0INTEGRATED ACCOUNTING : FINANCIAL ACCOUNTING & REPORTING (P1)

MODULE 1 : Development of Financial Reporting Framework

This module shall discuss the conceptual framework of financial statements and the accounting process, understand the
continuing professional development in the field of accounting, the meaning of the generally accepted accounting
principles, identify the standard-setting body in the Philippines, describe
the creation of the International Accounting Standards Board and the meaning of IFRS.
1.0 Development of Financial Reporting Framework, Standard setting bodies, Regulation of the
Accountancy Profession

1.1 Development of Financial Reporting Framework

1.1.1 Financial Reporting framework

o The term financial reporting framework is a set of criteria used to determine measurement, recognition, presentation
and disclosure of all material items appearing in the financial statements.

1.1.2 Components of the Framework.

o the objective of general purpose financial reporting
▪ The primary users of general purpose financial reporting are present and potential investors, lenders and other
creditors, who use that information to make decisions about buying, selling or holding equity or
debt instruments
o qualitative characteristics of useful financial information
o The qualitative characteristics of useful financial reporting identify the types of information are likely to be the most
useful to users in making decisions. These information is useful when it is relevant and represents faithfully what it
purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and
understandable.
o financial statements and the reporting entity
o the objective of financial statements is to provide information about the entity’s assets, liabilities, equity, income and
expenses for users in assessing the prospects for future net cash inflows to the entity and
management’s stewardship of the entity’s resources.
o the elements of financial statements
▪ elements directly related to financial position
▪ elements directly related to performance
o recognition and derecognition
▪ the process of incorporating in the balance sheet or income
statement an item that meets the definition of an element..
o measurement
▪ involves assigning monetary amounts at which the elements of the
financial statements are to be recognized and reported..
o presentation and disclosure

1.2 Standard-setting bodies

The overall purpose of accounting standards is to identify proper accounting practices for the preparation and
presentation of financial statements, thus creating a common understanding between preparers and users of financial
statements particularly the measurement of assets and liabilities and likewise to ensure comparability and uniformity in
financial statements based on the same financial information.
1. Financial Reporting Standards Council (FRSC)
● Now replaces the Accounting Standards Council (ASC)
● The main function is to establish and improve accounting standards that will generally accepted in the Philippines
● The approved statements of the FRSC are known as the Philippine Accounting Standards
(PAS) and Philippine Financial Reporting Standards (PFRS)
2. The Philippine Interpretation Committee (PIC)
● Formed by the FRSC and replaced the Interpretation Committee (IC) formed by the Accounting Standards Council
(ASC) in May 2006.
● Role of PIC is to prepare interpretations of PFRS for approval by the FRSC
3. International Accounting Standards Committee (IASC)
● Is an independent private sector body, with the objective of achieving uniformity in the accounting principles.
● Objective is to formulate and publish in the public interest accounting standards to be observed in the presentation of
financial statements
● To work generally for the improvement and harmonization of regulations, accounting
standards and procedures relating to the presentation of financial statements.
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4. International Accounting Standards Board (IASB)
● Replaces the IASC
● Publishes standards in a series of pronouncement called International Financial reporting Standards (IFRS)

1.3 The Regulation of the Accountancy Profession

The law regulating the practice of accountancy in the Philippines is Republic Act No. 9298 known as the “Philippine
Accountancy Act of 2004”.
1.3.1 Regulators of the profession
o The Board of Accountancy – the body authorized by law to promulgate rules and
regulations affecting the practice of the accountancy
profession in the Philippines. It is also responsible for
preparing and grading the Philippine CPA examination.
o Single practitioners and partnerships for the practice of public accountancy shall be registered certified public
accountants in the Philippines. The SEC shall not register any corporation organized for the practice of public
accountancy.
o CPAs generally practice their profession in three main areas:
a) Public accounting – independent and expert financial services made to the public.
b) Private accounting – CPAs employed in business entities in various capacity.
c) Government accounting – CPAs employed in government services, such as the BIR, COA, etc
o Continuing Professional Development (CPD)
Republic Act No. 10912 is the law mandating the strengthening the continuing professional
program for all regulated professions, including the accountancy profession in order to raise and
enhance the technical skill and competence of the CPA.
a) CPD credit units – the required credit hours for renewal of the CPA license and
accreditation of a CPA to practice the accountancy profession every three years is 120 credit units in
a compliance period of three year
b) Exemption from CPD – Upon reaching the age of 65 years, a CPA shall be permanently
exempted from CPD only to the renewal of CPA license and not for the
purpose of accreditation to practice the accountancy profession.

1.4 Conceptual Framework

Definition – it is a complete, comprehensive and single document promulgated by the
International Accounting Standards Board (IASB).
– It is a summary of the terms and concepts that underlie the preparation and
presentation of financial statements for external users.

1.4.1 Basic Objectives of the Conceptual Framework

a. Assist the Financial reporting Standards Council (FRSC) in developing accounting standards and reviewing
existing standards
b. Assist preparers of financial statements in applying accounting standards and in dealing with issues not yet
covered by GAAP
c. Assist the FRSC in the review and adoption of International Financial Reporting Standards (IFRS).
d. Assist users of financial statements in interpreting the information contained in the financial statements.
e. Assist auditors in forming an opinion as to whether financial statements conform with the Philippine GAAP.

1.4.2 Basic objective of financial statements

The overall objective of financial reporting is to provide financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making decisions about providing resources to
the entity.
1.4.3 Qualitative characteristics of financial statements.
These are the qualities or attributes that make financial accounting information useful to the users in making
economic decisions, such as:
o Relevance – is the capacity of the information to influence a decision.
▪ Predictive value
▪ Confirmatory value
o Materiality – known as the doctrine of convenience. Strict adherence to
GAAP is not required when the items are not significant
enough to affect the evaluation, decision and fairness of the
financial statements. It is often dependent on (1) good
judgment, (2) professional expertise and (3) common sense.
o Faithful representation – the actual effects of the transactions shall be
properly accounted for and reported in the financial statements

a) Ingredients of Faithful Representation

● Completeness – that relevant information should be presented that it facilitates
understanding and avoids erroneous implications.
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● Neutrality – that the information contained in the financial statements must be free
from bias, should not favor one party to the detriment of another party.
● Free from error – that there is no errors or omissions in the description of the transaction and the process used to
produce the reported information has been
selected and applied with no errors in the process.
b) Enhancing Qualitative Characteristics
● Comparability – the ability to bring together for the purpose of noting points of
likeness and difference, within an entity (intracomparability) and
across entities (intercomparability)
● Consistency – refers to the use of the same method for the same item, either from
period to period within an entity or in a single period across entities.
● Understandability – requires that financial information must be comprehensive if it
is to be most useful.
● Verifiability – financial information is supported by evidence so that an accountant
that would look into the same evidence would arrive at the same
economic decision or conclusions.
● Timeliness – means that financial information must be available or communicated
early enough when a decision is to be made.
1.4.4 Elements of Financial Statement – refer to the quantitative information reported in the statement of financial
position and income statement, such as:
a) Elements directly related to the measurement of financial position
▪ Asset
▪ Liability
▪ Equity
b) Elements directly related to the measurement of financial performance
● Income
● Expense
● Recognition principles of the elements
● Asset recognition principle
1. Asset is recognized when it is probable that future economic benefits will flow to the entity and the cost or
value of the asset can be measured reliably.
● Liability recognition principle
2. Liability is recognized when it is probable that an outflow of resources embodying economic benefits will be
required for the settlement of a present obligation and the amount can be measured reliably.
● Income recognition principle
3. Basic principle that income shall be recognized when earned, that it is probable that future economic benefits
will flow to the entity as a result of an increase in an asset or decrease in liability and that the economic benefits can be
measured reliably.
4. Other income recognition as follows:
1) Interest revenue – to be recognized on a time proportion basis taking into
account the effective yield on the asset
2) Royalties – shall be recognized on an accrual basis in accordance with the
substance of the relevant agreement.
3) Dividends – shall be recognized as revenue when the shareholder’s right to
receive payment is established, meaning, when the dividends are declared.
4) Installation fees – are recognized as revenue over the period of installation
by reference to the stage of completion.
5) Subscription revenue – should be recognized on a straight-line basis over
the subscription period.
6) Admission fees – are recognized as revenue when the event takes place.
7) Tuition fees – are recognized as revenue over the period in which tuition is provided.
● Expense recognition principle
5. Basic recognition principle is that expenses are recognized at the time it is incurred and that it can be measured
reliably.
6. Measurement bases or financial attributes of the elements of the financial statements
o Historical cost
Amount of cash or cash equivalent paid or the fair value of the consideration given to acquire an asset at the time of
acquisition. Also
known as “past purchase exchange price”
o Current cost
The amount of cash or cash equivalent that would have to be paid if the same or equivalent asset was acquired currently.
Also known as “current

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purchase exchange price”
o Realizable value
The amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly disposal. Also
known as “current sale
exchange price”
o Present value
Is the discounted value of the future net cash inflows that the asset is expected to generate in the normal course of
business. also known as “future exchange price”

1.4.5 The Concept of Capital and Capital maintenance.

The capital maintenance concepts measures profit as the amount of capital that the
enterprise can distribute to its owners and be as well off at the end of the period as it was at the
beginning.
a) Financial concept of capital
Capital is synonymous with net assets of the enterprise. The concept does not require the adoption of a specific
measurement basis, thus cash and
some financial assets a
b) Physical concept of capital
Defines capital as the operating capacity of the enterprise and requires the use of the current cost as measurement basis
for an enterprise’s assets and liabilities.

