Overview of Accounting Time Period – the life of the business is divided into series of

Accounting is “the process of identifying, measuring, and reporting periods.

communicating economic information to permit informed Materiality concept – information is material if its omission
judgment and decisions by users of information.” or misstatement could influence economic decisions.
Identifying - the process of analyzing events and Cost-benefit – the cost of processing and communicating
transactions to determine whether or not they will be information should not exceed the benefits to be derived
recognized. Only accountable events are recognized. from it.
Measuring - involves assigning numbers, normally in Accrual Basis of accounting – effects of transactions are
monetary terms, to the economic transactions and events. recognized when they occur (and not as cash is received or
Communicating - the process of transforming economic paid) and they are recognized in the accounting periods to
data into useful accounting information, such as financial which they relate.
statements and other accounting reports, for dissemination Historical cost concept – the value of an asset is determined
to users. on the basis of acquisition cost.
Types of Events Concept of Articulation – all of the components of a
1.External events – events that involve an external party. complete set of financial statements are interrelated.
 Exchange (reciprocal transfer) – reciprocal giving Full disclosure principle – financial statements provide
and receiving sufficient detail to disclose matters that make a difference to
 Non-reciprocal transfer – “one way” transaction users, yet sufficient condensation to make the information
 External event other than transfer – an event that understandable, keeping in mind the costs of preparing and
involves changes in the economic resources or using it.
obligations of an entity caused by an external party or Consistency concept – financial statements are prepared on
external source but does not involve transfers of the basis of accounting policies which are applied consistently
resources or obligations.
from one period to the next.
2. Internal events – events that do not involve an external
Matching – costs are recognized as expenses when the
party.
related revenue is recognized.
 Production – the process by which resources are
Residual equity theory – this theory is applicable where there
transformed into finished goods.
 Casualty – an unanticipated loss from disasters or are two classes of shares issued, ordinary and preferred. The
other similar events. equation is “Assets – Liabilities – Preferred Shareholders’
Measurement Equity = Ordinary Shareholders’ Equity.”
The several measurement bases used in accounting Fund theory – the accounting objective is the custody and
include, but not limited to, the following: administration of funds.
1. historical cost, Realization – the process of converting non-cash assets into
2. fair value, cash or claims for cash.
3. present value, Prudence (Conservatism) – the inclusion of a degree of
4. realizable value, caution in the exercise of the judgments needed in making
5. current cost, and the estimates required under conditions of uncertainty , such
6. sometimes inflation-adjusted costs. that assets or income are not overstated and liabilities or
The most commonly used is historical cost. This is usually expenses are not understated.
combined with the other measurement bases. Accordingly, Common branches of accounting
financial statements are said to be prepared using a mixture Financial accounting - focuses on general purpose financial
of costs and values statements.
Valuation by fact or opinion Management accounting – focuses on special purpose
When measurement is affected by estimates, the items financial reports for use by an entity’s management.
measured are said to be valued by opinion. Cost accounting - the systematic recording and analysis of the
When measurement is unaffected by estimates, the costs of materials, labor, and overhead incident to
items measured are said to be valued by fact. production.
Basic purpose of accounting Auditing - the process of evaluating the correspondence of
The basic purpose of accounting is to provide certain assertions with established criteria and expressing an
information about economic activities intended to be useful opinion thereon.
in making economic decisions. Tax accounting - the preparation of tax returns and rendering
Types of accounting information classified as to users’ needs of tax advice, such as the determination of tax consequences
General purpose accounting information - designed to of certain proposed business endeavors.
meet the common needs of most statement users. This Government accounting - refers to the accounting for the
information is governed by the Philippine Financial Reporting government and its instrumentalities, placing emphasis on
Standards (PFRSs). the custody of public funds, the purposes for which those
Special purpose accounting information - designed to funds are committed, and the responsibility and
meet the specific needs of particular statement users. This accountability of the individuals entrusted with those funds.
information is provided by other types of accounting, e.g., Four sectors in the practice of accountancy
managerial accounting, tax basis accounting, etc. 1.Practice of Public Accountancy - involves the rendering of
Basic Accounting Concepts audit or accounting related services to more than one client
Double-entry system – each accountable event is recorded in on a fee basis.
two parts – debit and credit. 2.Practice in Commerce and Industry - refers to employment
Going concern - the entity is assumed to carry on its in the private sector in a position which involves decision
operations for an indefinite period of time. making requiring professional knowledge in the science of
Separate entity – the entity is treated separately from its accounting and such position requires that the holder thereof
owners. must be a CPA.
Stable monetary unit - amounts in the financial statements 3.Practice in Education/Academe – employment in an
are stated in terms of a common unit of measure; changes in educational institution which involves teaching of accounting,
purchasing power are ignored. auditing, management advisory services, finance, business
law, taxation, and other technically related subjects.

