CASH Doubtful Accounts [AWERA Method]

Cash Items Allowance, Beginning ex. A 1,500 opposite (less)

 PCF (Write-off) (W) (300) opposite (add)

 Cash in Bank Expense [FAQ: Squeeze] E 1,200

 Traveler’s/Manager’s Check Recovery . R 100 opposite (less)

 Bank Draft & Money Order Allowance, Ending A 2,500 start from here

 Unrestricted Compensating Balance

NOTES RECEIVABLE
COMPENSATING BALANCE
Unrestricted Restricted Receivable Financing
↓ ↙ ↘  Secured Borrowing (Loans)
Cash Short Term Long Term ↳ Pledging [All of receivables]
Current Non-current ↳ Assignment [Specific receivables]
► Notification – Customer knows, [your creditor will collect]
Cash Equivalents ► Non-notification – Ikaw pa rin ‘yung nangongolekta
 Acquired → 3 months → Maturity  Sale of Receivable
 Acquired more than 3 months:
↳ Factoring
↙ ↘
► Casual Sale: Derecognize the AR; Service fee is a loss
Mature Mature more than 12
in 12 months months ► Continuing Arrangement: a long term agreement
↓ ↓  Buyer commits to buy the AR
Current Asset Non-current Asset  Includes a retention [aka: Factor’s Holdback]
↳ Discounting
 3-month Time Deposit Gain or Loss
 3-month Money Market WITH Recourse ------------------------ YES
 3-month Treasury bills WITHOUT Conditional sale ------ YES
 Any: Acquired before 3-month maturity Secured Borrowing--- NO*
✖ Equity Securities *will record actual liability
↳ XPN: Redeemable Preference. Share. [a debt instrument]
Discounting Procedures
Book balance > Bank Balance = cash shortage 1. Maturity Value = PxRxT
2. Discount = Mat Val x Disc Rate x Disc Period
Outstanding Checks, Beg. Deposit in Transit, Beg. ↓
Discount Date to Maturity
A: Checks drawn A: Deposits [Book Receipts]
3. Proceeds = Maturity Value – Discount
. .

To be paid To be acknowledged by bank

Proceeds
L: (Paid) L: (Acknowledged) [Bank credits]
.

Outstanding Checks, End Deposit in Transit, End L: Carrying Value (Face + Accrued Interest)
Loss on Discounting ↳ Date of Note to Date of Disc
Petty Cash Fund
Coins and currencies Coins and currencies LOANS RECEIVABLE
Replenishment checks Replenishment checks
Petty cash vouchers PCF, ending balance Initial Measurement: PV of Cash Flow
IOUs / Advances to EE PCF per count ↓ Fair Value [Transaction Price]*
Employee NSF checks PCF imprest balance Add: Direct Origination Cost
PCF per count [PRICE] PCF shortage ↓ Less: (Origination Fees) .

Loans Receivable
Proof of Cash
BEG RECEIPT DISBRSMT END *Transaction cost
Unadjusted Bal. xx xx xx xx ↳ Direct Origination - incurred
CM; DIT - evaluation of the borrower
Previous xx (xx)
Current xx xx ↳ Indirect Origination - expensed
DM; OC - not included
Previous (xx) (xx)
Current xx (xx) ↳ Origination fees - from the borrower
Adjusted Bal. xx xx xx xx - unearned int income**
Direct origination
(Origination fees)
Errors
Unearned Interest Income**
Common Types Effect
Check issued by another depositor UNDERSTATED
Subsequent Measurement: Amortized Cost using EIR
charged to the company’s account Bank balance
Deposit of another company credited to OVERSTATED
Expected Credit Losses (ECL): Three-stage Model
the company’s account Bank balance
Stage 1 Stage 2 Stage 3
Recorded amount of check issued is UNDERSTATED No significant
HIGH, customer’s check is LOW Book balance Trigger increase since initial Significant increase Credit-impaired
Recorded amount of check issued is OVERSTATED recognition

LOW, customer’s check is HIGH Book balance ECL 12-month ECL Lifetime Lifetime
Effective Interest EIR on gross EIR on gross EIR on
Rate for Interest carrying amount carrying amount amortized cost
Disclosures Income (no ECL) (no ECL) (with ECL)
 Policies for determining the composition of cash & cash eqs.
 Significant balances that are not available for use. Disclosures
 Compensating balance  For PFRS 7: Financial Instruments Disclosures
↳ Nature and extent of receivables, terms and conditions
ACCOUNTS RECEIVABLE ↳ Accounting policies & methods - recognition & measurement
↳ Exposure to credit risk and interest rate risk
Initial: Net Realizable Value  For pledged or assigned AR and notes discounted
Subsequent: Amortized Cost ↳ Nature of risks and rewards
↳ Carrying amount and associated liability
Beginning ↳ Terms and conditions relating to pledge
Credit Sales Collections  Income statement accounts that has materials amounts
Recovery Recovery (if not included) resulting from receivables.
Dishonored Checks Sales Discounts ↳ Total interest income using EIR and interest receivables
Sales Return & Allo. [Cr. Sales]  Nature and amount of bad debts expense recognized in
Write-offs profit or loss.
Ending
No effect: if the recovery of a write-off is already included in recording.
 INVENTORIES Step 1: TGAS
✓ Abnormal Loss COGAS at Retail
LOWER of Cost & Net Realizable Value (LCNRV) L: Net Sales3 .

 Applied per item Step 2: Adjusted Net Sales End, Inventory at retail
Estimated Selling Price ✓ Sales Returns only x Cost ratio .

Less: Cost of disposal ✓ Normal Loss End, Inventory at cost

Less: Cost to complete
Net Realizable Value Step 3: Cost Ratio
 Allowance method 3
only sales returns are deducted
↳ Loss in inventory writedown [Part of COGS]
4
all purchase returns, discounts, allowances, are accounted
Also, employee discounts and abnormal losses, are added back
↳ Reversal (gain) [Deducted to COGS]
 Raw materials are NOT written down:
Disclosures
↳ Finished goods are sold at or above cost  Accounting policies, cost method used
XPN: Finished goods price declines below cost  Total carrying amount, and CA in classifications to the entity
↳ Replacement cost used for NRV of raw materials  Total CA at FVLCD, and inventories expensed (COGS)
 Amount of writedown and reversals, and its circumstance
Cost of Inventories  Amount pledged as security for liabilities
 Purchase price, cost of bringing to location
 Conversion cost directly related to production, labor costs PROPERTY, PLANT, AND EQUIPMENT
 Import duties, other taxes, transport and handling costs Initial Measurement
 Less trade discounts, rebates
 Purchase Price  DACs  Dismantling cost
FOB Shipping Point (FOB Seller) ↳ Import duties ↳ at Fair Value
 Title transferred upon shipment ↳ NON-REFUNDABLE taxes
 Buyer is responsible for freight (part of cost) ↳ Net of Trade Discounts

