shall apply another systematic basis if this is more representative of the pattern in which benefit from the use of the underlying asset is diminished. Otherwise stated, the periodic rental received by the lessor in an operating lease is simply recognized as rent income.  A lessor lessor shall shall present present an an underlying underlying asset subject subject to operating operating lease in the statement statement of financial position according to the nature of asset. The underlying asset remains as an asset of the lessor. Consequently, the lessor bears all ownership or executory costs such as depreciation of leased property, real property taxes, insurance and maintenance. However, the lessor may pass on to the lessee the payment for taxes, insurance and maintenance cost. The depreciation policy for depreciable leased asset shall be consistent with the lessor’s normal depreciation for similar asset.

Accounting for Sales and Leaseback

 A sale and leaseback is an arrangement whereby one party sells a property to another party and then immediately leases the property back from its new owner. Thus, the seller becomes a seller-lessee and the purchaser.

Pro-forma journal entries Books of the seller-lessee

1. To record the sale

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Cash (consideration received)

xx

 Accumulated  Accumula ted Depreciation Depreciation

xx

Loss on sale of asset (if any)

xx

Equipment (consideration given)

xx

Deferred gain on sale and leaseback(if any)

xx

2. To record the leaseback Equipment

xx

Lease liability

xx

3. To record the first rental payment Lease liability

xx

Interest expense

xx

Cash

xx

4. To record depreciation of leased asset Depreciation expense

xx

 Accumulated  Accumula ted Depreciation Depreciation

xx

5. To record amortization of deferred gain Deferred gain on sale and leaseback

xx

Gain on sale and leaseback

xx

Books of the purchaser-lessor 

1. To record the purchase Equipment

xx

Cash 2. To record the lease as finance lease

xx

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Lease receivable

xx

Equipment

xx

Unearned interest income

xx

3. To record the first rental payment Cash

xx

Lease receivable

xx

4. To record earned interest Unearned interest income

xx

Interest Income

xx

Leaseback as a Operating Lease

For leaseback as an operating lease, the following rules should be observed: Pro-forma journal entries Books of the seller-lessee

1. To record the sale Cash (consideration received)

xx

 Accumulated  Accumula ted Depreciation Depreciation

xx

Loss on sale of asset (if any)

xx

Deferred loss on sale and leaseback(if any)

xx

Equipment (consideration given)

xx

Gain on sale and leaseback(if any)

xx

Deferred gain on sale and leaseback(if any)

xx

2. To record annual rental

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Rent Expense

xx

Cash

xx

3. To record amortization of deferred gain Deferred gain on sale and leaseback

xx

Gain on sale and leaseback

xx

4. To record amortization of deferred loss Loss on sale and leaseback/Rent Expense Deferred loss on sale and leaseback

xx xx

Books of the purchaser-lessor 

1. To record the purchase Equipment

xx

Cash

xx

2. To record the first rental payment Cash

xx

Rent Income

xx

3. To record depreciation of leased asset Depreci Dep reciatio ation n Expense Expense xx  Accumulated  Accumula ted Depreciation Depreciation

xx

Sale and Leaseback

 A transaction transaction which which involves involves the sale of an asset and the the leasing leasing back of the same asset.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

IFRS 16 requires an initial assessment to be made regarding whether or not the transer constitute a sale.

Assessments Tasks: 1. Define Define the the Accou Accountin nting g for for Leases Leases 2. Explain the Major Major and and other other criteria criteria in recognition recognition of Lease 3. Differentiate Differentiate between between Operating Operating Lease Lease and Finance lease 4. Discuss Discuss the the profor proforma ma entrie entries s for Lease Lease

References Ballada, Win (2020), Conceptual Framework and Accounting Standards. Manila,

Philippines. Domdane Publishers Co. Peralta, Jose F., Valix, Valix, Christian Aris M., Valix, Conrado T. (2017), (2017), Financial  Accounting  Accounti ng Volume Two. Manila, Manila, Philippines. Philippines. GIC GIC Enterprises Enterprises & Co.,Inc. Co.,Inc.

