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CFAS Reviewer 11-20

Chapter 11 discusses accounting policies, estimates, and errors, emphasizing the need for consistency in financial statements and outlining the treatment of changes in accounting policies and estimates. It highlights the distinction between retrospective and prospective applications of changes, as well as the handling of prior period errors. Chapter 12 covers events after the reporting period and related party disclosures, while Chapter 14 focuses on inventory measurement and accounting for property, plant, and equipment.

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0% found this document useful (0 votes)
17 views9 pages

CFAS Reviewer 11-20

Chapter 11 discusses accounting policies, estimates, and errors, emphasizing the need for consistency in financial statements and outlining the treatment of changes in accounting policies and estimates. It highlights the distinction between retrospective and prospective applications of changes, as well as the handling of prior period errors. Chapter 12 covers events after the reporting period and related party disclosures, while Chapter 14 focuses on inventory measurement and accounting for property, plant, and equipment.

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© © All Rights Reserved
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CHAPTER 11 - ACCOUNTING POLICIES, ESTIMATE AND ERRORS - refers to monetary amount for consistency with the

(PAS 8) definition of measurement uncertainty.


- does not relate to prior period and is not a correction of an
Accounting Policies error
 Are specific principles, bases, conventions, rules and practices
Examples of Accounting Estimate:
applied by an entity in preparing and presenting financial
a) A loss allowance for doubtful accounts
statements.
b) T he net realizable value of inventory and
T he entity is required to outline (Notes to Financial statements) inventory obsolescence
all significant accounting policies applied in presenting financial c) T he fair value of an asset or liability
statements. d) T he depreciation for property, plant, and
Change in Accounting Policy equipment
e) A provision for warranty obligation
A change in accounting policy shall be made only when: A change in accounting estimate is a normal, recurring correction
A. Required by an accounting standard or adjustment which the natural result of the use of estimate.
B. T he change will result in more relevant and faithfully represented
information about the financial position, financial performance How to report change in accounting estimate
and cash flow of the entity. T he effect of a change in accounting estimate shall be
recognized currently and prospectively by including it in income
Example of change in accounting policy or loss of:
A change in accounting policy arises when an entity adopts a GAAP A. T he period of change if the change effects that period
which is different from the one previously used by the entity only
Examples: B. T he period of change and future periods if the change
a) Change in the method of inventory pricing from the affects both.
FIFO to weighted average method. Changes in accounting estimate are to be handled currently
b) Changes from cost model to revaluation model in and prospectively.
measuring property, plant, and equipment.
c) T he initial adoption of policy to carry asset at revalued Prospective recognition of the effect of the change in accounting
amount is a change in accounting policy to be dealt with estimate means that the change is applied to transactions and other
as revaluation events from the date of change in estimate.
d) Change from cost model to fair value model in
measuring investment property. Change in useful life - Retrospectively
e) Change to a new policy resulting from the requirement Change in depreciation method -Prospectively
of a new PFRS Change in reporting entity
 It is a change whereby entities change their nature and
How to report a change in accounting policy report their operations in such a way that the financial
A change in accounting policy required by a standard or an statements are in effect those of a different entity.
interpretation shall be applied in accordance with the transitional  It is actually a change in accounting policy and
provisions therein. therefore shall be treated retrospectively or
(T ransitional Provision - Retrospectively & Retroactively) retroactively.
 T ransitional Provision - temporary rule that helps businesses adjust Prior period errors
when a new law or regulation is introduced. It gives them time to  Are omissions and misstatements in the financial
switch from the old rules to the new ones, making the transition statements for one or more periods arising from a
smoother and lessdisruptive. failure to use or misuse of reliable information.
 Retrospectively - applying new rules or changes to financial
statements from past years, as if those rules were always in place. How to treat prior period errors
 Prospectively - applying new rules or changes only to future Prior period errors shall be corrected retrospectively by
transactions or financial statements without altering the past adjusting the opening balances of retained earnings and
Retrospectively Application affected assetsand liabilities.
 Is applying a new accounting policy to transactions, other
events and conditions as if that policy had always been Retrospective Restatement means correcting the
applied. recognition and measurement of the amounts of elements of
 Any resulting adjustments from the change in accounting the financial statements as if a prior period error had never
policy shall be reported as an adjustment to the opening occurred.
balance of retained earnings.
CHAPTER 12 - EVENTS AFTER THE REPORTING PERIOD
T he amount of the adjustment is determined as of the beginning of
the year of change.
 Events whether favorable or unfavorable, that occur
T he financial statements of the prior period presented shall be between the end of reporting period and the date on
restated to conform with the new accounting policy. which the financial statements are authorized for issue.
