Theory of Accounts | 1

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

(5427)

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

Philippine Financial Reporting Standards include:

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

The Conceptual Framework is not a reporting standard and therefore

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

BASIC purpose of the CONCEPTUAL FRAMEWORK

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

SCOPE of the FRAMEWORK:

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

1. Primary users
a. Existing and potential investors
b. Existing and potential lenders and other creditors
2. Secondary users

GOING concern - the only underlying assumption; financial statements are normally
prepared on the assumption that an entity will continue in operation for the
foreseeable future.

IMPLICIT assumptions:
1. Accounting entity
2. Time period

Accrual - basis for financial statements of accounting recognizes transactions and

other events when they occur

QUALITATIVE characteristics are the attributes that make the information provided
in the financial statements useful to users.
Fundamental qualitative characteristics: Relevance and Faithful
Representations.
Enhancing qualitative characteristics: COMPARABILITY,
UNDERSTANDABILITY, VERIFIABILITY AND TIMELINESS.

RELEVANT financial information is capable of making a difference in the

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

INFORMATION is MATERIAL if its omission or misstatement could influence decisions

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

PERFECTLY faithful representation ingredients: COMPLETENESS, NEUTRALITY, and

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

ELEMENTS of FINANCIAL STATEMENTS – financial statements portray the financial

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

Recognition – process of incorporating or reporting in the statement of financial

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

PAS 1 – PRESENTATION OF FINANCIAL STATEMENTS

(5429)

FINANCIAL statements include:

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

FAIR presentation requires an entity:

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

Rule of offsetting:
a. An entity shall not offset assets and liabilities, and income and expenses,
unless required or permitted by PFRS
b. Gains and losses on disposal of noncurrent assets are reported by deducting
from the proceeds on disposal the carrying amount of the asset and related
selling expenses
c. Gains and losses arising from a group of similar transactions are reported on
a net basis, for example, foreign exchange gains and losses arising from
financial instruments held for trading
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Consistency of presentation – presentation and classification of items in the financial
statements are retained from one period to the next

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

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

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

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

COMPREHENSIVE INCOME – change in equity during a period resulting from

transactions and other events, other than those changes resulting from
transactions with owners in their capacity as owners. Includes:
1. Gain and loss arising from translating the financial statements of a
foreign operation
2. Gain and loss on remeasuring available for sale financial asset
3. The effective portion of gain and loss on hedging instrument in a cash
flow hedge
4. Actuarial gain or loss fully recognized in other comprehensive income
5. Revaluation surplus during the year

USE of NOTES:
1. To present information about the basis of preparation of financial
statements and the specific accounting policies used
2. To disclose the information required by PFRS that is not presented elsewhere
in the financial statements
3. To provide information that is not presented elsewhere in the financial
statements but is relevant to an understanding of the statements
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MATERIAL adjustment to ASSET and LIABILITY
1. Recoverable amount of PPE
2. Inventory obsolescent
3. Future outcome of litigation

PAS 10 – EVENTS AFTER REPORTING PERIOD

(5429)

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

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

FINANCIAL statements are said to be authorized for issue when the management
(board of directors) reviews the financial statements and authorizes them for
issue.

PAS 24 – RELATED PARTY DISCLOSURES

(5429)

A PARTY is related to an entity if the party, directly or indirectly through one or more
intermediaries:
1. Controls, is controlled by or is under common control with the entity
2. Has an interest in the entity that gives it significant influence over the
entity
3. Has joint control over the entity
RELATED party includes:
1. Parent, subsidiary, and fellow subsidiaries
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2. Associate
3. Key management personnel and close family members of such individuals
a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or the individual’s spouse

PAS 8 – ACCOUNTING POLICIES, ESTIMATES AND ERRORS

(5429)

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

applied by an entity in preparing and presenting financial statements

CHANGE in accounting estimate – adjustment of the carrying amount of an asset or a

liability or the amount of the periodic consumption of an asset that results
from the assessment of the present status and expected future benefit and
obligation associated with the asset and liability.