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Practice in the Government – employment or appointment to (2) Faithful representation
a position in an accounting professional group in the (a) Completeness
government or in a government–owned and/or controlled (b) Neutrality
corporation where decision making requires professional (c) Free from error
knowledge in the science of accounting, or where civil service II. Enhancing qualitative characteristics
eligibility as a CPA is a prerequisite (3) Comparability
(4) Verifiability
Accounting standards in the Philippines (5) Timeliness
Philippine Financial Reporting Standards (PFRSs) are (6) Understandability
Standards and Interpretations adopted by the Financial RELEVANCE - Is the capacity of the information to influence a
Reporting Standards Council (FRSC). They comprise: decision
1.Philippine Financial Reporting Standards (PFRSs); Predictive Value and Confirmatory Value
2.Philippine Accounting Standards (PASs); and Predictive value-information has predictive value when it can
3.Interpretations help users increase the likelihood of correctly predicting or
The need for reporting standards forecasting outcome of events.
Entities should follow a uniform set of generally Confirmatory value-information has feedback value when it
acceptable reporting standards when preparing and enables users confirm or correct earlier expectations.
presenting financial statements; otherwise, financial Materiality - is a practical rule in accounting which dictates
statements would be misleading. that strict adherence to GAAP is not required when the items
The term “generally acceptable” means that either: are not enough to affect the evaluation, decision and fairness
* the standard has been established by an authoritative of the financial statements.
accounting rule-making body; or -also known as the doctrine of convenience.
* the principle has gained general acceptance due to practice Materiality is really a “quantitative threshold” linked very
over time and has been proven to be most useful. closely to the qualitative characteristic of relevance. The
* The process of establishing financial accounting standards is relevance of information is affected by its nature and
a democratic process in that a majority of practicing materiality.
accountants must agree with a standard before it becomes Faithful Representation - quality of information that assures
implemented. users that the information is free from bias and error, and
faithfully represents what it purports to represent.
Conceptual Framework for Financial Reporting Completeness - requires that relevant information should be
The Conceptual Framework sets out the concepts that presented in a way that facilitates understanding and avoids
underlie the preparation and presentation of financial erroneous implication.
statements for external users. Neutrality - means that the financial statements should not
Authoritative Status and Applicability be prepared so as to favor one party to the detriment of
The Conceptual Framework is not a PFRS. When there is another party.
a conflict between the Conceptual Framework and a PFRS, Free from error - Means there are no errors or omissions
the PFRS will prevail. from the description of the phenomenon or transaction.
In the absence of a standard, management shall consider Understandability - requires that financial information must
the Conceptual Framework in making its judgment in be comprehensible or intelligible if it is to be useful.
developing and applying an accounting policy that results in Comparability - means the ability to bring together for the
information that is relevant and reliable. purpose of noting points of likeness and difference.
The Conceptual Framework is concerned with general- Comparable information presents similarities and
purpose financial statements. dissimilarities. Comparability may be made within an entity or
across entities.
Objective of general purpose financial reporting Timeliness - requires that the accounting information must
The objective of general purpose financial reporting be available or communicated early enough when a decision
is to provide financial information about the reporting entity is to be made.
that is useful to existing and potential investors, lenders and Verifiability - Means that different knowledgeable and
other creditors in making decisions about providing resources independent observers could reach consensus although not
to the entity. A secondary objective of financial statements is necessarily complete agreement, that a particular depiction is
to show the results of the stewardship of management. a faithful representation
The objective of general purpose financial reporting Financial Statements and reporting entity Underlying
forms the foundation of the Conceptual Framework. Other Assumptions
aspects of the Conceptual Framework flow logically from the GENERAL OBJECTIVE OF FINANCIAL STATEMENTS
objective. Financial statements provide information about
Users and their Needs economic resources of the reporting entity, claims against the
Primary users – those to whom general purpose financial entity and changes in economic resources and claims
reports are directed: Types of financial statements
(a) Existing and potential investors 1. Consolidated financial statements-these are the FS
(b) Lenders and other creditors. prepared when the reporting entity comprises both the
Only the common needs of primary users are met by parent and its subsidiaries.
the financial statements. 2. Unconsolidated financial statements-these are the FS
Qualitative Characteristics - are the qualities or attributes prepared when the reporting entity is the parent alone.
that make financial accounting information useful to the 3. Combined financial statements- these are the FS
users prepared when the reporting entity comprises two or more
I. Fundamental qualitative characteristics entities that are not linked by a parent and subsidiary
(1) Relevance relationship
(a) Predictive value REPORTING ENTITY - A reporting entity is an entity that is
(b) Feedback value required or chooses to prepare financial statements
Materiality – entity-specific aspect of relevance