Accounting Estimate  Adjustments or disclosure
 Is a monetary amount in the financial statements that is subject
to measurement uncertainty. T ypes of events after the reporting period:
a. Adjusting events - those that provide evidence of
Measurement Uncertainty - arises when monetary amounts in the financial conditions that exist at the end of the reporting period.
statements cannot be observed directly and must instead be estimated. b. Nonadjusting events - those that are indicative of
conditions that arise after the end of reporting period.
a. Individual’ s spouse and children
Examples of adjusting events:
b. Children of the individual’ s spouse
1 . Settlement after the reporting period of a court case
c. Dependents of the individual or the individual’ s spouse
2. Bankruptcy of a customer which occur after the reporting
3. Individuals or shareholders owning atleast 20% of the
period.
reporting entity.
3. Determination after the reporting period of the cost of asset
- close family members of such individuals or
purchased before the end of reporting period.
shareholders are also related.
4. Determination after the reporting period of the profit sharing or
4. Postemployment benefit plan for the benefit of employees.
bonus payment if the entity has the present obligation at the
- handler of the trust funds is a related reporting
end of reporting period to make such payment
entity.
5. Discovery of fraud or errors that show the financial statements
were incorrect.
Examples of nonadjusting events:
Related Party T ransaction
1 . Businesscombination after the reporting period.
 is a transfer of resources or obligations between related
2. Plan to discontinue an operation.
parties, regardless of whether a price is charged.
3. Major purchase and disposal of asset or expropriation of major
asset by government. Related Party Disclosure
4. Destruction of a major production plant by fire after the  Requires disclosure of related party relationships where
reporting period. control exists irrespective of whether there have been
5. Major ordinary share transaction and potential ordinary share transactions between the related parties.
transaction after the reporting period.  Relationship between parent and subsidiaries shall be
6. Announcing or commencing the implementation of a major disclosed regardless of whether there have been transactions
restructuring. on those related parties.
7. Entering into significant commitments or contingent liabilities  Entity’ s parent and if so the ultimate controlling party.
e.g issuing guarantees
Disclosure of related party transaction
8. Commencing major litigation arising solely from events that
 If there have been transaction between related parties, an
occurred after reporting period..
entity shall disclose the nature of the related party
Financial Statements authorized for issue relationship as well as information about the transactions and
 FS are authorized for issue when the board of directors outstanding balances necessary for an understanding of the
reviews the FS and authorizes the issue. financial statements.
 T he Financial statements are authorized for issue on the date
Include:
of issue by the board of directors and not on the date when
i. Amount of the transaction
shareholdersapprove the FS.
ii. Amount of the outstanding balance, terms and
conditions, whether secured or unsecured, and nature
CHAPTER 13 - RELATED PARTY DISCLOSURE
of considerations to be provided in settlements.
iii. T he allowance for doubtful accounts related to the
RELAT ED PART I ES
outstanding balance
Parties are considered to be related if one party has:
iv. T he doubtful account expense recognized during the
a. T he ability to control the other party
period in respect of amount due from related parties.
b. T he ability to exercise significant influence over the other party
c. Joint control over the reporting entity K ey M anagement Personnel Compensation
 an entity shall disclose key management personnel
Control - is the ownership directly or indirectly through subsidiaries of compensation in total and for each of the following:
more than half of the voting power of an entity.  Short term employees benefit
Joint Control - contractually agreed sharing of control over an economic  Postemployment benefits
activity.  Long-term benefits
 T ermination benefits
Examples of Related Parties:
 Shared based payment transactions
1 . Affiliates - the parents, subsidiary and fellow subsidiaries. An
investor owns more than 50% of an investee. Related party disclosure not required
- subsidiary is related to the parent and the fellow subsidiary of  Requires disclosure of related party transactions and
one parents is related to each other. outstanding balances in the separate financial statements of a
 Parent -owns more than 50% of the company parent, subsidiary, associate or venturer.
 Subsidiary - Investee Intergroup related party transactions and outstanding
2. Associates - entities over which one party exercises siginficant balances are eliminated in the preparations of consolidated
influence; Investor owns at least 20% of an investee. financial statements of the group.
-associate is related to investor.
Unrelated Parties
-includes subsidiary or subsidiaries of the associate
1 . 2-entities simply because they have a director or key
3. V enturers - are related to the join venture because they have joint
management personnel in common.
control of the activities of the joint venture.
2. Providers of finance, bank, trade unions, and government
-fellow venturers are not related to each other.
agencies in the course of their normal dealings.
Other Related Parties:
3. Customers and suppliers by virtues of their normal dealings
1 . K ey M anagement Personnel - are persons with managerial
with the reporting entity.
position; Officers with responsibility of controlling the activities
4. Fellow venturers are unrelated to each other but the venturers
of the entity.
are related to the joining venture.
