FINANCIAL LIABILITIES (IAS 1)

Classification
1. According to nature Essential Characteristics:
a. financial liability – deliver cash; exchange financial 1. present obligation
instruments with another entity a. legal
b. non-financial liability – residual definition b. contractual
2. Arising from past events –
2. According to FS presentation obligating events
a. Current Liability 3. Outflow of economic benefits
i. to be settled within 1 year  payment of cash
ii. to be settled within normal operating cycle  transfer of NCA
iii. held for trading  Performance of
service
b. Non-Current Liability – residual definition
*Due to be settled within 12 months *Due to be settled beyond 12 months
GR: CURRENT GR: NONCURRENT
XPN: XPN:
1. discretion to refinance or to roll over for Breach of Covenant – CL
12 months after the RP – NCL XPN: grace period is (non-adjusting
2. agreement to refinance an obligation on event)
or before the RP – NCL

3. According to source

Trade Obligations arising from CURRENT

Liabilities acquisition of G/S from suppliers
LIABILITIES in the OCB
12 months or less CURRENT
Non- Obligations arising from
Trade sources other than acquisitions
Liabilities of G/S from suppliers in the OCB more than 12
months NCL

ACCOUNTS PAYABLE
- always current A. Accounting for Discounts
- within the normal operating cycle Gross Method Net Method
- measured at fair value (equals the  Cash discount is not yet  Purchases and AP are
invoice price of the goods) deducted from the invoice recorded at net amount
price  cash discount not taken is
 CD is recognized when debited to PD lost (classified
actually taken as finance cost)
 adjusting entry to recognize
the PD
Within discount period:
Allowance for discounts – dr. NO ENTRY.
Purchase discounts – cr.
Beyond discount period
NO ENTRY. Purchase discount lost – dr.
Accounts Payable – cr.

B. Accounting for Freight

 in transit
 owner will pay for the freight
FOB SP FOB Destination Who actually Pay?
 transfer of title at point of  transfer of title at point of A. Freight prepaid – freight is
shipment (AP is recorded) destination paid before it is shipped; seller
 while in transit, buyer is liable  while in transit, seller is liable paid it
B. Freight collect – buyer paid it

C. Supplier’s debit balances

- these are debit balances in AP resulting from overpayments, returns and allowances and advance
payments to suppliers
- classified as Current asset, added back to AP
- dr. – supplier’s debit balances, cr. – AP
PREMIUMS & WARRANTIES
PREMIUMS WARRANTIES
 Recognize expense and liability at the point of  after-sale service; expense and liability at the
sale; point of sale
 to stimulate sales; and  promise to render free service such as repair
 Formula: Sales x Est. redemption5 x ratio x cost  accounting for warranty:
Accrual Approach Incurred Approach
 best theoretical  justified when
Premium Expense xx  based on estimate rationale since it warranty cost
Premium Liability xx  measured at net cost matches cost and is not
 from sale of main revenue substantial
product  the expressed is based  expensing
on estimate in year of warranty cost
sale to determine its only when
reasonableness and actually
accuracy incurred

OTHER LIABILITIES
Coupon Offer Customer Loyalty Free Product Gift Certificate
Definition/  to transfer goods  incentives to make  to transfer goods  recognize
Performance/ and services to the more purchases and services to “breakage” revenue
Obligation retailer  award credit or customers  actual redemption /
 to reimburse points  to transfer the expected gift
retailers for additional goods certificates x
discount and services expected breakage
Account title Rebate Liability Deferred Revenue – Deferred Revenue – Deferred Revenue –
debited Points Coupon Gift Certificate

UNEARNED INCOME REFUNDABLE DEPOSITS ESCROW DEPOSITS

- income already received but - consist of cash or - is the use of third party, which
not yet earned property that s received holds an asset or funds before they
- it may come from Goods but is refunded after are transferred from one party to
(advances from customers), specific conditions are another
Services (unearned income met
form service contracts) - measured as current Escrow Liability
liability Beg balance xx
BONUSES PAYABLE Cash receipt xx
- these qualify as short-term Liability for Deposits Interest income xx
employee benefits under PAS Beg balance xx Cash transfers/payments (xx)
19 Cash receipts xx Interest and other charges (xx)
- they are presented as Deposits returned (xx) End balance xx
incremental Salaries Expense; Deposits cancelled (xx)
if the bonus is payable over Deposits expired (xx)
more tan one period, apply the End balance xx
time value of money
CUSTOMER LOYALTY PROGRAM INTEREST PAYABLE GIFT CERTIFICATES
- used by business to build - expense incurred in - sold in exchange for future delivery
brand, loyalty, retain valuable addition to principal when of goods; no expiry
customers and increase sales borrowing money
volume Gift Certificates
- measured as a separate DIVIDEND PAYABLE GC beginning xx
component of the initial - dividends are recognized GC sold xx
transaction, allocate the TP on the date of declaration GC redemptions (xx)
GC expired (xx)
ACCRUED LIABILITIES GC end xx
- expenses already incurred but
not yet paid