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UNDERLYING ASSUMPTIONS - Are the basic notions or or difficulty of reliably associating certain costs with future
fundamental premises on which accounting process is based. revenue.
AKA postulates Derecognition - The removal of all or part of recognized asset
Implicit basic assumptions or liability from the statement of financial position.
1. Accounting entity Measurement - Quantifying in monetary terms the elements
2. time period in the financial statements.
3. Monetary unit 2 Categories
Going Concern - Means that in the absence of evidence to o A. Historical cost
the contrary, the accounting entity is viewed as continuing in o B. Current value
operation indefinitely. Thus, assets are normally recorded at Historical Cost
cost. Of an asset- is the cost incurred in acquiring or creating
Accounting Entity - The entity is separate from the owners, the asset comprising the consideration paid plus transaction
managers, and employees who constitute the entity cost.
Time period - Requires that the indefinite life of an entity is Of a liability- is the consideration received to incur the
subdivided into accounting periods, which are usually of liability minus the transaction cost.
equal length for the purpose of financial reports on financial Historical cost is the entry price or entry value to acquire
position, performance and cash flows. an asset or to incur a liability.
Monetary Unit Current value
Quantifiability-means that the assets, liabilities, equity, a. Fair value
income and expenses should be stated in terms of a unit of b. Value in use for asset
measure which is the peso in the Philippines. c. Fulfillment value for liability
Stability of peso-means that the purchasing power of the d. Current cost
peso is stable or constant and that its instability is Fair Value
insignificant and therefore may be ignore. Of an Asset- is the price that would be received to sell an
Elements of Financial Statements asset in an orderly transaction between market participants
Financial Position at measurement date.
 Asset - resource controlled by the entity as a result of Of a liability- is the price that would be paid to transfer a
past events and from which future economic benefits liability in an orderly transaction between market participants
are expected to flow to the entity at measurement date.
 Liability - present obligation of the entity arising  Exit price or exit value
from past events, the settlement of which is expected Value in use - Is the present value of the cash flows than
to result in an outflow from the entity of resources an entity expects to derive from the use of an asset and from
embodying economic benefits. the ultimate disposal.
 Equity – assets less liabilities • Exclude transaction costs.
Performance
Fulfillment value of liability - Is the present value of cash that
1. Income – encompasses both (a) revenues and (b) an entity expects to transfer in paying or settling a liability.
gains • Exclude transaction costs.
2. Expense – encompasses both (b) expenses and • Exit price or exit value
(losses)
Current cost
3. Recognition –the process of capturing for inclusion Of an asset-is the cost of an equivalent asset at the
in the financial statements an item that meets the measurement date comprising the consideration paid and
definition of an asset, liability, equity, income or transaction cost.
expense.
Of a liability-is the consideration that would be received less
4. Recognition: any transaction cost at a measurement date.
Only items that meet the definition of an asset, a liability • Also based on entry price or entry value but reflects
or equity are recognized in the statement of financial position
market conditions on measurement date.
Only items that meet the definition of income or expense PRESENTATION AND DISCLOSURE - Effective communication
are recognized in the statement of financial performance tool about the information in financial statements.
The said items are recognized only when their • Effective communication makes the information
recognition provides users of financial statements with
more relevant and contributes to a faithful
information that is both relevant and faithfully represented. representation of an entity’s assets, liabilities,
Recognition of Income and Expense income and expenses.
Point of sale income recognition- income shall be recognized Classification - Is the sorting of assets, liabilities, equity,
when earned.
income and expenses on the basis of shared or similar
Expenses are recognized when incurred. characteristics.
Expense Recognition Principles Aggregation - Is the adding together of assets, liabilities,
1. Direct association or matching
equity, income and expenses that have similar or shared
2. Systematic and rational allocation characteristics and are included in the same classification.
3. Immediate recognition Concepts of Capital
Direct association or matching - the expense is recognized Financial concept of capital - capital is synonymous with net
when the revenue is already recognized” on the basis of a
assets of the enterprise. This is the concept of capital
presumed direct association of the expense with specific adopted by most enterprises.
revenue. This is actually the “strict matching concept”. Physical concept of capital – capital is regarded as the
Systematic and rational allocation - Under the systematic
productive capacity of the enterprise based on, for example,
and rational allocation principle, some costs are expensed by
units of output per day.
simply allocating them over the periods benefited. Concepts of Capital Maintenance
The reason for this principle is that the cost incurred will Financial capital maintenance – Under this concept, a profit
benefit future periods and that there is an absence of a direct
is earned only if the financial (or money) amount of the net
or clear association of the expense with specific revenue. assets at the end of the of the period exceeds the financial (or
Immediate recognition - the cost incurred is expensed money) amount of the net assets at the beginning of the
outright because of uncertainty of future economic benefits