2. Close family members of key management personnel
CHAPTER 14 - INVENTORIES (PAS 2) inventory to get the W eighted average unit
cost. Multiplied by the units on hand to
 Are assets held for sale in the ordinary course of business, in derive the inventory value
the process of production for such sale or in the form of
materials or supplies to be consumed in the production process Specific Identification
or in the rendering of services.  Specific cost are attributed to identified items of
inventory
T rading Concern - is one that buys and sells goods in the same
 T he cost of inventory is determined by simply
form purchased.
multiplying the units on hand by the actual unit cost.
M erchandise Inventory - is generally applied to goods held by a
 Appropriate for inventories that are
trading concern.
segregated for a specific project and
M anufacturing Concern - is the one that buys goods which are
inventories that are not ordinarily
altered or converted into another form before they are made
interchangeable
available for sale.
M easurement of Inventory
Cost of Inventory
 Inventory shall be measured at the Lower of Cost and
 Shall comprise cost of purchase, cost of conversion and
Net Realizable V alue (LCNRV )
directly attributable cost incurred in bringing the inventory to
the present location and condition.
Net Realizable V alue (NRV ) - is the estimated selling
 Cost of Purchase - comprises the purchase price, import price in the ordinary course of business less the estimated
duties and irrecoverable taxes, freight, handling and cost of completion and the estimated cost of disposal.
other costs attributable to the acquisitions of finished
Accounting for LC NRV
goods and materials.
 If the cost is lower than net realizable value, there is no
- T rade discounts, rebates and other
accounting problem because the inventory is stated at
similar items are deducted.
cost and the increase in value is not recognized.
 Cost of Conversion - includes cost directly related to the
 If the net realizable value is lower than cost, the
units of production (eg. Direct labor)
inventory is measured at net realizable value.
- includes a systematic allocation
of fixed and variable production overhead that is
T he writedown of inventory to the net realizable value is
incurred in converting materials into finished
accounted for using the allowance method.
goods.
 Directly attributable cost - is the cost incurred in
Allowance Method - also known as “ loss method” because a
bringing the inventory to the present location and
loss account “ loss on inventory writedown” is debited and a
condition
valuation account “ allowance for inventory writedown” is
Excluded from cost of inventory credited.
a. Abnormal amount of wasted material
b. Storage cost, unless necessary in the production process prior  T he inventory is recorded at cost
to a further production stage.  Any loss on inventory writedown is accounted
i. Storage cost on goods in process is capitalized separately and it is included in the computation of Cost
ii. Storage cost in finished goods is expensed of Goods Sold.
c. Administrative Overhead  T he allowance for inventory writedown is presented as
d. Distribution or selling cost a deduction from the inventory.
Cost Formulas CHAPTER 15 - PROPERTY, PLANT AND EQUIPMENT
A. First in, First out
B. Weighted Average
 Are tangible assets that are held for use in production
Accounting Standard does not permit Last in, First Out (LIFO) or supply of goods or services, for rental to others, or
for administrative purposes, and are expected to be
A. First In, First Out used during more than one period.
 Assumes that the goods first purchased are first sold and
consequently the goods remaining in the inventory at the Major Characteristics:
end of the period are the most recently purchased or a. Are tangible assets, meaning with physical
produced. substance
 First come, First Sold b. Are used in business, meaning used in production
or supply of goods or services, for rental
T he inventory is thus expressed in terms of recent or purposes and for administrative purposes.
new prices while the cost of goods sold is representative of c. Are expected to be used over a period of more
earlier or old prices. than one year.
Examples:
B. Weighted Average i. Land vi. Aircraft
 Average unit cost is computed by dividing the total cost ii. Lang Improvements vii. Bearer Plants
of goods available for sale by the total number of units iii. Building viii. Furniture and Fixture
available for sale. iv. Machinery ix. T ools
i. T he cost of the beginning inventory plus the total v. Ship x. Motor V ehicle
cost of purchases during the period is divided by the
total units purchased plus those in the beginning
Initial M easurement b. Fair value of the share capital
 Any PPE that qualifies for recognition as an asset shall be c. Fair value or stated value of the share capital
measured at cost.
Issuance of bonds payable
If assets are acquired by issuing bonds payable is measured
Cost - is the amount of cash or cash equivalent paid and the fair
in the following order of priority:
value of other consideration given to acquire an asset at the time of
a. Fair value of bonds payable
acquisition or construction.
b. Fair value of asset received
Elements of Cost: c. Face amount of bonds payable
a) Purchase price, including import duties and
Exchange
nonrefundable purchase taxes, after deducting discounts
If it is acquired in exchange for a nonmonetary asset or a
and rebates.
combination of monetary and nonmonetary asset then it is
b) Cost directly attributable to bringing the asset to the
measured at fair value of the asset given in exchange plus
location and condition for the intended use.
any cash payment.
c) Initial estimate of the cost of dismantling and removing
the item for which the entity has a present obligation.