1.4.6 Accounting process

The accounting process can be classified into two parts:
▪ Recording phase
o analyzing the transaction
o journalizing
o posting.
▪ Summarizing phase
o unadjusted trial balance
o adjusting entries
o financial statements
o closing entries
o post-closing trial balance
o reversing entries. (Why do we need to make reversing entries)

Accounting Records of an Entity

o Business or source documents – materials evidencing a transaction.
o Books of Original Entry – pertain to the Journals – General Journal, Sales
Journal, Purchases Journal, Cash Receipt
Journal, and Cash Disbursements Journal
o Books of Final Entry – these are the Ledgers – General Ledger and
Subsidiary Ledgers.
● Adjusting entries – made at the end of every accounting period in order to
split mixed accounts or to bring the accounts up to
date. Adjusting entries allocate revenue and expenses
between current and future periods.
● Accounting cycle
● Analyzing the business documents or transactions.
● Journalizing
● Posting
● Preparing the unadjusted trial balance
● Preparing and adjusting entries
● Preparing the financial statements
● Preparing the closing entries
● Preparing a post-closing trial balance
● Preparing the reversing entries

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INTEGRATED ACCOUNTING: FINANCIAL ACCOUNTING & REPORTING (P1)

INTEGRATED ACCOUNTING – FAR (P1)

MODULE 3: ASSETS
This module will identify the items to be included in the account title “Cash and Cash Equivalents”, how and what
amount cash is presented on the statement of financial position and basic features of internal control to safeguard cash.
Understand the measurement of financial assets at fair value and amortized cost. This module also discusses the basic
principles in investment in associate and identify the equity method of accounting for equity investment. Basic
derivatives (excluding hedge accounting) such as forward and futures contracts, call and put options. Also included in
this module are Inventories,
Property, plant and equipment, investment property, Intangibles and the biological assets.
3.1 Financial Assets (PAS 7, PAS 32, PAS 39 / PFRS 9, PFRS 7 AND PAS 28)
o A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds,
mutual funds, and bank deposits are all are examples of financial assets. Unlike land, property, commodities, or other
tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form.
Rather, their value reflects factors of supply and demand in the marketplace in which they trade, as well as the degree of
risk they carry.

3.1.1 Cash and Cash equivalent

o to be reported as “cash”, an item must be unrestricted in use.
o Cash items to be included
o Cash on hand
o Cash in bank
o Cash fund – petty cash fund, payroll fund, dividend fund
o Items included as cash equivalents
o 3- month BSP treasury bill
o 3-year BSP treasury bill purchased 3 months before date of maturity
o 3-month time deposit
o 3-month money market instrument of commercial paper
o Equity securities cannot qualify since they do not have maturity date.

Case Analysis 1 – Cash & Cash Equivalent

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HAKOTE Company had a checkbook balance on December 31, 2020 of P8,000,000 and held the following
items in the safe:
Check payable to HAKOTE, dated January 5, 2021, included
In December 31 checkbook balance P 2,000,000
Check payable to HAKOTE, deposited December 20 and
Included in December 31 checkbook balance but returned
by the bank on December 30 stamped “NSF”. The check
was re-deposited January 2, 2021 and cleared the next day. 500,000
Check drawn on HAKOTE’s account and payable to a vendor
dated and recorded December 31 but not mailed until
January 15, 2021 1,500,000
Cash on hand – undeposited collections 400,000
Change fund 40,000
Time deposit for plant expansion 1,000,000
Treasury bill 2,500,000
Money market placement 3,000,000
Postage stamps unused 10,000

REQUIRED:
1. What total amount should be reported as cash on December 31, 2020 ?
2. What total amount should be reported as cash equivalents on December 31, 2020 ?

Case Analysis 2 – Bank Reconciliation

DECARE, Incorporated provided the following information at month-end:

TRANSACTIONS AMOUNT
Cash in bank per bank statement P 8,000,000
Deposit in transit 1,200,000
Outstanding checks, including certified check of P200,000 1,500,000
Amount erroneously credited by bank to DECARE account 150,000
Note collected by the bank for DECARE, Inc. including interest of P100,000 1,100,000
Service charge for the current month 20,000
NSF checks of customers returned by the bank 500,000
Error in recording a check in the book. The correct amount as paid by the bank 100,000
is P100,000 instead of P200,000 as recorded in the books.
Savings deposit in other bank closed by the BSP. 1,000,000
Currency and coins on hand 900,000
Petty cash fund 50,000

REQUIRED:
1. What is the adjusted cash in bank balance at month-end ?
2. What is the unadjusted cash in bank balance per ledger at month-end ?
3. What total amount of cash should be reported as current asset ?

Case Analysis 3

On December 31, 2020, CAMEL Company had the following cash balances:

Cash in bank – current account 6,000,000

Petty cash fund – all are reimbursed at end of year 50,000
Time deposit – 3 months, due January 15, 2021 2,500,000
Savings deposit 1,000,000
Cash in bank included P400,000 of compensating balance against short-term borrowing arrangement.
The compensating balance is legally restricted as to withdrawal.

REQUIRED:
1. What total amount should be reported as cash and cash equivalent ?

Case Analysis 4

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DUSTMINE Company provided the following on December 31, 2020:

Petty cash fund 50,000

Current account – BDO 4,000,000
Current account – BPI (overdraft) ( 250,000)
Money market placement – PSB 1,000,000
Time deposit – CHINA Bank 2,000,000

• A check for P100,000 was drawn against BDO current account dated and recorded December 29, 2020 but delivered
to payee on January 15, 2021.
• China Bank time deposit is set aside for land acquisition in early January 2021.

REQUIRED:
1. What total amount should be reported as cash and cash equivalents on December 31, 2021 ?

• Classification of Accounts
✓ A sinking fund set aside to pay a bond payable shall be classified as current asset when the bond payable is
already due within one year.
✓ A cash fund set aside for the acquisition of a non-current asset should be classified as noncurrent regardless of
the year of disbursement.
✓ Bank overdraft is classified as a current liability and should not be offset against other bank accounts with
debit balances.
✓ An overdraft can be offset if the owner has two or more accounts in one bank or if the amount is not material.
✓ Compensating balance if NOT legally restricted as to withdrawal shall be part of CASH.
✓ Compensating balance is legally restricted as to withdrawal shall be classified as “cash held as compensating
balance” under current assets if the related loan is short-term, otherwise, it is to be classified as non-current investment.

• Loans and Receivables (Case No. 7)

✓ Is a financial asset arising from a loan granted by a bank or other financial institution to a borrower or client
where the term may be short-term or the repayment periods covered several years.
✓ Initial measurement
▪ Measured at fair value plus transaction costs directly attributable to the acquisition of the financial assets such as
“direct origination costs”. Indirect origination costs are treated as outright expense.
• Subsequent measurement
o A loan receivable is measured at amortized cost using the effective interest method.
o If the initial amount recognized is LOWER than the principal amount, the amortization of the difference is added to
the carrying amount.
o If the initial amount recognized is HIGHER than the principal amount, the amortization of the difference is deducted
from the carrying amount.

Case Analysis - Loans and Receivables

METRO BANKING granted a loan to a borrower on January 1, 2020. The interest on the loan is 12% payable annually
starting December 31, 2020. The loan matures in three years on December 31, 2022. The information on the loan is as
follows:
Principal amount P 5,000,000
Origination fees received from borrower 331,800
Direct origination costs incurred 100,000
REQUIRED:
1. What is the initial carrying amount of the loan on January 1, 2020 ?
2. What is the carrying amount of the loan on December 31, 2020 ?
3. What is the carrying amount f the loan on December 31, 2021 ?
4. What is the carrying amount of the loan on December 31, 2022

• Investment in Debt Instrument

o Instruments representing a creditor relationship with an enterprise which has the following characteristics:
o Maturity value
o Periodic interest payments at a fixed or variable interest rate
o Maturity date

• Debt securities include the following:

o Philippine Treasury Bills and Warrants
o Corporate bonds
✓ Convertible debt – a business borrows money from a lender where both parties enter the agreement with the
intent to repay all or part by converting it into a certain number of its common shares.

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✓ Commercial papers – a short-term debt instrument issued by companies to raise funds
generally for a time period up to one year.

• Classification of Investments in Debt Securities

o Trading securities – securities that have been purchased by a company for
the purposes of realizing a short-term profit.
o Available for sale securities (AFS) – are debt or equity securities purchase with the intent of selling before they reach
maturity. They are reported at fair value. Unrealized gains and losses are included in accumulated OCIs within the
equity section of the balance sheet.
o Held to maturity securities (HTM) – securities purchased to be owned until maturity

• Forms of receivable financing

o Pledge of accounts receivable
The loan is recorded as follows:
Cash xx
Discount on note payablexx
Note Payable xxx

o Assignment of accounts receivable

May be done either on a non-notification basis or notification basis

o Factoring of accounts receivable

It is a sale of accounts receivable on a without recourse, notification basis either in the form of casual factoring or
factoring as a continuing agreement.

o Discounting of notes receivable –when the present value of the payments to be received from a note are less than its
face amount, the difference is called a discount.

Case Analysis – Pledge of A/R

ABC borrowed in November 1, 2020 P1,000,000 from BDO and issued a promissory note for the same. The term of the
loan is one year and discounted at 12%. The entity pledged accounts receivable of P2,000,000 to secure the loan.

REQUIRED:
1. What is the net proceeds of the loan?
2. What is the journal entry to record the loan ?

Case Analysis – Assignment of A/R

ABC Company assigned P800,000 of accounts receivable to a bank under a non-notification arrangement. The bank
advances 80% less service charge of P7,000. The company signed a promissory note that provided for interest of 1%
per month on the unpaid loan balance.

REQUIRED:
1. What are the journal entries necessary to record the above transactions ?

Case Analysis – Factoring of A/R

ABC Company factored accounts receivable of P750,000 with credit terms of 2/10, n/30 immediately after shipment of
the goods to the customer. The factor charged a 5% commission based on the gross amount of the receivable factored.
In addition, the factor withheld 20% of the amount of the receivables factored to cover sales return and allowances.

REQUIRED:
1. What is the amount received from factoring ?
2. What is the journal entry to record the factoring ?