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period, after excluding any distributions to, and contributions accumulated depreciation on property, plant, and
from, owners during the period. equipment are not offsetting.
Physical capital maintenance – Under this concept, a profit is
6. Frequency of reporting – An entity shall present a
earned only if the physical productive capacity (or operating
capability) of the enterprise (or the resources need to achieve complete set of financial statements (including
that capacity) at the end of the period exceeds the physical comparative information) at least annually. When an
productive capacity at the beginning of the period, after entity changes the end of its reporting period and
excluding any distributions to, and contributions from, presents financial statements for a period longer or
owners during the period. shorter than one year, an entity shall disclose the
PAS 1 Presentation of Financial Statements
following:
Objective of PAS 1
a. The period covered by the financial statements,
PAS 1 prescribes the basis for presentation of general
b. The reason for using a longer or shorter period, and
purpose financial statements to improve comparability
c. The fact that amounts presented in the financial
both with the entity's financial statements of previous
statements are not entirely comparable.
periods (intra-comparability) and with the financial
7. Comparative Information
statements of other entities (inter-comparability).
An entity shall present comparative information
General purpose financial statements
in respect of the preceding period for all amounts
General purpose financial statements are those
reported in the current period’s financial statements,
intended to serve users who do not have the authority
unless other standards permit or require otherwise.
to demand financial reports tailored for their own
8. Consistency of presentation - An entity shall retain
needs. General purpose financial statements cater to
the presentation and classification of items in the
most of the common needs of a wide range of external
financial statements from one period to the next unless:
users. General purpose financial statements are the
it is apparent that another presentation or classification
subject matter of the Conceptual Framework and the
would be more appropriate following a significant
PFRSs.
change in the nature of the entity’s operations or a
Complete set of financial statements
review of its financial statements; or
1.Statement of financial position
a PFRS requires a change in presentation.
2.Statement of profit or loss and other comprehensive
income
Additional Statement of financial position
3.Statement of changes in equity
An additional statement of financial position is
4.Statement of cash flows
presented as at the beginning of the preceding period
Notes
when an entity:
(5a) comparative information in respect of the
(a) Applies an accounting policy retrospectively, or
preceding period; and
(b) Makes a retrospective restatement of items in its
Additional statement of financial position (required only
financial statements, or reclassifies items in its financial
when certain instances occur)
statements.…..and the effect of the event to the
General features
statement of financial position as at the beginning of
1. Fair Presentation and Compliance with PFRSs - The
the preceding period is material.
application of PFRSs, with additional disclosure when
Statement of financial position
necessary, is presumed to result in financial statements A statement of financial position may be presented as
that achieve a fair presentation. either
2. Going concern - An entity is not a going concern if, as Classified – showing distinctions between current and
of the financial reporting date or prior to the date of noncurrent assets and liabilities, or
authorization of the financial statements for issue, Unclassified (based on liquidity) – showing no
management either: distinction between current and noncurrent items
a. Intends to liquidate the entity or to cease trading, or Current Assets
b. Has no realistic alternative but to do so. An entity shall classify an asset as current when:
The assessment of going concern is at least 12 months. it expects to realize the asset or intends to sell or
3. Accrual Basis of Accounting - An entity shall prepare consume it, in its normal operating cycle;
its financial statements, except for cash flow it holds the asset primarily for the purpose of trading;
information, using the accrual basis of accounting. a) it expects to realize the asset within twelve months
4. Materiality & Aggregation - Each material class of after the reporting period; or
similar items must be presented separately in the b) the asset is cash or a cash equivalent unless the asset
financial statements. is restricted from being exchanged or used to settle a
5. Offsetting - Assets and liabilities, and income and liability for at least twelve months after the reporting
expenses, shall not be offset unless required or period.
permitted by a PFRS. Current Liabilities
Measuring assets net of valuation allowances, An entity shall classify a liability as current when:
for example, obsolescence allowances on inventories, it expects to settle the liability in its normal operating
allowances for doubtful accounts on receivables, and cycle;