T he exchange is recognized at carrying amount of the asset
Directly Attributable Cost given in exchange plus any cash payment if the exchange
Examples of directly attributable costs that qualify for capitalization transaction lacks commercial substance.
ascost of the assetsincludes:
a. Cost of site preparations Commercial substance
b. Initial delivery and handling cost  New notion and is defined as the event or
c. Installation and assembly cost transaction causing the cash flows of the entity to
d. Professional fee change significantly by reason of the exchange.
e. Cost of testing whether the asset is functioning properly
T he exchange transaction has a commercial substance
Subsequent M easurement
when the cash flows of the asset received differ
 Cost Model - PPE are carried at cost less any accumulated
significantly from the cash flows of the asset transferred.
depreciation and any accumulated impairment loss.
 Revaluation Model - PPE are carried at revalued carrying Construction
amount. T he cost of self-constructed PPE includes:
i. Direct cost of materials
 T he revalued carrying amount is the fair value at the date ii. Direct cost of labor
of revaluation less any subsequent accumulated iii. Indirect cost and incremental overhead
depreciation and subsequent accumulated impairment specifically identifiable or traceable to the
loss. construction.
Acquisition on a cash basis
T he cost of abnormal amount of wasted material, labor or
T he cost of PPE is the Cash price at the recognition date
overhead incurred in the production of self-constructed asset
is not included in the cost of the asset.
T he cost of asset acquired on a cash basis simply includes the cash
paid plus directly attributable costs (e.g freight, installation cost) all Derecognition
cost necessary in bringing the asset to the location and condition for  T he cost of the PPE together with the related
the intended use. accumulated depreciation shall be removed from the
statement of financial position.
Acquisition on account
If it is subject to cash discount, the cost of an asset is equal to the
Carrying amount of an item of PPE shall be derecognized on
invoice price minus the discount, regardless of whether the discount
disposal or when no future economic benefits are expected
is taken or not.
from the use or disposal.
Cash discount is generally considered as reduction of cost and not as
T he gain or loss arising from the derecognition of an item of
income.
PPE shall be determined as the difference between the net
Acquisition on installment basis disposal proceeds and the carrying amountt of the item.
If an asset is offered at a cash price and at an installment price and is
Concept of Depreciation
purchased at the installment price, the asset shall be recorded at the
 Depreciation - system allocation of the depreciable amount of
cash price.
an asset over the useful life.
- matter or cost allocation in recognition of the
T he excess of the installment price over the cash price is treated as
exhaustion of the useful life of an item of PPE.
an interest to be amortized over the credit period.
Depreciation Period
Issuance of share capital
 Depreciation of an asset begins when it is available for
If shares are issued for consideration other than actual cash, the
use; when the asset is in the location and condition
proceeds shall be measured by the fair value of the consideration
necessary for the intended use by management.
received.
 Depreciation ceases when the asset is derecognized.
 Depreciation does not cease when the asset become
If the property is acquired through the issuance of share capital, the
idle temporarily.
property shall be measured at an amount equal o the following in
order of priority:
a. Fair value of the property received
T emporary idle activity does not preclude depreciating the asset as
future benefits are consumed not only through usage but also through Presentation of government grant
wear and tear and obsolescence.
1) Government grant related to asset shall be presented in the
Factors of Depreciation statement of financial position in either of two ways:
I. Depreciable Amount - the cost of an asset or other amount a) By setting the grant as deferred income
substituted for cost, less the residual value. b) By deducting the grant in arriving at the carrying
amount of the asset
Each part of an item of PPE with a cost that is significant in
2) Government grant related to income
relation to the total cost of the item shall be depreciated separately.
a) T he grant is presented in the income statement,
either separately or under the general heading
II. Residual V alue - is the estimated net amount currently
“ other income”
obtainable if the asset is at the end of the useful life.
b) Alternatively, the grant is deducted from the
related expenses
T he residual value of an asset shall be reviewed at least at each
financial year-end and if expectations differ from previous estimate, G overnment assistance
the change shall be accounted for as a change in an accounting  Is action by government designed to provide an
estimate. economic benefit specific to an entity or range of
entities qualifying under certain criteria.
