CFAS Reviewer 11-20
CFAS Reviewer 11-20
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.