CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

Objective of Financial Reporting CHAPTER 2

-------------------------------------------------------------------------------------------------------------------------
- DEFINITION HIERARCHY OF THE REPORTING STANDARDS
➔ The Conceptual Framework for Financial 1. PFRS
Reporting is a complete, comprehensive and 2. Judgement
single document promulgated by the a. Requirement in other PFRS
International Accounting Standards Board dealing with similar transactions
(IASB) b. Conceptual Framework
HISTORY c. Pronouncement issued by other
1. April 1989 standard setting bodies
- Framework for the preparation and d. Other accounting literature and
presentation of financial statements was industry practices
approved by the IASC board.
SCOPE OF THE CONCEPTUAL FRAMEWORK
2. July 1989
- Published the framework 1. The objective or general purpose of financial
3. April 2001 reporting
- Framework adopted by IASB 2. Qualitative characteristics of useful financial
- IASC became IASB information
4. September 2010 3. Financial statements and reporting entity
- Conceptual Framework for Financial 4. The elements of financial statements
Reporting 2010 approved by the IASB 5. Recognitions and derecognition
5. March 2018 6. Measurement
- Released complete version of CFFR 2018 7. Presentation and disclosures
CONCEPTUAL FRAMEWORK IS; 8. Concepts of capital and capital maintenance
❖ A summary of the terms and concepts that
underlie the preparation and presentation of THE OBJECTIVE OR GENERAL PURPOSE OF FINANCIAL
financial statements for external users. REPORTING
❖ Describes the concepts for general purpose
financial reporting; attempt to provide an overall ➢ Provide the financial information about the
theoretical foundation reporting entity that is useful to existing and
❖ Intended to guide standard setters, preparers, potential investors, lenders, and other creditors
and users of financial information in the (primary users/ main target) in making
preparation and presentation of statements. decisions about providing resources to the
PURPOSES OF REVISED CONCEPTUAL FRAMEWORK entity
● To assist the IASB in developing and revising IFRS USEFULNESS AND LIMITATIONS
● To help preparers to develop consistent 1. Many users rely on general purpose financial
accounting policies for areas that are not reports
covered by a standard or where there is choice 2. Not designed to show the value of the entity but
of accounting policy help users to estimate value
● To assist all parties to understand and interpret 3. Internal users need not to rely on general
IFRS purpose financial reports.
4. Other users may find it useful
IMPORTANT POINTS
5. Cannot provide all information
• IASB creates the standards to be 6. Based on estimated, judgements and models
followed in preparing financial INFORMATION ABOUT;
statements. ● Resources and Claims
• Basis of the standard is the framework - the nature and amounts of an entity’s
• The framework is NOT a standard and economic resources and claims assists
does not override any specific IFRS users to assess that entity’s financial
STATUS OF THE FRAMEWORK strengths and weaknesses; to assess
● If there is a conflict between the liquidity and solvency, and its need and
standard and the conceptual ability to obtain financing. Information
framework follow the standard about the claims and payment
requirements assists users to predict how
future cash flows will be distributed among
those with a claim on the reporting entity.
(Statement of Financial Position/ Balance
Sheet)
INFORMATION ABOUT;
● Changes in Resources and Claims
- Financial performance reflected by accrual
accounting (Statement of Comprehensive
Income)
- Financial performance reflected by past
cash flows (Statement of Cash Flows)
- Changes in economic resources and claims
not resulting from financial performance
(Statement of Changes in Equity)
INFORMATION ABOUT USE OF THE ENTITY’S RESOURCES
● Indicates how efficiently and effectively the
reporting entities management has used these
resources in its stewardship of those resources;
● In future periods and hence what the prospects
for future net cash inflows are
 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Qualitative Characteristics CHAPTER 3
-------------------------------------------------------------------------------------------------------------------------
- DEFINITION WHEN IS AN ITEM MATERIAL
➔ Qualitative characteristics are the qualities or ➔ An item is material if knowledge of it could
attributes that make financial accounting reasonably affect or influence the economic
information useful to the users decision of the primary users of the financial
statements
Table 1. QUALITATIVE CHARACTERISTICS OF USEFUL ➔ An information is material if the omission,
INFORMATION misstatement and obscuring of the information
FUNDAMENTAL ENHANCING could reasonably affect the economic decision
RELEVANCE ENHANCING of primary users.
MATERIALITY HIGHLIGHTS THREE ASPECTS
• Predictive value • Timeliness
➔ Could reasonably be expected to influence
• Conformity value • Verifiability (to be
◆ Adds an element of reasonability of
• Materiality (not reliable)
financial information on which economic
component, entity • Understandability decision is based
based, application) • Comparability ◆ Material information shall be limited to the
• Consistency economic decision of primary users rather
FAITHFUL than to all users which is too broad in
REPRESENTATION scope
◆ Shall be included in the financial
• Completeness
statements
• Neutrality
➔ Obscuring information
• Prudence ◆ Information is obscured if presenting or
• Free from error or communicating it would have a similar
material error) effect as omitting or misstating the
information
INGREDIENTS OF RELEVANCE ◆ The presentation of financial information
DEFINITION not readily understood or not clearly
➔ Relevance is the capacity of the information to expressed/ may be characterized by
influence a decision. deliberate vagueness, ambiguity and
➔ Relevance requires that the financial abstruseness.
information should be related or pertinent to ➔ Primary users
the economic decision. ◆ Include the existing and potential
PREDICTIVE VALUE investors, lenders, and other creditors
➔ Financial information has predictive value if it ◆ Only primary users of financial statements
can be used as an input to process employed are considered because these groups are
by users to predict future outcome. the users to whom general purpose
➔ Has predictive when it can help users increase financial statements are primarily directed
the likelihood of correctly or accurately FACTORS OF MATERIALITY
predicting or forecasting outcome of events ➔ Materiality depends on the magnitude and
CONFORMITY VALUE nature of the financial information
➔ Financial information has conformity value if it ➔ The size of the item in relation to the total of the
provides feedback about previous evaluations group to which the item belongs is taken into
➔ It enables users confirm or correct earlier account
expectations ➔ The nature of the item may be inherently
MATERIALITY material because by its very nature it affects
economic decision.
DEFINITION
INGREDIENTS OF FAITHFUL REPRESENTATION
➔ Materiality is a practical rule in accounting
which dictates that strict adherence to GAAP is DEFINITION
not required when the items are not significant ➔ Means that financial reports represent economic
enough to affect the evaluation, decision and phenomena or transactions in words and
fairness of the financial statements. numbers
➔ Materiality is a subquality of relevance based ➔ Means that the actual effects of the transactions
on the nature or magnitude or both of the items shall be properly accounted for and reported in
to which the information relates. the financial statements
➔ Materiality of an item depends on relative size
rather than absolute size. What is material for
one entity may be immaterial for another
 COMPLETENESS TYPES OF VERIFIABILITY
➔ Completeness requires that relevant ➔ Direct verification
information should be presented in a way that ◆ Means verifying an amount or other
facilities understanding and avoids erroneous representation through direct observation
implications (counting cash)
➔ A complete depiction includes all information ➔ Indirect verification
necessary for a user to understand the ◆ Means checking the inputs to a model,
phenomenon or transaction being depicted, formula or other technique and
including all necessary description and recalculating the inputs using the same
explanation. (notes to financial statements) methodology
➔ The purpose of the notes is to provide the UNDERSTANDABILITY
necessary disclosures required by the PFRS ➔ Understandability requires that financial
NEUTRALITY information must be comprehensive or
➔ A neutral depiction is without bias in the intelligible if it is to be most useful
preparation or presentation of financial COMPARABILITY
information ➔ Comparability means the ability to bring
➔ To be neutral, the information contained in the together for the purpose of noting points of
financial statements must be free from bias likeness and difference
➔ The information is directed to the common ➔ To be comparable, like things must look alike
needs of many users and not to the particular and different things must look different
needs of specific users ➔ Enables users to identify and understand
PRUDENCE similarities and dissimilarities
➔ The exercise of care and caution when dealing WITHIN AN ENTITY OR BETWEEN OR ACROSS
with the uncertainties in the measurement ➔ Within an entity
process such that assets or income are not ◆ The quality of information that allows
overstated and liabilities or expenses are not comparisons within a single entity through
understated time or from one accounting period to the
➔ Conservatism is synonymous with prudence next
which means that when alternatives exists, the ◆ Also known as horizontal comparability or
alternative which has the least effect on equity intracomparability
should be chosen. In case of doubt, record any ➔ Between and across entities
loss and do not record any gain. ◆ The quality of information that allows
FREE FROM ERROR comparisons between two or more entities
➔ Means there are no errors or omissions in the engaged in the same industry
description of the phenomenon or transaction ◆ Also known as intercomparability or
➔ Does not mean perfectly accurate in all aspects dimensional comparability
INGREDIENTS OF ENHANCING CONSISTENCY
DEFINITION ➔ Consistency refers to the use of the same
➔ Enhancing qualitative characteristics relate to method for the same item. Either from period to
the presentation or form of the financial period within an entity or in a single period
information. across entities
➔ Intended to increase increase the usefulness of IMPORTANT POINTS
the financial information that is relevant and
faithfully represented.
• Comparability is the goal and consistency help
to achieve that goal
TIMELINESS
➔ Means that financial information must be • Consistency is the uniform application of
available or communicated early enough when accounting method from period to period
a decision is to be made within an entity
➔ Enhances the truism that without knowledge of • Comparability is the uniform application of
the past, the basis for prediction will usually be accounting method between and across
lacking and without interest in the future, entities in the same industry
knowledge of the past is sterile. • Fundamental characteristics relate to the
VERIFIABILITY content of financial information
➔ Verifiability means that different knowledgeable
• Enhancing characteristic relate to the
and independent observers could reach
presentation of the financial information/
consensus, although not necessarily complete
increase the usefulness of the financial
agreement, that a particular depiction is a
information
faithful representation
➔ The financial information is verifiable in the
sense that it is supported by evidence
➔ Verifiability is synonymous with objectivity
 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Financial Statements and Reporting Entity Chapter 4-5
Elements of Financial Statements