Net Income Net Income after Net Income after Bonus and Net Income after Taxes, but before
before Bonus, but before Taxes Bonus
Bonus and Taxes
Taxes 𝐴𝑁𝐼 𝑥 (100% − 𝑇%)
𝐵 = 𝐵% 𝑥
𝐴𝑁𝐼 𝑥 (100% − 𝑇%)
𝐴𝑁𝐼 𝐵 = 𝐵% 𝑥
100% + (𝐵% 𝑋 (100% − 𝑇%)) (100% − 𝐵%) + (𝐵% 𝑋 (100% − 𝑇%))
𝐵 = 𝐵% 𝑥
B = B% x ANI 100% + 𝐵%
PROVISIONS
 Present obligation of Uncertain Timing and Amount  Recognition
o Legal Obligation – arising from contract, legislation or o present obligation
other operations of law o probable economic
o Constructive Obligation – obligation that is derived from an benefits
entity’s actions o can be measured
reliably
Likeliness to Happen Ranges of Outcome Treatment of Liability Treatment IF Asset
More than 95% Virtually Certain Provision (Accrue) Accrue as Asset
51% - 95% Probable Provision (Accrue) Contingent
Asset(disclose in Notes)
10% - 50% Possible Contingent Liability Ignored
(disclose in notes)
Less than 10% Remote Ignored Ignored

Best Estimation Common Type of Provisions

Single Obligation Most likely outcome Lawsuit or court cases Upon causing damage
Large Population Expected Value Decommissioning cost Upon imposition of provision of law
Range of Midpoint Warranties & Premiums Upon sale
Population Guarantee Upon default of party
Restructuring 1. entity has formal detailed plan
and
2. entity has raised valid
expectations of those affected

Other measurement consideration:

1. Present Value – if time value of money is material
2. Expected disposal of assets – not taken into account
3. Reimbursement – recognized when it is virtually certain
4. Future event – reflected if there is sufficient objective that will occur
5. Risk and Uncertainties – multiplying the amount of provisions to Risk Adjustment Factor
6. Changes in Provisions – reviewed at each reporting date and adjusted
7. Future Operating Losses – not recognized
Onerous Contract – recognized and measured as provisions

BONDS PAYABLE
 Bonds Payable is a contract where one party borrows funds from another party
 Bond Indenture – or a deed of trust is the document which shows in detail the terms of the bonds
 Bond Certificate – certificate given to bondholders or investors to provide evidence of ownership
Initial Subsequent Fair Value
Classification Amortized?
Measurement Measurement Changes
Financial FL at FVPL Fair Value Fair Value NO YES (P/L)
Liabilities
(NP, LP,BP) FL at AC FV – TC Amortized Cost YES NO

Scenario Comparison S.P.E.D Effect

PREMIUM Proceeds > Face Amount Stated > Effective Amortization is DEDUCTED from Interest expense
DISCOUNT Proceeds < Face Amount Stated < Effective Amortization is ADDED from Interest expense

Retirement of Bonds Retirement of Bonds

 extinguishing a bond liability Retirement Price xx
 retirement price excludes accrued interest Carrying Amount (xx)
 if retired on maturity, no G/L G/L on Retirement xx
COMPOUND FINANCIAL INSTRUMENTS
BONDS WITH SHARE WARRANTS CONVERTIBLE BONDS
Definition Share warrants represents the right to acquire Bonds can be exchanged into shares or other
shares of securities
the issuing entity at some future time
Allocation (1) to the bonds (liability component) – MV of bonds (1) to the bonds (liability component0 – MV of bonds
(2) to the warrants (Equity Component) (2) to the warrants (Equity Component)
Journal Cash xx Cash xx
Entry Discount on BP xx Discount on BP xx
Upon Bonds Payable xx Bonds Payable
Issuance Premium on BP xx Premium on BP
Share Warrants Outstanding xx Bond Conversion privilege outstanding
Exercise Cash xx Bonds Payable xx
Share Warrants Outstanding xx Premium on BP xx
Share Capital xx Bond Conversion privilege outstanding xx
Share Premium xx Discount on BP
Share Capital & Share Premium
Cash

Settlement of Convertible Bonds

At maturity Prior to Maturity
 bond retirement price is equal to the face  bond retirement price is allocated to the
 any balance to BCPO is transferred to Share liability and equity component using residual
Premium approach
 RP > CA  Loss on bond retirement
 RP < CA  Gain on bond retirement

NOTES PAYABLE
CLASSIFICATION AND MEASUREMENT
Initial Subsequent Fair Value Interest Expense
Classification Measuremen Measurement Amortized? Changes
t
Financial FL at
Attrib to risk
Liabilities FVPL
Fair Value Fair Value NO – OCI Face x Nominal Rate
(NP, LP, (elected
YES (P/L)
BP) )
FL at AC FV - TC Amortized YES NO CV x Effective Rate
Cost
Non-financial Best Best Estimate YES, if Usually, EIR If
Liabilities Estimate of of Cash measure at NO liability is measured
Cash Outflow Outflow PV at FVPL

Sub-classification Notes Payable at Amortized Cost Initial Measurement

Short Term Interest Bearing Face Value
Non-Interest Bearing Face Value, unless discounting is
material. If so, Present Value
Interest Bearing – with reasonable rate Face Value
Long Term Interest Bearing – with unreasonable
rate Present Value
Non-Interest Bearing
DEBT RECONSTRUCTING/RESTRUCTURE
- allows business that experiencing cash flow problems to decrease and renegotiate their delinquent
obligations in order to enhance liquidity and rehabilitate their operations

ASSET SWAP EQUITY SWAP MODIFICATION OF TERMS

- involving - involving the - involving modifications or changes in the terms of the contract or
transferring of a issuance by the debt
non-cash asset debtor of equity - substantial: at least 10% of the 10% test
to the creditor instruments to old financial liability CA of the old FL xx
- Dacion en Pago the creditor in - new liability is measured at PV Less: PV of (xx)
- CA of Liab – CA full or partial using prevailing market rate modified using old
of amount payment - CA of old > PV of modified  Gain rate xx
= G/L on existing - Debt-to-equity - CA of old < PV of modified  Loss G/L on
extinguishment swap modification
DEBT FORGIVENESS - Non-substantial: not accounted
- the CA of the liability forgiven is for as the extinguishment of old FL
simply recognized in P/L as given on - Any G/L is recognized in P/L; accounted for as adjustment in the
debt extinguishment old liability.
- Old liability is not extinguished and simply continued.