III. Useful life - either the period over which an asset is expected T he essence of government assistance is that no value can
to be available for use by the entity, or the number or reasonably be place upon it. Examples:
production or similar units expected to be obtained from the a. Free technical or marketing advice
asset by the entity b. Provision of guarantee
c. Government procurement policy that is
Factor in determining useful life: responsible for a portion of the entity’ s sales.
a. Expected usage of the asset
b. Expected physical wear and tear Government assistance does not include the following
c. T echnical or commercial obsolescence indirect benefits or benefits not specific to an entity:
d. Legal limit for the use of the asset (e.g expiry date a. Infrastracture in development areas (e.g
of the related lease) improvement to the general transport and
communication network)
b. Imposition of trading constraints on competitor
Depreciation M ethod c. Impsoved facilities (e.g irrigation for the
community)
I. Straight line method - the annual depreciation charge is
calculated by allocating the depreciable amount equally over Disclosure about government grant
the number of years of useful life.
-Constant charge over the useful life of the asset i. T he accounting policy adopted for government grant
-Function of time rather than as a function of usage including the method of presentation adopted in the
financial statements
II. Production Method - or “ output method” assumes that
ii. T he nature and extent of government grant recognized in the
depreciation is more a function of use rather than passage of
financial statements and an indication of other forms of
time.
government assistance from which the entity has directly
- Considered in terms of the output it produces or the
benefited
number of hours it works.
iii. Unfulfilled condition and other contingencies attaching to
- related to the estimated production capability of the
government assistance that has been recognized.
asset and is expressed in a rate per unit of output or per
hour of use.
Not required to disclose the name of the government agency
III. Diminishing balance or accelerated methods - provide higher who gave the grant along the date of sanction of the grant by such
depreciation in the earlier years and lower depreciation in the government agency and the date when cash was received in case of
later yearsof the useful life of the assets. monetary grant.
- it results in a decreasing depreciation charge over the
useful life.
- include sum of years’ digit method and double declining
balance method.

CHAPTER 16 - GOVERNMENT GRANT (PAS 20)

 As assistance by government in the form of transfer of


resources to an entity in return for part or future compliance
with certain conditions relating to the operating activities of
the entity.

Recognition
Government grant shall be recognized when there is reasonable
assurance that:
a) T he entity will comply with the conditions of the grant
b) T he grant will be received
CHAPTER 17 - BORROWING COSTS (PAS 23) Accordingly, any investment income from general
borrowings is not deducted from capitalizable borrowing
 Are defined as interest and other costs that an entity incurs in cost.
connection with borrowing of funds from banks and other
Average expenditure
financial institutions.
T he Capitailzation rate is computed by dividing the total
 Classified as:
annual borrowing cost by the total general borrowings
i. Specific borrowing - intended specifically in acquiring a
qualifying asset
T he amount of capitalized borrowing cost is the average
ii. General borrowing - intended partly in acquiring a
expenditures on the asset multiplied by the capitalization
qualifying asset and partly for general or working capital
rate.
purposes
Q ualifying Asset Commencement of Capitalization
 Is an asset that necessarily takes a substantial period of time to get
T he Capitalization of borrowing cost as part of the cost of a
ready for the intended use or sale
qualifying asset shall commence when the following three
Examples: condition are present:
a. Manufacturing plant a. When the entity incurs expenditure for the asset
b. Power generation facility b. When the entity incurs borrowing costs
c. Intangible asset c. When the entity undertakes activities that are necessary
d. Investment property to prepare the asset for the intended use or sale
 Borrowing cost incurred in connection with acquisition of a Cessation of Capitalization
qualifying asset should be capitalized as cost of the qualifying asset. Capitalization of borrowing costs shall cease when substantially
Excluded from Capitalization all the activities necessary to prepare the qualifying asset for the
 Does not require capitalization of borrowing costs relatig to the intended use or sale are complete.
following assets not considered as qualifying asset: An asset is normally ready for intended use or sale when the
a. Asset measured at fair value, such as biological asset physical construction of the asset is complete even though
b. Inventory that is manufactured in large quantity on a repetitive routine administrative work might still continue
basis, such as maturing whisky, even if it takes a substantial
period of time to get ready for sale. Disclosure related to borrowing cost
c. Asset tat is ready for the intended use or sale when acquired
a. T he amount of borrowing cost capitalized during the period
Accounting for borrowing cost b. T he capitalization rate used to determine the amount of
Mandates the following rules on borrowing cost: borrowing costs eligible for capitalization.
1 . If the borrowing is directly attributable to the acquisition
construction or production of a qualifying asset, the Segregation of assets that are “ qualifying assets” from other
borrowing cost is required to be capitalized as the cost of assets in the statement of financial position is not required to be
asset. disclosed.
In other words, the capitalization of borrowing cost is CHAPTER 18 - INVESTMENT IN ASSOCIATES (PAS 28)
mandatory for a qualifying asset
2. All other borrowing cost shall be expensed as incurred
Associates
In other words, if the borrowing is not directly attributable  is simply defined as an entity over which the investor has a
to a qualifying asset, the borrowing cost is expensed significant influence.
immediately.