RETROACTIVE application – applying a new accounting policy to transactions, other

events and conditions as if the policy had always been applied

PROSPECTIVE application – applying a new accounting policy to transactions

occurring after that date at which the policy changed

RETROSPECTIVE restatement – correcting the recognition, measurement and

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

AN ENTITY changes its accounting policy if:

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

A CHANGE in accounting policy should be reported either:

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

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

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

PFRS 5 – DISCOUNTINUED OPRATION AND ASSET HELD FOR SALE

(5432)

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

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

A NONCURRENT asset or disposal group shall be classified as held for sale when:
1. The sale is highly probable
2. The asset is available for immediate sale in its present condition subject only
to terms that are usual and customary for sales of such asset or disposal
group

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

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

HELD FOR SALE assets reclassified back as noncurrent should be measured at lower
of carrying amount on the basis that it had never been classified as held for
sale and recoverable amount
COMPONENT OF AN ENTITY – operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the
rest of the entity

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

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

THE results of discontinued operations shall be presented on the face of the income
statement as a single amount below the income from continuing operations
net of tax

PFRS 8 – OPERATING SEGMENT

(5432)

AN OPERATING SEGMENT is a component of an entity

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

AN OPERATING SEGMENT is reportable when:

1. The segment external and internal revenue is 10% or more of the combined
external and internal revenue of all operating segments.
2. The segment profit/loss is 10% or more of the greater between the combined
profit of all operating segments that reported profit and the combined loss
of all operating segments that reported a loss.
3. The assets of the segment are 10% or more of the total assets of all
operating segments.

OPERATING SEGMENTS that do not meet any of the quantitative thresholds may be
considered reportable and separately disclosed if management believes that
information about the segment would be useful to the users of the financial
statement.

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

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

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

MAJOR CUSTOMER disclosure:

1. Defined as one providing revenue which amount to 10% or more of the
combined external revenue of all operating segments
2. The identities of major customers need not be disclose
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PAS 34 – INTERIM FINANCIAL REPORTING

(5432)

INTERIM financial reports shall be published whenever the entity wishes

PUBLICLY traded entities are encouraged to provide interim financial reports at least
at the end of the half year and within 60 days at the end of the interim period

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

statements and selected notes

The year-end financial statements’ compliance with PFRS is not affected if an

entity does not prepare interim financial reports
CASH AND RECEIVABLES
(5437)

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

SYSTEMS in maintaining petty cash fund:

1. Imprest petty cash system – petty cash fund is only dr/cr when establishing
the PCF or adding/deducting amount to the balance or adjustments during
year-end
2. Fluctuating petty cash system – PCF is dr/cr every time there is a transaction
that involves the fund but does not need year-end adjustments
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BANK RECONCILIATION explains the difference between the bank balance and the
balance shown in the depositor’s records
RELATED items:
1. Related to book balance
a. Deposits credited by the bank but not yet recorded by the entity
(proceeds of loans, loans collected in behalf of the entity)
b. Deductions by the bank not yet recorded by the entity (bank charges,
payment to a loan where the bank is authorized to deduct payment
from the balance of the entity, customers’ NSF checks)
2. Related to bank balance
a. Outstanding checks
b. Deposits in transit

CHARACTERISTICS of loans and receivables:

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

IN CALCULATING the CA of a loan receivable, the lender adds to the principal direct
loan origination cost incurred by the lender. Note: Indirect loan origination
cost incurred by the lender shall be expensed outright; Loan origination fees
charged to the borrower shall be deducted and classified as unearned
interest income.

IF THERE IS EVIDENCE that an impairment loss on loan receivable has been incurred,
the amount of the loss is equal to the excess of the carrying amount of the
loan receivable over the present value of the cash flows related to the loan.

TRADE RECEIVABLES are classified as current assets when they are reasonably
expected to be collected within one year or within the normal operating cycle
whichever is longer.
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NONTRADE RECEIVABLES are classified as current assets only if they are reasonably
expected to be realized in cash within one year the length of the operating
cycle notwithstanding.

Offsetting is not allowed on receivables.

Estimation of Doubtful accounts based on CREDIT SALES focuses on the income

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

Allowance method of estimating uncollectible account is in consistency with accrual

accounting

RECEIVABLE FINANCING – method of generating cash from accounts receivable

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

PAS 2 – INVENTORY
(5442)

INVENTORIES – assets held for sale in the ordinary course of business, in the process
of production for such sale, or in the form of materials or supplies to be
consumed in the production process or in the rendering of services.

COST OF INVENTORY – cost of purchase, costs of conversion and other costs incurred
in bringing the inventory to their present location and condition
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COST OF PURCHASE – purchase price, import duties and other taxes, transport,
handling and other costs directly attributable to the acquisition of
inventories.