• Financial Assets at fair value through Profit and Loss

o Financial assets held for trading (trading securities), meaning by requirement. Held for trading if:
✓ It is acquired principally for the purpose of selling or repurchasing it in the near term
✓ It is part of a portfolio of identified financial assets that are managed together and there is evidence of a recent
actual pattern of short-term profit taking.
✓ It is a derivative except for a derivative that is a financial guarantee contract and an effective hedging
instrument.
a) All other investment in quoted equity instruments, by consequence (PFRS 9)
b) Financial assets that are irrevocably designated or by option on initial recognition (PFRS 9)
c) All debt investments that do not satisfy the requirements for measurement
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at amortized cost and at fair value through other comprehensive income.
NOTE: in other words, these assets classified as current assets are debt and equity securities that are purchased with the
intent of selling them in the near term or very soon.

Case Analysis

BAKULAW, Incorporated provided the following information at year-end in connection with the portfolio of equity
securities:
Aggregate cost P 1,700,000
Unrealized gain 40,000
Unrealized losses 260,000
Net realized gains during current year 300,000
The equity investments are measured at fair value through other comprehensive income.
At the beginning of current year, the entity reported an unrealized loss of P15,000 to reduce investments to market on a
portfolio basis.
REQUIRED:
1. In the year-end statement of changes in equity, what amount of unrealized loss should be reported ?

• Financial Assets at fair value through other comprehensive income (OCI)

Financial assets shall be measured at fair value through OCI if both of the following conditions are met:
✓ The business model is achieved both by collecting contractual cash flows and by selling the financial assets
✓ The contractual cash flows are solely payments of principal and interest on the principal outstanding.
• Financial Assets at amortized cost : Recall first the bond investment
1) Definition of bond. It is a contract of debt whereby one party called the issuer borrows fund from another
party called the investor.
2) Initial measurement. Initially recognized at fair valuew plus transaction costs that are directly attributable to
the acquisition (PFRS 9).
3) Subsequent measurement. Bond investment are measured and accounted subsequent to initial recognition as
follows:
a) Fair value through profit and loss
b) At amortized cost
c) At fair value through OCI
4) Financial assets shall be measured at amortized cost if the following conditions are met:
a) The business model is to hold the financial asset in order to collect contractual cash flows on specified dates.
b) The contractual cash flows are solely payments of principal and interest on the principal amount outstanding
Case Analysis

On January 1, 2020, MALAMPAYA Company purchased bonds with face amount of P5,000,000. The
entity paid P4,600,000 plus transaction cost of P142,000 for the bond investment.
The business model of the entity in managing the financial asset is to collect contractual cash flows that
are solely payment of principal and interest and also to sell the bonds in the open market.
The entity has not elected the fair value option of measuring financial asset. The bonds mature on
December 31, 2022 and pay 6% interest annually on December 31 each year with 8% effective yield.
The bonds are quoted at 105 on December 31, 2020 and 110 on December 31, 2021. The bonds are redeemed at face
amount on December 31, 2022.

REQUIRED: PREPARE AN AMORTIZATION TABLE TO SUPPORT QUESTIONS 1-4 BELOW.

1. What is the carrying amount of the bond on January 1, 2020 ?
2. What is the carrying amount of the bond on December 31, 2020 ?
3. What is the carrying amount of the bond on December 31, 2021 ?
4. What is the carrying amount of the bond on December 31, 2022 ?

• Methods of amortization of Bond Discount or Premium

o Straight-line method – provides for an equal amount of premium or discount amortization each accounting period.
o Bond outstanding method – the method is applicable to serial bonds and provides for a decreasing amount of
amortization
o Effective Interest method (PFRS 9) – under this method, the effective interest expense is determined by multiplying
the effective rate by the carrying amount of the bonds. The difference between effective interest and nominal interest is
the premium or discount amortization.

NOTE: In accordance with PRFS 9, bond investment shall be classified as financial assets measured at amortized cost
using the effective interest method

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Case Analysis – Effective Interest method
On January 1, 2020, ARROW Company issued two-year 8% bonds with face amount of P1,000,000 for P964,540, a
price which will yield a 10% effective interest cost per year.
Interest is payable semiannually on June 30 and December 31.
REQUIRED:
1. What is the amount of interest paid in June 30, 2020 ?
2. What is the amount of interest expense paid in June 30, 2020 ?
3. What is the amount of discount amortization for the period Jan 1 to June 30, 2020 ?
4. What is the carrying amount of the bond on June 30, 2020 ?

Case Analysis – Straight-line method

On June 1, 2020, ABC Company issued bonds with face amount of P5,000,000 at 97%. The bonds mature in 5 years and
pay 12% interest semi-annually on June 1 and December 1.

REQUIRED:
1. What are the journal entries to record the transaction every June 1 and Dec 31 ?

Case Analysis – Bond Outstanding method

ABC Company provided the following data:
Face amount of bond - 5,000,000
Issue price - 5,300,000
Date of bonds - January 1, 2020
Date of issue - January 1, 2020
Interest rate - 12%
Semi-annual interest dates - June 30 & Dec 31
The bond mature every December 31 of each year at the rate of P1,000,000 for 5 years.

REQUIRED:
1. Prepare a table of amortization following the bond outstanding method.

NOTES:
1). Financial assets at fair value through profit or loss and through other comprehensive income include both equity
securities and debt securities.
2). Financial assets at amortized cost include only debt securities.

• Investment in Associates (Equity method of accounting)

Equity method is based on the economic relationship between the investor and the investee and is applicable when the
investor has a significance influence over the investee.
Accounting procedures:
a) Investment is initially recognized at cost
b) The carrying amount is increased or decreased by the investor’s share of the profit and/or loss of the investee,
respectively. This share is recognized by the investor as investment income.
c) Distributions or dividends received from the equity investee reduce the carrying amount of the investment.
d) The investment must be in ordinary shares

NOTE: Under the equity method, cash dividend is not an income but a return or reduction of
investment

Case Analysis – Investment in Associates

OMEGA Company acquired 20,000 shares of EFFICASCENT Company on January 1, 2020 at P120 per
share. EFFICASCENT Company had 80,000 shares outstanding with a carrying amount of P8,000,000.
The difference between the carrying amount and fair value of EFFICASCENT on January 1, 2020 is attributable to a
broadcast license intangible asset. OMEGA Company has a 20-year straight-line
amortization policy for the broadcast license.
EFFICASCENT Company recorded earnings of P3,600,000 and P3,900,000 for 2020 and 2021, respectively, and paid
per-share dividend of P16 in 2020 and P20 in 2021.
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REQUIRED:
1. What is the investment income for 2020 ?
2. What is the investment income for 2021 ?
3. What is the carrying amount of the investment in associate on December 31, 2021 ?

• Basic Derivatives
It is a financial instrument that derives its value from the movement in commodity price, foreign exchange rate and
interest rate of an underlying asset or financial instrument.

o Forward contract – is a commitment to purchase or sell a specified commodity on a future date at a specified price.
o Futures contract – is a standard contract traded in a futures exchange market and one party will never know who is on
the other side of the contract in contrast with a forward contract who knew each other very well.
o Call option – gives the holder the right to purchase an asset
o Put option – gives the holder the right to sell an asset.
o Interest rate swap – a contract whereby two parties agree to exchange cash flows for future interest payments based on
a contract of loan.
o NOTE: unlike an interest rate swap, forward and futures contract, an option must be paid for. This is a derivative that
requires an initial small payment for the protection against unfavorable movement in price.

Case Analysis – Derivative

THE WOODS Company uses approximately 200,000 units of raw materials in its manufacturing operations. On
December 1, 2020, the entity purchased a call option to buy 200,000 units of raw
materials on July 1, 2021 at a strike price of P25 per unit.
The entity paid P20,000 for the call option. The entity designated the call option as a cash flow hedge
against price fluctuation for its July purchase.
The market price of the raw materials is P28 on December 31, 2020 and P21 on July 1, 2021.

REQUIRED:
1. What is the derivative asset on December 31, 2020 ?
2. What amount should be recognized as loss on call option in 2021 ?
3. What is the derivative liability on July 1`, 2021 ?
4. What is the cost of purchases on July 1, 2021 ?

• Non-Financial Assets (PAS 2, PAS 16, PAS 38, PAS 40, PAS 23, PAS 41, PAS 20, PAS 36, PFRS 5, PFRS
6, PFRS 13) – type of asset whose value is determined by tangible characteristics and physical net
worth. Examples include real estate and vehicles, intellectual property such as patents and
trademarks.

• Both financial and nonfinancial assets may be used as collateral to back secured debt standing in contrast to unsecured
debt which is only backed by the borrower's ability to pay. One factor that makes a form of collateral more attractive to
the lender is the ability to quickly sell the asset if the borrower fails to make principal or interest payments. A financial
asset that trades on an exchange, like a stock or bond, is easier to sell than a nonfinancial asset

• 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 rendering services.

• Classes of inventories are:

• Inventories of trading concern
o Is one that buys and sells goods in the same form as purchased. Merchandise
inventory is generally applied to goods held by a trading entity.
• Inventories of manufacturing concern
o Finished goods
o Goods in process
o Raw materials
o Factory or manufacturing supplies
• Applying the legal test , the following items are includible in inventory:
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o Goods owned and on hand
o Goods in transit and sold FOB destination
o Goods in transit and purchased FOB shipping point
o Goods out in consignment
o Goods in the hands of salesman or agents
o Goods held by customers on approval or in trial.

Case Analysis
PORTAL Company provided the following information:
Materials - P 1,400,000
Advance for materials ordered - 200,000
Goods in process - 650,000
Unexpired insurance on inventories - 60,000
Advertising catalogs and shipping cartons - 150,000
Finished goods in factory - 2,000,000
Finished goods in company-owned retail
Store, including 50% profit on cost - 750,000
Finished goods in hands of consignees
Including 40% profit on sales - 400,000
Finished goods in transit to customers,
Shipped FOB destination at cost - 250,000
Finished goods out on approval, at cost - 100,000
Unsalable finished goods, at cost - 50,000
Office supplies - 40,000
Materials in transit shipped FOB shipping
Point, excluding freight of P30,000 - 330,000
Goods held on consignment, at sales price, cost P150,000 - 200,000
REQUIRED:
1. What is the correct amount of inventory ?