Significant Influence - is the power to participate in the
Asset financed by specific borrowings financial and operating policy decisions of the associate but not
 If funds are borrowed specifically for the purpose of acquiring a control or joint control over those policies.
qualifying asset, the amount of capitalizable borrowing cost is the
If the investor holds, directly or indirectly through subsidiaries,
actual borrowing cost incurred during the period less any investment
20% or more of the voting power of the investee, it is presumed
income from the temporary investment of those borrowings.
that the investor has a significant influence, unless it can be clearly
Asset financed by general borrowing demonstrated that this is not the case.
 Provides that if the funds are borrowed generally and used for
acquiring a qualifying asset, the amount of capitalized borrowing M easurement of investment in associate
cost is equal to the average carrying expenditure on the asset during T he investment in associate is measured using the equity method
the period multiplied by a capitalization rate or average interest rate. of accounting. T he accounting procedures under the equity method
are:
Capitalizable borrowing cost shall not exceed the actual interest a. T he investment is initially recognized at cost.
incurred. b. T he carrying amount is increased by the investor’ s
share of the net income of the investee and decreased
T he capitalization rate or average interest rate is equal to the total by the investor’ s share of the net loss of the investee
annual borrowing cost divided by the total general borrowings c. Dividends received from an equity investee reduces the
outstanding during the period. carrying amount of the investment
d. T he Investment must be in ordinary share
No specific guidance is provided for general borrowing with respect
to investment income. If the investment is in preference share, the equity
method is not appropriate regardless of the percentage
because the preference share is a nonvoting equity.
e. If the investor has a significant influence over the investee, the CHAPTER 19 - IMPAIRMENT OF ASSETS (PAS 36)
investee is said to be an associate.
IM PAI RM ENT
Excessof cost over carrying amount T here is an established principle that an asset shall not be
carried at above the recoverable amount.
An accounting problem arises if the investor pays more or less for an
investment than the carrying amount of underlying net asset. If the carrying amount of an asset is higher than the recoverable
amount, the asset is judged to have suffered an impairment loss.
If the investor pays more than the carrying amount of the net assets
acquired, the difference is commonly known as excess of cost over T he Recoverable amount of an asset is the fair value less cost of
carrying amount and may be attributed to the following: disposal or value in use, whichever is higher
a. Undervaluation of the investee’ s asset
b. Goodwill Fair V alue lesscost of Disposal
Fair value is the price that would be received to sell an asset in
If the asset of the investee are fairly valued, the excess of cost over an orderly transaction between market participants at the
carrying amount of the underlying net assets is attributable to goodwill. measurement date.
If the excess is attributable to undervaluation of depreciable asset, it is Fair value less cost of disposal is equal to the exit price or
amortized over the remaining life of the depreciable asset. selling price of an asset minus cost of disposal.
If the excess is attributable to undervaluation of land, it is not amortized  Cost of disposal is an incremental cost directly
because the land is non-depreciable. (The excess is expensed when the attributable to the disposal of an asset, excluding
land is sold) finance cost and income tax expense.
If the excess is attributable to inventory, the amount is expensed when
V alue in Use
the inventory is already sold.
 Is measured as the present value or discounted value of
If the excess is attributable to goodwill, it is included in the carrying future net cash flows expected to be derived from an asset.
amount of the investment and not amortized.
T he net cash flow are pretax cash flows and pretax discount rate
is applied in determining the present value. Estimates of future
Excessif fair value cost
cash flow include:
Any excess of the fair value of the associate’ s net asset acquired over
a. Cash inflows from the continuing use of the asset.
the cost of the investment is included as income in the determination of
b. Cash outflows necessarily incurred to generate the cash
the investor’ s share of the associate’ s net income or net loss in the
inflows from the continuing use of the asset.
period in which the investment is acquired.
c. Net cash flows received or paid on the disposal of the
asset at the end of the useful life in an arm's length
Discontinuance of equity method
transaction.
Investor shall discontinue the use of the equity method from the date
Estimate of future cash flow do not include cost of improving
that it ceases to have significant influence over an associate.
asset performance, restructuring cost, cash flows from financing
On the date of the significant is lost, the investor shall measure any activities and income tax payment.
retained investment in associate at fair value.
Recognition of impairment loss
T he fair value of the investment at the date it ceases to be an associate If the recoverable amount of an asset is less than the carrying
shall be regarded as the fair value on initial recognition as a financial amount, an impairment loss has occurred.
asset.
T he impairment loss shall be recognized immediately by
T he difference between the carrying amount of the retained investment reducing the asset’ s carrying amount to its recoverable amount.
at the date the significant influence is lost and the fair value of the
retained investment shall be included in profit or loss. T he impairment loss is recognized and presented separately in
the income statement.
