Theory of Accounts | 1

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

(5427)

Financial Reporting Standards Council - standard setting body created by

the PRC upon recommendation of the BOA in carrying out its powers
and functions under R.A. 9298. It shall have 15 members: Chairman,
BOA, SEC, BSP, BIR, COA, FINEX, and 4 sectors of accounting practice
(2 per sector) public, commerce & industry, academe and government.

Philippine Financial Reporting Standards include:

1. PFRS corresponding to IFRS issued by IASB
2. PAS corresponding to IAS issued by IASC
3. Phil. Interpretations corresponding to IFRIC and SIC Interpreta-
tions and Interpretations developed by PIC

 The Conceptual Framework is not a reporting standard and there-

fore does not define standard for any particular measurement or
disclosure issue.
 The Conceptual Framework is concerned with general purpose fi-
nancial statements including consolidated financial statements.

BASIC purpose of the CONCEPTUAL FRAMEWORK

1. To assist FRSC in developing accounting standards that represents
GAAP in the Philippines.
2. To assist FRSC in reviewing and adopting existing international ac-
counting standards.
3. To assist auditors in forming an opinion as to whether financial
statements conform with accounting standards.

SCOPE of the FRAMEWORK:

1. Objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Definition, recognition and measurement of elements from which
financial statements are constructed
4. Concepts of capital and capital maintenance

USERS of FINANCIAL INFORMATION

1. Primary users
a. Existing and potential investors
b. Existing and potential lenders and other creditors
2. Secondary users
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GOING concern - the only underlying assumption; financial statements are
normally prepared on the assumption that an entity will continue in
operation for the foreseeable future.

IMPLICIT assumptions:
1. Accounting entity
2. Time period

Accrual - basis for financial statements of accounting recognizes transactions

and other events when they occur

QUALITATIVE characteristics are the attributes that make the information

provided in the financial statements useful to users.
Fundamental qualitative characteristics: Relevance and Faithful
Representations.
Enhancing qualitative characteristics: COMPARABILITY, UNDER-
STANDABILITY, VERIFIABILITY AND TIMELINESS.

 RELEVANT financial information is capable of making a difference in

the decision made by users.
 COMPARABILITY enables users to identify and understand similarities
and differences among items.

INFORMATION is MATERIAL if its omission or misstatement could influence

decisions that users make on the basis of financial information about
an entity.

PERFECTLY faithful representation ingredients: COMPLETENESS, NEUTRAL-

ITY, and FREE FROM ERROR.

Neutral - unbiased
Completeness - financial reports should include all information necessary for a
user to understand the phenomenon being depicted including all nec-
essary description and explanation
Prudence - inclusion of a degree of caution in the exercise of judgment need-
ed in making estimates under conditions of uncertainty such that as-
sets and income are not overstated, or liabilities and expenses are not
understated
Comparability - information exhibits when two different entities has been pre-
pared and presented in a similar manner
Reliability - users are assumed to have a reasonable knowledge of business
and economic activities and a willingness to study the information with
reasonable diligence
 Theory of Accounts | 3
Understandable - information are classified, characterized and presented
clearly and concisely
Verifiability - high degree of consensus can be secured among independent
measures using the same measurement method
Timeliness - having information available to decision-makers in time to be
able of influencing their decisions

ELEMENTS of FINANCIAL STATEMENTS – financial statements portray the

financial effects of transactions and other events by grouping them in-
to broad classes according to their economic characteristics.
ELEMENTS directly related to the measurement of financial position
are assets, liabilities and equity
ELEMENTS directly related to the measurement of financial perfor-
mance are income and expenses

Recognition – process of incorporating or reporting in the statement of fi-

nancial position or statement of comprehensive income an item that
meets the definition of an element of financial statements.
ASSET – a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity
LIABILITY – a present obligation of the entity arising from past events
Measurement – process of determining the monetary amounts at which the
elements are to be recognized and carried in the financial statements

PAS 1 – PRESENTATION OF FINANCIAL STATEMENTS

(5429)

FINANCIAL statements include:

1. Statement of financial position (balance sheet)
2. Statement of financial performance (income statement)
3. Statement of changes in equity
4. Statement of cash flows
5. Notes to financial statement