FOB Destination (FOB Buyer) Acquisition [Exchange of Assets]

 Title transferred upon receipt of buyer Issuance of Shares [RIP] Issuance of Bonds [BAB]
 Seller is responsible for freight (OpEx) i. FV of asset Received i. FV of Bonds
FREIGHT ii. FV of shares Issued ii. FV of Asset received
↳ Freight Collect – paid by the buyer iii. Par of shares issued iii. Face of the Bonds
↳ Freight Prepaid – paid by the seller
Exchange
Inclusions With Commercial Substance Without Commercial Substance
TERMS BUYER SELLER FV of asset given up CA of asset given up
FOB Shipping Point Include Exclude A: Cash paid A: Cash paid
FOB Destination Exclude Include L: Cash received L: Cash received
Installment sales Include Exclude Initial Cost Initial Cost
Out on approval Exclude Include FV given up ↑ *no gain or loss
Stock items Exclude Include Less: CA given up
Special order1 Include Exclude Gain ↑ Loss ↓
Buyback agreement2 Exclude Include
1
Considered sold when completed and segregated. Depreciation
2
Seller bears the risks and rewards, proceeds are reported as liability.
SYD = n(n+1) Declining
2 Ex. 150% ; 5 yrs
 Consignor – the principal owner (may-ari ng goods)
*fractional ↳ 1.5 ÷ useful life = 30%
 Consignee – the agent (taga-benta lang)
Ex. 10 yrs = 55 ↳ Residual value: ignored, but
↳ Out on consignment: Include in consignor’s inventory
Depreciation starts at 10/55 considered on final year
↳ Held on consignment: Exclude from consignee’s inventory
Inclusions
Gross Profit Method
 Based on Sales: Sales is 100% LAND LAND IMPROVEMENTS
 Based on Cost: COGS is 100%  Purchase price  Fence
 Legal fees  Water systems
Step 1: Compute for COGS  Escrow fees  Drainage
Net Sales3  Survey cost  Sidewalks
Less: COGS (squeeze)  Tenants [for land use]  Pavements
Gross Profit  Permanent improvements  Landscapes
 Special Assessments ✓subject to depreciation
Step 2: Required Inventory on Hand BUILDING
Beginning Inventory PURCHASED CONSTRUCTED
Add: Net Purchases4  Purchase Price  DM, DL, FOH
COGAS  Legal fees  Permits, license
Less: Estimated COGS (Step 1)  Tenants [for building use]  Excavation
Required/Estimated Inventory on Hand  Renovation/Remodeling  Interest expense
 Temporary improvements
Step 3: Shortage/Overage
Interpretation for Land and Building
Req/Est. Inv < Actual Inventory = Overage
↳ Land and building is purchased at single cost:
Req/Est. Inv > Actual Inventory = Shortage
 Old building is still usable - allocate based on FV
Cost-to-Retail Ratio  Old building not usable - allocate solely to land
 Conservative [✓ Markup ✖ Markdown] ↳ Old building is demolished for land use:
COGAS @ Cost - Demolition cost is capitalized for LAND.
COGAS @ Retail – Markdown ↳ Old building is demolished for a new one
↳ Lower cost rate
IMMEDIATELY DEMOLISHED
↳ Markdown added back for ending inventory
If the new building is PPE or If the new building is
Investment Property accounted as Inventory
 Average [✓ Markup ✓ Markdown]
COGAS @ Cost  CA of old building – LOSS  Capitalized - new bldg.
COGAS @ Retail  Demolition cost - Capitalized

 FIFO [Excludes beginning inventory] DEMOLISHED FOR LATER PERIOD

COGAS @ Cost – BI@ Cost If the new building is If the old building is
COGAS @ Retail – BI @ Retail PPE, IP, or Inventory Leased
 Capitalized - new bldg.
 CA of old building – LOSS ↳ Cost to induce tenant
 Demolition cost - Capitalize to vacate.
 Machinery and Equipment Legal life*
Amortization: SHORTER of Expected use
↳ Purchase taxes are capitalized, except VAT
↳ Purchase price *Patent - 20 years
Trademark - 10 years; renewable
↳ Freight, insurance, installation costs
Copyright - Life of author + 50 yrs.
↳ Cost of testing
NOTES:
Revaluation Model  Expenditure is incurred in Research Phase if it cannot be
Fair Value ↑ identified.
Less: Carrying Amount .  R&D Expenditures that have alternative future use can
Revaluation Surplus ↑ be capitalized.
↳ Derecognize → RE
Costs not recognized as R&D
↳ Amortize → RE [Remaining useful life]  R&D Expenditures incurred before production
 Activities that relate to commercial production
Replacement cost [depreciated amount]
↳ May be used if fair value is not available. RECOGNITION OF GOODWILL
 Purchased through Business Combination
Leasehold Improvements ✖ Internally generated
↳ Changes made by tenant under operating lease
↳ Depreciated by SHORTER of ADDITIONAL PATENT
i. Useful life of improvements; Competitive Patent Relative Patent
ii. Remaining term of lease  Acquired to protect the  Acquired to extend the
original patent life of old patent
Borrowing Cost  Amortized over remaining  Cost of related patent
useful life of the old plus unamortized cost of
 SPECIFIC BORROWING patent the patent
Interest Expense (Actual)
Less: Interest Income (Temporary Investment) Cash Generating Units
Capitalizable Borrowing Cost Value in use
Recoverable Amount* (higher) FVLCD
 GENERAL BORROWING L: Carrying Amount
Step 1: Weighted Average Expenditures [WAE] Impairment Loss Goodwill – 100%
Step 2: Capitalization Rate Step 4: Non-cash asset – Excess (CA)
Actual vs. Average
Actual Borrowing Cost ↘ ↙ *Recoverable amount is INDIVIDUALLY determined.
Total Principal (General) LOWER
↓ SEGMENT REPORTING
Step 3: Average Borrowing Capitalizable ✓
 REVENUE TEST [10%] - Internal & External
Weighted Ave. Expenditures Actual Borrowings ↑  ASSET TEST [10%] - Total Assets
x Capitalization Rate . L: Average Borrowings  PROFIT TEST [10%] Profit Higher absolute amount
Average Borrowing Cost Interest Expense ↑ Loss
 OVERALL-SIZE TEST [75%] - Total External
 SPECIFIC and GENERAL BORROWING ↳ Minimum required amount
↳ Combined for computation of WAE ↳ Combined two or more next higher segments (even if it
is below the 10% threshold) if the minimum required amount
Basis of capitalizable cost: is not reached.
Weighted Average Expenditures
Management can still consider a segment as reportable if they believe
Less: Specific Borrowings
that it is still important, even if it is below the 10% requirement.
Expenditures Allocable to General Borrowing
Disclosures
AGRICULTURE  Product or Service → Revenue from external revenue
 Geographical area → Domicile of foreign operations
Plant Consumable → Biological Asset  Major customers → 10% or more of external revenue
Bearer → PPE ↳ Reliance
↳ Amount of revenue from all
↳ Produce at point of harvest → Biological Asset
↳ What segment
after harvest → Inventory
↳ NOT REQUIRED DISCLOSURES:
Animal – Consumable/Bearer → Biological Asset ✖ Identity
✖ Amount of segment revenue from each customer
 Biological asset - measured at FVLCD
↳ XPN: if no fair value available: EVENTS AFTER THE REPORTING PERIOD
Cost
L: Accumulated Dep and Impairment loss
 Adjusting Events [at reporting date]
COST ✓
↳ Court case – if had present obligation
 If bearer plant is a PPE, test for impairment loss: ↳ Bankruptcy of a major customer – credit impaired
↳ FVLCD vs Recoverable value ↓ = LOSS ↓ ↳ Impairment loss
↳ Fraud or error in the financial statement
INTANGIBLES
 Non-Adjusting [after reporting date] → Disclose
 Finite useful life - Amortized ↳ Major business combination
 Indefinite life - Annually tested for impairment ↳ PLAN to discontinue
↳ Fire destruction
Internally-generated Intangible Asset ↳ Change in tax rate
Research Phase Development Phase ↳ ForEx, ordinary share transactions after reporting date
↳ Commencing litigation after reporting date
 Planned to gain new  Application of research
scientific or technical findings
knowledge  “Technical feasibility”  Other Provisions
 EXPENSED outright  GR: Expensed ↳ Disclose the authorization date, and who authorizes the
 XPN: Capitalized if requisites FS and if there is a power to amend the FS.
are met ↳ FS should not be prepared on a going concern basis if the
management decides to liquidate after the end of period.
 DISCONTINUED OPERATIONS Land If sold ✖% = OV (UV)
Depreciables Depre Exp ✖% = OV (UV)
 Actually disposed Intangibles Amort Exp ✖% = OV (UV)
Inventory COGS ✖% = OV (UV)
 Classified as held for sale
✖ NOT held for sale if classified after end of reporting period *undervaluation increases share in net income