Equity M ethod not Applicable
Reversal of an impairment loss
Investment in associate shall not be accounted for using the equity An impairment loss recognized for an asset in prior years shall
method if the investor is parent that is exempt from preparing be reversed if there has been a change in the estimate of the
consolidated financial statement or if all of the following apply: recoverable amount.
a) T he investor is a wholly-owned subsidiary, or a partially
owned subsidiarity of another entity and other owners do not If the recoverable amount of an asset that has previously been
object to the investor not applying the equity method. impaired turns out to be higher than the current carrying amount,
b) T he investor’ s debt and equity instruments are not traded in a the carrying amount of the asset shall be increased to new
public market or over the counter market. recoverable amount.
c) T he investor did not file or it is not in the process of filling
However, increased carrying amount of an asset due to reversal
financial statements with the SEC for the purpose of issuing
of an impairment loss shall not exceed the carrying amount that
any class of instruments in a public market.
would have been determined, had no impairment loss been
d) T he ultimate or any intermediate parent of the investor
recognized for the asset in prior years.
produces consolidated financial statements available for public
use that comply with PFRS. T he reversal of the impairment loss shall be recognized
immediately in the income statement as gain on reversal of
impairment loss.
Cash generating unit (C G U) Identifiable Intangible Asset
 A cash generating unit is the smallest identifiable group of assets  Patent, copyright, franchise, trademark, customer list,
that generate cash inflows from continuing use that are largely computer software, and broadcasting license.
independent of the cash inflows from other assets or group of assets.
Unidentifiable Intangible Asset
A cash generating unit is segment of business that generates revenue
 Cannot be sold , transferred, licensed, rented, or exchanged
and cash inflows independently.
separately.
In practice, a cash generating unit is segment of business that generates  Inherent in a continuing business and can only be identified
revenue and cash inflows independently. with the entity as a whole
 Squarely describes a goodwill
T he recoverable amount of an asset shall be determined for the asset
individually. Initial measurement of intangible Asset
However, if its not possible to estimate the recoverable amount of the  Shall be measured initially at cost
individual asset, an entity shall determine the recoverable amount of the T he cost of separately acquired intangible asset comprises:
cash generating unit to which the asset belongs. a. Purchase price
b. Import duties and nonrefundable purchase tax
Allocation of Impairment loss c. Directly attributable cost of preparing the asset for the
When an impairment loss is recognized for a cash generating unit, this intended use (e.g professional fees arising directly from
loss shall be allocated to the assets of the unit in the following order: bringing the asset to its working condition and cost of
testing the asset)
A. T o the goodwill, if any
B. T o all other noncash assets of the unit prorata based on their
Internally generating intangible asset
carrying amount.
T he cost of an internally generated intangible asset comprises
T he excess impairment loss is allocated to the other noncash asset all directly attributable cost necessary to create, produce, and
prorata based on carrying amount. prepare the asset for the intended use.
Directly attributable costs are:
Journal entry to recognize the impairment loss
a. Cost of material and services used or consumed in
In recognizing the impairment the carrying amount of an asset shall not generating the intangible asset
be reduced below its fair value less cost of disposal; or value in use, b. Cost of employee benefit arising from the generation of
which ever is higher. the intangible asset
c. Fee to register a legal right.
T he amount of impairment loss that would otherwise have been
allocated to the asset shall be allocated prorata to the other assets of the Internally generated brand, masthead, publishing title, customer
cash generating unit. list and other item similar in substance shall not be recognized
as intangible asset.
Reversal of Impairment losson goodwill
Internally generated goodwill shall not be recognized as an
An impairment loss is recognized for goodwill shall not be reversed in asset.
subsequent period.
Expenditure expensed when incurred
CHAPTER 20 - INTANGIBLE ASSETS (PAS 38) a. Start up cost - may consist of organization cost such as legal
cost incurred in establishing a legal entity, preopening cost or
INT ANG I BLE ASSET expenditure to open a new facility or business, and
 Identifiable nonmonetary asset without physical substance. preopening cost or expenditure for commencing new
operation or launching new products.