-------------------------------------------------------------------------------------------------------------------------
CHAPTER 4 CHAPTER 5
- OBJECTIVE OF FINANCIAL STATEMENTS RELATES TO FINANCIAL POSITION
➔ To provide information about an entity’s assets, ➔ Assets
liabilities, equity, income, and expenses that is ◆ A present economic resource controlled by
useful to financial statements users in assessing the entity as a result of past events
the prospects for future net cash inflows to the ◆ An economic resource is a right that has
entity and in assessing managements the potential to produce economic benefits
stewardship of the entity’s resources ➔ Liability
FINANCIAL STATEMENTS ◆ A present obligation of the entity to
➔ STATEMENT OF FINANCIAL POSITION transfer an economic resource as a result
◆ Asset, liabilities, owners equity of past events
◆ Balance Sheet ◆ An obligation is a duty or responsibility
➔ STATEMENT OF FINANCIAL PERFORMANCE that the entity has no practical ability to
◆ Income Statement avoid
◆ Income, expenses ➔ Equity
➔ STATEMENT OF CHANGES IN EQUITY ◆ The residual interest in the assets of the
◆ Beginning and ending equity entity after deducting all its liabilities
➔ STATEMENT OF CASH FLOWS RELATES TO FINANCIAL PERFORMANCE
◆ Cash basis ➔ Income
➔ NOTES TO FINANCIAL STATEMENTS ◆ Increase in assets or decreases in liabilities
◆ Supporting document that result in increases in equity, other than
REPORTING ENTITY those relating to contributions from holders
➔ Required or chooses to prepare financial of equity claims
statements ◆ Encompasses revenue and gains;
➔ Single entity, a portion of an entity, more than ◆ Revenue arises in the course of the ordinary
one entity (parent and subsidiary) regular activities and is referred to by
TYPES OF FINANCIAL STATEMENTS variety of different names including sales,
➔ Consolidated financial statements fees, interest, dividends, royalties and rent
◆ Prepared when the reporting entity ◆ Gains represent other items that meet the
comprises both the parent and its definition of income and do no arise in the
subsidiaries course of the ordinary regular activities
◆ Not designed to provide separate ➔ Expenses
information about the ALEIE of a particular ◆ Decreases in assets, or increases in
subsidary liabilities, that result in decreases in equity,
➔ Unconsolidated financial statements other than those relating to distributions to
◆ Prepared when the reporting entity is the holders of equity claims
parent alone ◆ Expenses arise in the course of ordinary
◆ Typically not sufficient to meet the regular activities include of cost of goods
requirement needs of primary users sold, wages, and depreciation
➔ Combined financial statements ◆ Losses do not arise in the course of ordinary
◆ When the reporting entity comprises two or regular activities and include losses
more entities that are not linked by a parent resulting from disasters
and subsidiary relationship
 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Recognition and Derecognition Chapter 6
-------------------------------------------------------------------------------------------------------------------------
- ➔ Current Value
RECOGNITION ◆ Cost of an equivalent asset at the
➔ The process of capturing inclusion in the measurement date comprising the
financial statement s an item that meets the consideration paid and transaction cost
definition of asset, liability, equity, income or
expense MEASUREMENT BASIS
➔ Carrying amount refers to the amount at which ➔ Relevance
an asset, a liability or equity is recognized in the ◆ Characteristics of the asset or liability
statements of financial position ◆ Contribution to future cash flows
Table 2. RECOGNITION CRITERIA ➔ Faithful Representation
FAITHFUL ◆ Measurement inconsistency
RELEVANCE
REPRESENTATION ◆ Measurement uncertainty
Whether recognition of Whether recognition of
an item results in an item results in a
relevant information faithful representation
may be affected by; may be affected by;
• Low profitability of a • Measurement
flow of economic uncertainty
benefits • Recognition
• Existence inconsistency
uncertainty • Presentation and
disclosure of resulting
income, expenses and
changes in equity