Case Analysis

MACRO Company counted the ending inventory on December 31, 2020 and reported the amount of P2,000,000 before
any corrections.
None of the following items were included when the total amount of ending inventory was computed:
a) Goods located in the entity’s warehouse are on consignment from another entity, P150,000.
b) Goods sold by the entity and shipped FOB Destination were in transit on December 31, 2020 and received by
the customer on January 2, 2021, P200,000.
c) Goods purchased by the entity and shipped FOB Shipping Point were in transit on December 31, 2020 and
received by the entity on January 2, 2021, P300,000.
d) Goods sold by the entity and shipped FOB Shipping Point were in transit on December 31, 2020 and received
by the customer on January 2, 2021., P400,000.
REQUIRED:
1. What amount of inventory should be reported on December 31, 2020 ?

• Lower of cost and net Realizable Value – the estimated selling price in the ordinary course of business less the
estimated cost of completion and the estimated cost of disposal. Methods of accounting for inventory writedown are:
o Direct method
a) The method is also known as “cost of goods sold method”
b) Any loss on inventory writedown is NOT ACCOUNTED FOR SEPARATELY but “buried” in the cost of
goods sold.
o Allowance method (case to be solve asynchronous)
a) The inventory is recorded AT COST and any loss on inventory writedown is ACCOUNTED FOR
SEPARATELY.
b) The method is also known as “loss method”
c) A loss account “loss on inventory writedown” is debited and a valuation account “allowance for inventory
writedown” is credited.
NOTES:
1) If the required allowance increases, an additional loss is recognized.
2) If the required allowance decreases, a gain on reversal of inventory writedown is recorded.
3) The gain is limited only to the extent of the allowance balance.

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4) Preferably, the allowance method is used in order that the effects of writedown and reversal of writedown can
be clearly identified.

Case No. 20 - Inventories, Lower of Cost or NRV

HOUSEKEEPER Company has two products with cost and selling price as follows:
Product X Product Y
Selling price 2,000,000 3,000,000
Estimated selling cost 600,000 700,000
Materials and conversion cost 1,500,000 1,800,000
General administration cost 300,000 800,000
At year-end, the manufacture of inventory has been completed but no selling cost has yet been incurred.

REQUIRED:
1. Under LCNRV by individual item, the inventory shall be measured at what amount ?
2. Under the LCNRV by total, the inventory shall be measured at what amount ?

• Property, Plant and Equipment (IAS 16)

o Nature and Characteristics
These are (1). tangible assets that are held by an enterprise for (2). use in the
production or supply of goods or services for rental to others, or for
administrative purposes. These assets are expected to be (3). used during more
than one period.

o Recognition principles
An item of PPE that qualifies for recognition as an asset shall be measured
initially at cost which is the amount of cash and cash equivalent given to acquire
the asset.
• Probable that future economic benefits associated with the asset will flow to the entity
• The cost of the asset can be measured reliably
o Initial recognition basis (Accounting policy)
• Cost model – the PPE are carried at cost less any accumulated depreciation and any accumulated impairment loss.
• Revaluation model – means that the PPE are carried at revalued amount, being fair value at date of revaluation less any
subsequent accumulated depreciation and subsequent impairment loss.

o Depreciation methods (ASYNCHRONOUS ) : Prob 27-1 & 27-2

• Equal or uniform charge methods
o Straight-line
o Composite
o Group
• Variable charge or use-factor methods
o Working hours or service hours
o Production or output method
• Decreasing charge or accelerated or diminishing balance methods
o Sum of the years’ digits
o Declining balance method
o Double declining balance method
• Other methods
o Inventory or appraisal
o Retirement method
o Replacement method
o Impairment of asset (ASYNCHRONOUS: TA, Impairment, v1, P817)
• Is a fall in the market value of an asset so that the recoverable amount is now less than the carrying amount in the
statement of financial
position.
• External sources that would indicate impairment of the asset
o Significant decline in the market value of the asset.
o Significant change in the technological, market, legal or economic environment of the business.
o Increase in the interest rate or market rate of return on investment which will affect the discount rate used in
calculating the value in use.
o The carrying amount exceeds the fair value of the net assets.
• Internal sources that would indicate impairment of the asset
o Obsolescence or physical damage of an asset
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o Significant change in the manner or extent the asset is used on the entity.
o Economic performance of an asset will be worse than expected

Case analysis – PPE (Depreciation)

AMIANAN Company recently purchased two items of equipment:

a) Acquired a press at an invoice price of P3,000,000 subject to a 5% cash discount which was taken. Costs of
freight and insurance during shipment were P50,000 and installation costs amounted to P200,000.
b) Acquired a welding machine at an invoice price of P2,000,000 subject to a 10% cash discount which was not
taken. Additional welding supplies were acquired at a cost of P100,000.
REQUIRED:
1. What is the total increase in the equipment account as a result of the transactions ?

Case Analysis – PPE

STARWASH, Incorporated, at the beginning of the current year acquired the following assets:
Cost Residual value Useful life (years)
Machinery 310,000 10,000 5
Office equipment 110,000 10,000 10
Building 1,600,000 100,000 10
Delivery equipment 430,000 30,000 4
REQUIRED:
1. What is the composite depreciation rate ?
2. What is the total composite life of the assets ?
3. What is the journal entry to record the depreciation for the current year ?

Case Analysis – Depreciation Method

BUTTER Company acquired a machinery on April 1, 2020 as follows:

Cost P 1,200,000
Residual value 120,000
Estimated useful life 8 years

REQUIRED:
1. What is the depreciation for 2020 using sum-of-years digits ?
2. What is the depreciation for 2021 using sum of years digits ?
3. What is the depreciation for 2020 using double declining balance ?
4. What is the depreciation for 2021 using double declining balance ?

• Investment Property
It is defined as property (land or building or part of building or both) held by an owner or by the lessee under a finance
lease to earn rentals or for capital appreciation or both.

o Nature and measurement principle

✓ Defined as property (land or building or part of the building or both can qualify as investment property)
✓ Examples of investment property are
▪ Land held for long-term capital appreciation
▪ Land held for a currently undetermined use
▪ Building owned by the entity or held under a finance lease and leased out under one or more operating leases.
▪ Building that is vacant but is held to be leased out under one or more operating leases.
▪ Property being constructed or developed for future use as investment property.

o Initial measurement of Investment property

An investment property shall be measured initially at its cost:
a) Purchase price
b) Directly attributable expenditures such as professional fees for legal services, property transfer taxes and other
transaction costs.

c) The difference between the cash price and the total payments is recognized as interest expense over the credit
period.

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o Subsequent measurement
The entity shall choose either of the following models as its accounting policy and shall apply the policy to all of its
investment property:
a) Fair value model – under this model, the changes in fair value from year to year are recognized in profit or
loss.

b) Cost model – under this model, the asset shall be carried at cost less accumulated depreciation and any
accumulated impairment loss.

Case Analysis

An entity ventured into construction of a mega shopping mall in Asia which is rated as the biggest shopping. The board
of directors decided instead of selling the shopping mall to a local investor, the entity would hold this property for
purposes of earning rental income to tenants.
The construction of the shopping mall was completed and the property was placed in service on January 1, 2020 given
the cost of construction at P100 million. The shopping mall’s useful life is 10 years with a residual value of P10 million.
An independent valuation expert provided the following fair value at each subsequent year-end:
December 31, 2020 - P 120 million
December 31, 2021 - 125 million
December 31, 2022 - 115 million
REQUIRED:
A. Using the Cost Model, prepare journal entries to record:
1. The acquisition of the investment property.
2. The subsequent annual depreciation.

B. Using the Fair Value Model, prepare journal entries to record Investment Property
in :
1. 2020
2. 2021
3. 2022.

Case Analysis – Investment Property

BANTAY DAGAT Company owned three investment properties given the following details:
Initial cost Fair value (Dec 31, 2020 Fair value (Dec 31, 2021
Property 1 2,700,000 3,200,000 4,000,000
Property 2 3,450,000 3,000,000 2,100,000
Property 3 3,300,000 3,900,000 3,600,000
Each property was acquired in 2020 with a useful life of 10 years. The accounting policy is to use the fair value model
for investment property.
REQUIRED:
1. What is the gain or loss to be recognized for 2021 ?

• Intangibles
Is an identifiable non-monetary asset without physical substance and must be controlled by the entity. Thus the three
essential criteria in the definition are:
a) Identifiability – when it is separable, it arises from contractual legal rights
b) Control – the power of the entity to obtain the future economic benefits
c) Future economic benefits – includes revenue from sale of products or services, cost savings & other benefits
resulting from the use of the asset by the entity.

• Nature and recognition principle (conditions met)

a) Probable that future economic benefits attributable to the asset will flow to the entity.
b) The cost of the intangible asset can be measured reliably.
c) Identifiable intangible assets are:
▪ Patent
▪ Copyright
▪ Franchise
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▪ Trademark or Brandname
▪ Customer list
▪ Computer software
▪ Broadcasting license, airline right and fishing right
d) Intangible asset are classified as unidentifiable if it can not be sold, transferred, licensed, rented or exchanged
separately.

Case Analysis
DEBIT Company purchased a patent on January 1, 2015 for P6,000,000. The original life of the patent was estimated to
be 15 years. However, in December 2020, the controller received information proving conclusively that the product
protected by the patent would be obsolete within 4 years.
The entity decided to write off the unamortized portion of the patent cost over five years beginning in
2020.
REQUIRED:
1. What is the patent amortization for 2020 ?