Presentation [below continuing operations] Discontinuance of Using Equity Method

↳ Retained investment → financial asset
Income from CONTINUING xx
↳ Recognize in profit or loss:
Add: Income from DISCONTINUED:
Revenue xx Proceeds of sold shares Fair value of retained shares
Less: Expenses [termination cost] (xx) L: CV of investment sold L: CV of retained shares .

Impairment Loss (xx) G/L on disposal G/L on reclassification

Income (Loss) xx(xx)
Tax: (Expense) Benefit xx(xx) xx Reclassification: [Equity Securities]
PROFIT xx Gain or Loss
FVPL → Investment in Assoc Profit or Loss
INVESTMENT IN EQUITY SECURITIES FVOCI → Investment in Assoc OCI → RE
Invstmt in Assoc → FVPL or FVOCI Profit or Loss
At Fair Value
% Purpose OS PS Sale of Investment in Equity Security:
FVPL < 20% Trading ✓ ✓ Treatment of Gain/Loss
FV of Shares ↑ FVPL: in Profit or Loss
FVOCI < 20% Non-trading ✓ ✓
L: CA of Shares ↳ Transaction cost is netted against
Assoc/JV 20-50% Significant Influence ✓ ✖
Unrealized Gain ↑ gain or loss on sale
Subsidiary >50% Control ✓ ✖
Selling Price ↑ FVOCI: OCI → RE
Trading FVPL L: Carrying Amount
Realized Gain ↑ ↳ Transaction cost is reported in P/L
Security irrevocable FVPL
Non-trading as loss on sale.
designation FVOCI
INVESTMENT PROPERTY
 CASH/PROPERTY DIVIDENDS
↳ Dividend Income → Profit or loss ✓ Capital appreciation ✖ As inventory
 SHARE DIVIDENDS – not an income ✓ Undetermined use ✖ Owner-occupied [PPE]
✓ Operating Lease ✖ Occupied by employees
Share Dividend – Same class Share Dividend – Different class
 Memo entry only  The investment carrying value ✖ Finance Lease
 Does not affect the carrying is allocated to the shares
value of the shares held based on MV at receipt of  Separable Property
dividend.  Investment Property → Rented out
 Owner-occupied → Administrative purposes
 Debit new investment
Credit old investment
Shares from other company are property dividends  Non-separable Property Example:

Ancilliary Insignificant → Investment Property → Condo

Shares in lieu of cash Cash in lieu of shares or ↳ Security
 Debit investments  “as if sold” scenario Support ↳ Maintenance
 Significant → Owner-occupied → Hotel
HEIRARCHY OF VALUATION ✓ Gain or loss based on value
i. Fair value of shares per share after declaration of  Financial Statement
ii. Cash dividends that would share dividends ↳ Separate → Investment Property
have been received ↳ Consolidated → Owner-occupied [PPE]

Investment in Associate COST MODEL FAIR VALUE MODEL

 CA [Cost – AD - Impairment]  FV at year-end
Uses equity method (cost + transaction cost)  Depreciated [useful life]  Not depreciated
 FV changes – [disclosed]  FV changes [P/L]
Acquisition cost Dividends received/receivable
Share in profit Share in loss
Share in OCI Share in OCL  Reclassification
Impairment loss ↳ Cost model - Carrying amount
↳ Fair value method - Amount at date of change
Goodwill or Gain Reclassification Treatment of Difference
Step 1: Share in Net Identifiable Assets (FVINA)  Inventory → Investment Property Profit or Loss
 Investment Property → Inventory Profit or Loss
Net assets of investee  Investmt Prop → Owner-occupied Profit or Loss
A: Undervaluation of asset*
L: Overvaluation of asset FV > CA
 Revaluation Surplus [OCI]
Adjusted Net Identifiable Assets  Previous impairment loss
✖ Ownership %  Owner-occupied to ↳ Reverse – P/L
Share in FVINA Investment Property ↳ Excess – Rev Surplus [OCI]
*the effect of undervaluation increases the net
assets of the investee; decreases the goodwill CA < FV
 Revaluation Surplus [reverse]
Step 2: Goodwill or gain  Excess – Impairment Loss – P/L

Acquisition cost
L: Share in FVINA (Step 1)  Derecognition
Goodwill (Gain on purchase) Net Proceeds ↑
Carrying amount at derecognition date
Share in Profit Gain↑ (Loss) on Disposal
Unadjusted net income
L: Amortization of undervaluation of asset
A: Amortization of overvaluation of asset
A: Gain on purchase (date of acquisition only)
L: Impairment of goodwill .