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a) it holds the liability primarily for the purpose of PAS 1 does not prescribe the order or format in
trading; which an entity presents items.
the liability is due to be settled within twelve months
Statement of profit or loss and other comprehensive income
after the reporting period; or An entity shall present all items of income and expense
b) the entity does not have an unconditional right to recognized in a period:
defer settlement of the liability for at least twelve 1. in a single statement of profit or loss and other
months after the reporting period. comprehensive income; or
Currently maturing long-term liabilities 2. in two statements: (1) a statement displaying the profit or
loss section only (separate ‘statement of profit or loss’ or
General rule: Currently maturing long term liabilities ‘income statement’) and (2) a second statement beginning
are presented as current liabilities. with profit or loss and displaying components of other
Exceptions: comprehensive income.
1. Refinancing agreement is fully completed on or Extraordinary items
before the balance sheet date – non-current liability • PAS 1 prohibits the presentation of any items of
income or expense as extraordinary items in the
2. Refinancing agreement after the balance sheet date
statement(s) presenting profit or loss and other
but before the financial statements are authorized for comprehensive income or in the notes.
issue – noncurrent liability if the entity expects, and has Other comprehensive income for the period
the discretion, to refinance it on a long-term basis a. Changes in revaluation surplus
under an existing loan facility. b. Unrealized gains and losses on investments in FVOCI
securities
Breach of loan agreement
c. Remeasurements of the net defined benefit liability
General rule: A liability that is payable on demand is a (asset)
current liability. d. Gains and losses arising from translating the financial
Exception: It is presented as non-current liability if the statements of a foreign operation
lender provides the entity, on or before the balance e. Effective portion of gains and losses on hedging
sheet date, a grace period ending at least 12 months instruments in a cash flow hedge
• OCI may be presented either (a) net of tax or (b)
after the balance sheet date to rectify a breach of loan gross of tax.
covenant. Reclassification adjustments
Presentation of deferred taxes • Reclassification adjustments are amounts
Deferred tax liabilities (assets) are presented as reclassified to profit or loss in the current period that
noncurrent items in a classified statement of financial were recognized in other comprehensive income in
the current or previous periods.
position, irrespective of their expected dates of
reversal.
Minimum line items in the statement of financial
position
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts shown
under (e), (h) and (i)); Total comprehensive income
e. Investments accounted for using the equity Total comprehensive income comprises all components of
method; 1. Profit or loss; and
f. Biological assets; 2. Other comprehensive income.
Presentation of Expenses
g. Inventories;
1. Nature of expense method
h. Trade and other receivables; 2. Function of expense method
i. Cash and cash equivalents; If an entity classifies expenses by function, it shall
j. Assets (or disposal groups) classified as held for disclose additional information on the nature of expenses
sale in accordance with PFRS 5;
k. Trade and other payables; Nature of expense Method
l. Provisions; The first form of analysis is the ‘nature of expense’
m. Financial liabilities (excluding amounts shown under method. An entity aggregates expenses within profit or loss
(k) and (l)); according to their nature (for example, depreciation,
n. Liabilities and assets for current tax, as defined in purchases of materials, transport costs, employee benefits
PAS 12 Income Taxes; and advertising costs), and does not reallocate them among
o. Deferred tax liabilities and deferred tax assets, as functions within the entity. This method may be simple to
defined in PAS 12; apply because no allocations of expenses to functional
p. Liabilities included in disposal groups classified as classifications are necessary.
held for sale in accordance with PFRS 5; Revenue X
q. Non-controlling interests, presented within equity; Other income X
and Changes in inventories of finished goods
r. Issued capital and reserves attributable to owners of and work in progress X
the parent Raw materials and consumables used X
Order/ Format of Presentation Employee benefits expense X
Depreciation and amortisation expense X