• Measurement after recognition

An entity shall choose either of these models as an accounting policy:
1) Cost model – intangible asset shall be carried at cost less any accumulated amortization and any accumulated
impairment loss.
2) Revaluation model – intangible asset shall be carried at a revalued amount less any subsequent amortization
and any subsequent impairment loss.
3) Intangible asset can only be carried at revalued amount if there is an active market for the asset.

Case Analysis – Intangible Assets

MITSOBOSHI Company was granted a patent on January 1, 2017 and appropriately capitalized P450,000 of related
costs. The entity was amortizing the patent over the useful life of 15 years.
During 2020, the entity paid P150,000 in legal costs in successfully defending an attempted infringement of the patent.
After the legal action was completed, the entity sold the patent to the plaintiff for P750,000. The policy is to take no
amortization in the year of disposal.

REQUIRED:
1. What amount should be reported as gain from sale of patent in 2020 ?

• Subsequent expenditures
Subsequent expenditure on an intangible asset shall be recognized as expense. However these expenses may be
capitalized or added to the cost of the intangible asset if the two (2) recognition criteria for intangible asset are met.
o Amortization
o A systematic allocation of the amortizable amount (cost of the intangible asset less residual value) of an intangible
asset over the useful life.
o Intangible asset with limited or finite life are amortized over their useful life.

• Biological Assets/Agricultural produce/Harvest

• Are living animals and living plants
• Agricultural produce is the harvested products of an entity’s biological assets
• Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.

• Classification of biological assets

Biological Assets Agricultural produce Product After Harvest

Sheep Wool Yarn, carpet
Trees in plantation forest Felled trees Logs, lumber
Sugarcane plant Harvested cane Sugar
Dairy cattle Milk Cheese
Pigs Carcass Sausage, cured ham
Tobacco plant Picked leaves Cured tobacco

• Recognition and measurement

o An entity shall recognize a biological asset or agricultural produce when
a) Entity control the asset
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b) Probable that future economic benefits associated with the asset will flow to the entity
c) The fair value or cost of the asset can be measured reliably.
o Biological asset shall be measured on initial recognition and at the end of each reporting period at fair value less cost
of disposal

• Non-Current Assets Held for Sale

o A non-current asset is classified as held for sale if the carrying amount shall be recovered principally through a sale
transaction rather than through continuing use.
o Such asset shall be excluded from property, plant and equipment but presented separately as current assets.
o That a non-current asset classified as held for sale shall not be depreciated.

• Idle or Abandoned Property

o An entity shall not classify as held for sale a noncurrent asset that is to be abandoned. This is because the carrying
amount would be recovered principally through continuing use.

• Optional Disclosures
Entities are encouraged to disclose the following information which may prove relevant to the needs of financial
statement users:
o The carrying amount of temporarily idle non-current assets
o The gross carrying amount of any fully depreciated PPE still in use
o The carrying amount of PPE retired from active use and classified as held for sale
o When the cost model is used.

Case Analysis

MONTERO Company' noncurrent assets were accounted using the revaluation model. On September 1, 2020, the entity
classified a land as held for sale.

At that date, the carrying amount of the land was P4,900,000 and the balance in the revaluation surplus was P1,200,000.
Also on the same date, the fair value of the land was estimated at P5,700,000 and the cost of disposal at P140,000. On
December 31, 2020, the fair value less cost of disposal of the land did not change. The land was sold on January 31,
2021 for P6,200,000.

1. What is the adjusted carrying amount of the land on December 31, 2020 ?
2. What is the revaluation surplus on December 31, 2020 ?
3. What is the impairment loss for 2020 ?
4. What amount should be reported as gain on disposal of land in 2021 ?

INTEGRATED ACCOUNTING : FINANCIAL ACCOUNTING & REPORTING (P1)

INTEGRATED ACCOUNTING – FAR (P1)

MODULE 4 : LIABILITIES
This module identify the essential characteristics of an accounting liability, examples of liabilities, the initial and
subsequent measurement of current and noncurrent liabilities, debt restructuring and its principles of derecognition. The
non-Financial liabilities such as premiums and warranties, unearned
revenues for gift certificates and subscriptions, provisions and contingencies.
4.1 Financial Liabilities
o Is any liability that is a contractual obligation to deliver cash or other financial asset to another entity
o To exchange financial instruments with another entity under conditions that are
potentially unfavorable.
Examples of Financial Liabilities:
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o Trade accounts payable
o Notes payable
o Loans payable
o Bonds payable
Examples of non-financial liabilities
o Deferred revenue and warranty obligations – because the outflow of economic benefits
is the delivery of goods and services rather than a contractual obligation to pay cash
o Income tax payable – because it is imposed by law and non-contractual.
o Constructive obligations – because the obligations do not arise from contracts.

4.1.1 Accounts payable and other trade payables

4.1.1.1 Initial recognition
o An entity shall measure initially a financial liability at fair value minus transaction costs that are directly attributable to
the issue of the financial liability.
o However, the transaction costs are expensed immediately if the financial liability is designated initially at fair value
through profit or loss.
o Transaction costs include the following:
▪ Fees and commissions paid to agents, advisers, brokers, dealers
▪ Levies by regulatory agencies & security exchanges
▪ Transfer taxes and duties.
o Transaction does not include:
▪ Debt premiums or discounts
▪ Financing costs
▪ Internal administrative or holding costs
4.1.1.2 Subsequent measurement
o Provides that after initial recognition, an entity shall measure a financial liability at:
▪ Amortized costs using the effective interest method – simply stated, the difference between the face amount and
present value of the financial liability is amortized using the effective interest method.
▪ Fair value through profit or loss – under this option, the financial liability (example: bond payable) is measured at fair
value at every year-end and any change in fair value is recognized in profit or loss.

Case Analysis - Accounts Payable

TANGO Company disclosed the following liability account balances on December 31, 2020:
Accounts payable P 1,900,000
Bonds payable 3,400,000
Premium on bonds payable 200,000
Deferred tax liability 400,000
Dividends payable 500,000
Income tax payable 900,000
Note payable, due January 31, 2021 600,000
REQUIRED:
1. On December 31, 2020, what total amount should be reported as current liabilities ?

Case Analysis – Accounts Payable

681 APPLIANCE Company sells appliance service contracts agreeing to repair appliances for two-year period. The
past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly during the first
contract year and 60% is incurred evenly during the second contract year.
Receipts from service contract sales are P500,000 for 2020 and P600,000 for 2021. Receipts from contracts are credited
to unearned service revenue. All sales are made evenly during the year.

REQUIRED:
1. What is the contract revenue for 2020 ?
2. What is the unearned revenue on December 31, 2020 ?
3. What is the contract revenue for 2021 ?
4. What is the unearned revenue on December 31, 2021 ?

• Debt restructuring

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o Nature and forms
✓ Debt restructuring is a situation where the creditor grants to the debtor concession that would not otherwise be
granted in a normal business relationship. Common forms are:

✓ Asset swap – transfer of any asset such as real estate, inventory or investment by the debtor to the creditor in
full settlement of an obligation. Asset swap is treated as a derecognition of a financial liability or extinguishment of an
obligation.

✓ Equity swap – a transaction whereby a debtor and a creditor may renegotiate the terms of a financial liability
with the result that the liability is fully or partially extinguished by the debtor issuing equity instrument to the creditor.

✓ Modification of terms – may involve either the interest or maturity value or both.

✓ Modification of interest may be a reduction of the interest rate, forgiveness of unpaid interest or a moratorium
on interest payment.

Case Analysis – Asset SWAP

An entity provided the following balances at year-end:
Note payable - 2,000,000
Accrued interest payable - 400,000
At year-end, the entity transferred to the creditor land with carrying amount of P1,500,000 and fair value of P2,200,000.

REQUIRED:
1. What is the amount of gain or loss on the extinguishment of debt ?
2. Prepare the journal entry to record the transaction.

Case Analysis – Equity Swap

An entity showed the following data at year-end:
Bonds payable - P 5,000,000
Accrued interest payable - 500,000
The entity issued share capital with a total par value of P2,000,000 and fair value of P4,500,000 in full settlement of
the bonds payable and accrued interest. On the other hand, the fair value of the bonds payable is P4,700,000.

REQUIRED:
1. How much is the gain or loss on the extinguishment of debt using the fair value of shares ?
2. How much is the gain or loss on the extinguishment of debt using the fair value of Bonds payable ?
3. How much is the gain or loss on the extinguishment of debt using the carrying amount of bonds payable ?
4. What is the appropriate journal entries for each ?

Case Analysis – Modification of Terms

On January 1, 2020, ABAKADA Company showed the following:

Note payable – due January 1, 2020 @ 14% 5,000,000
Accrued Interest payable 1,000,000
The company is granted by the creditor the following concessions on January 1, 2020:
a) The accrued interest of P1,000,000 is forgiven.
b) The principal obligation is reduced to P 4,000,000.
c) The new interest rate is 10% payable every December 31.
d) The new date of maturity is December 31, 2023.

NOTES:
1. The PV of the new note payable is equal to the PV of the new principal plus the PV of the
interest payments on the new liability.
2. The present value (PV) of 1 at 14% for 4 periods is 0.5921.
3. The present value (PV) of an ordinary annuity of 1 at 14% for 4 periods is 2.9137.

REQUIRED:
Prepare the appropriate journal entries with accompanying computations to record:
1. The extinguishment of the old note payable.
2. The interest payment on the new note payable for 2020.
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3. To amortize the discount on note payable for 2020.

• Principles of derecognition
o Approach 1 - The basic derecognition principle is that an entity should derecognize a financial asset when it no longer
qualifies as an asset of the entity.
o Approach 2 – an entity to derecognized a financial asset or a pre-defined component thereof if:
✓ The contractual rights to the cash flows from the asset expire
✓ The entity transfers the asset

• Non-Financial Liabilities
o Are mainly contingencies or types of liabilities that are not of financial transaction origin. Examples include deferred
revenue, advances received and provisions that might have to be made as a result of these changes.
o Non-financial liabilities mainly require non-cash obligations that need to be provided in order to settle the balance,
which includes goods, services, warranties, environmental liabilities.
o Non-financial liability can be best described as an obligation that is associated with the retirement or maintenance of a
long-lived asset in the future.