Must be controlled by the entity as a result of past event and from
b. T raining cost to operate the asset
which future economic benefits are expected to flow to the entity.
c. Advertising and promotional cost
3 essential criteria in the definition of an intangible asset: d. Businessrelocation or reorganization cost
i. Identifiability e. Selling and administrative overhead
ii. Control
iii. Future economic benefit M easurement after recognition
1 . Cost M odel - intangible asset shall be carried at cost, less
An asset is identifiable when: any accumulated amortization and any accumulated
I. It is separable (the asset could be sold, transferred, licensed, rented, or impairment loss
exchanged separately)
2. Revaluation model - an intangible asset shall be carried at
II. It arises from contractual or other legal right (if it is acquired
revalued amount or fair value on the date of revaluation, less
through purchase, there is a transfer of legal right that would make the
asset identifiable) any subsequent amortization and any subsequent
 Control - power of the entity to obtain the future economic benefit accumulated impairment loss
flowing from the intangible asset and restrict the access of other from An intangible asset can only be carried at revalued amount if
those benefits. there is an active market for the asset
 T he entity must be able to enjoy the future economic benefits
from the asset and prevent others from enjoying the same Amortization and Impairment of intangible asset
benefits. 1 . Intangible asset with limited or finite life are amortized over
Future economic benefit may include revenue from the sale of products, their useful life
cost saving or other benefits resulting from the use of the asset by the
entity.
Intangible asset with finite useful life are tested for impairment Examples of Development Activities
whenever there is an indication of impairment at the end of reporting i. Design, construction, and testing of preproduction
period. prototype or model
2. Intangible asset with indefinite life are not amortized but are tested ii. Design of tools, jigs, molds and dies involving new
for impairment at least annually and whenever there is an indication technology
that the intangible asset may be impaired. iii.Design, construction and operation of a pilot plant that
is not of a scale economically feasible to the entity for
Amortization commercial production.
 Systematic allocation of the amortizable amount of an intangible iv. Design, construction and testing of a chosen alternative
asset over the useful life for new or improved product or process.
 Amortizable amount is the cost of the intangible asset less
Activities not considered research and development
residual value
Activities that relate to commercial production do not result to
It is recorded by debiting amortization expense and crediting the research and development cost
intangible asset account. a. Engineering follow through in an early phase of commercial
production
Normally, the intangible asset account is credited directly for the b. Quality control during commercial production
periodic amortization but an accumulated amortization account may be c. T rouble shooting breakdown during production
maintained. d. Routine on-going effort to refine, enrich or improve quality
of an existing product
Amortization shall begin when the asset is available for use, means the e. Adaptation of an existing capability to a particular
asset is in the location and condition for the intended use. requirement or customer need
f. Periodic design change to existing products
Useful life g. Routine design of tools, jigs, molds and dies.
 Either indefinite or finite
Accounting for research cost
 If finite, may be expressed in terms of years or the number of units Expenditure on research or on the research phase of an internal
to be produced. project shall be recognized as expense when incurred.
T he useful life of an intangible asset is indefinite when there is no T he reason is that at the research phase of a project, an entity
forseeable limit to the period over which the asset is expected to cannot be certain that future economic benefits would probably
generate net cash flow. Means there are no legal, contractual, flow to the entity.
competitive and other factors that would limit the useful life of the
intangible asset. At the research stage, there is too much uncertainty about the
likely success of the project.
T he major problem of an intangible asset is determining the useful life.
Accounting for Development Cost
Amortization method In contrast with research cost, development cost is incurred at a
 Shall reflect the pattern in which the future economic benefits from later stage in a project and the probability of success may be more
the asset are expected to be consumed by the entity. apparent
If such patter cannot be determined reliably, the straight line method of Development cost - may or may not be recognized as an intangible
amortization shall be used. asset depending on a very strict criteria.
Research and Development Development cost may qualify as intangible asset if and only if the
 an entity cannot distinguish the research phase from the entity can demonstrate all of the following:
development phase, the entity treats the expenditure as if it were a. T echnical feasibility of completing the intangible asset which
incurred in the research phase only. is achieved when a prototype or model is produced
b. T he intention to complete the intangible asset
 Research - original and planned investigation undertaken with c. T he ability to use or sell the intangible asset
the prospect of gaining scientific or technical knowledge and d. T he intangible asset will generate probable future benefit
understanding. e. Availability of resource or funding to complete the asset
 Research activity - is undertaken to discover new knowledge f. T he ability to measure reliably the development expenditure
that will be useful in developing new product.
 Development - is the application of research findings or other Capitalizable expenditure
knowledge to a plan or design for the production of new or Expenditure for research and development which have alternative
substantially improved materials, device, process, system or future use, either in additional research project or for productive
service, prior to the commencement of commercial product. purposes, can be capitalized.
 Development Activity - involves the application of research
Accordingly, cost incurred for materials, equipment and intangible
findings to develop a new product.
asset related to research and development activities which have an
Examples of research activities: alternative future use can be capitalized.
i. Laboratory research aimed at obtaining or discovering new
Subsequently, the following should be charged to research and
knowledge
development expense:
ii. Searching for application of research finding and other
a. Cost of materials used
knowledge
b. Depreciation of equipment used in research and
iii.Conceptual formulation and design of possible product or
development
processalternative
c. Amortization of intangible asset used in R and D
iv. T esting in search for product or process alternative.

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