ACCOUNTING CYCLE

Statement of Financial Position (Beginning)

A+L=E
+
Statement of Financial Performance
Contributions from equity holders-distribution to
equity holders
Changes in equity
=
Statement of Financial Postion (End)
A=L+E

DERECOGNITION
➔ Removal of all or part of a recognized asset or
liability from SFP
➔ Derecognition of an asset occurs when the
entity loses control of all or part of the asset
➔ Derecognition of a liability occurs when the
entity no longer has a present obligation for all
or part of the liability
MEASUREMENT
DEFINITION
➔ Quantifying in monetary terms the elements in
the financial statements
➔ Historical Cost
◆ Original acquisition of an assets is the cost
incurred in acquiring or creating the asset
comprising the consideration paid plus
transaction cost
 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Presentation and Disclosure Chapter 7
-------------------------------------------------------------------------------------------------------------------------
-
PRESENTATION AND DISCLOSURE; NET INCOME UNDER FINANCIAL CAPITAL
➔ Can be effective communication tool about the • Net income occurs when the nominal
information in financial statements amount of the net assets at the end of the
EFFECTIVE COMMUNICATION REQUIRES year exceeds the nominal amount of net
➔ Objective and principles assets at the beginning of the period
➔ Classification
• Excluding distributions to and contributions
◆ Sorting of ALEIE on the basis of shared or by owners during the period
similar characteristics
PHYSICAL CAPITAL
➔ Aggregation
◆ Adding together of ALEIE that have similar or
• Quantitative measure of the physical
productive capacity to produce goods and
shared characteristics and are included in
services
the same classification
◆ Not too many details, not excessive • Measured at current cost
aggregation • Should be used if the main concern of the
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE users is the operating capability of the
CONCEPT OF CAPITAL entity
➔ Adopted by most entities in preparing their NET INCOME UNDER PHYSICAL CAPITAL
financial statements • Net income occurs when the physical
➔ Capital is synonymous with the net assets of productive capital at the end of the year
equity of the entity exceeds the physical productive capital at
➔ Under a physical concept of capital such as the beginning of the period
operating capability capital is regarded as the • Excluding distributions to and contributions
productive capacity of the entity based on, for by owners during the period
example, units of output per day
CAPITAL MAINTENANCE
➔ Means that a company only generates a profit
once the costs associated with operations
during a selected accounting period have been
fully recuperated
➔ Net income is the amount an entity can
distribute to its owners and be as “well-off” at
the end of the year as its beginning
RETURN OF CAPITAL AND RETURN ON CAPITAL
RETURN ON CAPITAL
• Shareholders invest in entity to earn a return
on capital or an amount in excess of their
original investment
RETURN OF CAPITAL
• Erosion of the capital invested in the entity
TWO CONCEPTS OF CAPITAL MAINTENANCE
FINANCIAL CAPITAL
• Also known as “net assets approach”
• Invested money or invested purchasing
power, capital is synonymous with net
assets or equity of the entity
• The monetary amount of the net assets
contributed by shareholders and the
amount of the increase in net assets
resulting from earnings retained by the
entity
• Based on historical cost and adopted by
most entities
 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Presentation of STATEMENT OF FINANCIAL POSITION PAS 1 Chapter 8
-------------------------------------------------------------------------------------------------------------------------
- working capital from the assets used in long-
FINANCIAL STATEMENTS term operations
➔ The means by which the information
accumulated and processed in financial
accounting is periodically communicated to 1
CURRENT ASSETS
the users ➔ Asset is cash or cash equivalent, unless it's set
➔ Financial representation of the financial aside for the specific purpose of paying off a
position and performance of an entity debt that is due more than 12 months after the
GENERAL PURPOSE FINANCIAL STATEMENTS end of the reporting period
➔ Intended to meet the needs of users who are ➔ Holds the asset primarily for the purpose of
not in a position to require an entity to prepare trading (intention of selling it in the near future
reports tailored to their particular information for profit)
needs ➔ Expects to realize the asset within 12 months/
➔ Directed to all common users and not specific entity’s normal operating cycle after the
users reporting period (anticipates that the asset will
COMPONENTS OF FINANCIAL STATEMENTS be sold, converted into cash, or otherwise used
1. Statement of Financial Position (Balance up within the 12 months)
Sheet) 2
NONCURRENT ASSETS
2. Income Statement ➔ A residual definition
3. Statement of Comprehensive Income ➔ All other assets not classified as current as
4. Statement of Changes in Equity noncurrent
5. Statement of Cash Flows 3
PROPERTY, PLANT AND EQUIPMENT
6. Notes to Financial Statements ➔ Tangible assets which are held by an entity for
OBJECTIVE OF FINANCIAL STATEMENTS use in production or supply of goods and
➔ To provide information about the financial services
position, financial performance, and cash flows ➔ Are presented at cost less accumulated
of an entity that is useful to a wide range of depreciation
users in making economic decisions ➔ Land, building, machinery, equipment, furniture,
➔ To show the results of the managements fixtures, patterns, molds (?), dies and tools
stewardship of the resources LONG TERM INVESTMENTS
➔ Must provide information about; assets, ➔ An asset held to make money through things
liabilities, equity, income, expense, gains, losses, like interest, royalties, dividends, rent, capital
cash flows, and contributions by and growth, or trading relationships.
distributions to owners INTANGIBLE ASSETS
FREQUENCY OF REPORTING ➔ An identifiable nonmonetary asset without
➔ Shall be presented at least annually physical substance
➔ When the end of reporting period changes and ➔ Patent, franchise, copyright, lease right,
FS are presented for a period longer or shorter trademark and computer software
than 1 year, it shall disclose; ➔ Unidentifiable intangible asset is goodwill
◆ Period covered by the FS OTHER NONCURRENT ASSETS
◆ Reason for using a longer or shorter ➔ Assets that do not fit into the definition of the
period previously mentioned noncurrent assets
◆ Fact hat amounts presented in the FS ➔ Long term advances to officers, directors,
are not entirely comparable shareholders and employees, abandoned
STATEMENT OF FINANCIAL POSITION property and long term refundable deposit
➔ Shows three elements comprising financial
4
CURRENT LIABILITIES
position, namely assets, liabilities, and equity ➔ expects to settle the liability within the entity’s
➔ Investors, creditors (primary users) analyze the normal operating cycle
SFP to evaluate such factors as liquidity, ➔ holds the liability primarily for trading
solvency and the need of the entity for ➔ is due to be settled within 12 months after the
additional financing reporting period
CLASSIFICATION OF ASSETS ➔ does not have a right to defer settlement of
➔ The classification of current and noncurrent the liability for at least 12 months after the
assets is useful by distinguishing between reporting period
assets that are continuously circulating as
➔ due to be settled within 12 months after the 7. PAS 1, paragraph 74