• Measurement and Accounting Treatment (IAS 37)

• Non-financial liabilities should be measured at amounts that would rationally be paid to settle any present obligation
or amount to transfer it to a third party on the balance sheet date.

• Premiums
• Premiums are articles of value such as toys, dishes, silverware and other goods given to customers as result of past
sales or sales promotion activities.

Case Analysis 3 – Premiums

XYZ manufactures Product X and sells it at P300 per unit. A bowl is offered to customers on the return of 5 wrappers
plus remittance of P10. The bowl costs P50 and is estimated that 60% of the wrappers will
be redeemed. The first year data concerning the premium plan is summarized as:
Sales , 10,000 units at P300 each 3,000,000
Bowls purchased, 2,000 units @ P50 each 100,000
Wrappers redeemed 4,000
REQUIRED:
1. What are the journal entries made in the first year to record the sales, premium purchases and
redemption ?
2. What is the amount of estimated liability at year-end ?

• Warranty
o Home appliances like TV sets, stereo sets refrigerators and the like are often sold under guarantee or warranty to
provide free repair service or replacement during a specified period if products are defective.
o There are two approaches in recording warranty expense:
✓ Accrual approach
Has the soundest theoretical support because it properly matches cost and revenue.
✓ Expense as incurred approach
Is the approach of expensing warranty cost only when actually incurred.

Case Analysis 4 – Warranty (Accrual Approach)

BGC Company sells 1,000 units of TV sets at P9,000 each for cash. Each TV set is under warranty for one year. The
entity has estimated from past experiences that warranty cost will probably average P500 per unit and that only 60% of
the units sold will be returned for repair. The company incurs P180,000 for repairs during the year.

REQUIRED:
1. What is the amount of warranty cost to be set up as estimated liability on the warranty ?
2. Prepare the journal entries ?

Case Analysis 5 – Warranty (Expense as Incurred Approach)

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BCDA sells refrigerators that carry a 2-year warranty against defects. The sales and warranty repairs are made evenly
throughout the year. Based on past experience, the entity projects an estimated warranty cost as a percentage of sales as
follows:
First year of warranty - 4%
Second year of warranty- 10%
2020 2021
Sales 5,000,000 6,000,000
Actual warranty repairs 140,000 300,000

REQUIRED:
1. Prepare the journal entries in 2020.

• Provisions and contingencies

• Provisions is an existing liability of uncertain timing or uncertain amount which shall be recognized as a liability in the
financial statements under the following conditions:
o The entity has a present obligation (legal or constructive) as a result of past events.
o It is probable that an outflow of resources would be required to settle the obligation
o The amount of obligation can be measured reliably.
• Examples of provisions:
o Warranties – obligation arising from sale of product with warranty
o Environmental contamination – example is the cost of cleaning the entity
o Abandonment costs – an oil company initially purchases an oil field has legal
obligation to decommission the site at the end of its life.
o Court case – a provision is recognized for the best estimate of the damages in a
present obligation in case the entity losses the case.
o Guarantee – an entity gives a guarantee of certain borrowings of another entity
who at the end of the year files a petition for bankruptcy.
• Contingent Liability is a possible obligation that arises from past event and whose existence will be confirmed only by
the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity, thus
not recognized because:
o It is not probable that an outflow of resources will be required to settle the obligations
o The amount of the obligation cannot be measured reliably.

Case Analysis – Decommissioning liability

ABC Mining Company extracts natural gas and oil in the Philippine Malampaya Deep. On January 1, 2020, the entity
constructed a drilling platform for P25,000,000 and is required by Philippine law to remove and dismantle the platform
at the end of its useful life of 10 years.
The straight-line method is used in depreciating the drilling platform. The entity has estimated that such
decommissioning will cost P5,000,000. Based on a 12% discount rate, the present
value of 1 for 10 years is 0.322.
REQUIRED
1. What is the amount of decommissioning liability in 2020 ?
2. What is the amount of interest expense in 2020 ?
3. What is the amount of depreciation expense in 2020 ?
4. What is the amount of interest expense in 2021 ?
5. Prepare the journal entries in 2020 and 2021.

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INTEGRATED ACCOUNTING : FINANCIAL ACCOUNTING & REPORTING (P1)

MODULE 5 : Equity
This module discusses the share capital transactions of business entities, the nature, recognition and measurement of
share capital. The elements of shareholders’ equity, issuance and retirement of preference share and ordinary shares,
share split, treasury shares and other equity transactions. Dividends, retained earnings and other comprehensive income
is likewise discussed including book value
and earnings per share of stocks.
5.1 Share capital transactions
5.1.1 Nature, recognition and measurement
• “capital stock” or “share capital” is the amount fixed in the articles of incorporation to be subscribed and paid in by the
shareholders of the corporation. Also called the “authorized share capital”. The share capital is measured at an amount
equal to the following in the order of priority:
o Fair value of services rendered
o Fair value of shares issued
o Par value or stated value of shares issued
• Ordinary share capital – holders has no fixed return on investment and the financial reward is dependent on the
operations of the entity.
• Preference share capital – have preference claims on dividends and net assets in
the event of liquidation and they have a limited or fixed return on investment.
o Callable preference share – is one which can be called in for redemption at a specified price at the option of the
corporation or issuer.
o Redeemable preference share - share that provides for mandatory redemption by the issuer for a fixed amount at a
future date. They are classified as current or noncurrent financial liability depending on the redemption date.
o Convertible preference share – one in which gives the holder the right to exchange the holdings for another securities
(ordinary shares or bonds) of the issuing corporation.

Case Analysis – Callable

ABC issued 10,000 callable preference shares with par value of P100 at P120 per share. Subsequently, the preference
shares are called in at P150 per share.

REQUIRED:
1. What is the journal entry to record the issuance of the preference shares ?
2. What is the journal entry to record the call ?

NOTE: WHEN PREFERENCE SHARES ARE CALLED IN AT MORE THAN THE ORIGINAL ISSUE PRICE
OF THE PREFERENCE SHARES, THE EXCESS IS DEBITED TO RETAINED EARNINGS.

Case Analysis – Redeemable

ABC issued 10,000 preference shares at the par value of P100 per share. The preference shares have a mandatory
redemption by the issuer for P 1,200,000. A dividend of P100,000 is paid to the redeemable preference shareholders.
Subsequently, the preference shares are redeemed by the issuer for P1,200,000.

REQUIRED:
1. What is the journal entry to record the issuance of the redeemable shares ?
2. What is the journal entry to record the payment of dividend ?
3. What is the journal entry to record the redemption of the preference shares ?

Case Analysis – Convertible

ABC Company provided its record of shareholders’ equity as follows:
Preference share capital, 10,000 shares, P100 par - 1,000,000
Ordinary share capital, 200,000 shares authorized
100,000 shares issued, P30 par - 3,000,000
Share premium – PS - 200,000
Share premium – Ordinary - 1,000,000
Retained earnings - 2,000,000
REQUIRED:
1. What is the journal entry if the preference share is converted into ordinary share in the ratio
of one preference share for three (3) ordinary shares ?
2. What is the journal entry if the preference share is converted into ordinary share in the ratio
of one preference share for five (5) ordinary shares ?

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• Issuance and retirement of preference and ordinary shares , Share split, treasury shares and other equity transactions
o Share split up – a transaction whereby the original shares are called in for cancelation and replaced by a larger number
accompanied by a reduction in the par value or stated value.
Sample Case:
An entity has 10,000 shares issued and outstanding, with P100 par value. If the shares are split up 5 to 1, the new
capitalization would be 50,000 shares with P20 par value.

COMPUTATION:
SHARE CAPITAL (10,000 SHARES x P100) 1,000,000
TOTAL SHARES AFTER SPLIT UP 50,000 SHARES
SHARES NEW PAR VALUE P 20

Share split down – a transaction whereby the original shares are canceled and replaced by a smaller number
accompanied by an increase in the par value or stated value.
Sample Case:
An entity has 10,000 shares issued and outstanding with P100 par value. If the shares are split down 5 to 1, the new
capitalization would be 2,000 shares with P500 par value.

COMPUTATION:
SHARE CAPITAL BEFORE SPLIT DOWN (10,000 x P100) 1,000,000
SHARE CAPITAL AFTER SPLIT (2,000 x P500) 1,000,000
Treasury shares – are an entity’s own shares that have been issued and then reacquired but not canceled. The
treasury shares are initially recorded at cost of acquisition and subsequently may be reissued or sold at cost, more than
cost or below cost.
Retirement of treasury shares –if treasury shares are subsequently retired, the share capital account is debited
at par value or stated value and treasury account credited at cost.
Sample Case:

1,000 ordinary shares with par of P100 are held as treasury at a cost of P80,000 and subsequently retired, what will be
the journal entry ?

Ordinary share capital 100,000

Treasury shares 80,000
Share premiums – treasury shares 20,000
NOTE:
IF THE RETIREMENT RESULTS IN A LOSS (COST OF TREASURY SHARES EXCEEDS
THE PAR VALUE) SUCH LOSS IS DEBITED TO THE FOLLOWING IN THE ORDER OF
PRIORITY:
1. SHARE PREMIUM FROM ORIGINAL ISSUANCES
2. SHARE PREMIUM FROM TREASURY SHARES
3. RETAINED EARNINGS

• Dividends
Distributions of earnings or capital to the shareholders in proportion to their shareholdings and is classified into :
Dividends out of earnings
Dividends out of capital

o Essential dates for accounting purposes

Date of declaration – the date on which the board of directors authorize the payment of dividends to
shareholders
Date of record – the date on which the stock and transfer book of the corporation will be closed for registration
and only those shareholders registered are entitled to receive dividends.
Date of payment –the date on which the dividend liability is to be paid.

• Forms of dividends out of earnings:

o Cash dividends
o Property dividends – dividends in kind or noncash assets.
o Liability dividends in the form of bond and scrip – note which is a formal evidence of indebtedness to pay a sum of
money at some future time.
o Share dividends or bonus issue – are distributions of the earnings of the entity in the form of the entity’s own shares.
When share dividends are declared, the retained earnings of the entity are in effect capitalized, meaning transferred to
share capital

• Retained earnings
o Cumulative balance of the following:
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 Net income or loss for the period
Dividend distribution
Prior period errors
Changes in accounting policy
Reclassification of some components of OCI
Other capital adjustments

o Kinds of retained earnings

Unappropriated – that portion which is free and can be declared as dividends to shareholders
Appropriated – that portion which has been restricted and therefore is not available for any dividend
declaration.

Case Analysis – Retained earnings

RYAN Company issued share capital of 20,000 shares with P5 par at P10 per share. On January 1, 2020, the retained
earnings totaled P300,000. In March 2020, the entity reacquired 5,000 shares at P20 per share. In June 2020, the entity
sold 1,000 of these shares to corporate officers for P25 per share.
The cost method is used to record treasury shares. Net income for 2020 was P60,000.

REQUIRED:
1. What amount should be reported as unappropriated retained earnings on December 31,
2020 ?

Case Analysis – Retained earnings

On January 1, 2020, ABC Company reported P1,750,000 of appropriated retained earnings for the construction of a new
office building which was completed in 2020 at a total cost of P1,500,000. In 2020, the company appropriated
P1,200,000 of retained earnings for the construction of a new plant. Also, P2,000,000 of cash was restricted for the
retirement of bonds payable due in 2021.

REQUIRED:
1. What amount should be reported as appropriated retained earnings on December 31, 2020 ?

• Other Comprehensive Income (OCI) (not recognized in profit or loss or permitted by PFRS)
Unrealized gain or loss on equity investment
Unrealized gain or loss on debt investment
Gain or loss from translating the financial statements of a foreign operation
Change in revaluation surplus
Unrealized gain or loss from derivative contracts designated as cash flow hedge
Remeasurements of defined benefit plan, such as actuarial gain or loss recognized in the current year
Change in the fair value attributable to the credit risk of a financial liability irrevocably
designated at fair value through profit or loss.
• Book value per share and Earnings per share
• Book value per share – is the amount that would be paid on each preference
and ordinary share assuming the entity is liquidated.
• If there is only one class of share capital (ordinary share)
FORMULA:
TOTAL ORDINARY SHARES EQUITY
BOOK VALUE – OS = --------------------------------------------------------
TOTAL ORDINARY SHARES OUTSTANDING

• If there are two classes of share capital – it is necessary to apportion the shareholders’ equity between the preference
share and ordinary share.
FORMULA:
PREFERENCE SHAREHOLDERS’ EQUITY
BOOK VALUE – PS = ------------------------------------------------------------
PREFERENCE SHARES OUTSTANDING

ORDINARY SHARES EQUITY

BOOK VALUE – OS = --------------------------------------------------------
ORDINARY SHARES OUTSTANDING

• Basic earnings per share – means the amount expected to be received by a

shareholder each year as a return on investment.
• Formula to compute the basic earnings per share
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 NET INCOME (INCOME – DIVIDENDS (PS)
BASIC EARNINGS PER SHARE = ----------------------------------------------------------
ORDINARY SHARES OUTSTANDING
NOTES:
o Earnings should be the net Income after deducting the annual preference dividend.
o The annual cumulative preference dividend is deducted from net income, whether such dividend is declared or not.
o The annual noncumulative preference dividend is deducted from net income only when declared.
o The ordinary shares outstanding should be the weighted average ordinary shares outstanding.

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INTEGRATED ACCOUNTING : FINANCIAL ACCOUNTING & REPORTING (P1)

MODULE 6 : Other Topics

This module discusses share-based payments, borrowing costs its nature and criteria for capitalizing borrowing costs,
operating lease and finance lease accounting and taxable profit, employee benefits, identification and measurement of
interim and segment reporting, reconciliation of profit using the
transaction approach, PFRS for Small and medium Sized Entities (SMEs) and Micro Enterprises.
6.1 Share-based payments (PFRS 2)
Requires an entity to recognize share-based payment transactions (such as granted shares,
share options, or share appreciation rights) in its financial statements, including transactions
with employees or other parties to be settled in cash, other assets, or equity instruments of the
entity. Two ways are:
• Equity-settled share based payment transactions
o The entity issues equity instruments in consideration for services received, for example, SHARE OPTIONS.
o Share options are conceived as additional compensation on senior offices and other key employees.
o Share options is measured using 2 methods:
1. Fair value method – the compensation is equal to the fair value of the share
options on date of grant.
2. Intrinsic value method – the compensation is equal to the intrinsic value of the
share options (Intrinsic value means excess of market value of the share over
the option price)

• Cash-settled share-based payment transactions

The entity incurs a liability for services received and the liability is based on the entity’s equity instruments, for
example, SHARE APPRECIATION RIGHTS.

Case Analysis – Share-based payments (Fair Value method)

On January 1,1 2020, share options are granted to employees to purchase 100,000 ordinary shares of P50 par value at
P60 per share. On this date, the fair value of each share option is P20. The option are exercisable immediately. The
employees exercised all their share options on December 31, 2020.

REQUIRED:
1. What is the journal entry on January 1, 2020 to recognize the compensation?
2. What is the journal entry on December 31, 2020 to record the exercise of share option?

Case Analysis – Share-based payments (Intrinsic Value method)

On January 1, 2020, an entity granted 10,000 share options to its employees. The share options vest on December 31,
2021 provided the employees remain in service until then. The fair value of the share
option cannot be estimated reliably. The par value per ordinary share is P100.
The option price is P125 and the market value of the ordinary share is also P125 at the date of grant. All
share options vested on December 31, 2021 and no employees left the entity.
The share options can be exercised starting January 1, 2022 and expire two years after. All share
options are exercised on December 31, 2022. The share market prices are as follows:
December 31, 2020 - P 150
December 31, 2021 - P 180
December 31, 2022 - P 200
REQUIRED:
1. What is the amount of compensation expense to be recognized on 2020, 2021 and 2022 ?
2. What are the journal entries at the end of each year ?

NOTE: INCREASE IN INTRINSIC VALUE AFTER THE VESTING PERIOD IS RECOGNIZED AS

ADDITIONAL COMPENSATION IMMEDIATELY

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6.2 Borrowing costs ( PAS 23) (Intermediate Acctg, v1, p690)
• Are defined as interest and other costs that an entity incurs in connection with borrowing of funds which include the
following:
o Interest expense calculated using the effective interest method.
o Finance charge with respect to a finance lease.
o Exchange difference arising from foreign currency borrowing to the extent that it is regarded as an adjustment to
interest cost.
• Excluded from capitalization
o Assets measured at fair value, such as biological assets.
o Inventory produced or manufacture in large quantity on a repetitive basis, such as maturing “whisky”
o Assets that are ready for their intended use or sale when acquired.
• Assets finance by Specific borrowings
o If funds are borrowed specifically for acquiring a qualifying asset, the amount of capitalizable borrowing cost is the
actual borrowing cost incurred less any investment income from the temporary investment of those borrowings.

6.2.1 Nature and criteria for capitalizing borrowing costs

• Under the PFRS for SMEs, an SME shall recognize all borrowing costs as expense of the period when incurred. The
PFRS for SMEs does not permit capitalization of interest even if the interest is directly attributable to the acquisition,
construction or production of a qualifying asset.
• Under the full PFRS, borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset shall be capitalized as part of the cost of the asset

Case Analysis – Borrowing cost

At the beginning of 2020, ABC Company borrowed P1,500,000 at an interest of 10% specifically for the construction of
a new building. The actual borrowing cost on this loan is P150,000. The company had
also outstanding during the year a 5-year 8% general borrowing of P7,000,000.
The construction of the building started on January 1, 2020 and was completed on December 31, 2020.
Expenditures on the construction on 2020 were:
January 1 - P 500,000
April 1 - 1,000,000
May 1 - 1,500,000
September 1 - 1,500,000
December 31 - 500,000
Total cost - P 5,000,000

REQUIRED:
1. What is the amount of average expenditures ?
2. What is the amount of the general borrowing ?
3. What is the amount of the capitalizable borrowing cost ?

Insert here
Borrowing cost COMPANY E

a) Leases (PFRS 16, PFRS 17)

o A lease is an agreement between one party called “LESSOR” and another called “LESSEE” whereby the LESSEE is
granted the right to use the property owned by the LESSOR for a specific period of time in consideration for certain
payment in the form of rent. Two kinds
of lease are recognized as follows:
b) Operating lease (Theory of Accounts, p124 and Valix, v2, p406)
o Lease is classified as operating lease if it does not transfer substantially all the risk and rewards incidental to
ownership.
o Lease payments under an operating lease shall be recognized as an expense on a straight-line basis over the lease term
unless another systematic basis is more representative of the time pattern of the user’s benefit (part of Lessee- PAS 17
paragraph 33).
o Lease income from operating lease on the part of the lessor shall be recognized on a straight-line basis over the lease
term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the
leased asset is diminished. (part of Lessor, PAS 17 paragraph 50)

INSERT HERE operating lease – VENUS CO.

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c) Finance lease – LESSEE
o Lease is classified as finance lease if it transfers substantially all the risks and rewards incident to ownership of an
asset. Title may or may not eventually be transferred.
o Criteria in order that a lease shall be classified as a finance lease :
a) The lease transfers ownership of the leased asset to the lessee at the end of the lease term
b) The lessee has bargain purchase option
c) The lease term is for the major part of the economic life of the asset even if title is not transferred (% is not
provided in PAS 17)
d) The present value of the minimum lease payment amounts to substantially
all of the fair value of the leased asset at the inception of the lease.