FAIR presentation requires an entity:

a. To comply with applicable PFRS
b. To present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable infor-
mation
 Theory of Accounts | 4
c. To provide additional disclosures when compliance with the specific re-
quirements in PFRS is insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the
entity’s financial position and financial performance

Rule of offsetting:
a. An entity shall not offset assets and liabilities, and income and ex-
penses, unless required or permitted by PFRS
b. Gains and losses on disposal of noncurrent assets are reported by de-
ducting from the proceeds on disposal the carrying amount of the as-
set and related selling expenses
c. Gains and losses arising from a group of similar transactions are re-
ported on a net basis, for example, foreign exchange gains and losses
arising from financial instruments held for trading

Consistency of presentation – presentation and classification of items in the

financial statements are retained from one period to the next

 An entity can change the presentation and classification of items in the

financial statements from one period to the next when:
a. It is apparent following a significant change in the nature of the en-
tity’s operations or a review of its financial statement that another
presentation or classification would be more appropriate.
b. A PFRS requires a change in presentation

 An entity must present additional line items in a statement of financial

position when such presentation is relevant to an understanding of the
entity’s financial position

COMPREHENSIVE INCOME – change in equity during a period resulting from

transactions and other events, other than those changes resulting
from transactions with owners in their capacity as owners. Includes:
1. Gain and loss arising from translating the financial statements of a
foreign operation
2. Gain and loss on remeasuring available for sale financial asset
3. The effective portion of gain and loss on hedging instrument in a
cash flow hedge
4. Actuarial gain or loss fully recognized in other comprehensive in-
come
5. Revaluation surplus during the year
 Theory of Accounts | 5
USE of NOTES:
1. To present information about the basis of preparation of financial
statements and the specific accounting policies used
2. To disclose the information required by PFRS that is not presented
elsewhere in the financial statements
3. To provide information that is not presented elsewhere in the financial
statements but is relevant to an understanding of the statements

MATERIAL adjustment to ASSET and LIABILITY

1. Recoverable amount of PPE
2. Inventory obsolescent
3. Future outcome of litigation

PAS 10 – EVENTS AFTER REPORTING PERIOD

(5429)

EVENTS after the end of the reporting period are events, favorable and unfa-
vorable, that occur between the end of the reporting period and the
date when the financial statements are authorized for issue.

ADJUSTING events are those that provide evidence of conditions that existed
at the end of the reporting period.

FINANCIAL statements are said to be authorized for issue when the manage-
ment (board of directors) reviews the financial statements and author-
izes them for issue.

PAS 24 – RELATED PARTY DISCLOSURES

(5429)

A PARTY is related to an entity if the party, directly or indirectly through one

or more intermediaries:
1. Controls, is controlled by or is under common control with the enti-
ty
2. Has an interest in the entity that gives it significant influence over
the entity
3. Has joint control over the entity
 Theory of Accounts | 6
RELATED party includes:
1. Parent, subsidiary, and fellow subsidiaries
2. Associate
3. Key management personnel and close family members of such individ-
uals
a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or the individual’s spouse

PAS 8 – ACCOUNTING POLICIES, ESTIMATES AND ERRORS

(5429)

ACCOUNTING policies – specific principles, bases, conventions, rules and

practice applied by an entity in preparing and presenting financial
statements

CHANGE in accounting estimate – adjustment of the carrying amount of an

asset or a liability or the amount of the periodic consumption of an as-
set that results from the assessment of the present status and ex-
pected future benefit and obligation associated with the asset and lia-
bility.

RETROACTIVE application – applying a new accounting policy to transactions,

other events and conditions as if the policy had always been applied

PROSPECTIVE application – applying a new accounting policy to transactions

occurring after that date at which the policy changed

RETROSPECTIVE restatement – correcting the recognition, measurement and

disclosure of amount of elements of financial statements as if a prior
period error never occurred

AN ENTITY changes its accounting policy if:

1. It is required by PFRS
2. The change will result in providing reliable and more relevant infor-
mation about the entity’s financial position financial performance and
cash flows.