ACCOUNTING FOR LEASES / LESSEE ACCOUNTING (PFRS 16)

OVERVIEW
Leases – a contract that conveys the right use from lessor to lessee

implied (available for Classification

use)
identified asset
explicitly identified Operating Lease
 no substantial transfer of
risk and rewards
right to obtain  rent transaction only
right to control substantially all economic
use benefits
Finance Lease
 there is substantial transfer
 option to extend
 form; rent; Substance; Sale
lease term

 option to terminate

Lease payments are summed

Operating Lease
Recognized as income on straight-line basis
Lessor Accounting
Direct Finance Lease
Finance Lease
Sales-type Lease
Lease payments are summed
Operating Lease
Recognized as expense on straight-line basis
Lessee Accounting
Lease Liability (FiVOReT)
Finance Lease
Right of Use Asset (BLADE)

LESSOR ACCOUNTING

OPERATING LEASE: lease payments are recognized as lease income on a straight-line basis over the lease term
Executory Costs: Initial Direct Cost
- expensed as incurred by the lessee - Capitalized as part of leased asset’s costs and
- taxes, insurance & maintenance expensed like that of lease income
Lease Bonus Security Deposits
- recognized as unearned lease income and Liability: refundable upon expiration of the lease
amortized over the lease term

FINANCE LEASE: (If any of TOMS is cheeked)

Transfer of ownership Option to purchase Material LT (75% of UL) Subatantial PV OF MLP (90% of PV)
 DIRECT FINANCE LEASE SALES-TYPE LEASE
Nature Companies in manufacturing/dealer
Companies in financing business
business
Income Interest Income Gross Profit
Composition of 1. Annual Rental 1. Annual rental
Gross Investment 2. Residual value guaranteed 2. Residual value guaranteed
(SAME) 3. Unguaranteed residual value 3. Unguaranteed residual value
4. Exercise price of the purchase option 4. Exercise price of the purchase option
5. Termination penalty 5. Termination penalty
Computation of
Gross Income Gross Rental2 xx Gross Rental2 xx
RV of option1 xx RV of option1 xx
Gross Income xx Gross Income xx

1 – RV is guaranteed or unguaranteed 1 – RV is guaranteed or unguaranteed

2 – Annual rental x Lease Term
Annual Rental: (Cost - PV of RV or option)/PV
Composition of Net 1. Annual rental
1. Cost/ carrying amount of the leased
Investment 2. Residual value guaranteed
asset
3. Unguaranteed residual value
2. Initial direct cost
4. Exercise price of the purchase
option
If not available, then proceed to 1 – 5.
5. Termination penalty
Cost of the asset xx PV of rentals xx
IDC – lessor xx PV or RV/option xx
Net Investment xx Net Investment xx
Unearned Interest
UII = Gross Income – Net Investment UII = Gross Income – Net Investment
Income
Initial direct cost Included in the measurement Expensed immediately

Under, sales-type lease:

Sales LOWER: Net Investment & FV (LOWER: Net Investment & FV)
less PV of unguaranteed RV
COGS Cost of Asset xx Cost Asset xx
IDC – lessor xx IDC – lessor xx
COGS xx PV of unguaranteed RV (xx)*
COGS xx
*RV is not sold to customer
Gross Profit (deduct the two) (deduct the two)
G/UG will differ in sales and COGS but will result in the same GP

 sales, COGS, and GP are reported only under Sales-type lease.

 No GP is recognized under DFL since the cost and FV of the asset are equal

LESSEE ACCOUNTING
Lessee – all leases are finance lease. OPERATING LEASE if:
a. short term lease – 12 months or less
b. low value lease – may be more than 12 months: valued at the time of purchase

FINANCE LEASE:
 recognize at the inception date
LEASE LIABILITY (FiVOReT) -  PV of the RIGHT-OF-USE ASSET (BLADE)
Minimum Lease Payments 1. Bonus received
1. Fixed lease payments 2. Lease Liability
Initial 2. Variable lease payments 3. Advanced Payment
Measurement 3. Option price (reasonably certain) 4. Direct Cost (initial)
4. Residual value guaranteed 5. Estimated dismantling
5. Termination benefits
Blue – mutually exclusive
Subsequent measurement: Cost Model
Subsequent XPN: FV Model (L&B) or Rev mode
Amortized Cost
Measurement
CA = Cost – AD –AIL (straight line method)
 Residual Value; use
1. RV @ the end of Useful life – either is present
2. RV Guaranteed – neither is present transfer of ownership
if any is present,
3. RV Unguaranteed - ignored then does not
Useful life revert back
1. UL of the asset – either is present option to purchase
2. Shorter of UL & LT – neither is present

SALES AND LEASEBACK

Lease Liability – measured at the PV of lease payments ROUA – measured at proportionate to the prev CA

SELLING PRICE > FAIR VALUE SELLING PRICE < FAIR VALUE
Accounting Additional Financing Prepayment of lease payment
Effect on LL Deducted from the lease liability Added to the lease liability
Formula for 𝐿𝑒𝑎𝑠𝑒 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 − 𝐴𝑑𝑑 ′ 𝑙 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝐿𝑒𝑎𝑠𝑒 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 + 𝑝𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑅𝑂𝑈𝐴 = 𝐶𝑉 𝑥 𝑅𝑂𝑈𝐴 = 𝐶𝑉 𝑥
ROUA 𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒
Formula for 𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 − (𝐿𝑒𝑎𝑠𝑒 𝐿𝑎𝑖𝑏 − 𝐴𝐹) 𝐹𝑉 − (𝐿𝑒𝑎𝑠𝑒 𝐿𝑎𝑖𝑏 + 𝑝𝑟𝑒𝑝)
G/L 𝐺𝐿 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝐺/𝐿 𝑥 𝐺𝐿 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝐺/𝐿 𝑥
𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒

SELLING PRICE = FAIR VALUE

No accounting problem
No accounting problem Actual G/L = Fair Value – Carrying Amount
𝑳𝒆𝒂𝒔𝒆 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒚
𝑹𝑶𝑼𝑨 = 𝑪𝑽 𝒙
𝑭𝒂𝒊𝒓 𝑽𝒂𝒍𝒖𝒆
𝑭𝒂𝒊𝒓 𝑽𝒂𝒍𝒖𝒆 − 𝑳𝒆𝒂𝒔𝒆 𝑳𝒂𝒊𝒃
𝑮𝑳 = 𝑨𝒄𝒕𝒖𝒂𝒍 𝑮/𝑳 𝒙
𝑭𝒂𝒊𝒓 𝑽𝒂𝒍𝒖𝒆

ACCOUNTING FOR INCOME TAXES (PAS 12)

OVERVIEW
Accounting Income Taxable Income
Nature The income in accordance with BIR
NIBT
rules
Where it is being reported Income Statement Income Tax Return
Rules in Computing With PFRS rules With BIR laws
Computation Revenues xx Taxable Revenues xx
Less: Expenses xx Less: Deductible Expense xx
Net Income xx Taxable Income xx
Method of Accounting Accrual Method Cash Basis

Differences:
Taxable Temporary Difference (TTD) / Deductible Temporary Difference (DTD) /
Future Taxable Amount (FTA) / Future Deductible Amount (DTA) /
Deferred Tax Liability (DTL) Deferred Tax Asset (DTA)
DTL – amount of income taxes payable in future periods DTA - Reduces taxes that will be paid in the future
Accounting NI > Taxable Income Accounting NI < Taxable Income
CA of Asset > Tax Base CA of Asset < Tax Base
CA of Liability < Tax Base CA of Liability > Tax Base
Future Taxable Amount (FTA) x tax rate / DTL Future Deductible Amount (FTA) x tax rate / DTA

Nontaxable Items that are exempted

Income from tax or subject to FWT
Permanent
Nondeductible Will no appear in tax (usually
Income subject to WH)
INCome
Differences

TTD FTA DTL

FTA
Temporary
DTD FDA DTA
FTA
 1. Permanent – Income and expense are included in either but will never be in the other. These are
excluded in ITR and have no future tax consequences

2. Temporary – Income and expenses are included in both but at different periods. These are items that
are recognized in accounting in one period but recognized in tax in another period

Examples of NTI:
1. Interest income on time Notes:
savings 1. Current Tax Expense (Current provision for IT) = Taxable income x TR
2. Gains subject to capital tax
3. Dividends received by 2. Current Tax Liability = Current Tax Expense (CTE) – payment
domestic corporations
4. Gain from settlement of life 3. Deferred Tax Liability (DTL) = FTA x Tax rate
insurance
4. Deferred Tax Asset (DTA) = FDA x Tax rate
Examples of NDE:
1. Life insurance premium paid 5. Net Deferred Tax Expense/Benefit = Net temporary difference x Tax
2. Fines, penalties and rate
surcharges
3. Charitable contributions in 6. Total Income Tax Expense = CTE+- Net NTE/NTB
excess of tax limit; = accounting income subject to tax x Tax rate
4. Goodwill arising from
business combination

TAX BASE
 is the amount of asset/liability that is allowed for tax purposes
 it is the amount that is deductible for tax purposes against future income

Tax %:
Reconciliation of Accounting Income: Current portion – use tax rate that
PRETAX FINANCIAL INCOME xx has been enacted or substantially
Nontaxable income (xx) enacted by year end.
Nondeductible income xx
Financial income subject to tax xx Deferred portion – use tax rates that
FTA (xx) FDA x Tax % = DTA are expected to apply to the period
FDA xx FTA x Tax % = DTL when the temporary difference
TAXABLE INCOME xx TI x Tax % = IT Payable reverses that have been enacted or
substantially enacted by year end.

Interperiod – recognitionof DTA/DTL (from Intraperiod - allocation of tax to the various

period to period income items

OFFSETTING/PRESENTATION:
OFFSETTING PRESENTATION IN SFP SCI
Allowed if (1) has legal
Current tax asset enforceable right to set off and Presented separately
and liability (2) intends to asset on a net as CA and CL Tax consequences are
basis accounted for in the same
GR: not allowed, XPN: if the way as the related
Deferred tax asset taxes are levied by the same Presented sepertely as transactions and events.
and liability authority and (2) has legal NCA and NCL
enforceable right
EMPLOYEE BENEFITS (PAS 19R)
- considerations paid or given in exchange of service or as a result of termination (e.g. pension
payments). It includes:

1. Post-employment – received after the employment (employee left because of employer’s

decision)
Contributory – bot ee and er will contribute to the fund Defined Contribution Plan
- er transfers fixed contribution to a separate entity
Noncontributory – only the er contribute to the fund - the contribution is definite but the benefit is definite
- employee bears the investment risk
Funded Plan – er sets aside funds for future retirement Define Benefit Plan
benefits - er’s obligation is to provide agreed benefits to its
Unfunded Plan – er retains the obligation for the employees
payment of retirement benefits - employer bears the investment risk