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ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS  ______________  ________ _____________ ______________ _______________ ______________ _____________ ______________ _______________ ______________ ____________  ______ 

Module 10 Accounting for Insurance Contracts; Deferred Tax; and Earnings per Share Week 16-17 Introduction

This module comprises Accounting for Insurance Contracts, Deferred Tax, and Earnings per share topics. It tackles the definition, measurement and recognition of these items. The related standards are incorporated in the discussion as well as the presentation and disclosure in the financial statements. Learning Objectives

 After studying studying this module, students students should should be able to: 1. Understand Understand and explain explain the concepts concepts under under Insurance Insurance Contracts, Contracts, Deferred Tax and Earnings per share 2. State the the recognition recognition and and measurement measurement under the the accounting accounting standards standards 3. Demonstr Demonstrate ate the presen presentati tation on and disclos disclosure ure of the

Accounting for Insurance Contracts

Definition of Insurance Contracts

The Insurance Contracts is a “contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.”

Scope of Insurance Contracts

Insurance contracts, including reinsurance contracts, it issues; Reinsurance contracts it holds; and investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts. Some contracts meet the definition of an insurance contract but have as their primary purpose the provision of services for a fixed fee. Such issued contracts are in a scope of

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the standard, unless an entity entit y chooses to apply to them IFRS 15 Revenue from Contracts with Customers and provided the following conditions are met:  A. The entity entity does does not reflect reflect an assessment assessment of the risk associated associated with with an individual individual customer in setting the price of the contract with that customer; B. The contract compensates the customer by providing a service, rather rat her than making cash payments to the customer; C. The insurance risk transferred by the contract arises primarily from the customer’s use of services rather than from uncertainty over the cost of those services. Recognition of Insurance Contracts  An entity shall recognize a group of insurance insurance contracts issued from the earliest of the following: a. The beginning beginning of the coverage period of of the group group of contracts b. The date when the first payment payment from a policyholder policyholder in the group becomes becomes due due c. For a group of of onerous onerous contracts, contracts, when when the group becomes becomes onerous. onerous. Measurement of Insurance Contracts On initial recognition, an entity shall measure a group of insurance contracts at the total of the fulfillment of cash flows and contractual margin. Subsequently, the carrying amount of a group insurance contract at the end of each reporting period shall be the sum of: the liability for remaining coverage and the liability for incurred claims.

Deferred Tax Definition of Deferred tax liability and Deferred tax asset 1. Deferred tax liability is the amount of income tax payable in future periods with respect to a taxable temporary difference. It also the deferred tax consequences attributable to taxable temporary difference or future taxable amount.

 Actually, a deferred deferred tax liability liability arises arises from the following: following:  A. When the accounting accounting income is higher than taxable income because of timing

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B. When carrying amount of an asset is higher than tax base. C. When carrying amount of a liability is lower than the tax base. 2. Deferred tax asset is the amount of income tax recoverable in the future periods with

respect to deductible temporary difference and operating loss carry forward. In other words, a deferred tax asset is the deferred tax consequence attributable to a future deductible amount and operating loss carry forward.  A deferred deferred tax asset asset arises from the following: following:  A. When the accounting accounting income is higher than taxable income because of timing differences. B. When tax base of an asset is higher than carrying amount. C. When tax base of a liability is lower than the carrying amount. Recognition of Deferred tax liability

PAS 12, paragraph 15, provides that deferred tax liability shall be recognized for all taxable temporary differences. However, a deferred tax liability is not recognized when the taxable temporary difference arises from:  A. Goodwill Goodwill resulting from a business combination combination and and whivh whivh is nondeductible nondeductible for tax purposes. B. Initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting income nor taxable income. C. Undistributed Undistributed profit of subsidiary subsidiary,, associate or joint joint venture w when hen the parent, parent, investor or venturer is able to control the timing of the reversal of the temporary difference.

Recognition of Deferred tax asset

PAS 12, paragraph 24, provides that a deferred tax asset shall be recognized for all deductible temporary differences and operating loss carry forward when it is probable that taxable income will be available against which the deferred tax asset can be used.