A CHANGE in accounting policy should be reported either:

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1. A change in accounting policy required by PFRS shall be reported in
accordance with the transitional provisions therein
2. If the PFRS contains no transitional provisions or if an accounting poli-
cy is changed voluntarily, the change shall be reported retrospectively

 When it is difficult to distinguish a change in an accounting policy from

a change in an accounting estimate, the change is treated as change
in accounting estimate with appropriate disclosure

PFRS 5 – DISCOUNTINUED OPRATION AND ASSET HELD

FOR SALE (5432)

DISPOSAL GROUP – a group of assets to be disposed of by sale or otherwise,

together as a group in a single transaction, and liabilities associated
with those assets that will be transferred in the transaction

A NONCURRENT asset or disposal group shall be classified as held for sale

when:
1. The sale is highly probable
2. The asset is available for immediate sale in its present condition sub-
ject only to terms that are usual and customary for sales of such asset
or disposal group

FOR the sale of a noncurrent asset held for sale to be highly probable:
1. Management must be committed to a plan to sell the asset
2. An active program to locate a buyer and complete the plan must have
been initiated
3. The asset must be actively marketed for sale at a reasonable price in
relation to its current fair value
4. The sale should be expected to qualify for recognition as a completed
sale within one year from the date of classification of the asset as
“held for sale”
5. It is unlikely that the sale will be withdrawn

AN ENTITY shall measure a noncurrent asset or disposal group classified as

held for sale at lower of carrying amount and fair value less cost
to sell.

AN ENTITY shall recognize any subsequent increase in fair value less cost to
sell of a noncurrent asset or disposal group classified as held for sale
 Theory of Accounts | 8
as gain to be included in profit or loss but not in excess of the cumula-
tive impairment loss previously recognized

HELD FOR SALE assets reclassified back as noncurrent should be measured at

lower of carrying amount on the basis that it had never been classi-
fied as held for sale and recoverable amount
COMPONENT OF AN ENTITY – operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from
the rest of the entity

A COMPONENT of an entity is classified as discontinued operations either:

1. The entity has actually disposed of the operations; or
2. The operation meets the criteria to be classified as held for sale

THE results of discontinued operations shall be presented on the face of the

income statement as a single amount below the income from continu-
ing operations net of tax

PFRS 8 – OPERATING SEGMENT

(5432)

AN OPERATING SEGMENT is a component of an entity

1. That engages in business activities from which it may earn revenue
and incur expenses, including revenue and expenses relating to trans-
actions with other components of the same entity
2. Whose operating results are regularly reviewed by the entity’s chief
operating decision maker to make decisions about resources to be al-
located to the segment and assess its performance.
3. For which discrete information is available.

AN OPERATING SEGMENT is reportable when:

1. The segment external and internal revenue is 10% or more of the
combined external and internal revenue of all operating segments.
2. The segment profit/loss is 10% or more of the greater between the
combined profit of all operating segments that reported profit and the
combined loss of all operating segments that reported a loss.
3. The assets of the segment are 10% or more of the total assets of all
operating segments.
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OPERATING SEGMENTS that do not meet any of the quantitative thresholds
may be considered reportable and separately disclosed if management
believes that information about the segment would be useful to the
users of the financial statement.

THE total external revenue of all reportable segments is 75% or more of the
entity’s external revenue.

AN ENTITY shall disclose for each period in relation to a reportable operating

segment the following:
1. General information about the operating segment (factors used to
identify the entity’s reportable segments, including the basis of organi-
zation; types of products and services from which each reportable
segment derives its revenue).
2. Information about segment profit or loss, including specified revenue
and expenses included in profit or loss, segment assets and segment
liabilities.
3. Reconciliations of total segment revenue, total segment profit or loss,
total segment assets and total segment liabilities to the corresponding
amounts in the entity’s financial statements.

MAJOR CUSTOMER disclosure:

1. Defined as one providing revenue which amount to 10% or more of
the combined external revenue of all operating segments
2. The identities of major customers need not be disclose

PAS 34 – INTERIM FINANCIAL REPORTING

(5432)

INTERIM financial reports shall be published whenever the entity wishes

PUBLICLY traded entities are encouraged to provide interim financial reports

at least at the end of the half year and within 60 days at the end of
the interim period

INTERIM financial reports should include as a minimum a condensed set of

financial statements and selected notes

 The year-end financial statements’ compliance with PFRS is not affect-

ed if an entity does not prepare interim financial reports
 Theory of Accounts | 10
CASH AND RECEIVABLES
(5437)