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

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

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

Method of Measuring Inventories:

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

PURCHASE commitments – commitments entered into by the entity to purchase

products in the future at a fixed price

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

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

RETAIL METHOD – used for convenience for measuring inventories of large number
of rapidly changing items with similar margins for which it is impracticable to
use other costing method. When using the retail method, the standard
requires the use of average cost retail

BROKER-TRADERS – those who buy or sell commodities for others or on their own
account. Their commodities are measured at fair value less cost to sell

PAS 41 – AGRICULTURE
(5442)
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BIOLOGICAL ASSETS – both living animals and living plants; they are to be measured
at fair value less cost to sell
AGRICULTURAL ACTIVITY – is the management by an entity or the biological
transformation and harvest of biological asset for sale or for conversion into
agricultural produce or additional biological asset
AGRICULTURAL PRODUCE – harvested product of an entity’s biological asset and
measured at fair value less cost to sell at the point of harvest
Cost to sell – commissions to brokers and dealers, levies by regulatory
agencies, transfer taxes and duties

A gain or loss arising on the initial recognition of biological asset and from a
change in fair value less cost to sell of a biological asset shall be included in
the profit or loss for the period

PAS 16 – FINANCIAL INSTRUMENTS

5449

REQUIREMENTS to classify as Financial Instrument:

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

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

entity after deducting the liabilities; residual method

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

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

PAS 39 – RECOGNITION AND MEASUREMENT

OF FINANCIAL INSTRUMENTS (5449)
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FINANCIAL ASSETS at fair value through profit or loss include

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

A FINANCIAL ASSET is classified as held for trading if:

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

AVAILABLE FOR SALE FINANCIAL ASSETS are non-derivative financial assets that:
1. Are designated as available for sale – by designation.
2. Are not classified as financial assets at fair value through profit or loss, held
to maturity investments and loans and receivable. – by residual definition

Characteristics of financial assets classified as HELD TO MATURITY:

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

TRANSACTION costs directly attributable to the acquisition of financial assets and

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

When an entity sells/reclassifies more than an insignificant amount of held to

maturity investments prior to maturity, such sales or reclassifications will
 Theory of Accounts | 17
disqualify the entity from using the held to maturity classification during the
current year and in the next two years.

Characteristics of a derivative:
1. The value changes in response to the change in a specified underlying
2. It requires no initial investment or an initial small investment
3. It is settled at a future date

FORWARD contract – an agreement between two parties to exchange a specified

amount of commodity, security or foreign currency at a specified date in the
future with the price or exchange rate being set now.
FUTURE contract – a contract traded on a n exchange that allows an entity to buy a
specified commodity or a financial security at a specified price on a specified
date
OPTION – contract giving the owner the right but not the obligation to buy or sell an
asset at a specified price any time during a specified period in the future
EMBEDDED derivative – a component of a hybrid instrument that also includes a non-
derivative host contract

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

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

PAS 28 – INVESTMENTS IN ASSOCIATES

(5449)

ASSOCIATE – an entity over which the investor has significant influence

SIGNIFICANT influence – power to participate in the financial and operating policy
decisions of an entity
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EQUITY method in recording investment in associate:
1. Initially recorded at cost
2. Increased or decreased by the investor’s share of the profit or loss of the
investee after the date of acquisition
3. The investor’s share of the profit or loss of the investee is recognized in the
investor’s profit or loss
4. Distributions received from the investee reduce the carrying amount of the
investment

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

investments should be accounted for in accordance with PAS 39 either as
non-marketable securities or available for sale securities.

PAS 40 – INVESTMENT PROPERTY

(5449)

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

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

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

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

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

PAS 16 – PROPERTY, PLANT AND EQUIPMENT

(5454)
 Theory of Accounts | 19

PROPERTY, PLANT AND EQUIPMENT – tangible assets held for use in production or
supply of goods or services, for rental to others, or for administrative
purposes and expected to be used during more than one reporting period

SOURCES of Cash Flows:

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

CARRYING amount – amount at which the asset is recognized in the statement of

financial position after deducting any accumulated depreciation and
impairment losses
COST of PPE – purchase price, import duties and non refundable purchase taxes, any
cost directly attributable in bringing the asset to the location and condition
for its intended use

EXCHANGE w/ commercial substance – there is an improvement in the cash flow after

exchange; FV of asset given up; difference will be the gain (loss) in the
exchange
EXHANGE w/o commercial substance – CA of the asset given up; no gain (loss)
recognized

DEPRECIATION – systematic allocation of an asset’s cost less residual value over its
useful life
RESIDUAL VALUE – the estimated net amount currently obtainable if the asset is at
the end of its useful life
USEFUL LIFE – period over which an asset is expected to be available for use by an
entity or the number of production of similar units expected to be obtained
from the asset by an entity

BETTERMENT – expenditure made to improve existing facilities by increasing

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

INSIGNIFICANT changes in fair value – revaluations are necessary only every 3 – 5

years
SIGNIFICANT changes in fair value – revaluations are necessary annually

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

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

CHANGE IN CARRYING AMOUNT due to REVALUATION:

√ Increase shall be recognized in Revaluation Surplus as component of OCI and
in P/L to the extent that it reverses a revaluation decrease previously
recognized
√ Decrease shall be recognized in P/L after deducting any revaluation surplus
previously recognized

PAS 20 – GOVERNMENT GRANTS

(5454)

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

resources to an entity in return for past or future compliance with specified
conditions relating to the operating activities of the entity

Recognition:
√ Entity will comply with the conditions attaching to them
√ The grants will be received
Should be recognized as income over the period as the relevant expense on a
systematic and rational basis
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GRANT related to assets – primary condition is that an entity qualifying for them
should purchase, construct, or otherwise acquire long-term assets;
accounting treatment would be either set up the grant as deferred income or
deduct it in arriving at the carrying amount of the asset
GOVERNMENT assistance – action by a government designed to provide an economic
benefit specific to an entity or a range of entities qualifying under certain
criteria and for which the government cannot reasonably place a value

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

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

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

CAPITALIZATION commences at:

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

Capitalization SHALL be suspended only during extended period of delay in

which active development is delayed

QUALIFYING ASSET is financed by:

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

PAS 36 – IMPAIRMENT OF ASSETS

(5454)

IMPAIRMENT LOSS – carrying amount or cash generating unit exceeds its recoverable
amount
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RECOVERABLE amount – higher between fair value less cost to sell and value in use
VALUE in use – present value of estimated future cash flows expected to arise from
continuing use of an asset and from its ultimate disposal

CASH GENERATING UNIT – smallest identifiable group of assets that generate cash
inflows from continuing use that are largely independent of the cash inflows
from other assets or group of assets
CORPORATE ASSETS – other than goodwill that contribute to the future cash flows
of both the cash generating unit under review, and other cash generating
units; i.e. headquarters building, EDP equipment and research center

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

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

REVERSAL of an impairment loss:

√ The increased carrying amount of the asset shall not exceed the carrying
amount that would have been determined had no impairment loss been
recognized in the prior years
√ Impairment loss recognized for goodwill shall not be reversed in a
subsequent period

PFRS 6 – EXPLORATION AND EVALUATION OF MINERAL

RESOURCES (5454)

EXPLORATION AND EVALUATION EXPENDITURES – incurred when the legal rights to

explore a specific area have been obtained but the technical feasibility and
commercial viability of extracting a mineral resource are not yet
demonstrable
 Theory of Accounts | 24
Exploration and Evaluation asset is classified as either: (1) tangible asset, or
(2) intangible asset.

ACCOUNTING for costs of drilling holes:

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

INTANGIBLE ASSET – identifiable nonmonetary asset without physical substance

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

Intangible asset that was acquired separately shall initially be recognized at

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

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

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

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

of another business entity

RULE on amortizing intangible asset:

 Theory of Accounts | 26
√ Pattern of benefits if can be measured
√ Otherwise, straight line method
 Theory of Accounts | 27
AMORTIZATION:
√ Finite useful life – depreciable amount shall be allocated on a systematic
basis over its useful life
Amortization shall commence when it is available for the intended use
√ Indefinite useful life – shall not be amortized but tested for impairment
annually and when there is an indication that the intangible asset may be
impaired

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

RESEARCH – original and planned investigation undertaken with the purpose of

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

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

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

If an entity cannot distinguish the research phase form the development

phase of an internal project to create an intangible asset, the entity shall
treat the expenditure on that project as f it were incurred in the research
phase only
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PAS 37 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT
ASSETS (5465)

CURRENT LIABILITIES:
√ Expected to be settled within the normal operating cycle
√ Due to be settled within one year
√ Incurred for trading
√ No unconditional right to defer settlement

PROVISION – uncertain timing or amount

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

LEGAL OBLIGATION is derived from the following:

√ Legislation
√ Contract
√ Other operation of law

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

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

CONTINGENT LIABILITY:
√ Possible obligation arising from past events that will be confirmed only by
the occurrence or nonoccurrence of one or more uncertain future events not
wholly within the control of the entity.
 Theory of Accounts | 29
√ Present obligation that arises from past events and is not recognized because
it is not probable that an outflow of resources will be required to settle the
obligation or the obligation cannot be measured reliably.

OBLIGATING EVENT – creates a legal or constructive obligation because the entity

has no other realistic alternative but to settle the obligation.

ONEROUS CONTRACT – the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits to be received under the contract.

RECONSTRUCTING – structured program that is planned and controlled by the

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

COMPOUND FINANCIAL INSTRUMENT – bond or similar instrument convertible by

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

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

PAS 17 – LEASES
(5465)

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