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Operating loss carry forward is an excess of tax deductions over gross income in a year that may be carried forward to reduce taxable income in a future year. Certain entities registered with the Board of Investments are permitted to carry over net operating loss for tax purposes subject to limitations of the relevant law and implementing regulations of the Board of Investments.

Earnings per Share

Earning per share is the amount attributable to every share of ordinary share outstanding during the period. Thus, the earnings per share information pertain only to ordinary share. Earnings per share is not computed for preference share because there is a fixed rate return for such share.

Types of Earning per Share

1. Basic Earnings per share Determination of basic earnings (or loss) per share

The net income is equal to the amount after deducting dividends di vidends on preference share. If the preference share is cumulative, the preference dividend for the current year only is deducted from the net income, whether such dividend is declared or not. If the preference share is noncumulative, the preference dividend for the current year is deducted from the net income only if there is declaration. If there is a significant change in the ordinary share capital during the year, the weighted average number of ordinary shares outstanding outstanding during the period period should be used as denominator. denominator. In a bonus issue, ordinary shares are issued to existing shareholders for no consideration. Therefore, the number of ordinary shares is increased without increase in resources. A bonus issue is actually a share dividend.  Application Guidance 2 of PAS 33, provides that “the number of ordinary shares to  Application be used in calculating basic earnings per share for all periods prior to the rights issue is the number of ordinary shares outstanding prior to the rights issue multiplied by an adjustment factor”. 2. Diluted earnings per share

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It is the amount attributable to every share of ordinary share outstanding during the period while giving effect to all dilutive potential ordinary shares outstanding during the period. The reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions is termed as dilution. Potential ordinary share is a financial instrument or other contract that may entitle the holder to ordinary shares or represents future issuance of ordinary shares. Three major types of potential ordinary shares: 1. Convertible bond payable payable are dilutive whenever whenever interest per ordinary share obtainable obtainable on conversion is lesser that the basic earnings per share. The computation of diluted earnings per share assumes that the bonds payable is converted into ordinary share.  Accordingly, adjustments  Accordingly, adjustments shall be made both to net income and to the number of ordinary shares outstanding. The net income is adjusted by adding back the interest expense on the bond payable, net of tax. The number of ordinary shares outstanding is increased by the number of ordinary shares that would have been issued upon conversion of the bond payable.

2. Convertible preference share are dilutive whenever the amount of dividend on such shares declared in or accumulated for the current period per ordinary share obtainable on conversion is lesser than the basic earnings per share. The computation of diluted earnings per share also assumes that the bonds payable is converted into ordinary shar share. e.  Accordingly, the net income is not reduced anymore by the amount of preference  Accordingly, preference dividend. The number of ordinary shares outstanding is increased by the number of ordinary shares that would have been issued upon conversion of the preference share. 3. Share option and warrant have a dilutive effect only when the average market price of ordinary shares during the period exceeds the exercise price of the options or warrants. For the purpose of calculating diluted earnings per share, an entity shall assume the exercise of dilutive options and warrants of the entity.

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The assumed proceeds from these instruments shall be regarded as having been received from the issue of ordinary shares at the average market price of ordinary shares during the period. This is also known as treasury shares method. The difference between the number of ordinary shares issued and the number of ordinary shares that would have been issued at the average market price of ordinary shares during the period shall be treated as an issue of ordinary shares for no considerations. Entities required to present earnings per share Public enterprises are required to present earnings per share to achieve comparability in financial reporting. On the other hand, nonpublic enterprises are only encouraged but not required to present earnings per share.

Assessments

Tasks: 1. Define the the Accounting Accounting for Insurance Insurance Contracts Contracts and Deferred Deferred Tax 2. Explain Explain the the concept concept of Earnin Earnings gs per per Share Share 3. Discuss the measurement measurement and and recognition recognition for Insurance Insurance Contracts Contracts and and Deferred Deferred Tax

References Ballada, Win (2020), Conceptual Framework and Accounting Standards. Manila, Philippines. Domdane Publishers Co.

Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial  Accounting  Accounti ng Volume Two. Manila, Manila, Philippines. Philippines. GIC GIC Enterprises Enterprises & Co.,Inc. Co.,Inc.

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