Adjusted Net Income

 INVESTMENT IN DEBT SECURITIES WASTING ASSETS
Classification: Costs
Amortized Cost FVOCI FVPL  Acquisition Cost [Cost + DACs]
 Exploration Costs [finding location before extraction]
 Hold-to-collect  Hold-to-collect  If definition of AC ↳ Successful Effort Method: Successful – Capitalize
and SELL and FVOCI are Unsuccessful – Expense
 SPPI  SPPI not met
↳ Full Cost Method: Capitalized, successful or not
 Development Cost [extracting resources]
Measurement: ↳ Tangible: Not capitalized, accounted separately
 If FV is not available, use present value ↳ Intangible: Capitalized
 Restoration Cost [At present value]
FVPL FVOCI Amortized Cost
Initial Measurement Fair Value ✓ Cost* Cost* Depletion
Transaction Cost Expensed ✓ Capitalized Capitalized  Depletable base: Cost – Residual Value [Land]
Interest Income Face ✖ SIR ✓ CV ✖ EIR CV ✖ EIR  Depletion rate: Dep base ÷ Estimated Output
Interest Receivable Face Value ✖ Stated Interest Rate
 Depletion: Rate ✖ Produced (Extracted)
At Year End FV @ YEnd FV @ YEnd CV (Amortized Cost) ✓
 Depletion in COGS: Rate ✖ Units sold
Changes in FV P/L OCI -N/A-
Presentation in FS Current ✓ Non-current Non-current
G/L on Disposal Profit or Loss Depreciation: [Property used]
Impairment No ✓ Yes Yes Properties Movable → Straight line
*Fair value + Transaction cost
Immovable → shorter of:
Reclassification: [Debt Securities] Useful life Mining Period
↓ ↓
↳ First day of the reporting period following the change of
Straight Line Output Method
business model
Dividend Payments
 New carrying amount: Fair Value
FVPL → FVOCI at reclassification date Wasting Asset Trust Fund
Maximum  Unrestricted RE; plus  Unrestricted RE
 New effective rate
Dividend  Realized accumulate depletion
 New carrying amount: Fair Value
at reclassification date
FVPL → AC
 New effective rate Unrestricted RE
 New CA vs Face → Amortize ✓ A: Accumulated Depletion
 New carrying amount: Fair Value L: Liquidating Dividend Declared
at reclassification date L: Depletion in Ending Inventory
FVOCI → FVPL
 Cumulative Unrealized gain/loss in OCI:
Maximum Dividend that can be declared
Reclassify to Profit or Loss ✓
 Cumulative Unrealized gain/loss in OCI:
Eliminated, adjusted at FV GOVERNMENT GRANTS
FVOCI → AC  Measured as if it had always been at
amortized cost Definition
 SAME effective rate  Transfer of resources in return for past/future compliance
 New carrying amount: Fair Value with conditions relating to operations.
AC → FVPL at reclassification date  Does not include assistance/subsidies which are not part of
 OLD vs NEW carrying amount → P/L normal trading transactions.
 New carrying amount: Fair Value
at reclassification date Recognition
AC → FVOCI
 OLD vs NEW carrying amount → OCI  Fair value Entity will comply to conditions
 SAME effective rate  Requisites Grants will be received

Classifications
 Related to ASSETS
↳ Deferred Income Method (Liability)
 Recognize income based on useful life
↳ Deduction to cost of asset
 Debit cash; Credit asset [reduced]
 Related to INCOME
↳ Recognize “Other Income”
↳ Deduction to related expenses

NOTE:
 Recognize the grants in profit or loss:
↳ Specific expenses – in proportion of expenses
↳ Depreciable assets – along with depreciation
↳ Non-depreciable – “bear the cost of obligations”
↳ IMMEDIATELY – compensation for losses and expenses
when grant becomes receivable

Repayment of Grants [Full or partial]

 Conditions are not met
 Change in accounting estimate

 Related to ASSETS
↳ Increase the carrying amount of asset
↳ Reduction of Deferred Income
↳ Cumulative depreciation that would have been
charged to P/L [additional depreciation expense]

 Related to INCOME
i. Apply against unamortized deferred income
ii. Excess – recognize as loss on repayment
 FINANCIAL LIABILITIES SUBSTANTIAL NON-SUBSTANTIAL
 Extinguish the OLD debt ✖ Extinguish the OLD debt
Recognize NEW
GR: Classified and measured at amortized cost ✖ G/L → adjustment to OLD
 If the gain/loss is atleast
XPN: Met the atleast one criteria for classifying in FVPL  New effective interest rate
10% of the OLD liability
↳ Fair value through profit or loss
► Designated by entity as at FVPL
Step 1 Step 2
► The liability is held for trading: if one condition is met: CA of the old liability ↑ CA of old liability↑
 Incurred principally for repurchasing in near future L: PV of the new (original EIR1) L: PV of new (new EIR1)
 Part of short-term profit-making portfolio G↑/L on modification2 G↑/L on extinguishment
 A derivative [XPN: if it is a hedging instrument] 1
Use the new principal 2
Including fees paid

Accounts Payable Bonds Payable

 List price – trade discounts = Invoice price FV at quotation [FV less transaction cost]
 “Discounts lost” - only in NET METHOD  Initial PV of payments [excluding accrued interest]
 Year-end adjustment: purchase of inventory  Subsequent – Amortized cost

GROSS METHOD NET METHOD Retirement of Bonds Journal entry:

Within the discount period: ↳ At maturity date – no gain or loss Bonds Payable
Allowance for discounts ↳ Before maturity- ✓CA ✓Accrued Interest Cash
-no entry-
Purchase discount
Beyond the discount period: Full Retirement Partial Retirement
Purchase discount lost Retirement Price ↑ Call [Retirement Price] ↑
-no entry- L: CA of Bonds Payable L: CA of bonds [pro-rated]
Accounts payable
Loss↑/Gain on retirement Loss↑/Gain on retirement
Effect of Freight Charges
Who should pay? Who paid? Effect on AP Compound Financial Instrument
 Liability Component – without warrants/conversion
Shipping Point Freight collect Buyer Buyer -
 Equity Component – residual amount
Shipping Point Freight prepaid Buyer Seller Increase
Destination Freight prepaid Seller Seller -
Total Consideration
Destination Freight collect Seller Buyer Decrease
Less: FV of liability component
Equity component
Notes Payable

Measurement INCOME TAX

Initial Effect Subsequent
Short Accounting Income
Face - Face
term
Permanent Difference: Current Tax Expense
SIR = EIR Face - Face
Interest- Less: (NTI) Net Deferred Tax Expense (Benefit)
bearing SIR > EIR PV Premium Amortized Add: NDE Total Income Tax Expense
Long
.