2. Short-term
EB due to be settled within 12 Sick leave, vacation leave,
Salaries and Wages
months personal leave
Car, housing & etc. SSS, Pag-ibig, PhilHealth, HMO Profit-sharing

3. Termination Benefits – benefits given as a result of termination of employment

4. Other long-term benefits – residual definition

DEFINED BENEFIT PLAN

- requires actuarial assumptions to measure the obligation and there is possibility of actuarial gains or
losses
- the obligation under this is measured on a discounted basis

Service Cost Net Interest Remeasurements

 interest expense on  remeasurement of
defined benefit defined benefit
 current service cost
obligation obligation
 past service cost
Components  interest expense on  remeasurement of plan
 gain or loss on
plan assets assets
settlement
 interest expense on  remeasurement of
effect of asset ceiling effect of asset ceiling
Other comprehensive
Reporting Profit or Loss (part of employee benefit expense)
income

Relationships:
Settlement of Payment < PV of DBO  Gain on settlement Actual return on PA > Interest Income on PA → Remeasurement Gain
Settlement of Payment > PV of DBO  Loss on settlement Actual return on PA < Interest Income on PA → Remeasurement Loss
FVPA < DBO → Accrued benefit cost (a NCL): Deficit
DBO per actuary < DBO per books → Remeasurement Gain
FVPA > DBO → Prepaid benefit cost (a NCA item): Lower of surplus &
DBO per actuary > DBO per books → Remeasurement Loss
AC

OTHER LONG-TERM BENEFITS

- definition: not expected to be settled wholly within 12 months
- example: long-term paid absences, jubilee or other long service benefit, long-term disability benefits
- recognition: the same recognition as that of defined benefit obligation, but all are recognized in P/L
- FVPA – funds set aside for the payment of retirement benefits
SUMMARY
EBE Rem PBO FVPA
PBO, beg xx
FVPA, beg xx
CSC xx xx
Fair Value of Plan Assets
PSC xx xx Beginning Balance Benefits paid
PV of settlement (liability) (xx) (xx) Interest Income Remeasurement loss
Settlement Price xx (xx) Contribution
Remeasurement gain
Interest Expense, PBO xx (xx)
Ending Balance
Interest Income, FVPA (xx) xx
FVPA: Retirement G/L xx(xx) xx(xx) Defined Benefit Obligation
DBO: Actuarial G/L xx(xx) xx(xx) Benefits paid Benefits paid
Remeasurement gain Remeasurement gain
Change in effect of AC, net of interest xx(xx)
on DBO on DBO
Interest Expense effect of AC xx Ending Balance Ending Balance
Contributions xx
Benefits (xx) xx
Total xx xx xx xx

RECOGNITION AND MEASUREMENT

 EB is recognized as expense when employees rendered services
 The benefits are measured at undiscounted amounts
o any unpaid is recognized as accrued expense; and
o any unpaid in advance will lead to reduction of future payments or refund

OTHER EMPLOYEE BENEFITS

entitled to cash
vesting payment for unused
Can be carried forward vesting
Accumulating
and can be used in future v
not entitled to cash
non-vesting
vesting
payment
Compensated
absences
entitlement lapsed if the
current period is not used
Non- cannot be carried
accumulating forward
no entitled for unused upon
leaving

PROFIT-SHARING AND BONUS PLANS

 Entity shall recognize the expected cost if:
o entity has present obligation: and
o reliable estimate can be made

TERMINATION
Entity’s decision Employees decision Not condition on proving future services

SHARE-BASED COMPENSATION (IFRS 2)

- based on the Market Value of the shares (higher Net Income = higher Market Value)
Equity Settled Cash-settled
- settled through equity instruments - settled through cash
- gives an entitlement to employees a right to buy shares - liability until paid
at a lower price - Example: share appreciation rights
- example: share option
No-Emplyee: Option between the two
(1) FV of goods or services received - ES or CS
(2) FV of shares issues - creates a compound financial
(3) Par value or stated value of shares issued instrument (liab)
- priority (FV); and equity – residual
Modification from Cash-settled to Equity-settled:
 share options shall be based on FV at the date of modifications
 the liability is cancelled;

Vesting Condition
Performance Condition – necessitates the fulfillment of both a service and defined
Service Condition – performance target
employee is required to Non-market Condition – related to company’s Market Condition – related to the
serve a period of time operation (e.g. shares issues is based on price of the entity’s shares (e.g.
sales) target share price)

SHARE OPTIONS SHARE APPRECIATION RIGHTS

Definition - are granted to officers to purchase - Entity incurs a liability of services and is
shares at a specified price based on the increase in the entity’s share
- considered additional compensation price over a specified level over a specified
period of time; cash-settled SBP.
Measurement (1) Fair value method – compensation is Fair value of the liability as of the reporting date
(for equal to the FV of options at grant and remeasured annually (changes in P/L)
employees) date. Required by standards.
(2) Intrinsic value method – Market value Fair Value = Market value – predetermined price
– Option price. Used if FV method is
N/A.
Recognition - VEST Immediately (GR) – recognize - VEST immediately (GR) – recognize
of Expense in FULL with a corresponding immediately on the date of grant
increase in equity (share options - DO NOT VEST – recognize as expense over
outstanding) the service (or vesting) period. Use
- DO NOT VEST - recognize as expense cumulative approach.
over the service (or vesting) period.
Use cumulative approach.
Computation No. of share options xx No. of SARs xx
Multiply Fair Value xx Multiply Fair Value of SARs xx
Total Compensation xx Total Compensation xx
Multiply pro rate xx Multiply pro rate xx
Compensation to date xx Compensation to date xx
Compensation recognized (xx) Compensation recognized (xx)
Compensation expense xx Compensation expense xx
Exercise Cash xx  option price x number of shares
SOO xx  compensation expense
OSC xx  par x number of shares
SP xx  balancing figure