reporting period a. Liability is classified as current even if
5
NONCURRENT LIABILITIES the lenders has agreed after the
➔ all liabilities not classified as current are reporting period and before
classified as noncurrent statements are authorized for issue
➔ finance lease liability, deferred tax liability not to demand payment as a
consequence of breach
6
EQUITY 8. PAS 1, paragraph 75
➔ residual interest in the assets after deducting a. Liability is classified as noncurrent if
all of its liabilities the lender has agreed on or before the
➔ net assets or total assets minus liabilities end of reporting period to provide a
7-8
COVENANTS grace period ending at least 12
➔ attached to borrowing agreements which months
represent undertaking by the borrower 9. PAS 1, paragraph 54
➔ restrictions on the borrower as to undertaking a. As a minimum the face of SFP shall
further borrowings, paying dividends, include the following line items: (refer to
maintaining specified level of working capital page 151 in book)
and so forth 10. PAS 1, paragraph 57
➔ breach of conditions makes the liability a. Standard does not prescribe the order
payable on demand or format in which items are to be
SHAREHOLDERS EQUITY presented
➔ residual interest of owners in the net assets of a
corporation measured by the excess of assets
over liabilities
NOTES TO FINANCIAL STATEMENTS
➔ provide narrative description or disaggregation
of items presented in the financial statements
and information about items that do not qualify
for recognition
➔ used to report information that does not fit into
the body of the financial statements
➔ to provide necessary disclosures required by
the PFRS
FORMS OF STATEMENT OF FINANCIAL POSITION
➔ Report Form
◆ Three major sections in a downward
sequence of assets, liabilities, equity
➔ Account Form
◆ Assets are shown on the left and
liabilities and equity on the right
LINE ITEMS
➔ Present current assets before noncurrent and
current liabilities before noncurrent and equity
after liabilities
PAS
1. PAS 1, paragraph 66
a. Entity shall classify an asset as
current/noncurrent when; (refer to 1 & 2 )
2. PAS 1, paragraph 66 (noncurrent assets)
3. PAS 16. Paragraph 6
a. Defines property, plant and equipment
as tangible assets
4. PAS 1, paragraph 69
a. Entity shall classify a liability as current
when; (refer to 4 )
5. PAS 1, paragraph 69 (noncurrent liabilities)
6. PAS 1, paragraph 7
a. The holders of instruments classified
as equity are simply known as owners
 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Presentation of INCOME STATEMENT PAS 1 Chapter 9
-------------------------------------------------------------------------------------------------------------------------
- ➔ Expenses are aggregated according to their
INCOME STATEMENT/ FINANCIAL PERFORMANCE nature and not allocated among the various
➔ A formal statement showing the financial functions within the entity
performance of an entity for a given period of ➔ Expenses are no longer classified as cost of
time goods sold, distribution cost, administrative
➔ Measured in terms of the level of income expenses and other expenses
earned by the entity through the effective and ➔ Expenses which are the same nature are
efficient utilization of its resources groups or aggregated and presented as one
➔ Also known as results of operations item
➔ Transaction approach is the traditional COMPREHENSIVE INCOME
preparation ➔ The change in equity during a period resulting
➔ Presents income, expenses, gains, losses, and from transactions and other events, other than
net income or loss changes resulting from transactions with
➔ Useful in predicting future performance and owners
ability to generate future cash flows ➔ Includes profit or loss or income and expenses
SOURCES OF INCOME affecting net income
➔ Sales of merchandise to customers PROFIT OR LOSS
◆ Sales returns, allowances, discounts ➔ Total income less expenses
shall be deducted from gross sales to ➔ Bottom line in the traditional income statem,ent
arrive at net sales ➔ May use net income or net loss
➔ Rendering services ➔ Other comprehensive income comprises items
➔ Use of entity resources of income and expense that are not recognized
◆ Includes interest, rent, royalty, dividend in profit or loss or not shown in the traditional
income income statement
➔ Disposal of resources other than products STATEMENT OF COMPREHENSIVE INCOME
◆ Include gain on sale of investments ➔ Prepared in order to show the total
and gain on sale of property, plant comprehensive income
and equipment ➔ Starts with the net income or loss as shown in
CLASSIFICATION OF EXPENSE the income statement plus or minus the
➔ Distribution costs components of other comprehensive
◆ Costs directly related to selling, ➔ To provide a more comprehensive information
advertising and delivery of goods (p. on financial performance
165) PAS
➔ Administrative expense 1. PAS 1, paragraph 87
◆ Cost of administering the business a. Specifically mandates that an entity
(management) shall not present any items of income
➔ Other expenses and expense as extraordinary either on
◆ Expenses not directly related to the the face of the income statement or
selling and administrative function statement of comprehensive income or
➔ Cost of goods sold in the notes
➔ Income tax expense 2. PAS 1, paragraph 82
FORMS OF INCOME STATEMENT a. Income statement and SCI shall
➔ Either function of expense or their nature within include the following line items (p. 166)
the entity 3. PAS 1. Paragraph 99
FUNCTIONAL PRESENTATION a. An entity shall present an analysis of
➔ Classifies expenses according to their function expenses using a classification based
as part of cost of goods sold, distribution costs, on the function or nature of the
administrative expenses and other expenses expense within the entity
➔ Also known as cost of cost of goods sold 4. PAS 1, paragraph 105
methof a. Management is required to select the
➔ Shall also disclose additional information on presentation that is reliable and more
the nature of expenses including depreciation, relevant
amortization and employee benefit cause b. Does not prescribe any format
NATURAL PRESENTATION
➔ Also known as nature of expense method
 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Statement of Cash Flows PAS 7 Chapter 10
-------------------------------------------------------------------------------------------------------------------------
- DIVIDENDS PAID AND RECEIVED
STATEMENT OF CASH FLOWS ➔ Dividend received may be classified as
➔ A component of financial statements investing because it is a return on investment
summarizing the operating, investing, and ➔ Dividends paid may be classified as operating
financing activities of an entity to assist users to determine the ability to pay
➔ Provides information about the cash receipts dividends out of operating cash flows
and cash payments of an entity during a period PAS
and the change in an entity’s cash and cash ➔ PAS 7, paragraph 7
equivalents ◆ Qualification of cash equivalents is
➔ To provide relevant information about cash when it has a short maturity of three
receipts and cash payments of an entity during months or less from the date of
a period acquisition
➔ Are inflows and outflows of cash and cash ➔ PAS 7, paragraph 33
equivalents ◆ Interest paid and received shall be
➔ Strictly a cash concept classified as operating cash flows
CASH AND CASH EQUIVALENT because such items enter into the
➔ Cash comprises cash on hand and demand determination of net income or loss
deposits ➔ PAS 7, paragraph 33
➔ Cash equivalents are short-term highly liquid ◆ Dividend received shall be classified as