INSERT HERE – FINANCE LEASE HUAWEI

d) Finance Lease – LESSOR

o Direct financing lease – recognized only interest income
a) With residual value
b) Transfer of title to lessee
o Sales type lease - recognizes interest income and gross profit on sale

o Components of Lease Payments (Intermediate Acctg, v2, p338)

• The lease payments comprise the following payments for the right to use the underlying asset during the lease term:
o Fixed lease payments
o Variable lease payments
o Exercise price of a purchase option if the lessee is reasonably certain to exercise the option
o Amount expected to be payable by the lessee under a residual value guarantee
o Termination penalties if the lease term reflects the exercise of a termination option.

Case Analysis – Direct Financing Lease

On January 1, 2020, ABC Company (Lessor) leased a machinery to another entity with the following details:
Cost of machinery 1,518,650
Annual rental payable at end of each year 500,000
Lease term 4 years
Useful life of machinery 4 years
Implicit interest rate 12%
Present value of annuity of 1 for 4 years at 12% 3.0373
REQUIRED:
1. What is the amount of unearned interest income ?
2. What is the journal entry to record the lease receivable ?

NOTES:
• PAYMENT REPRESENTS THE ANNUAL RENTAL
• INTEREST IS EQUAL TO PRECEDING PRESENT VALUE TIMES INTEREST RATE (12%)
• PRESENT VALUE IS THE BALANCE OF THE PRESENT VALUE AFTER DEDUCTING PRINCIPAL
PAYMENT
• INTEREST ON THE LAST AMORTIZATION IS BALANCING AMOUNT – PAYMENT MINUS PRINCIPAL

e) Income tax (PAS 12, PFRS 14)

✓ Accounting profit – or financial income is the net income for the period before deducting income tax expense

✓ Taxable profit – is the income for the period determined in accordance with the rules established by the
taxation authorities upon which income taxes are payable or recoverable.

f) Difference between accounting and taxable income:

o Permanent differences
✓ Items of revenue and expense which are included in either accounting income or taxable income but will never
be included in the other.
✓ It pertains to non-taxable revenue and non-deductible expenses.

Page | 28
✓ Do not give rise to deferred tax asset and liability because they have no future tax consequences. Examples
include the following:
a). interest income on deposits
b). dividends received
c). life insurance premiums
d). Tax penalties, surcharges and fines are non-deductible.

o Temporary differences
a) Differences between the carrying amount of an asset or liability and the tax base and also include timing
differences.
b) temporary differences give rise either to (1). Deferred tax liability and (2).
Deferred tax asset
o Deferred tax liability
It is the amount of income tax payable in future periods with respect to a taxable temporary difference. It arises from the
following
1). When the accounting income is higher than taxable income because of timing
differences.
2). When the carrying amount of an asset is higher than the tax base.
3). When the carrying amount of a liability is lower than the tax base. (vol 2, p 523)
o Deferred tax asset
Is the amount of income tax recoverable in future periods with respect to deductible temporary differences and operating
loss carry forward.

Case Analysis – Deferred Tax Liability

In 2020, ABC Company reported in accounting income a gross profit on installment sale of P 1,000,000 but not in
taxable income. The temporary difference is expected to be reported in taxable income
equally in 2021 and 2022. The income tax rate is 30%.
2020 2021 2022
Accounting Income 4,000,000 5,000,000 7,000,000
Taxable Income 3,000,000 5,500,000 7,500,000
REQUIRED:
1. What is the journal entry to record the current tax expense ?
2. What is the journal entry to record the deferred tax liability ?

Case Analysis – Deferred Tax Asset

In 2020, ABC Company received an advance rental payment of P600,000 which was subject to tax but not reported in
accounting income until 2021. The income tax rate is 30%. The income statement and tax return showed the following:
2020 2021
Accounting Income subject to tax 5,000,000 7,000,000
Taxable Income 5,600,000 6,400,000
REQUIRED:
1. What is the journal entry to record the current tax expense ?
2. What is the journal entry to record the deferred tax asset

• Employee benefits (PAS 19, PAS 26)

o Are all forms of consideration given by an entity in exchange for service rendered by employees including directors
and management personnel or for the termination of employment which include the following:
a) short-term employee benefits such as wages, salaries, profit sharing and bonuses
b) postemployment benefits, such as retirement benefit plans and pensions
o retirement benefits such as pensions and retirement
o life insurance
o medical care
c) other long-term benefits, long-term service leave and jubilee leave
d) termination benefits, severance and redundancy pay

Page | 29
• Defined benefit plan – a post employment plan other than a defined contribution plan.
The entity’s obligation is to provide the agreed benefits to employees such as SSS, RA 7641
✓ Components of defined benefit cost:
Service cost comprising:
o Current service cost
Is the increase in the present value of the defined benefit obligation resulting from employee service in the current
period.
o Past service cost
a) Is the change in the present value of defined benefit obligation for employee service in prior periods resulting
from a plan amendment or curtailment.
b) Curtailment may arise from closing of the plant, discontinuance of operations or termination or suspension of
a plan.
c) Any gain or loss on settlement

• Net interest comprising:

o Interest expense on defined benefit obligation
o Interest income on plan assets
o Interest expense on effect of asset ceiling
• Remeasurements comprising:
o Re-measurement of plan assets
o Re-measurement of projected benefit obligation (PBO)
o Re-measurement of the effect of asset ceiling
NOTE:
1. Service cost and net interest are included in profit or loss as component of employee benefit expense
2. All of the remeasurements are fully recognized through other comprehensive income (OCI)

• Defined benefit liability – is the present value of expected future payments required to settle the obligation arising
from employee service in the current and prior periods.

INSERT HERE CASE ANALYSIS EMPLOYEE BENEFITS CURRENT SERVICE COST

INSERT HERE CASE ANALYSIS – EMPLOYEE BENEFITS ABC CO

• Interim Reporting (PAS 34, PAS 24)

o means the preparation and presentation of financial statements on a monthly, quarterly or semiannually basis.
o The SEC and PSE require entities covered by the reportorial requirements of Revised Securities Act to file quarterly
interim financial reports within 45 days after end of each of the first three quarters.
o PAS 34 does not mandate which entities are required to publish interim financial reports and how frequently.

• Basic principles of interim reporting

a) that an entity shall apply the same accounting policies in the interim financial
statements
b) revenues from products sold or services rendered are generally recognized for interim reports
c) costs and expenses are recognized as incurred in an interim period
d) that if the business is seasonal, the entity is encourage to disclose financial information
e) that the preparation of interim financial reports generally requires a greater use of estimation than annual
financial reports.

INSERT HERE CASE ANALYSIS – INTERIM FINANCIAL REPORTING – HARVARD

• Segment reporting
o It is the disclosure of certain financial information about the products and services an entity produces and the
geographical areas in which an entity operates.
o The purpose of such disclosure is to enable investors and users make better assessment of each business activity
leading to the understanding of the performance of the entity as a whole.

• Identification of segments
o Operating segments are identified on the basis of internal reports about components of an entity that are regularly
reviewed by the chief operating decision maker in order to allocate resources to the segment and assess its performance.

• Disclosure required for reportable operating segments

• General information about the operating segment
• Information about reported segment profit or loss
Page | 30
• Reconciliations of the totals of segment revenue, profit or loss, segment assets, liabilities and other material segment
items.

• Cash to Accrual
o Computation of sales
✓ Cash Basis
A/R – beginning xx
Add: credit sales xx
Total sales xx
Less: A/R – end xx
Sales discounts xx xx
Total collections xx
Cash sales, net xx
Total sales – cash basis xx

✓ Accrual Basis
Cash sales xx
Sales on account:
Trade accounts and notes receivable, end xx
Collection of trade accounts and notes receivable xx
Sales returns, allowances & discounts xx
Accounts and notes receivable written- off xx
Trade notes receivable discounted (directly credited) xx
Total xx
Less: Trade accounts & notes receivable, beginning xx xx
Total sales – accrual basis xx

o Computation of purchases.
✓ Cash basis
Inventory – Jan 1 xx
Add: Purchases under accrual basis xx _/
Goods available for sale xx
Less: Inventory – Dec 31 xx
Cost of goods sold xx

Accounts payable – Jan 1 xx

Add: Purchases – accrual basis xx _/
Total xx
Less: Accounts payable – Dec 31 xx
Purchases – cash basis xx
✓ Accrual basis
Cash purchases xx
Purchases on account:
Trade accounts and notes payable, end xx
Payment of trade accounts &notes payable xx
Purchase returns, allow & discounts xx
Total xx
Less: trade accounts & notes payable, beg xx xx
Purchases – accrual basis xx

• Convert cash basis revenues and expenses to accrual basis revenues and expenses
Expenses paid – cash basis xx
Add: Prepaid expenses – beginning xx
Accrued expenses – ending xx
Total xx
Less: Prepaid expenses – ending xx
Accrued expenses – beginning xx xx
Expenses – accrual basis xx

• PFRS for SMEs and Micro Enterprises

o Is designed to apply to the general purpose financial statements and other financial reporting of profit-oriented entities
that “do not have public accountability”.
o SMEs are entities that do not have public accountability and publish general purpose financial statements for external
users.
o Micro-business entities are those whose total assets or total liabilities are below the P3 million floor threshold
Page | 31
• Reporting requirements
o PFRS for SMEs requires presentation of both investment in associates and investments in joint ventures as separate
line item.

• Exemptions from PFRS (SMEs) criteria :

1. It is a subsidiary of a parent reporting under full PFRS.
2. It is a subsidiary of a foreign parent.
3. It is a subsidiary of a foreign parent that has been applying the standard.
4. It has short-term projections.
5. It is part of a group either a significant joint venture or an associate.
6. It is a branch office of a foreign entity.
7. it has plans to conduct initial public offering within the next 2 years.
8. It has a subsidiary that is mandated to report under full PFRS.
9. It has been preparing financial statements using full PFRS, and decided to liquidate
Its assets.

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