SHAREHOLDER’S EQUITY (PFRS 16)

OVERVIEW
A. Contributed Capital
a. Share Capital – always at par
i. Ordinary SC – real owners
ii. Preferred SC – real owners
b. Share Premium
 excess of FV over par, resale of TS, Donated Capital, Issuance of share warrants, share options,
convertible bonds payable
 distribution of small dividends
 quasi-reorganization/recapitalization
c. Subscribed SC – not fully paid
d. Subscription receivable – expected to be received within 1 year
 beyond 1 year: contra-equity account, deduction from SHE (GR)
B. Other Comprehensive Income (CUAGU) Issuance of SC
a. Change in Revaluation Surplus
 first time issuance from unissued
b. Unrealized G/L on investment in FVOCI
C & unauthorized SC
c. Actuarial Gin or Loss (Remeasurements)
 Illegal to issue shares @ below par
d. Gain or Loss on translation
or stated value
e. Unrealized G/L on forward contract classified as CF Hedge
 Issuance at discount
C. Retained Earnings
Cash xx
a. Appropriated RE – restricted from dividends
Discount on SC xx
b. Unappropriated RE – maximum dividends for corporation
SC xx
to declare
 Liability of SH
 Contra-equity account
 Ordinary
Share Capital

Preferred

Subscribed Share Ordinary

Contributed Capital Capital
Preferred

Share Premium

Less: Subscription
Receivable (GR)

(1) Share Capital

(3) Share Premium
(O & P )

Legal Capital
(2) Subscribed SC (4) Share Dividends
(O & P) Payable
Components of SHE

Accumulated Profit or Unappropriated RE

Loss
Accumulated Appropriated RE
Comprehensive
Income Accumulated
OCT and L

Treasury Shares

Discount on Share
Deduction from SHE
Capital

Capital Liquidated
 Issuance in excess for non-cash consideration Issuance of two (2) or more equity instrument:
priority: i. relative FV approach (if all FV is available)
i. FV of noncash consideration received ii. Residual value approach (allocate first to
ii. FV of shares issued instrument FV)
iii. Par value/stated value of shares

Expenses related to issuance:

Share Issuance Costs Listing Costs Joint Costs
Definition Costs that are jointly
Cost of public offering no
Direct costs to sell shares related to listing and
DAC
issuance
Accounting Treatment Contra equity account Expensed Allocated between them
Examples Underwriting
commissions, accounting Road show presentation,
Audit fees, counsel, tax
and legal fees, printing public relations
opinion, valuation report
costs, DST, filing fees, consultant fees
advertising expense

Legal Capital
Trust Fund Doctrine - pertains to the legal portion of the paid-in-capital resulting from the
- protection for the creditors issuing of share capital
- corporation  limited liability With par value sales No par value shares
- prohibited Legal Capital = Issued + Legal Capital = issued +
subscribed subscribed + Share Premium

Preference Shares
CALLABLE REFERENCE REDEEMABLE REFERENCE CONVERTIBLE PREFERENCE
SHARES SHARES SHARE
Right to the corporation to the shareholders - is that allows the holder to
Classification part of SHE Part of liabilities exchange their shares for
Dividends deduction to RE Interest expense other securities by the issuing
Issue Price vs. Redemption Issue price vs. Redemption company
Redemption - because earnings on OS are
price price
IP > RP Credit  Share Premium Credit  Gain unlimited, a preference SH
may convert to OS
IP< RP Debit  RE Debit  Loss - usually convertible to common
stock

Accounting for Delinquent/SUBSCRIBED SHARES TREASURY SHARES

- Previously issued; reacquired but not cancelled,
@subscription contra-equity
Cash xx - Violation of trust fund doctrine, in fact
Subscription receivable xx - Remedy: reduce the RE appropriated
Subscription Share Capital xx - Legal limit: balance of unappropriated RE to not
Share Premium – OS xx make a deficit
- Cost method: TS are recorded at cost
@payment - No G/L on the acquisition, sale, issue or cancellation of
Cash xx entity’s instrument shall be recognized.
Subscription Capital xx
Subscribed Share Capital xx 1. Reissuance of TS – legal to issue belowe par
Share Capital xx because it is not first time

Delinquency – offered at public auction for highest Reissue > Cash (@reissue price) xx
bidder Cost Treasury Shares xx
Highest Bidder – willing to accept the minimum Share Premium – TS xx
number of shares for the “offer prize” Reissue Cash (@reissue price) xx
No Bidder – the corporation will be the bidder; < Share Premium – TS xx
delinquent shares  treasury shares Cost Treasury Shares (@cost) xx
DONATED SHARES
- Acquisition of TS at no costs. Upon receipt, no JE 2. Retirement/Cancelation of TS
is required Par > Share Capital xx
- Are actually treasury shares, reduces the number Cost Treasury Shares xx
of out. shares. Share Premium – TS xx
Reissue Cash (@reissuance price ) xx Reissue < Share Capital xx
> Cost Share Premium - TS xx Cost SP-OI / SP-TS / RE xx
Reissue Share Capital xx Treasury Shares (@cost) xx
< Cost Share Premium - TS xx
 Priority:
𝑟𝑒𝑡𝑖𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
1. SP - Original Issuance - prorata 𝑆𝑃 − 01 𝑥
𝑡𝑜𝑡𝑎𝑙 𝑖𝑠𝑠𝑢𝑒𝑑
Donation form Shareholders 2. SP – Treasury Shares
- donation other than shares 3. Retained Earnings
- If from SHs: credit to donated capital
- If from non-SHs, credit to income Note: Either reissuance/retirement, the restrictions
has to be reserved.
Appropriated RE xx
RE xx