investments that are readily convertible to operating cash flow because it enters
known amount of cash and is subject to an into the determination of net income
insignificant risk of change in value ➔ PAS 7, paragraph 34
➔ Bank overdrafts are repayable on demand ◆ Dividend paid shall be classified as
form an integral part of cash management and financing cash flow because it is a cost
are included as a component of cash and cash of obtaining financial resources
equivalents
CLASSIFICATION OF CASH FLOWS
OPERATING ACTIVITIES
➔ Cash flows from the principal revenue
producing activities of the entity
➔ From transactions and other events that enter
into the determination of net income or loss
INVESTING ACTIVITIES
➔ Cash flows from the acquisition and disposal of
long-term assets and other investments not
included in cash equivalents
➔ Transactions involving nonoperating assets
FINANCING ACTIVITIES
➔ Cash flows from the equity capital and
borrowing of the entity
➔ Transactions involving nontrade liabilities and
equity
NONCASH TRANSACTIONS
➔ Noncash investing and financing transactions
shall be disclosed only either in the notes of
financial statements or in a separate schedule
INTEREST PAID AND RECEIVED
➔ Interest paid may be classified as financing
because it is a cost of obtaining financial
resources
➔ Interest received may be classified as investing
because it is a return on investment
➔ For financial institutions, interest paid and
received are operating activities
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Accounting Policies, Estimates, and Errors PAS 8 Chapter 11
-------------------------------------------------------------------------------------------------------------------------
- ➔ Result of mathematical mistakes, mistakes in
ACCOUNTING POLICIES applying accounting policies, fraud or
➔ Specific principles, bases, conventions, rules oversight
and practices applied by an entity in
preparing and presenting financial statements HOW TO TREAT PRIOR PERIOD ERRORS
➔ Must select and apply the same accounting RETROSPECTIVELY
policies each period to achieve comparability ➔ By adjusting the opening balances of retained
CHANGE IN ACCOUNTING POLICY earning and affected assets and liabilities
➔ Arises when an entity adopts a GAAP which is ➔ If comparative statements are presented, the
different from the one previously used by the financial statements of the prior period shall
entity be restated so as to reflect the retroactive
➔ Change shall be made only when: application of the prior period errors as a
◆ Required by an accounting standard retrospective restatement
◆ Will result in more relevant and WHAT THE HELL ARE RETRO AND PRO STUFF
faithfully represented information ➔ Retrospective
about the financial performance, ◆ generally, is a look back at events that
position, and cash flows took place, or works that were
HOW TO REPORT A CHANGE IN ACCOUNTING POLICY produced, in the past.
RETROSPECTIVE APPLICATION ◆ Consideration of past events
➔ Any resulting adjustment from the change in ➔ Prospective
accounting policy shall be reported as an ◆ generally means “of or in the future.”
adjustment to the opening balance means “potential, likely, or expected.”
➔ If comparative information is presented, the It's used to describe something that
financial statements of the prior period might happen—or that you expect to
presented shall be restated to conform with happen—in the future.
the new accounting policy ◆ consideration of or in preparation for
ACCOUNTING ESTIMATE the future.
➔ A normal recurring correction or adjustment of
an asset or liability which is the natural result
of the use of an estimate
➔ May be required for doubtful accounts,
inventory obsolescence, useful life and
residual value of asset, and warranty cost
HOW TO REPORT A CHANGE IN ACCOUNTING ESTIMATE
CURRENTLY AND PROSPECTIVELY
➔ By including it in income or loss of:
◆ The period of change if the change
affects that period only
◆ The period of change and future
periods if the change affects both
➔ Shall not be accounted for by restating
amounts reported in financial statements of
prior periods
➔ Are to be handled currently and prospectively
➔ Prospective recognition of the effect of a
change means that the change is applied to
transactions and other events from the date of
change in estimate
PRIOR PERIOD ERRORS
➔ Are omissions and misstatements in the
financial statements for one or more periods
arising from a failure to use or misuse of
reliable information
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Events After the Reporting Period PAS 10/PAS 24 Chapter 12-13
Related Party Disclosures
➔ Venturers
-------------------------------------------------------------------------------------------------------------------------
EVENTS AFTER THE ACCOUNTING PERIOD ◆ Related to the joint venture as they
- ➔ Adjusting Events have joint control of the activities
◆ Those that provide evidence of ◆ Fellow venturers are not related to
conditions that exist at the end of each other unlike fellow subsidaries
reporting period OTHER RELATED PARTIES
➔ Non-adjusting Events ➔ Key management personnel
◆ Those that are indicative of conditions ◆ Persons with managerial positions with
that arise after the end of reporting responsibility of controlling the
period activities of entity
FINANCIAL STATEMENTS AUTHORIZED FOR ISSUE ➔ Close family members of key management
➔ When the board of directors reviews the personnel
financial statements and authorizes them ◆ Spouse, children, dependents of the
issue individual or spouse
➔ Sometimes, an entity is required to submit the ➔ Individuals or shareholders
FS to the shareholders for approval after the FS ◆ Owns at leas 20% of the entity
have been issued ◆ Includes close family members
➔ Sometimes, FS are authorized for issue on the ➔ Postemployment benefit plan
date of issue by the board of directors and not ◆ Funded by contributions from the
on the date when shareholders approve the entity
financial statements ◆ Constitute the trust fund handled by a
trustee
CHAPTER 13 1
RELATED PARTIES TRANSACTION
RELATED PARTY ➔ A transfer of resources or obligations between
➔ Are considered to be related if one party has related parties, regardless of whether a price is
the ability to control the other party, exercise charges
significant influence over the other party, and
2
RELATED PARTIES DISCLOSURES
joint control over the reporting entity ➔ Relationships between parent and subsidiaries
➔ Control or investor and associates shall be disclosed
◆ Ownership directly or indirectly regardless of whether there have been
through subsidiaries of more than half transactions between those related parties
of the voting power of an entity ➔ Shall disclose the name of the entity’s parents
➔ Significant influence and if different, the ultimate controlling party
◆ May be gained by share ownership of ➔ 3
The disclosures of related party transaction
20% or more shall include:
➔ Joint control ◆ The amount of the transaction
◆ Contractually agreed sharing of ◆ Amount of outstanding balance, terms
control and conditions, nature of
EXAMPLES OF RELATED PARTIES consideration to be provided in
➔ Affiliates settlement
◆ Parent, subsidiary, and fellow ◆ Allowance for doubtful accounts
subsidiaries related to the outstanding balance
◆ If an investor owns more than 50% of ◆ Doubtful accounts expense recognized
an investee the investor is the parent during the period in respect of amount
and the investee is the subsidiary due from related parties
◆ Subsidiary is related to the parent and KEY MANAGEMENT PERSONNEL COMPENSATION
4

the fellow subsidiaries of one parent ➔ Short term employee benefits (salary/bonus)
are also related to each other ➔ Postemployment benefits (retirement
➔ Associates pension)
◆ Entities over which one party exercises ➔ Other long-term benefits (paid absences)
significant influence ➔ Termination benefits (separation of severance
◆ If an investor owns at least 20% of the pay)
investee the investee is the associate ➔ Share based payment transactions (share
◆ Associate is related to the investor and options)
includes subsidiary or subsidiaries of
the associate
 UNRELATED PARTIES
➔ Two entities simply because they have a
director or key management personnel in
common
➔ Providers of finance, banks, trade unions, and
government agencies in the course of their
normal dealings
➔ Customers and suppliers by virtue of their
normal dealings
➔ Fellow venturers are unrelated to each other
but the venturers are related to the joint
venture

PAS
➔ PAS 24, paragraph 201
◆ Examples of related party transaction:
● Purchase and sale of goods
● Purchase and sale of property
and other asset
● Rendering or receiving services
● Leases
● Transfer of research and
development
● License agreement
● Financing arrangements,
including loans and equity
contributions
● Guarantee and collateral
● Settlement of liabilities on behalf
of the entity or by the entity on
behalf of another party
➔ PAS 24, paragraph 122
◆ Requires disclosure of related party
relationships where control exists
irrespective of whether there have
been transactions between related
parties
➔ PAS 24, paragraph 173
◆ If there have been transactions
between related parties, an entity shall
disclose the nature of the related party
relationship as well as information
about the transactions and
outstanding balances necessary for
an understanding of the FS
➔ PAS 24, paragraph 164
◆ An entity shall disclose key
management personnel
compensation in total and for each of
the categories
➔ PAS 24, paragraph 3
◆ Requires disclosure of related party
transactions and outstanding
balances in the separate financial
statements of a parent, subsidiary,
associate, and venturer
➔ PAS 24, paragraph 4
◆ Intragroup related party transactions
and outstanding balances are
eliminated in the preparation of
consolidated FS of the group
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Inventories PAS 2 Chapter 14
-------------------------------------------------------------------------------------------------------------------------
- d) Distribution or selling cost
INVENTORIES
➔ Inventories are assets held for sale in the
ordinary course of business, in the process of COST FORMULAS
1

production for such sale or in the form of a) First in, First out
materials or supplies to be consumed in the b) Weighted average
production process or in the rendering of ➔ Standard does not permit anymore use of the
services last in, first out (LIFO)
MANUFACTURING FIRST IN FIRST OUT (FIFO)
TRADING CONCERN
CONCERN ➔ Assumes that the goods first purchased are
• One that buys and • One that buys goods first sold and consequently the goods
sells goods in the which are altered or remaining in the inventory at the end of the
same form converted into period are most recently purchased or
purchased another form before produced
➔ in accordance with the ordinary
• Merchandise they are made
available for sale merchandising procedure that the goods are
inventory is
sold in the order they are purchased
generally applied to • Finished goods, goods
➔ first come, first sold
goods held by a in process, raw
➔ inventory is thus expressed in terms of recent
trading concern materials and factory
or new prices while the cost of goods sold is
supplies
representative of earlier or old prices
WEIGHTED AVERAGE
➔ Cost of beginning inventory + total cost of
COST OF INVENTORIES purchase during the period ÷ total units
➔ Shall comprise cost of purchase, cost of purchased + those in the beginning inventory=
conversion and other cost incurred in bringing weighted average unit cost x units on hand=
the inventories to their present location and inventory value
condition ➔ Average unit cost is computed by dividing the
➔ Is determined by: units on hand x actual unit total cost of goods available for sale by the
cost total number of units available for sale
➔ Other cost is included in the cost of inventories
only to the extent that is incurred in bringing EXAMPLE
the inventories to their present location and
condition UNITS UNIT COST TOTAL SALES IN
COST OF PURCHASE OF INVENTORIES COST UNITS
➔ Shall comprise the purchase price, import Jan 1 Beg. 800 200 160,000
duties and irrecoverable taxes, freight, Balance
8 Sale 500
handling and other costs directly attributable
18 Purchase 700 210 147,000
to the acquisition of finished goods and
22 Sale 800
materials
31 Purchase 500 220 110,000
➔ Trade discounts, rebates and other similar
Assume the ending inventory is 700 units
items are deducted in determining cost of
FIFO
purchase
UNITS UNIT COST TOTAL COST
COST OF CONVERSION
From Jan 18 200 210 42,000
➔ Shall include cost directly related to the units
Purchase
of production such as direct labor
From Jan 31 500 220 110,000
➔ Also includes a systematic allocation of fixed
Purchase
and variable production overhead that is
700 152,000
incurred in converting materials into finished
The 700 units are measured using the latest purchase
goods
on Jan. 31 500 units and partly from Jan. 18 purchase
EXCLUDED FROM COST OF INVENTORIES
200 units
a) Abnormal amount of wasted material
b) Storage cost on goods in process is
Kasabot ka? ako pud 😊
capitalized but storage cost on finished
goods is expensed
c) Administrative overhead
WEIGHTED AVERAGE
UNITS UNIT COST TOTAL COST
Jan. 1 Beg. 800 200 160,000
18 Purchase 700 210 147,000
31 Purchase 500 220 110,000
Total goods for 2,000 417,000
sale
Weighted average unit cost (417,000 / 2,000) 208.50
Inventory cost (700 x 208.50) 145,950

The weighted average unit cost is computed by

dividing the total cost of goods available for sale by
the total units available for sale

2
SPECIFIC IDENTIFICATION
➔ Means that specific costs are attributed to
identified items of inventory
3
MEASUREMENT OF INVENTORY
➔ Inventories shall be measured at the lower
cost and net realizable value
➔ Cost is determined using either FIFO or
average cost
➔ Measurement of inventory at the lower of cost
and net realizable value is known as LCNRV
(what)
➔ Net realizable value or NRV is the estimated
selling price in the ordinary course of business
– estimated cost of completion – estimated
cost of disposal
ACCOUNTING FOR LCNRV
➔ If cost is lower than net realizable value, there
is no accounting problem; inventory is stated
at cost and the increase in value is not
recognized
➔ If NRV is lower than cost, inventory is measured
at NRV
➔ The writedown of inventory to NRV is
accounted for using allowance method
➔ IF cost > NRV= no accounting problem
➔ IF NRV > cost = inventory is measured at NRV
ALLOWANCE METHOD
➔ The inventory is recorded at cost and any loss
on inventory writedown is accounted for
separately
➔ Also known as loss method because a loss
account “loss on inventory writedown” is
debited and a valuation account “allowance
for inventory writedown” is credited

PAS
1. PAS 2, p 25
- Expressly provides that the cost of
inventories shall be determined by using
either FIFO or weighted average
2. PAS 2, p. 23
- This method is appropriate for inventories
that are not ordinarily interchangeable
3. PAS 2, p. 9
- Inventories shall be measured at the
lower cost and net realizable value
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Property, Plant and Equipment PAS 16 Chapter 15
-------------------------------------------------------------------------------------------------------------------------
-

PROPERTY, PLANT AND EQUIPMENT REVALUATION MODEL

➔ Are tangible assets that are held for use in ➔ Means that PPE are carried at revalued
production or supply of goods or services, for carrying amount; the fair value at the date of
rental to others, or for administrative purposes, revaluation less any accumulated
and are expected to be used during more depreciation and any accumulated
than one period impairment cost
EXAMPLES OF PPE ACQUISITION ON A CASH BASIS
a) Land g) motor vehicle ➔ Cost of an item of PPE s the cash price
b) Land improvements h) furniture and equivalent at the recognition date
c) Building fixtures ➔ Cost of asset acquired on a cash basis simply
d) Machinery i) office equipment includes the cash paid + directly attributable
e) Ship j) Patters, molds, dies costs (freight, installation cost and other cost
f) aircraft k) Tools necessary in bringing the asset to the location
l) Bearer plants and condition for the intended use)
INITIAL MEASUREMENT ACQUISITION ON INSTALLMENT BASIS
➔ Shall be measured at cost ➔ When payment for item of PPE is deferred
➔ Cost is the amount of cash or cash equivalent beyond normal credit terms, the cost is the
paid and the fair value of the other cash price equivalent
consideration given to acquire and asset at ➔ If asset is offered a cash price and at an
the time of acquisition or construction installment price and is purchased at
ELEMENTS OF COST installment price, asset be recorded at cash
a) Purchase price, import duties, price

nonrefundable purchase taxes, after ➔ Excess of installment price over the cash price
over the cash price is treated as an interest to
deducting discounts and rebates
be amortized over the credit period
b) Cost directly attributable to bringing the
ISSUANCE OF SHARE CAPITAL
asset to the location and condition for the
➔ PH GAAP provides that if shares are issued for
intended use
consideration other than actual cash,
c) Initial estimate of the cost of dismantling proceeds shall be measured by the fair value
and removing the item for which the entity of the consideration received
has a present obligation ➔ Where a property is acquired through the
issuance of share capital, the property shall be
DIRECTLY ATTRIBUTABLE COST measured at an amount equal to the following
a) Cost of site preparation in order of priority
b) Initial delivery and handling cost a) Fair value of the property received
c) Installation and assemble cost b) Fair value of the share capital
d) Professional fee c) Par value or stated value of the share
e) Costs of testing whether the asset is capital
functioning properly
2
EXCHANGE
➔ Cost of an item of PPE acquired in exchanged
SUBSEQUENT MEASUREMENT for a nonmonetary asset or a combination of
➔ After initial recognition, an entity shall choose monetary and nonmonetary asset is
either the cost model or the revaluation model measured at fair value plus any cost payment
as the accounting policy for PPE and apply it to ➔ Exchange is recognized at carrying amount if
an entire class of PPS exchange transaction lacks commercial
COST MODEL substance
➔ Means that PPE are carried at cost less any
accumulated depreciation and any
accumulated impairment cost
 COMMERCIAL SUBSTANCE - Shall be reviewed at least at each financial
➔ A new notion and is defined as the event or year-end and if expectation differs from
transaction causing the cash flows of the previous estimate, the change shall be
entity to change significantly by reason of the accounted for as a change in an accounting
exchange estimate
➔ An exchange transaction has commercial ➔ Useful life
substance when the cash flows of the asset - Either the period over which an asset is
received differ significantly from the cash expected to be available for use by the
flows of the asset transferred entity or the number of production or
3
CONSTRUCTION similar units expected to be obtained
➔ Cost of self constructed asset is determined from the asset by the entity
using the same principles as for as acquired - Factors in determining useful life are
asset ➢ Expected usage of the asset
➔ A) direct cost of materials ➢ Expected physical wear and tear
➔ B) direct cost of labor ➢ Technical or commercial
➔ C) indirect cost of incremental overhead obsolescence
specifically identifiable or traceable to the ➢ Legal limit for the use of the asset,
constructions such as the expiry date of the related
4
DERECOGNITION lease
➔ Means that the cost of the PPE together with DEPRECIATION METHOD
the related accumulated depreciation shall be ➔ Shall reflect the pattern in which the future
removed from the SFP economic benefits from the asset are
➔ Gain or loss arising from the derecognition of expected to be consumed by the entity
an item of PPE shall be determined as the; net STRAIGHT LINE METHOD
disposal- carrying amount of the item ➔ Considers depreciation as a function of time
CONCEPT OF DEPRECIATION rather than as a function of usage
➔ Defined as the systematic allocation of the ➔ The annual depreciation charge is calculated
depreciable amount of an asset over the by allocating the depreciable amount equally
useful life over the number of years of useful life
➔ A matter of cost allocation in recognition of ➔ A constant charge over the useful life of the
the exhaustion of the useful life of an item of asset
PPE PRODUCTION METHOD
DEPRECIATION PERIOD ➔ Production or output method assumes that
➔ Depreciable amount of an asset shall be depreciation is more a function of use rather
allocated on a systematic basis over the than passage of time
useful life ➔ Useful life of the asset is considered in terms of
➔ Begins when it is available for use, meaning, the output it produces or the number of hours
when the asset is in the location and condition it works
necessary for the intended use by ➔ Depreciation is related to the estimated
management production capability of the asset and is
➔ Depreciation ceases when the asset is expressed in a rate per unit of output or per
derecognized, therefore depreciation does not hour of use
cease when the asset becomes idle DIMINISHING BALANCE METHOD
temporarily ➔ Diminishing balance or accelerated method
➔ Temporary idle activity does not preclude provide higher depreciation in the earlier years
depreciating the asset as future economic and lower depreciation in the later years of the
benefits are consumed not only through useful life of the asset
usage but also through wear and tear and ➔ Result in a decreasing depreciation charge
obsolescence over the useful life
FACTORS OF DEPRECIATION ➔ Accelerated method includes sum of of year’s
➔ Depreciable amount digits method and double declining balance
- Cost of an asset or other amount method
substituted for cost-residual value PAS
- Each part of an item of PPE with a cost 1. PFRS 9, p. 5.1.1
that is significant in relation to the total - Asset acquired by issuing bonds payable
cost of the item shall be depreciated is measured in the following order
separately - A) fair value of bonds payable
➔ Residual value - B) fair value of asset received
- The estimated net amount currently - C) face amount of bonds payable
obtainable if the asset is at the end of the 2. PAS 16, p. 24
useful life - Cost of an item of PPE acquired in
exchanged for a nonmonetary asset or a
 combination of monetary and
nonmonetary asset is measured at fair
value plus any cost payment
3. PAS 16, p. 22
- Cost of the abnormal amount of wasted
material, labor or overhead incurred in the
production of self-constructed asset is
not included in the cost of the asset
4. PAS 16, p. 67
- Carrying amount of an item of PPE shall
be derecognized on disposal or when no
future economic benefits are expected
from the use or disposal
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Government Grant PAS 20 Chapter 16
-------------------------------------------------------------------------------------------------------------------------
-

GOVERNMENT GRANT
1
GOVERNMENT ASSISTANCE
➔ Assistance by government in the form of ➔ Action by government designed to provide an
transfer of resources to an entity in return for economic benefit specific to an entity or range
part or future compliance with certain of entities qualifying under certain criteria
conditions relating to the operating activities ➔ No value can be placed upon it
of the entity ➔ Free technical or marketing advice, provision
RECOGNITION of guarantee, government procurement policy
➔ Shall be recognized when there is reasonable that is responsible for a portion of the entity’s
assurance that sales
➔ A) the entity will comply with the conditions of ➔ Does not include indirect benefits or benefits
the grant not specific to an entity: infrastructure in
➔ B) the grant will be receive development areas, imposition of trading
➔ Grant in recognition of specific expenses shall constraints on competitors, improved facilities
be recognized as income over the period of DISCLOSURES
the related expense ➔ Accounting policy adopted from government
ILLUSTRATIONS REFER TO BOOK grant including the method of presentation
➔ Grant that becomes receivable as adopted in the financial statements
compensation for expenses or losses already ➔ Nature and extent of government grant
incurred or for the purpose of giving ➔ Unfulfilled conditions and other contingencies
immediate financial support to the entity with attaching to government assistance that has
no further related costs shall be recognized as been recognized
income of the period in which it becomes ➔ Not required to disclose the name of the
receivable government agency that gave the grant along
➔ Grant related to depreciable asset shall be with the date of sanction and the date when
recognized as income over the periods and in cash was received in case of monetary grant
proportion to the depreciation of the related
asset
➔ Grant related to nondepreciable asset PAS
requiring fulfillment of certain conditions shall 1. PAS 20, p. 3
be recognized as income over the periods - Definition of government grant
which bear the cost of meeting the conditions
PRESENTATION OF GOVERNMENT GRANT
1. Related to asset
a. Setting the grant as deferred income
b. Deducting the grant in arriving at the
carrying amount of the asset
2. Related to income
a. Presented in the income statement
either separately or under “other
income”
b. Deducted from the related expense
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Borrowing Costs PAS 23 Chapter 17
-------------------------------------------------------------------------------------------------------------------------
- ➔ Capitalization rate or average interest rate =
total annual borrowing cost ÷ total general
BORROWING COSTS
1
borrowings outstanding
➔ Interest and other costs that an entity incurs in
➔ Any investment income from general
connection with borrowing of fund
borrowing is not deducted from capitalizable
➔ Interest costs incurred as a result of
borrowing cost
borrowings from banks and other financial
COMMENCEMENT OF CAPITALIZATION
institutions
➔ When conditions are present yuhh
➔ Borrowing can be classified as specific
borrowing and general borrowing ➔ A) when entity incurs expenditures for the
SPECIFIC BORROWING asset
➔ Intended specifically in acquiring a qualifying ➔ B) when the entity incurs borrowing costs
asset ➔ C) when the entity undertakes activities that
GENERAL BORROWING are necessary to prepare the asset for the
➔ Intended partly in acquiring a qualifying asset intended use or sale
and partly for general or working capital
purposes CESSATION OF CAPITALIZATION
QUALIFYING ASSET
2
➔ When substantially all the activities necessary
➔ An asset that necessarily takes a substantial to prepare the qualifying asset for intended
period of time to get ready for the intended use or sale are complete
use or sale ➔ Asset is normally ready for the intended use or
➔ Manufacturing plant, power generation facility, sale when the physical construction of the
intangible asset, investment property
asset is complete
EXCLUDED FROM CAPITALIZATION OF BC
3

➔ Asset measured at fair value, such as DISCLOSURES RELATED TO BORROWING COSTS

biological asset ➔ Amount of borrowing cost capitalized during
➔ Inventory that is manufactured in large the period
quantities on a repetitive basis
➔ Capitalization rate used to determine the
➔ Asset that is ready for the intended use or sale
amount of borrowing cost eligible for
when acquired
capitalization
4
ACCOUNTING FOR BORROWING COSTS
➔ Segregation of assets that are qualifying
➔ Capitalization of borrowing cost is mandatory
for a qualifying asset assets from other assets in the SFPostion is not

➔ If borrowing cost is not directly attributable to required to be discloses

a qualifying asset, borrowing cost is expensed
PAS
immediately
1. PAS 23, p. 5
5
ASSET FINANCED BY SPECIFIC BORROWING
➔ If funds are borrowed specifically for the - Borrowing cost definition
2. PAS 23
purpose of acquiring a qualifying asset, the
- Requires that borrowing costs incurred in
amount of capitalizable borrowing cost is the
actual borrowing cost incurred during the connection with acquisition of a qualifying
asset should be capitalized as cost of the
period-any investment income from the
qualifying asset
temporary investment of those borrowings
3. PAS 23
6
ASSET FINANCED BY GENERAL BORROWING - Does not require capitalization of

➔ If funds are borrowed generally and used for borrowing costs relating to the following

acquiring a qualifying asset, the amount of assets not considered as qualifying asset

capitalizable borrowing cost is equal to the 4. PAS 23, p. 8

average carrying expenditures on the asset - Rules on borrowing cost

during the period x capitalization rate or 5. PAS 23, p. 12

average interest rate - Asset financed by specific borrowing

➔ Capitalizable borrowing cost shall not exceed 6. PAS 23, p. 14

the actual interest incurred - Asset financed by general borrowing