CASH EQUIVALENTS – short term and highly liquid investments that are read-
ily convertible into cash and so near their maturity that they represent
insignificant risk of changes in value because of changes in interest
rate.
BANK overdrafts, as a rule, if material should be reported as a current liabil-
ity. Exception:
1. 2/more accounts in the same bank
2. 2/more accounts in different banks, overdraft if immaterial

SYSTEMS in maintaining petty cash fund:

1. Imprest petty cash system – petty cash fund is only dr/cr when estab-
lishing the PCF or adding/deducting amount to the balance or adjust-
ments during year-end
2. Fluctuating petty cash system – PCF is dr/cr every time there is a
transaction that involves the fund but does not need year-end adjust-
ments

BANK RECONCILIATION explains the difference between the bank balance

and the balance shown in the depositor’s records
RELATED items:
1. Related to book balance
a. Deposits credited by the bank but not yet recorded by the enti-
ty (proceeds of loans, loans collected in behalf of the entity)
b. Deductions by the bank not yet recorded by the entity (bank
charges, payment to a loan where the bank is authorized to de-
duct payment from the balance of the entity, customers’ NSF
checks)
2. Related to bank balance
a. Outstanding checks
b. Deposits in transit

CHARACTERISTICS of loans and receivables:

1. They have fixed or determinable payments
2. They are unquoted
3. The holder can recover substantially all of its investment unless there
has been a credit deterioration

IN CALCULATING the CA of a loan receivable, the lender adds to the principal

direct loan origination cost incurred by the lender. Note: Indirect loan
 Theory of Accounts | 11
origination cost incurred by the lender shall be expensed outright;
Loan origination fees charged to the borrower shall be deducted and
classified as unearned interest income.

IF THERE IS EVIDENCE that an impairment loss on loan receivable has been

incurred, the amount of the loss is equal to the excess of the carrying
amount of the loan receivable over the present value of the cash flows
related to the loan.

TRADE RECEIVABLES are classified as current assets when they are reasona-
bly expected to be collected within one year or within the normal op-
erating cycle whichever is longer.

NONTRADE RECEIVABLES are classified as current assets only if they are rea-
sonably expected to be realized in cash within one year the length of
the operating cycle notwithstanding.

Offsetting is not allowed on receivables.

Estimation of Doubtful accounts based on CREDIT SALES focuses on the in-

come statement rather that n the statement of financial position
AGING OF RECEIVABLES and PERCENTAGE OF ACCOUNTS RECEIVABLE
METHOD are methods of estimating doubtful accounts that emphasizes
asset valuation rather that income measurement.

Allowance method of estimating uncollectible account is in consistency with

accrual accounting

RECEIVABLE FINANCING – method of generating cash from accounts receiva-

ble
1. Assignment
2. Factoring
3. Pledging
4. Discounting

PAS 2 – INVENTORY
(5442)

INVENTORIES – assets held for sale in the ordinary course of business, in the
process of production for such sale, or in the form of materials or sup-
 Theory of Accounts | 12
plies to be consumed in the production process or in the rendering of
services.

COST OF INVENTORY – cost of purchase, costs of conversion and other costs

incurred in bringing the inventory to their present location and condi-
tion

COST OF PURCHASE – purchase price, import duties and other taxes,

transport, handling and other costs directly attributable to the acquisi-
tion of inventories.

COST OF CONVERSION – cost directly related to the units of production (such

as direct labor and direct materials), systematic allocation of fixed
production overhead, and systematic allocation of variable production
overhead

FOB Shipping point – FAS (Free Alongside), CIF (Cost, Insurance and Freight),
ex-ship

Method of Measuring Inventories:

1. Gross Method – invoice price + related costs
2. Net Method – invoice price + related costs – discounts not taken

PURCHASE commitments – commitments entered into by the entity to pur-

chase products in the future at a fixed price

INVENTORIES shall be measured at LOWER of cost and net realizable value

INVENTORIES are usually written down to net realizable value item by item;
the amount of any writedown of any inventory shall be classified as
component of cost of good sold in the period the writedown or loss oc-
curs.