ACCOUNTING FOR RIGHTS ISSUE Upon exercise, the JE would be:

- rights issue is given to present SH to enable them to acquire new @par xx
shares Cash xx
- this will be offered first to current shareholders because it might Share Capital xx
dilute their percentage share @more than par
- Stock Right: right to buy shares; no entry upon issuance Cash xx
- the exercise price is usually lower than the current market value of Share Capital xx
the shares Share Premium xx

RETAINED EARNINGS - Cumulative balance of P/L Legal – appropriated for

↑in DIV as a result of ∆ in FV RE, Beginning - Basis for dividend TS
distribution Contractual – in
Dividends declared Net Income
- adjustment for prior compliance with loan
Net Loss period error agreements
TS appropriated - ∆ in accounting policy Discretionary – for
RE, Ending - equity adjustments (TS) expansion of factory

RECAPITALIZATION
- ∆ in the capital structure of the entity; RE is zero after reorganization; disclosed in the notes for a
minimum period of 33 years.
- Old shares are retired and new shares are issued. Types:
1. Change from no par to par Compare the Quasi-reorganization
previous par (issue - AKA: corporate adjustments. Fresh start in
2. Change from par to no par price) vs. new stated
accounting sense
3. Reduction of par value Share Capital xx - Purpose: to eliminate deficit  negative balance
4. Reduction of stated value SP – Recap xx of RE because of losses through adjusting BS
accounts
5. Share Split (split up)
- Procedures:
- Silent, higher number of shares & lower par
value 1. Adjust assets and liability – to confirm with
- Total SHE is not affected before and after FV
- Driven by desire to raise the no. of outstanding 2. Adjustment will be reflected to the RE
shares in order to lower the unit market price. 3. If there is still deficit, reclassify SP  RE
- must be approved by SCE
- Requisites:
6. Reverse Share Split (split down) 1. Large deficit taxes 2. Approved by SCE
- transaction which the original shares are 3. Approved by 4. Beneficial to all
canceled and replaced with a lower number of shareholders parties
shares but with the par value increased 5. Approved by
creditors
DIVIDENDS
Cash Dividend
Dividends - % of par or stated value or an amount per share
- Distribution of earnings to owners - per class of share
- Reduction of RE - issued/declared for both class of shares
- Max amount: Unappropriated RE - steps;
- 3 important dates
1. Date of Declaration – BOD approved 1. Allocate the basic dividends of PS/OS
dividend distribution; reduce the RE a. PS = outstanding shares x fixed dividends x dividend in arrears
account  fixed rate: par x dividend rate
2. Date of Record (cutoff record)  dividend in arrears – numbers of years when the corporation didn’t issue shares
3. Date of Payment
b. OS = outstanding shares x fixed dividends rate
Kind of Dividends  if 2 PS rate; (1) 1 parti – use is rate. (2) 2 parti – use lower rate
1. Cash dividends
2. Property dividends 2. Allocate the remaining dividend
3. Stock dividends  total dividends = basic dividends
4. Scrip dividends  if nonparticipating PS – allocate to OS only
5. Liquidating dividends  If participating PS – allocate to OS/PS (allocation is based on outstanding
shares x par)
Share Dividend Scrip Dividends
- distribution in the form of entity’s own - they are official indebtedness to pay a sum
Property Dividends shares of money
Measurement: - RE is decreased; but SC is increased - credit to scrip dividends payable
1. Property dividend payable (PDP) (addition to SC)
 @FVLCTS of the NCA Liquidating Dividends
 Remeasured at BS date and Kinds: - maximum dividend of wasting asset
settlement 1. Small Stock Dividends corporation (extraction of natural
2. Noncash asset held for distribution  less than 20% resources)
 Lower of carrying amount and  measured at higher FV of share and - Illegal during the entity’s lifetime
FVLCTS Par value
 If FVLCTS < CA  impairment loss Unappropriated RE xx
 Remeasured at BS date 2. Large Stock Dividends Add: Accumulated xx
 20% or more of the OS Depletion
@date of settlement  at par Less: Capital (xx)
- PDP vs. NCAHFD  Liquidated
PDP > NCA  gain on distribution Small Dividends Large Dividends Maximum Dividend xx
PDP < NCA  loss on distribution RE xx RE xx
SDP xx SDP xx
SP xx
BOOK VALUE PER SHARE (BVPS)
OVERVIEW
- amount per share that the shareholders will receive in assumption that the corporation will be liquidated

1 CLASS OF SHARE – Ordinary 2 CLASSES OF SHARES – Ordinary and Preference Shares

Shares
𝑇𝑜𝑡𝑎𝑙 𝑆𝐻𝐸 𝑆𝐻𝐸 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑡𝑜 𝑂𝑆 𝑆𝐻𝐸 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑡𝑜 𝑃𝑆
𝐵𝑉𝑃𝑆 = 𝐵𝑉𝑃𝑆 − 𝑂𝑆 = 𝐵𝑉𝑃 − 𝑃𝑆 =
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑒𝑐 𝑆𝐻𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠

ALLOCATION
Step 2: Distribute Dividends
Step 1: Compute for the available shareholder’s equity for dividends - as if dividends declared (choose lower rate if more than 1 PS)
Retained earnings xx (a) distribute the basic dividends of PS (Total PS x %)
Retained earnings – appropriated xx (b) distribute the basic of OS (Total OS x %)
Revaluation Surplus xx (c) distribute the remaining shareholder’s equity
Share Premium xx - Participating – allocate remaining SHE based on their balance
Total SHE available for dividends xx proportionately
- Non-participating – allocate 100% to OS
Step 3: Compute for the numerator
Notes:
 For preference share: Number of shares x Liquidation value/Par
 Subscription receivable is ignored
Value (call price (ignored) is price to be returned to Pref SH in
 TS are treated as cancelled or retired, therefore, deducted to
case called/redeemed.
Outstanding
 For ordinary shares: Number of shares x par value

Proforma for 1 PS only: Excess PS (1) PS (2) OS

Total Shareholder’s Equity xx Total SHE xx xx xx xx
Less: SHE – preference xx Less: Entitlement to dividends – PS (1) (xx) xx
Par xx Less: Entitlement to dividends – PS (2) (xx) xx xx
Liquidation Premium xx Less: Entitlement to dividends – OS (xx) xx
Dividends xx Balance for participation xx
SHE – Ordinary (avail for div) xx Allocation to participating PS (xx) xx
÷ Number of Out Shares xx Allocation to OS (xx) xx
BVPS xx Total Book Value xx xx xx xx
Divided by: Number of Shares Outstanding xx xx xx
BVPS xx xx xx xx
 EARNINGS PER SHARE (IAS 23)
OVERVIEW
- amount of income per share attributable to the ordinary
BEPS computation Average ordinary shares are affected
shares 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓 𝐷𝑖𝑣 by:
- For PS. they’ll receive fixed dividends (EPS not necessary) 𝐵𝐸𝑃𝑆 =
𝐴𝑣𝑒 𝑃𝑟𝑑 𝑆ℎ 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 1. Outstanding shares at the
- Required to be presented by: (1) publicly-listed companies
beginning
and (2) companies the performance of management; FS 2. Reacquired
presentation: (a) Face of I/S or (b) notes to FS  PS is cumulative – 1 year
dividend is deducted whether 3. Reissued
- Uses of EPS: (1) determinant of Market Value of shares 4. Subscribed
and (2) determinant of the performance of management; declared or not
FS presentation: (a) Face of I/S or (b) notes to FS  PS is non-cumulative –
deducted only if declared Retrospective application to:
- Redeemable PS (a liability) – its dividends (treated as 5. Share split (up and down)
interest expense) are ignored 6. Bonus Issue (stock dividend)
REDEMPTION OF PREFERENCE SHARES SHARE RIGHTS/STOCK RIGHTS/PREEMPTIVE RIGHT
CV > Redemption Price  Gain CV < Redemption Price  Loss - average outstanding shares = computed average OS x adjustment
𝑁𝐼 − 𝑃𝑟𝑒𝑓 𝐷𝑖𝑣 + 𝐺𝑎𝑖𝑛 𝑜𝑛 𝑅𝑒𝑑𝑒𝑚 𝑁𝐼 − 𝑃𝑟𝑒𝑓 𝐷𝑖𝑣 − 𝐿𝑜𝑠𝑠 𝑜𝑛 𝑅𝑒𝑑𝑒𝑚
𝐵𝐸𝑃𝑆 = 𝐵𝐸𝑃𝑆 = Adjustment FV right on
𝑊𝑒𝑖𝑔ℎ𝑡ℎ𝑒𝑑 𝐴𝑣𝑒 𝑜𝑓 𝑂𝑆 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒 𝑜𝑓 𝑂𝑆 =
Factor FV ex right FV of shares + proceeds from exercise
Outstanding shares + Additional share

FV right on – FV rights

MV right on – Exercise Price

# of rights + 1

DILUTED EARNING PER SHARE

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 Potential Ordinary Share – is a financial instrument or other contract in which the holder may be entitled
𝐷𝐸𝑃𝑆 = to ordinary shares; to reflect the maximum possible dilutive effect arising from POSs
𝑎𝑣𝑒𝑟𝑔𝑎𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠

Included in Average OS: (1) Convertible PS; (2) Dilution - occurs when the inclusion of potential Antidilution – occurs when the inclusion of potential
Convertible Bond Payable and (3) Share ordinary shares decreases the BEPS ordinary shares increases the BEPS
options/Warrants
EPS > BEPS  dilutive
Test for Dilution LPS > BEPS → antidilutive
EPS < BEPS  antidilutive (ignored)
BEPS vs. Dilution LPS < BEPS → dilutive
EPS = BEPS  no accounting problem
POTENTIAL ORDINARY SHARES:
Multiple Potential Ordinary Shares - rank from most dilutive (least incremental EPS) to least dilutive (highest incremental EPS)
CONVERTIBLE PREFERENCE SHARE CONVERTIBLE BOND PAYABLE SHARE OPTIONS/WARRANTS
As if The convertible PS is converted into OS the convertible BP is converted into OS The share options (for employees) and
Effect to NI The amount of preference dividend is no Interest expense on BP, net of tax is warrants (for shareholders) are
(numerator) longer deducted added back to the NI exercised. No effect in numerator.
Decision Compare MV vs. Exercise Price
BEPS > DEPS → dilutive BEPS > DEPS → dilutive MV > EP → dilutive
BEPS < DEPS → antidilutive (ignored) BEPS < DEPS → antidilutive (ignored) MV < EP → antidilutive (no one will buy at
price higher than MV)
Incremental 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
EPS Most dilutive since no incremental EPS
# 𝑜𝑓 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 # 𝑜𝑓 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