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Other expenses X
Total expenses (X)
Profit before tax X
Function of Expense or Cost of sales Method
The second form of analysis is the ‘function of expense’
or ‘cost of sales’ method and classifies expenses according to
their function as part of cost of sales or, for example, the
costs of distribution or administrative activities. At a
minimum, an entity discloses its cost of sales under this
method separately from other expenses. This method can
provide more relevant information to users than the
classification of expenses by nature, but allocating costs to
functions may require arbitrary allocations and involve
considerable judgement.

• An example of a classification using the function of

expense method is as follows:
Revenue X When it is difficult to distinguish a change in
Cost of sales (X) accounting policy from a change in accounting estimate, the
Gross profit X change is treated as a change in an accounting estimate.
Other income X An entity shall change an accounting policy only if the change:
Distribution costs (X) 1. is required by a PFRS; or
Administrative expenses (X) 2. results to a more relevant and reliable information about
Other expenses (X) an entity’s financial position, performance, and cash flows.
Profit before tax X Examples of changes in accounting policy
Disclosure of dividends 1. Change from FIFO cost formula for inventories to the
Dividends declared by an entity are disclosed either Average cost formula.
in the (a) notes or (b) statement of changes in equity. 2. Change in the method of recognizing revenue from
long-term construction contracts.
Order of presentation of disclosures in the Notes 3. Change to a new policy resulting from the
1. Statement of compliance with PFRSs; requirement of a new PFRS.
2. Summary of significant accounting policies applied; 4. Change in financial reporting framework, such as
3. Supporting information for items presented in the from PFRS for SMEs to full PFRSs.
other financial statements; and 5. Initial adoption of the revaluation model for
4. Other disclosures. property, plant, and equipment and intangible
assets.
PAS 8 Accounting Policies, Changes in Accounting Estimates 6. Change from the cost model to the fair value model
and Errors of measuring investment property.
Objectives and scopes 7. Change in business model for classifying financial
PAS 8 prescribes the criteria for selecting, applying, assets resulting to reclassification between financial
and changing accounting policies and the accounting and asset categories.
disclosure of changes in accounting policies, changes in Examples of changes in accounting estimate
accounting estimates and correction of prior period errors. 1. Change in depreciation or amortization methods
Accounting policies - are “the specific principles, bases, 2. Change in estimated useful lives of depreciable
conventions, rules and practices applied by an entity in assets
preparing and presenting financial statements.” (PAS 8.5) 3. Change in estimated residual values of depreciable
Accounting policies are the relevant PFRSs adopted assets
by an entity in preparing and presenting its financial 4. Change in required allowances for impairment losses
statements and uncollectible accounts
Philippine Financial Reporting Standards (PFRSs) are 5. Changes in fair values less cost to sell of non-current
Standards and Interpretations adopted by the Financial assets held for sale and biological assets
Reporting Standards Council (FRSC). They comprise the Errors include the effects of:
following: a. Mathematical mistakes
Philippine Financial Reporting Standards (PFRSs); b. Mistakes in applying accounting policies
Philippine Accounting Standards (PASs); and c. Oversights or misinterpretations of facts; and
Interpretations d. Fraud