RETAIL METHOD – used for convenience for measuring inventories of large

number of rapidly changing items with similar margins for which it is
impracticable to use other costing method. When using the retail
method, the standard requires the use of average cost retail

BROKER-TRADERS – those who buy or sell commodities for others or on their

own account. Their commodities are measured at fair value less cost to
sell
 Theory of Accounts | 13
PAS 41 – AGRICULTURE
(5442)

BIOLOGICAL ASSETS – both living animals and living plants; they are to be
measured at fair value less cost to sell
AGRICULTURAL ACTIVITY – is the management by an entity or the biological
transformation and harvest of biological asset for sale or for conver-
sion into agricultural produce or additional biological asset
AGRICULTURAL PRODUCE – harvested product of an entity’s biological asset
and measured at fair value less cost to sell at the point of harvest
Cost to sell – commissions to brokers and dealers, levies by regulatory
agencies, transfer taxes and duties

 A gain or loss arising on the initial recognition of biological asset and

from a change in fair value less cost to sell of a biological asset shall
be included in the profit or loss for the period

PAS 16 – FINANCIAL INSTRUMENTS

5449

REQUIREMENTS to classify as Financial Instrument:

1. There must be a CONTRACT
2. There must be at least two parties
3. Financial asset to an entity
4. Financial liability or equity to another

Equity instrument – a contract that evidences a residual interest in the assets

of an entity after deducting the liabilities; residual method

A PREFERENCE SHARE can be classified as a LIABILITY under the following

conditions:
1. Mandatory redemption by issuer
2. Redeemable at the option of the holder

PAS 39 – RECOGNITION AND MEASUREMENT

OF FINANCIAL INSTRUMENTS (5449)

FINANCIAL ASSETS at fair value through profit or loss include

 Theory of Accounts | 14
1. Financial assets that are held for “trading”. – by requirement of the
standards
2. Financial assets that are “designated” on initial recognition as at fair
value through profit or loss. – by designation

A FINANCIAL ASSET is classified as held for trading if:

1. It is acquired principally for the purpose of selling or repurchasing it in
the near term.
2. On initial recognition, it is part of a portfolio of identified financial as-
sets that are managed together and for which there is evidence of a
recent actual pattern of short-term profit taking.
3. It is a derivative except for a derivative that is a financial guarantee or
a designated and an effective hedging instrument.

AVAILABLE FOR SALE FINANCIAL ASSETS are non-derivative financial assets

that:
1. Are designated as available for sale – by designation.
2. Are not classified as financial assets at fair value through profit or loss,
held to maturity investments and loans and receivable. – by residual
definition

Characteristics of financial assets classified as HELD TO MATURITY:

1. They have fixed or determinable payments and a fixed maturity
2. They are quoted in an active market
3. The holder has demonstrated positive intention and ability to hold
them to maturity

TRANSACTION costs directly attributable to the acquisition of financial assets

and issue of financial liabilities include:
1. Fees and commissions paid to agent
2. Levies by regulatory authorities
3. Transfer taxes and duties

 When an entity sells/reclassifies more than an insignificant amount of

held to maturity investments prior to maturity, such sales or reclassifi-
cations will disqualify the entity from using the held to maturity classi-
fication during the current year and in the next two years.

Characteristics of a derivative:
1. The value changes in response to the change in a specified underlying
2. It requires no initial investment or an initial small investment
3. It is settled at a future date
 Theory of Accounts | 15
FORWARD contract – an agreement between two parties to exchange a speci-
fied amount of commodity, security or foreign currency at a specified
date in the future with the price or exchange rate being set now.
FUTURE contract – a contract traded on a n exchange that allows an entity to
buy a specified commodity or a financial security at a specified price
on a specified date
OPTION – contract giving the owner the right but not the obligation to buy or
sell an asset at a specified price any time during a specified period in
the future
EMBEDDED derivative – a component of a hybrid instrument that also in-
cludes a non-derivative host contract

Embedded derivatives are “bifurcated” or accounted for separately when:

a. On a stand-alone basis, the embedded feature meets the definition of
a derivative
b. The combined contract is measure at fair value through other compre-
hensive income
c. The economic characteristics and risks of the embedded derivative and
the host contract are not closely related

PAS 28 – INVESTMENTS IN ASSOCIATES

(5449)

ASSOCIATE – an entity over which the investor has significant influence

SIGNIFICANT influence – power to participate in the financial and operating
policy decisions of an entity

EQUITY method in recording investment in associate:

1. Initially recorded at cost
2. Increased or decreased by the investor’s share of the profit or loss of
the investee after the date of acquisition
3. The investor’s share of the profit or loss of the investee is recognized
in the investor’s profit or loss
4. Distributions received from the investee reduce the carrying amount of
the investment

 If the investor ceases to have significant influence over an associate

the investments should be accounted for in accordance with PAS 39 ei-
ther as non-marketable securities or available for sale securities.
 Theory of Accounts | 16
PAS 40 – INVESTMENT PROPERTY
(5449)

INVESTMENT property – land or building or part of building or both held by an

owner or finance lease to earn rentals or for capital appreciation or
both.
Investment property shall be measured at:
1. Initially – cost
2. Subsequent – either fair value or cost less accumulated depreciation
and any accumulated impairment losses

WHEN the entity uses the COST model, transfer between investment property,
owner-occupied property and inventory shall be accounted for at car-
rying amount.

A transfer from investment property CARRYIED AT FAIR VALUE to owner-

occupied property shall be accounted for at fair value which becomes
the deemed cost

PAS 16 – PROPERTY, PLANT AND EQUIPMENT

(5454)

PROPERTY, PLANT AND EQUIPMENT – tangible assets held for use in produc-
tion or supply of goods or services, for rental to others, or for adminis-
trative purposes and expected to be used during more than one re-
porting period

SOURCES of Cash Flows:

1. Continuing use
2. Disposal
3. Settling a liability

CARRYING amount – amount at which the asset is recognized in the state-

ment of financial position after deducting any accumulated deprecia-
tion and impairment losses
COST of PPE – purchase price, import duties and non refundable purchase
taxes, any cost directly attributable in bringing the asset to the loca-
tion and condition for its intended use
 Theory of Accounts | 17
EXCHANGE w/ commercial substance – there is an improvement in the cash
flow after exchange; FV of asset given up; difference will be the gain
(loss) in the exchange
EXHANGE w/o commercial substance – CA of the asset given up; no gain (loss)
recognized

DEPRECIATION – systematic allocation of an asset’s cost less residual value

over its useful life
RESIDUAL VALUE – the estimated net amount currently obtainable if the as-
set is at the end of its useful life
USEFUL LIFE – period over which an asset is expected to be available for use
by an entity or the number of production of similar units expected to
be obtained from the asset by an entity

BETTERMENT – expenditure made to improve existing facilities by increasing

capacity
ADDITION – expenditure made for new facilities which increase capacity
REPLACEMENT – expenditure made to restore capacity after abandonment or
retirement
MAINTAINANCE – expenditure made to help insure continuity of service ca-
pacity

INSIGNIFICANT changes in fair value – revaluations are necessary only every

3 – 5 years
SIGNIFICANT changes in fair value – revaluations are necessary annually

ACCUMULATED Depreciation on the date of revaluation are treated either as:

1. Proportionate Method – restated proportionately with the change in the
gross carrying amount of the asset so that the carrying amount after
revaluation equals the revalued amount
2. Elimination Method – eliminated against the gross carrying amount of
the asset and the net amount restated to the revalued amount of the
asset

CHANGE IN CARRYING AMOUNT due to REVALUATION:

 Increase shall be recognized in Revaluation Surplus as component of
OCI and in P/L to the extent that it reverses a revaluation decrease
previously recognized
 Decrease shall be recognized in P/L after deducting any revaluation
surplus previously recognized
 Theory of Accounts | 18
PAS 20 – GOVERNMENT GRANTS
(5454)

GOVERNMENT GRANT – assistance from the government in the form of a

transfer of resources to an entity in return for past or future compli-
ance with specified conditions relating to the operating activities of the
entity

Recognition:
 Entity will comply with the conditions attaching to them
 The grants will be received
 Should be recognized as income over the period as the relevant ex-
pense on a systematic and rational basis

GRANT related to assets – primary condition is that an entity qualifying for

them should purchase, construct, or otherwise acquire long-term as-
sets; accounting treatment would be either set up the grant as de-
ferred income or deduct it in arriving at the carrying amount of the as-
set
GOVERNMENT assistance – action by a government designed to provide an
economic benefit specific to an entity or a range of entities qualifying
under certain criteria and for which the government cannot reasonably
place a value

 A government grant that becomes repayable shall be accounted for as

a change in accounting estimate
 Repayment of a grant
 Related to income shall be applied first against any unamortized
deferred income set up previously, and any excess is recognized
immediately in P/L
 Related to an asset:
 Recorded by increasing the carrying amount of the asset or re-
ducing the deferred income balance by the amount repayable
 Cumulative additional depreciation that would have been rec-
ognized to date as an expense in the absence of the grant shall
be recognized immediately as an expense
 Theory of Accounts | 19
PAS 23 – BORROWING COSTS
(5454)

BORROWING COSTS – interest and other costs that an entity incurs in con-
nection with borrowing of funds
QUALIFYING ASSETS for capitalizing interest cost:
 Investment property
 Manufacturing plant
 Power generation facility
 Intangible asset

CAPITALIZATION commences at:

 Expenditures for the asset are being incurred
 Borrowing costs are being incurred
 Activities that are necessary to prepare the asset for its intended use
or sale are in progress

 Capitalization SHALL be suspended only during extended period of de-

lay in which active development is delayed

QUALIFYING ASSET is financed by:

 Specific borrowing – the capitalizable borrowing cost is equal to the ac-
tual borrowing cost incurred up to the completion of asset minus any
investment income from the temporary investment of the borrowing
 General borrowings – the capitalizable borrowing cost is equal to the
average expenditures on the asset multiplied by the average interest
rate or actual borrowing cost incurred up to completion, whichever is
lower.

PAS 36 – IMPAIRMENT OF ASSETS

(5454)

IMPAIRMENT LOSS – carrying amount or cash generating unit exceeds its re-
coverable amount
RECOVERABLE amount – higher between fair value less cost to sell and value
in use
VALUE in use – present value of estimated future cash flows expected to arise
from continuing use of an asset and from its ultimate disposal
 Theory of Accounts | 20
CASH GENERATING UNIT – smallest identifiable group of assets that generate
cash inflows from continuing use that are largely independent of the
cash inflows from other assets or group of assets
CORPORATE ASSETS – other than goodwill that contribute to the future cash
flows of both the cash generating unit under review, and other cash
generating units; i.e. headquarters building, EDP equipment and re-
search center

 When impairment testing a cash-generating unit, any corporate assets

shall be allocated on a reasonable and consistent basis; the usual basis
is the CA of cash-generating unit
 Allocation of impairment loss recognized for a cash generating unit –
first, to any goodwill, and the balance to the other assets on a prorate
basis based on carrying amount

REVERSAL of an impairment loss:

 The increased carrying amount of the asset shall not exceed the carry-
ing amount that would have been determined had no impairment loss
been recognized in the prior years
 Impairment loss recognized for goodwill shall not be reversed in a sub-
sequent period

PFRS 6 – EXPLORATION AND EVALUATION OF MINERAL

RESOURCES (5454)

EXPLORATION AND EVALUATION EXPENDITURES – incurred when the legal

rights to explore a specific area have been obtained but the technical
feasibility and commercial viability of extracting a mineral resource are
not yet demonstrable

 Exploration and Evaluation asset is classified as either: (1) tangible as-

set, or (2) intangible asset.

ACCOUNTING for costs of drilling holes:

1. Successful Effort Method
 Resources are present: capitalized as asset
 Resources are absent: expensed outright
2. Full Cost Method
 Regardless of present or absent: capitalized
 Theory of Accounts | 21
PAS 38 – INTANGIBLE ASSETS
(5456)

INTANGIBLE ASSET – identifiable nonmonetary asset without physical sub-

stance

Identifiable when:
 It is separable – capable of being separated from the entity and
sold transferred, licensed, rented or exchanged regardless of
whether the entity intends to do so.
 It arises from contractual or other legal rights, regardless of
whether those rights, are transferable or separable from the entity
or from other rights and obligations

 Intangible asset that was acquired separately shall initially be recog-

nized at FV
 Initial recognition either:
 Cost model – carried at cost less accumulated amortization and
impairment losses
 Revaluation model
 Unrecognized intangibles by the acquire shall also be recognized by
the acquirer
 Identifiable intangibles are separated from goodwill

Intangibles acquired by way of government grant may be initially recorded at

either:
 Fair value
 Nominal amount or zero, plus any expenditure that is directly attribut-
able to preparing the asset for its intended use
 Examples of intangibles by government grant:
 Airport landing rights
 License to operate radio/TV programs

 GOODWILL shall be recognized only when it is acquired through the

purchase of another business entity

RULE on amortizing intangible asset:

 Pattern of benefits if can be measured
 Otherwise, straight line method
 Theory of Accounts | 22
AMORTIZATION:
 Finite useful life – depreciable amount shall be allocated on a system-
atic basis over its useful life
 Amortization shall commence when it is available for the intended
use
 Indefinite useful life – shall not be amortized but tested for impairment
annually and when there is an indication that the intangible asset may
be impaired

 The RESIDUAL value of an intangible asset with a finite life shall be as-
sumed zero, unless:
 There is a commitment by a third party to purchase the asset at
the end of its useful life
 There is an active market for the asset and residual value can be
determined by reference to that market and it is probable that such
market will exist at the end of the asset’s useful life

RESEARCH – original and planned investigation undertaken with the purpose

of gaining new scientific and technical knowledge and undertaking.
 Search for application of research finding or other knowledge
 Search for product or process alternative
 Formulation and design of the possible product or process alterna-
tive

DEVELOPMENT – application of research finding or other knowledge to a plan

or design for the production of new or substantially improved material,
device, product, process, system, or service, prior to the commence-
ment of commercial production or use.

 If an entity cannot distinguish the research phase form the devel-

opment phase of an internal project to create an intangible asset,
the entity shall treat the expenditure on that project as f it were in-
curred in the research phase only

PAS 37 – PROVISIONS, CONTINGENT LIABILITIES AND

CONTINGENT ASSETS (5465)

CURRENT LIABILITIES:
 Expected to be settled within the normal operating cycle
 Due to be settled within one year
 Theory of Accounts | 23
 Incurred for trading
 No unconditional right to defer settlement

PROVISION – uncertain timing or amount

RECOGNIZED as a liability under the following conditions:
 The entity has a present obligation, legal or constructive, as a re-
sult of a past event.
 It is probable that an outflow of resources embodying economic
benefits would be required to settle the obligation.
 The amount of the obligation can be measured reliably.

LEGAL OBLIGATION is derived from the following:

 Legislation
 Contract
 Other operation of law

CONSTRUCTIVE OBLIGATION is derived from an entity’s action where:

 By an established pattern of practice, published policy or sufficiently
specific current statement, the entity has indicated to other parties
that it will accept certain responsibilities.
 The entity has created a valid expectation on the part of those other
parties that it will discharge those responsibilities.

CONTINGENT LIABILITY:
 Possible obligation arising from past events that will be confirmed only
by the occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the entity.
 Present obligation that arises from past events and is not recognized
because it is not probable that an outflow of resources will be required
to settle the obligation or the obligation cannot be measured reliably.

OBLIGATING EVENT – creates a legal or constructive obligation because the

entity has no other realistic alternative but to settle the obligation.

ONEROUS CONTRACT – the unavoidable costs of meeting the obligations un-

der the contract exceed the economic benefits to be received under
the contract.

RECONSTRUCTING – structured program that is planned and controlled by the

management that materially changes either the scope of a business of
an entity or the manner in which that business is conducted.
 Theory of Accounts | 24
PAS 32 – FINANCIAL INSTRUMENT
(5465)

COMPOUND FINANCIAL INSTRUMENT – bond or similar instrument convertible

by the holder into a fixed number of ordinary shares of the entity
 The issuer shall classify the liability and equity components of a com-
pound instrument separately as financial liability and equity instrument.
 Allocation: First, the liability component is measured at fair value and
then the remainder of the proceeds is allocated to the equity compo-
nent.

PERPETUAL DEBT INSTRUMENT – provide the holder with the contractual right
to receive payments on account of interest at fixed dates extending in-
to the definite future, either with a right or no right to a return of prin-
cipal.

PAS 17 – LEASES
(5465)

FINANCE LEASE – contract that transfers substantially all the risks and re-
wards incidental to ownership of an asset, although title may or may
not eventually be transferred