SIR ≠ EIR
Term SIR < EIR PV Discount Amortized
Temporary Difference:
Non-Int-
bearing
PV Discount Amortized Less: (FTI) ✖ Tax% = DTL↑ Net Deferred Tax
Add: FDE ✖ Tax% = DTA Expense↑ (Benefit)
Debt Refinancing Taxable Income ✖ Tax% = Current Tax Expense

Reporting Period FS Issuance PERMANENT DIFFERENCE TEMPORARY DIFFERENCE

(on or before reporting date)  either accounting or taxable  both accounting or taxable
Refinancing done here Refinancing done here income income
↓ ↓ ✖ Tax returns  Timing difference DTA
Non-current Current ✖ Future consequences DTL
 Non-Taxable Income  Taxable
 Has discretion to refinance for atleast 12 months ↳ Interest Income (FWT) ↳ Income [normal operation]
↳ Non-current ↳ Dividends (FWT) ↳ DTL (Future Taxable
 Unconditional right to defer (delay) payment ↳ Gains (CGT) Amounts)
↳ Life insurance gains
Debt Restructure → for the ENTITY
Asset Swap [Dacion en Pago] XPN → not for ENTITY– taxable
Carrying amount of liability ↑
L: Carrying amount asset given  Non-Deductible Expenses  Deductible
Gain ↑ Loss ↓ [Profit or loss] ↳ Fines and penalties ↳ Expenses [ordinary, necessary]
↳ Charity contributions ↳ DTA (Future Deductible
Equity Swap [Debt-to-Equity] Amounts)
↳ Life insurance expense

Step 1: Gain or loss on debt restructure → for the ENTITY

XPN → not for ENTITY– deduct
i. FV of Equity
CA of Liability ↑ ii. FV of Liability Deferred Tax Asset Deferred Tax Liability
L: Measurement of Equity iii. CA of Liability Assets: Tax Base > CA CA > Tax Base
Gain ↑ Loss ↓ [P/L] ↳ No Gain/Loss Liabilities: Tax Base < CA CA < Tax Base
↳ Face + Accrued Interest
Deferred Taxes at Different Dates
Step 2: Share Premium
Measurement of Equity CREATION REVERSAL
L: Par/Stated value of shares FTA: ↑ DTL ↑ ITE ↑ DTL ↑ ITE
Share Premium FDA: ↑ DTA ↓ ITE ↓ DTA ↑ ITE

Debt Forgiveness [a gain on extinguishment] Temporary Difference Income Tax

Taxable: if reversed, then Decreases
Modification of Terms – may be a combination of: Deducible: if reversed, then Increases
 Reduction of interest rate and/or principal amount
 Reduction or condonation of accrued interest Temporary difference
 Extension of maturity date x Future tax rate .

Deferred tax asset/liability for the period

 LEASES  Journal Entry
Cash → Selling Price
Accounting for the Lessor Right of Use Asset
↳ Operating Lease1 Rent/Lease income Equipment [for example] → CA of asset transferred
Executory cost → EXPENSED Lease Liability → PV or rentals
DACs → CAPITALIZE Gain on Sale
Annual Payments Lease bonus → Unearned
Lease term Security deposit → Liability [refundable]
✖
Sample Problem
Total Lease Payments2
÷ Lease Term 1Operating lease is a simple rental agreement
Annual Lease Income 2Including lease bonus CASE 1: Selling Price = Fair value
Selling price 3,000 CA 2,250
In case of commencing the lease between the period: Fair value 3,000 PV of Rentals 1,268
Example: Journal entry:
4/1 a. Lease Liability = 1,268 [PV of Rentals]
 Lease starts at April 1 Cash 120,000 b. Right of Use Asset = 951
 120,000 annually Lease income 120,000
Lease Liability 1,268
 Annual lease income ✖ 9/12 CA ✖ → 2,250 ✖
12/31 Fair value 3,000
Only 90,000 will be recognized for the year Lease income 30,000
Unearned Lease Income 30,000
c. Gain or Loss = 433
↳ Finance Lease Actual FV – rights retained 3,000 – 1,268
✖ → 750 ✖
 Gross Investment [Undiscounted] [TTRex] Gain or loss FV 3,000

Total lease payments CASE 2: Selling Price > Fair value

Add: Termination penalty Selling price 10,000 CA 5,400
Residual value [guaranteed or not] Fair value 9,000 PV of Rentals 2,700
*Excess SP is deducted from lease liability
Exercise price .

Gross Investment a. Lease Liability = 2,700 [PV of Rentals]

b. Right of Use Asset = 1,020
 Net Investment [PV or Discounted] CA ✖
Lease Liability – Excess selling price
→ 5,400 ✖
2,700 – 1,000
Fair value 9,000

DIRECT FINANCING c. Gain or Loss = 2,920

i. ii. Actual
✖
Fair value – (Rights retained – Excess selling price)
→ 3,600 ✖
9,000 – (2,700 – 1,000)
Gain or loss Fair value 9,000
Cost of the leased asset PV of Annual Rentals
A: DACs .A: PV of the Residual Value CASE 3: Selling Price < Fair value
Net Investment Net Investment Selling price 10,000 CA 9,600
Fair value 12,000 PV of Rentals 7,182
SALES-TYPE *Excess selling price is added to lease liability
 Directly Attributable Costs are expensed [COGS]
a. Lease Liability = 7,182 [PV of Rentals]
Step 1: Cost of Goods Sold b. Right of Use Asset = 7,345.6
Lease Liability + Excess selling price 7,182 + 2,000
Cost of leased asset CA ✖
Fair value
→ 9,600 ✖
12,000
Add: DACs
Less: PV of unguaranteed residual value c. Gain or Loss = 563.6
Fair value – (Rights retained + Excess selling price) 12,000 – (7,182 + 2,000)
Cost of Goods Sold3 Actual
Gain or loss
✖
Fair value → 2,400 ✖
12,000

Step 2: Gross Profit Other Theories

FV of leased asset LOWER ← Sales
PV of lease payments less: COGS3
Operating Lease
↓ Gross Profit
 Lessee is only allowed to record lease as expense if:
PV of Annual Rentals
↳ Underlying asset is of low value; and
Add: PV of the Exercise Price [reasonably certain]
↳ Lease term is short term in nature [does not exceed 12 mos.]
PV of the Residual value [guaranteed; will revert back]
 A contract of lease with purchase option is not short term.
PV of Lease Payments
 An asset is low value if:
↳ The lessee can benefit from the asset on its own
 Regardless whether the present value of the residual value
is added to sale [guaranteed] or deducted from COGS ↳ The underlying asset is not highly dependent or highly
[unguaranteed], the gross profit will be the same amount. interrelated with other assets.
 Lease payments are recognized on a straight-line basis
GUARANTEED RV UNGUARANTEED RV unless another systematic basis is more representative of
Sales PV of Rent + PV of RV PV of Rent the lessee’s benefits from the asset.
COGS (CA of the Asset) (CA of Asset – PV of RV) ↳ Lessor (nagpapaupa) - Rent Income
Gross Profit SAME SAME ↳ Lessee (umuupa) - Rent Expense
 Depreciation is recognized by the lessor.
NOTE: Gross Investment - Net Investment = Unearned interest income
Finance Lease
Accounting for the Lessee  Indicators that a lease agreement is a finance lease:
↳ Transfer ownership to the lessee at the end of lease term
Lease Liability [amortized] Right of Use Asset
↳ Lessee has option to purchase the asset at a price
Total lease payments Lease Liability
A: Termination penalty A: Payment to lessor sufficiently lower than fair value at the date of option,
Residual value [guaranteed] Initial direct cost and it is reasonably certain that it will be exercised.
Exercise price Dismantling cost at PV ↳ Lease term is for the major part of economic life of the
property even if the title is not transferred [substance over form]
Depreciation of the Leased Asset ↳ Leased asset are of a specialized nature.
RUA – Residual value [guaranteed] Useful life of the asset
Years [SHORTER] Lease term
Right of Use vs. Lease as Expense [POV of the Lessee]
SALE AND LEASE-BACK Right of Use Asset Lease as Income/Expense
(under finance lease) (under operating lease)
Measurement Viewed as simple Viewed as a purchase of asset
rental agreement on deferred payment basis
 Lease liability = PV of Lease payments
Records lease payments as
 Right of Use Asset: Records lease payments as rent
reduction of liability and as
Initial Lease Liability4 expense
payment of interest
Carrying Value ✖
Fair Value of the asset Does not record the leased property Lessee records the property as
in lessee’s books as an asset an asset and recognizes a liability
 Gain or Loss to be recognized Does not record depreciation Records depreciation expense
Fair Value of Asset – Rights retained4
Actual gain or loss5 ✖
Fair Value of the asset
Rights retained by the lessee = PV of Rentals
4

Fair value ↑ – Carrying Amount = Actual Gain ↑

5
 EMPLOYEE BENEFITS FINANCIAL STATEMENTS
Short-Term Benefits
GR: Expensed – when employees render services Qualitative Characteristics of FS
Fundamental Enhancing [VCUT]
XPN: Capitalized if it forms part of an asset
 Relevance  Verifiability
↳ Predictive ↳ Direct
Paid in cash (Used) ↳ Input ↳ Indirect
Employee Benefits Expense Accrued (Unused) ↳ Confirmatory  Comparability
↳ Feedback ↳ The goal
PAID ABSENCES: ↳ Consistency helps achieve comparability
 Accumulating – carried forward  Faithful  Understandability
↳ Vesting – employees are entitled upon leaving Representation ↳ Useless even if relevant and faithfully
↳ Non-vesting – not entitled upon leaving ↳ Completeness represented if not understood by users
↳ Neutrality  Timeliness
 Non-accumulating – not carried forward
↳ Free-from-error ↳ Generally the older, less useful
↳ Unused paid leaves are not accrued when it lapse

Post-Employment Benefits Statement of Financial Position

DEFINED CONTRIBUTION DEFINED BENEFIT  AKA: Balance Sheet
 Employer provides fixed  Employer is obliged to  Useful for investors and creditors to assess an entity’s
amount of contribution provide the agreed amount liquidity and solvency.
 The contribution is definite, of benefit.
but the benefit is not because  The benefit is definite but Minimum Content of the Statement of Financial Position
the fund is managed by a the contribution may vary. Assets Liabilities and Equities
 Cash and cash equivalents  Trade and other payables
trustee.  The employer should provide
 Trade and other receivables  Provisions
 The employee bears the risk for an additional contribution  Inventories and biological assets  Liabilities in discontinued operations
as the benefit is not defined. to cover the agreed benefit.  Property, plant and equipment  Current and deferred tax liabilities
 Investment [under equity method]
Defined Contribution  Investment property  Issued capital and reserves
 Intangible assets  Non-controlling interests
 Contributions → EXPENSED  Non-current assets held for sale
 Assets in discontinued operations
 Unpaid contributions → Accrued benefits [liability]
 Current and deferred tax assets
 Excess contributions → Prepaid1 [asset]
Statement of Comprehensive Income
1
only if will be used for future payments or cash refund  Comprised of : Profit or loss and Other comprehensive income
 Minimum content:
Defined Benefit ↳ Revenue: Interest using EIR; insurance revenue
↳ Gains and losses from financial assets at amortized cost
 Fair Value of Plan Asset: FACB or F(B)RIC
↳ Gains and losses from reclassification of financial assets
FVPA, Beginning
↳ Finance costs, impairment losses
Actual return Actual return ↑
↳ Share of profit and loss of associates and joint ventures
Contributions Interest income (Expected return)
(Benefits paid) Remeasurement Gain↑ Loss Statement of Cash Flows
FVPA, Ending
DIRECT METHOD
 Defined Benefit Obligation: D(B)RIPC Collection from customers xx
DBO, Beginning Collection from other income (operating) xx
(Benefits paid) DBO – actuary ↑ L: Payment to trade creditors (xx)
Remeasurement Loss (Gain) DBO – books Payment of other expenses (operating) . (xx)
Interest Expense Remeasurement G/L↑ Cash generated from operations xx
Past service cost L: Income tax paid . (xx)
Current service cost Net cash from operating activities xx
DBO, Ending
Sale of PPE xx
Notes: Sale of long-term investment xx
↳ Interests – P/L Decrease in actuary - Gain Cash receipts from investing xx
Remeasurement – OCI Increase in actuary – Loss L: Purchase of PPE (xx)
Cash payments for investing . (xx)
↳ FVPA ↑ [Asset] Net cash from investing activities xx
DBO [Liability]
Prepaid↑ (Accrued) benefit cost [Non-current] Cash receipts from issuance of shares xx
Cash receipts from issuance of debt instruments xx
Defined Benefit Cost L: Repayments of long-term liabilities (xx)
↳ Profit or Loss [Retirement Benefit Expense] SSIII Payments for dividends (xx)
Past Payments for interests . (xx)
Service Cost Current Net cash from financing activities xx
Settlement (Gain) or Loss Settlement Payment ↑
(Interest Income – FVPA) PV DBO Settled .

INDIRECT METHOD
Interest Expense – DBO Loss↑ Gain on settlement
Net income after tax xx
Interest Expense – EAC
Tax expense xx
Defined Benefit Cost – P/L
Net income before tax xx
Depreciation xx
↳ Other Comprehensive Income
Amortization xx
- All remeasurements / actuarials
Loss on sale xx
FVPA Reameasurement G/L
L: Gain on sale (xx)
DBO Reameasurement G/L Net Remeasurement G/L
.

Operating income before working cap changes xx

EAC Reameasurement G/L
Decrease in non-cash current assets [ex. Collections] xx
L: Increase in non-cash current assets (xx)
Net Remeasurement Gain/Loss [OCI]
Increase in trade current liabilities [credit: Payables] xx
Retirement Benefit Expense [P/L]
L: Decrease in trade current liabilities [ex. Payment of AP] (xx)
TOTAL DEFINED BENEFIT COST
.

Cash generated from operations xx

L: Income tax paid (xx)
 Effect on Asset Ceiling [EAC]
Interest tax paid (xx)
Example: Profit/Loss OCI
.

Net cash from financing activities xx

EAC Beg ✖ % Residual
EAC, Beg 1,000 1,000 Change in EAC
1,500
500 Statement of Changes in Equity – reconciliation of
EAC, End 1,500
1,000 10%
✖ Residual beginning and ending balances of equity shown in SFP
Discount 10%
100 [P/L] 400 [OCI] Note to FS – Non-quantitative information; basis of
⬉ Remeasurement Gain (Loss) ⬈ preparation of the FS; includes accounting policies used
 SHAREHOLDERS’ EQUITY  Share dividend – transfer from RE to share capital
↳ Amount debited from RE:
Components: Small share dividends Par/Stated value
Share Capital (A) XX - below 20% of the Higher
Subscribed Share Capital xx outstanding shares at FV FV @ declaration
Less: Subscription Receivable (i) (xx) XX Large share dividends
Share Premium (ii) XX - atleast 20% of the Par/Stated value
Share Dividends Distributable XX outstanding shares
Contributed Capital XX
Retained Earnings (B) XX C. Treasury Shares
Other Comprehensive Income (iii) XX
Less: Treasury Shares (C) (XX) Recorded at COST Cash paid to acquire treasury shs.
Shareholders’ Equity XX Book value of asset transferred

A. Share Capital GAIN ON REISSUANCE GAIN ON RETIREMENT

Issue Price ↑ Par value ↑
Contributed Capital Cost . Cost .

PAID-IN CAPITAL APIC (ii) Gain ↑ Gain ↑

[Total Par/Stated value] [Other than paid-in] Gain is credited to Share Premium - TS
 Issued (OS, PS)  Share Premium
 Subscribed (i)  TS Transactions LOSS ON REISSUANCE LOSS ON RETIREMENT
- Current portion (asset)  Share warrants/option Issue Price ↓ Par value ↓
- Non-current (deducted)  Donated capital Cost Cost
 Share dividend declared
. .

 Bond conversion Loss ↓ Loss ↓

 Distributed dividends
Loss is debited to: [order of priority]
i. Share Premium – TS i. Share Premium of original
ISSUANCE: (should be same class) shares (ex. OS)
 Separate Par value Share Premium ✓
Stated value Share Premium ✖ ii. Retained Earnings ii. Share Premium – TS
 With other class of shares (should be same class)

Case 1: Fair Value Method - Both shares have fair value iii. Retained Earnings
Fraction Consideration [Allocated]
PS: Shares at FV PS/Total PS Allocation Shares Issued and Outstanding [Sample Problem]
OS: Shares at FV OS/Total OS Allocation 100,000 OS authorized
TOTAL FV CONSIDERATION 40,000 outstanding

Case 2: Incremental Method – Not all shares have fair value  Declared and issued 20% share dividends
Proceeds / Consideration XX  Purchased 5,000 shares
L: Shares with fair value . XX  Reissued 2,000 shares in treasury
Allocation to other shares [no fair value] XX  Declared 3-for-1 share split

Case 3: Par Value Method - Both shares, no fair value ISSUED: 144,000 shares
*use par value Fraction Consideration [Allocated] OUTSTANDING: 135,000 shares
PS: Shares at Par PS/Total PS Allocation Issued Outstanding
OS: Shares at Par OS/Total OS Allocation Beginning 40,000 40,000
TOTAL PAR CONSIDERATION 20% share dividends 8,000 8,000
Purchase of shares [treasury] (5,000)
Reissuance of treasury2 - 2,000
B. Retained Earnings
TOTAL 48,000 45,000
Share split [3-for-1] 144,000 135,000
Unappropriated RE
Appropriated RE
Less: Dividends declared1 Issued Outstanding
Retained Earnings Reissuance Ignored ADDED
2
Treasury
Retirement DEDUCTED DEDUCTED

UNAPPROPRIATED Free for declaration of dividends

EARNINGS PER SHARE
 Legal capital
 Par – aggregate par value  Objective: measure the interests of each ordinary share in
of shares the entity performance over the reporting period.
 No par – total consideration  Both BEPS and DEPS should be reported in case the entity
(including excess) is reporting a discontinued operation.
 Contractual  Potential ordinary shares:
APPROPRIATED
 Sinking fund ↳ Financial liabilities or equity in securities that are
 Bond redemption convertible into ordinary shares [convertible bonds and PS]
 Redemption of PS ↳ Share options and warrants
 Voluntary ↳ Shares that would be issued upon satisfaction of
 Plant expansion conditions resulting from contractual arrangements
 Increase of working capital
 Contingencies Basic Earnings Per Share [BEPS]
*Appropriation for FUND is an
asset, not under RE. Net Income – PS Dividend4
BEPS =
 Unrealized G/L Weighted Ave No. of OS Outstanding
OTHER  Revaluation surplus
COMPHREHENSIVE  Remeasurement G/L 4
PS Dividends Cumulative - DEDUCT
INCOME (iii)  Hedging G/L Non-cumulative - DEDUCT only if declared
 Translation G/L
1
Dividends recognized at declaration date Diluted Earnings Per Share [DEPS]

 Cash dividends – reduction from RE and asset Δ in Numerator Δ in Denominator

 Property dividends – reduction from RE and asset Convertible PS Dividend Additional shares
Preference Shares NOT DEDUCTED (as if converted)
↳ At declaration: FV less Cost to Distribute
Add back the interest Additional shares
↳ End of reporting period: Convertible Bonds
expense, net of tax (as if converted)
LOWER Carrying Amount Share Warrants Additional shares
NO CHANGE
FV less Cost to Distribute and Options (assumed issued)
 BOOK VALUE PER SHARE SHARE-BASED PAYMENTS

Shareholders’ Equity1 EQUITY-SETTLED CASH-SETTLED

BVPS =
Outstanding shares2  Share options [key employees]  Share appreciation rights
 Employees receive shares  Employees receive cash
Total SHE [issuance of shares] [incurs liability]
L: Liquidation value3
Dividends4 . Issued shares Measurement of Compensation Expense
SHE – Ordinary shares1 Add: Subscribed shares5  GR: FV of share options at  FV of the liability (SARs) at
Less: Treasury shares date of grant reporting date
3
Liquidation value 2
Outstanding shares ↳ remeasured every
L: Preference share at par  XPN: No FV: Intrinsic value year end until settled
Liquidation premium
5
For BVPS purposes, FV at year-end
4
Dividends - include arrears subscribed shares include FV at year-end (RP)
Less: Exercise price (fixed)
if cumulative subscription receivables Less: Predetermined price2
Intrinsic value1
Excess (FV of SARs)
Dividends on Preference Shares 1
value na matitipid ni employee if 2
market value determined at the
Non-cumulative No arrears mag-eexercise instead of purchasing
date of grant
Cumulative Include arrears the shares
 Ordinary shares will also receive
dividends at preference rate Recognition
(lower rate if more than one PS) If vests immediately: If do not vest:
Participating  Expense at grant date  Expense over vesting period
 Preference shares will participate for the
excess, pro-rata based on the total  Grant date until first period of
par value. exercise
 Preference shares will only receive
dividends up to their rate. Sample Problem: Equity settled - with condition
Non-participating
 Ordinary shares will only receive the Granted 200 share options on January 1, 2024
excess amounts. Number of employees entitled 150
Vesting period 3 years
Sample Problem Fair value of the share options (grant date) P 10
Par value of shares P 40
December 31, 2024 Balance Exercise/Option price P 50
10% PS 5,000 shares, P100 par; P 500,000 Fair values at year end (2024-2026): P 60; P 75; P 80
Cumulative; Participating
12% PS 6,000 shares, P100 par; Paid-in 600,000 EEs who left EEs expected to leave
Non-cumulative; Participating December 31, 2024 10 20
OS 10,000 shares, P40 par 400,000 December 31, 2025 3 2
Share premium excess over par 320,000 December 31, 2026 17 0
Retained Earnings 480,000
TOTAL Shareholders’ Equity 2,300,000 Requirement 1: Compensation expense each year
The entity has not paid any dividends for 2023. (1 year arrear) 2024 2025 2026
Number of employees 150 140 137
Requirement 1: Determine the book value per each shares. L:Employees who left (10) (3) (17)
10% PS 12% PS OS Excess over par
Employees expected to leave (20) (2) -
Total SHE 500,000 600,000 400,000 800,000 Employees entitled for share option 120 135 120
10% PS dividends (+ arrears) 100,000 (100,000) ✖ Share options per employee 200 200 200
12% PS dividends 72,000 (72,000) Number of share options to vest 24,000 27,000 24,000
10% OS dividends (lower rate) 40,000 (40,000) ✖ FV of SOs at grant date* P 10 P 10 P 10
Remaining balance for participation 588,000
Allocate based on PAR value:
TOTAL COMPENSATION EXPENSE 240,000 270,000 240,000
10% PS (588k ✖ 500/1,500) 196,000 (196,000) ✖ Period vested / vesting period 1/3 2/3 3/3
12% PS (588k ✖ 600/1,500) 235,200 (235,200) Cumulative Compensation 80,000 180,000 240,000
OS (588k ✖ 400/1,500) 156,800 (156,800) L:Cumulative Compensation last year - (80,000) (180,000)
Book value (SHE allocation) 796,000 907,200 596,800 - Compensation Expense this year 80,000 100,000 60,000
Outstanding shares ÷ 5,000 ÷ 6,000 ÷10,000
*use intrinsic value if FV is not available
Book Value Per Share 159.2 151.2 59.68

Requirement 2: Journal entries

Notes: 2024: Entry for exercising share options:
 The OS has given 10% dividends, because the PS is Compensation expense 80,000
participating. No initial dividends if non-participating. Share Options Outstanding 80,000 Cash1 1,200,000
SOs Outstanding2 240,000
 The PSs are allocated with the remaining balance because 2025: Ordinary share capital3 960,000
these are participating. Compensation expense 100,000 Share premium - OS4 480,000
Share Options Outstanding 100,000
1Net effect to total SHE- at Option price
Requirement 2: Determine the dividends per each shares. 2026: 2Cumulative balance of SOs outstanding
10% PS 12% PS OS Excess over par Compensation expense 60,000 3Shares issued ✖ Par value
Total SHE 500,000 600,000 400,000 800,000 Share Options Outstanding 60,000 4Balancing figure

10% PS dividends (+ arrears) 100,000 (100,000)

12% PS dividends 72,000 (72,000)
10% OS dividends (lower rate) 40,000 (40,000) Sample Problem: Cash settled
Remaining balance for participation 588,000 Granted 3,000 SARs on January 1, 2024
Allocate based on PAR value:
10% PS (588k ✖ 500/1,500) 196,000 (196,000)
Vesting period 3 years
12% PS (588k ✖ 600/1,500) 235,200 (235,200) Fair value on 1/1/24 (predetermined price) 300
OS (588k ✖ 400/1,500) 156,800 (156,800)  Fair values at year end (2024-2026): P 315; P 330; P 318
Total Dividends 296,000 307,200 196,800 -
Outstanding shares ÷ 5,000 ÷ 6,000 ÷10,000
 SARs were exercised on December 31, 2026
Dividend Per Share 59.2 51.2 96.8
Requirement 1: Compensation expense each year
2024 2025 2026
Number of Share Appreciation Rights 3,000 3,000 3,000
✖ FV of SARs (FV year end – PD price) P 15 P 30 P 18
TOTAL COMPENSATION EXPENSE 45,000 90,000 54,000
✖ Period vested / vesting period 1/3 2/3 3/3
Cumulative Compensation 15,000 60,000 54,000
L: Cumulative Compensation last year - (15,000) (60,000)
Compensation Expense this year 15,000 45,000 (6,000)*
*treated as gain on reversal of SARs

Cash and Share Alternatives (Compound)

 Residual approach: SARs (liability), then SOs (equity)
 SARs - over vesting period; SOs – equally every year
Hercules, Certified Public Accountant 2023