PAS 10 Events after the Reporting Period

Events after the Reporting Period
Events after the reporting period are “those events,
favorable or unfavorable, that occur between the end of the
reporting period and the date that the financial statements
are authorized for issue.” (PAS 10)

Two types of events after the reporting period

1. Adjusting events after the reporting period – are those
that provide evidence of conditions that existed at the end of
the reporting period.

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2. Non-adjusting events after the reporting period – those i. Bearer plants
that are indicative of conditions that arose after the reporting
period Recognition
Date of authorization of the financial statements The cost of an item of property, plant and equipment shall be
This date is the date when management authorizes recognized as an asset only if:
the financial statements for issue regardless of whether such a. it is probable that future economic benefits
authorization for issue is for further approval or for final associated with the item will flow to the entity; and
issuance to users. b. the cost of the item can be measured reliably.
Examples of adjusting events: Initial measurement
1. The settlement after the reporting period of a court • An item of PPE is initially measured at its cost.
case that confirms that the entity has a present Elements of Cost
obligation at the end of reporting period. 1. Purchase price, including non-refundable purchase
2. The receipt of information after the reporting period taxes, after deducting trade discounts and rebates.
indicating that an asset was impaired at the end of 2. Costs directly attributable to bringing the asset to
reporting period. For example: the location and condition necessary for it to be
a. The bankruptcy of a customer that occurs after the capable of operating in the manner intended by the
reporting period may indicate that the carrying amount of a management.
trade receivable at the end of reporting period is impaired. 3. Present value of decommissioning and restoration
b. The sale of inventories after the reporting period may give costs to the extent that they are recognized as
evidence to their net realizable value at the end of reporting obligation
period Examples of directly attributable costs
3. The determination after the reporting period of the • Costs of employee benefits arising directly from the
cost of asset purchased, or the proceeds from asset construction or acquisition of PPE;
sold, before the end of reporting period. • Costs of site preparation;
4. The discovery of fraud or errors that indicate that • Initial delivery and handling costs (e.g., freight costs);
the financial statements are incorrect. • Installation and assembly costs;
Examples of non-adjusting events normally requiring • Testing costs, net of disposal proceeds of samples
disclosures: generated during testing; and
1. Changes in fair values, foreign exchange rates, • Professional fees.
interest rates or market prices after the reporting Cessation of capitalizing costs to PPE
period. Recognition of costs in the carrying amount of an
2. Casualty losses (e.g., fire, storm, or earthquake) item of PPE ceases when the item is in the location and
occurring after the reporting period but before the condition necessary for it to be capable of operating in the
financial statements were authorized for issue. manner intended by management.
3. Litigation arising solely from events occurring after Measurement of Cost
the reporting period. The cost of an item of PPE is the cash price
4. Major ordinary share transactions and potential equivalent at the recognition date. If payment is deferred
ordinary share transactions after the reporting beyond normal credit terms, the difference between the cash
period. price equivalent and the total payment is recognized as
5. Major business combination after the reporting interest over the period of credit unless such interest is
period. capitalized in accordance with PAS 23 Borrowing Costs.
6. Announcing a plan to discontinue an operation after Acquisition through exchange
the reporting period. If the exchange has commercial substance, the asset
7. Declaration of dividends after the reporting period received from the exchange is measured using the following
Disclosures order of priority:
• Date of authorization for issue a. Fair value of asset Given up
• Adjusting events b. Fair value of asset Received
• Material Non-adjusting events c. Carrying amount of asset Given up
If the exchange lacks commercial substance, the
(Picture last page) asset received from the exchange is measured at (c) above.

PAS 16 Property, Plant and Equipment Subsequent measurement

Characteristics of PPE Subsequent to initial recognition, an entity shall
a. Tangible assets – items of PPE have physical substance choose either:
b. Used in normal operations – items of PPE are used in the (a) the cost model or
production or supply of goods or services, for rental, or for (b) the revaluation model
administrative purposes as its accounting policy and shall apply that policy to an entire
c. Long-term in nature – items of PPE are expected to be class of PPE.
used from more than a year.
Examples of items of PPE Cost Model
a. Land used in business After recognition, an item of PPE is measured at its
b. Land held for future plant site cost less any accumulated depreciation and any
c. Building used in business accumulated impairment losses.
d. Equipment used in the production of goods Depreciation
e. Equipment held for environmental and safety Depreciation is the systematic allocation of the
reasons depreciable amount of an asset over its estimated useful life.
f. Equipment held for rentals When computing for depreciation, each part of an
g. Major spare parts and long-lived stand-by item of PPE with a cost that is significant in relation to the
equipment total cost of the item shall be depreciated separately.
h. Furniture and fixture

7
 Depreciation begins when the asset is available for use, *The fair value is determined using an appropriate valuation
i.e.,
when
it is
in the

location and condition necessary for it to be capable of technique, taking into account the principles set forth under
operating in the manner intended by management. PFRS 13.
Depreciation ceases when the asset is derecognized or Frequency of revaluation
when it is classified as “held for sale” under PFRS 5, For items with significant and volatile changes in fair
whichever comes earlier. value, annual revaluation is necessary. For items with
Selection of depreciation method insignificant changes in fair value, revaluation may be made
There are various methods of depreciation. The entity every 3 or 5 years
shall select the method that most closely reflects the Revaluation applied to all assets in a class
expected pattern of consumption of the future economic If an item of PPE is revalued, the entire class of PPE to
benefits embodied in the asset. which that asset belongs shall be revalued.
However, a depreciation method that is based on The items within a class of PPE are revalued
revenue that is generated by an activity that includes the use simultaneously to avoid selective revaluation of assets and
of an asset is not appropriate. the reporting of amounts in the financial statements that are
The Straight-line method of Depreciation a mixture of costs and values as at different dates.
Straight line method – depreciation is recognized evenly over Subsequent accounting for revaluation surplus
the life of the asset by dividing the depreciable amount by Revaluation is initially recognized in other
the estimated useful life. comprehensive income unless the revaluation represents
Depreciation = (Historical cost – Residual value) ÷ impairment loss or reversal of impairment loss, in which case
Estimated useful life it is recognized in profit or loss.
Subsequently, the revaluation surplus is accounted for as
Changes in depreciation method, useful life, and residual follows:
value 1. If the revalued asset is non-depreciable, the revaluation
A change in depreciation method, useful life, or residual surplus accumulated in equity is transferred directly to
value is a change in accounting estimate accounted for retained earnings when the asset is derecognized.
prospectively. 2. If the revalued asset is depreciable, a portion of the
Prospective accounting means the change affects only revaluation surplus may be transferred periodically to
the current period and/or future periods. The change does retained earnings as the asset is being used.
not affect past periods. Derecognition
Revaluation Model The carrying amount of an item or PPE shall be
After recognition as an asset, an item of PPE whose derecognized:
fair value can be measured reliably shall be carried at a a. on disposal; or
revalued amount, being its fair value at the date of the b. when no future economic benefits are
revaluation less any subsequent accumulated depreciation expected from its use or disposal
and subsequent accumulated impairment losses.

Revaluation surplus
Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx