Chapter 22 Subsequent Measurement

IFRS 16, PARAGRAPH 34, provides that

Invest Property lessee applies the fair value model in
Cash Surrender Value measuring investment property.

 Fair Value model- The changes in fair

Investment Property is defined as property value from year to year are recognized
(land or building) held by the owner or by in profit or loss. No depreciation is
lessee under finance lease. recorded for the Investment Property.
 Cost model- the Asset should be carried
Intention: Earn rentals or for capital
at cost less accumulated depreciation
appreciation.
and any accumulated impairment loss.
An investment property is NOT HELD; Fluctuation in the fair value of the
investment property year to year are
a) For use in the production or supply of not recognize.
goods or services or for administrative
purposes Recognition of Investment Property
b) For sale in the ordinary course of
business Investment property shall be recognized as
an asset when and only when;
Excluded: (Not classified as Inventory
Appreciation  It is probable that the future economic
benefits that are associated with the
1. Owner-occupied property investment property will flow to the
2. Property held for future use as owner- entity.
occupied property
 The cost of the investment property can
3. Property held for future development
be measured reliably
and subsequent use as owner-occupied
property. Initial Measurement of Investment Property
4. Property occupied by the employees,
whether or not the employees pay rent An Investment Property shall be measured
at market price initially at its cost. Direct Attributable
5. Owner-occupied property awaiting expenditure includes professional fees for
disposal legal services, property transfer taxes and
6. Property held for sale in the ordinary
other transaction cost.
course of business
7. Property being constructed or developed
Cash Surrender Value
on behalf of third parties
8. Property that is leased to another
It is the amount which the insurance firm
entity under a finance lease.
will pay upon the surrender and
Examples of Investment property;
cancelation of the life insurance policy.
a) Land held for long term capital The entity may insure the life of its
appreciation officers and name itself as beneficiary.
b) Land held for currently undetermined
use
 If the beneficiary is the officer
c) Building owned by the reporting entity
leased out under an operating lease insured or any person other than the
d) Building that is vacant but is held to entity like wife of the officer, no
be leased out under an operating lease accounting problem encountered.
e) Property that is being constructed or
developed for future use as investment  An accounting problem will arise when
property the beneficiary is the entity itself.
 It is on this assumption that the fair value or cash flows is an offset, in
following discussion is geared. whole or in part, to the change in fair
value or cash flows of a hedged item. It
Chapter 23 is for protecting a financial loss or the
structuring of a transaction to reduce
Derivatives risk.
Interest rate Swap
Two components of Hedging

Derivatives are becoming increasingly 1. Hedging instruments- is the derivatives

common but very complicated. Huge losses whose fair value or cash flow would be
may be suffered by banks and other expected to offset changes in the fair
financial institutions because of too much value of the hedge item.
exposure in derivatives financial 2. Hedged item- is an asset, liability,
instruments. It is a executory contract, firm commitment, highly probable
meaning it is not a transaction but an forecast transaction or net investment
exchange of promises about future action. in a foreign operation.

Purposes of Derivatives: To manage Three types of Hedging Relationship

financial risk.
1. Fair Value Hedge
a) Change in commodity price 2. Cash Flow Hedge
b) Change in cash flows 3. Hedge of a Net Investment in a foreign
c) Foreign currency exposure operation

Types of financial risk Measurement of Derivatives

1. Price Risk- is the uncertainty about An entity shall recognized and measure all
the future price of an asset. derivatives as either asset or liability
2. Credit Risk- is the uncertainty over at FAIR VALUE. Both fair value and
whether a counterparty or the party on notional shall be fully disclosed. An
the other side of the contract will unrealized gain or loss is recognized when
honour the terms of the contract. there is change in the fair value.
3. Interest rate risk- is the uncertainty
about future interest rates and their No Hedging Designation
impact on cash flows and the fair value
Changes in fair value of a derivative that
of the financial instruments.
is not designated as a hedging instrument
4. Foreign currency risk- is the
shall be recognized in profit or loss. In
uncertainty about future Philippine
this case the derivative can be thought of
peso cash flows stemming from assets
as a speculation.
and liabilities denominated in foreign
currency. Cash Flow Hedge

It is a derivative that offset in whole or

Hedging- means designating one or more
in part the variability in cash flow from
hedging instruments so that the change in a probable forecast transaction.
A probable “Forecast Transaction” is an
uncommitted but anticipated future
transaction.
 The Derivative is measured at fair
value.
 The change in Fair Value is recognized
as component of other comprehensive
income to the extent that the hedge is
effective.
 The ineffective portion is recognized
in profit or loss.
 The hedge item is not adjusted to
conform to fair value.
Fair Value Hedge
It is a Derivative that offset in whole or
in part the change in the Fair Value of an
asset or a liability.
Examples of Derivatives:
Chapter 24
Derivatives
Forward, Future & Option
A Forward Contract is an agreement between
two parties to exchange a specified amount
of commodity, security or foreign currency
on a specified date in the future at a
specified price or exchange rate.
Note: Public Instruments
A Future Contract is a contract to
purchase or sell a specified commodity at
some future date at a specified price. It
is also traded in a future exchange market
in much the same manner as a debt and
equity securities being traded in the
stock market.

Interest Rate Swap NOTE: Private Contract

Forward Contract An Option is a contract that gives the

holder the right to purchase or sell an
Future Contract asset at a specified price during a
definite period at some future time. It is
Option Contract a Right not an Obligation to purchase or
sell.
Note: These Derivatives are financial
instruments Separate from the primary Call Option (Buyer) - gives the
financial instruments, meaning “stand- holder the right to purchase an asset
alone” derivatives.
Put Option (Seller) – gives the
Interest Rate Swap holder the right to sell an asset.
It is a contract whereby two parties agree The payment is commonly known as the
to exchange cash flows for future interest “option premium”
payments based on a contract of loan.
The call option is note exercised because
Contract of loan- Primary Financial the market price is lower than the call
Instrument. option price.
Interest Rate Swap- Derivative Market Price > Exercise Price= In the
Financial Instruments. money
Note: The unrealized gain in the interest Market Price < Exercise Price= Out of the
rate swap is a component of other money
comprehensive income because the
derivative agreement is designated as a Market Price = Exercise Price = At the
cash flow hedge. money

Embedded Derivative

It is a component of a hybrid or combined

contract with the effect that some of the
cash flows of the combined contract vary
in a way similar to a stand-alone
derivative. There is a basic contract
known as the “host contract” that has an
embedded derivative. It is not a separate
contract.
Example of Embedded Derivative
 Equity Conversion Option
 Redemption Option
 Interest or principal payment is linked
to the price of gold or silver
Bifurcation is the process of separating
an embedded derivative from the host
contract.
Chapter 25
Property, Plant and Equipment
Property, plant and equipment
With physical substance
Used in business or use in
production or supply of goods or services,
for rental purposes and for
administrative.
It is expected to be used over a
period of more than one period.
Recognition of property, plant and
equipment
a) It is probable that the future economic
benefits associated with the asset will
flow to the entity.
b) The cost of the asset can be measured
reliably.
Measurement at recognition
An item of property, plant, and equipment
that qualifies for recognition as an asset
shall be measured at cost.
Elements of cost
a) Purchase price, including import duties
and non-refundable purchase taxes,
after deducting trade discounts and
rebates.
b) Cost directly attributable to bringing
the asset to the location and condition
necessary for it to be capable of
operating in the manner intended by
management.
c) Initial estimate of the cost of
dismantling and removing the item and
restoring the site on which it is
located, the obligation for which an
entity incurs.
Direct Attributable Cost
1. Cost of employee benefits arising
directly from acquisition of property,
plant and equipment.
2. Cost of site preparation
3. Initial delivery and handling cost
4. Installation and assembly cost
5. Professional fees
6. Cost of testing whether the asset is
functioning properly
Measurement after recognition
Cost Model- means that property,
plant and equipment are carried at cost
less any Accumulated Depreciation and any
impairment loss.
Revaluation Model- means that property,
plant and equipment are carried at
revalued carrying amount. It is a fair
value at the date of revaluation less any
subsequent accumulated depreciation and
subsequent impairment loss.
Acquisition of Property
Cash On Basis- The cost of an item of
property, plant and equipment is the cash
price equivalent at the recognition date.
Includes the cash paid plus directly
attributable cost such as freight
installation cost.
On account subject to cash discount
The cost of asset is equal to the
invoice price minus the discount,
regardless whether the discount is
taken or not. If the discount is not
taken, the same is charged to purchase
discount lost account which is shown
as other expense.
Installment Basis- if an asset is
offered at a cash price and at an
installment price and is purchased at
the installment price, the asset shall
be recorded at the cash price. The
excess of the installment price over
the cash price is treated as an
interest to be amortized over the credit
period.
If no available cash price, the asset is
recorded at an amount equal to present
value of all payment using an implied
interest rate.
Issuance of Share Capital- Philippine
GAAP provides that if shares are issued
for consideration other than actual cash,
the proceeds shall be measured at the fair
value of the consideration received.
1. Fair Value of the property received
2. Fair Value of the share capital
3. Par Value or stated value of the share
capital
Issuance of bonds payable
PFRS 9, Paragraph 5.1.1, provides that the
entity shall measure the financial
liability at fair value plus transaction
cost that are directly attributable to the
issue of the financial liability.
1. Fair Value of bonds payable
2. Fair Value of asset received
3. Face amount of bonds payable
Exchange- PAS 16, paragraph 24
Nonmonetary asset or a combination of
monetary and nonmonetary asset is measured
at Fair Value.
Carrying amount:
1. Commercial Substance- It is a new
notion and is defined as the event or
transaction causing the cash flows of
the entity to change significantly by
reason of the exchange.
a) Fair value of asset given plus any
cash payment-on the part of the
payor.
b) Fair value of asset given minus
any cash received-on the part of
the recipient.
2. No commercial substance- The acquired
item of property, plant and equipment
is measured at the carrying amount of
the asset given. No gain or loss is
recognized when the exchange lacks
commercial substance.
3. Trade In- This means the property is
acquired by exchanging another
property as part payment and the
balance payable in cash or any
other form of payment in accordance
with agreed terms.
a. Fair Value of asset given plus
cash payment.
b. Trade In value of asset given
plus cash payment.
Donation- Expenses incurred in
connection with the donation, like payment
of registration fees and legal fees shall
be charged to the donated capital account.
Capital gifts or grants shall be recorded
at fair value when received or receivable.
Capital gifts or grants are generally
subsidies and therefore recognized as
income.
Construction
a. Direct cost of materials
b. Direct cost of labour
c. Indirect cost and incremental
overhead specifically identifiable
or traceable to the construction
Chapter 26
Government Grant
PAS 20, Paragraph 3, defines government
grant 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 and measurement
1. The entity will comply with the
conditions attaching to the grant.
2. The grant will be received.
Classification of government grant
 Grant Related to asset- this is
government grant whose primary
condition is that an entity qualifying
for the grant shall purchase, construct
or otherwise acquire long-term asset.
 Grant related to income- By residual
definition, this is government grant
other than grant related to asset.
Accounting for government grant
The grant is taken to income over one or
more periods in which the related cost is
incurred.

Presentation of government grant
1. Government grant related to asset,
including nonmonetary grant at fair
value.
a) By setting the grant as deferred
income.
b) By deducting the grant in arriving
at the carrying amount of the asset.
2. Government grant related to income
a) The grant is presented in the income
statement, either separately or
under the general heading ‘other
income’
b) Alternatively, the grant is deducted
from the related expense.
Repayment of Government Grant
Shall be accounted for a change
accounting estimate.
a) Repayment of grant related to income-
shall be applied first against any
unamortized deferred income and any
excess shall be recognized immediately
as an expense.
b) Repayment of grant related to an asset-
shall be recorded by increasing the
carrying amount of the asset.
c) Cumulative additional depreciation-
recognized as an expense.
Grant of interest-free loan
Forgivable loan from government is treated
as a government grant when there is
reasonable assurance that the entity will
meet the terms for forgiveness of the
loan.
PAS 20, Paragraph 10, NIL or below-market
rate of interest is treated as a Manufacturing Plant
government grant.
Government Assistance- is an action by
government designed to provide an
economic benefit specific to an
entity.
No value:
a) Free Technical or marketing advice
b) Provision of guarantee
c) Government procurement policy that
is responsible for a portion of the
entity’s sales.
Does not include Indirect Benefits:
a) Infrastructure in development areas
such as improvement to the general
transport and communication
network.
b) Imposition of trading constraints
on competitors.
c) Improved facilities such as
irrigation for the benefits of an
entire local community.
Chapter 27
in
Borrowing Costs
Under PAS 23, Paragraph 5, borrowing costs
are defined as interest and other costs
that an entity incurs in connection with
borrowing of funds.
a) Interest Expense calculated using the
effective interest method.
b) Finance charge with respect to a
finance lease.
c) Exchange difference arising from
foreign currency borrowing to the
extent that it is regarded as an
adjustment to interest cost.
Qualifying asset
It is an asset that necessarily takes a
substantial period of time to get ready
for the intended use or sale.
Power Generation Facility
Intangible Asset
Investment Property
Excluded from capitalization
 Asset measured at fair value such as b. Legal fees and other expenditures for
biological assets. establishing clean title.
Inventory Manufactured on a c. Broker’s commission
repetitive basis, such as maturing d. Escrow Fees
whisky, even if it takes a substantial
e. Fees for Registration and Transfer of
period of time to get ready for sale.
Title
Assets that are ready for their f. Cost of relocation or reconstruction of
intended use or sale when acquired.
property belonging to others in order to
Accounting for borrowing cost acquire possession.

PAS 23, Paragraph 8, mandates the g. Mortgages, encumbrances and interest on

following rules on borrowing cost: such mortgages assumed by the buyer.
h. Unpaid taxes up to date of acquisition
a) If the borrowing is directly
attributable to the acquisition assumed by buyer.
construction or production of a i. Cost of survey
qualifying asset, the borrowing cost is
j. Cost of clearing and demolishing
required to be capitalized.
b) All other borrowing costs shall be unwanted old structures, less proceeds
expensed as incurred. from salvage value.
k. Payments to tenants to vacate the land.
Asset financed by specific borrowing
l. Cost of permanent improvements such as
PAS 23, Paragraph 12, provides that if the
cost of grading, levelling and landfill.
funds are borrowed specifically for the
purpose of acquiring a qualifying asset, m. Cost of option to buy the acquired
the amount of capitalizable borrowing land. If the land is not acquired, the
costs is the actual borrowing cost cost of option is expense outright.
incurred during the period less any
Land Improvements not subject to
investment Income from the temporary
investment of those borrowings. depreciation are charged to the land
account.
Asset financed by general borrowing
Land Improvements depreciable are charged
PAS 23, Paragraph 14, provides that if the to a special account land improvements.
funds are borrowed generally and used for
acquiring a qualifying asset, the amount 1) Fences 4.) Sidewalks
of capitalizable borrowing cost is equal 2) Water Systems 5.) Pavements
to the average carrying amount of the 3) Drainage Systems 6.) Cost of trees
asset during the period multiplied by a
capitalization rate or average interest Special Assessment- are taxes paid by the
rate. Any investment income is not landowner as a contribution to the cost of
deducted from capitalizable borrowing public improvements. It is a treated as
cost. part of the cost of the land.

Chapter 28 Real Property taxes- are treated as

outright expense.
Land and Building
Building Account
Land Account When Purchased:
Costs chargeable to Land a. Purchase Price
a. Purchase Price
b. Legal fees and other expenses in a. Purchase Price
connection with the purchase b. Freight, handling, storage, and other
c. Unpaid taxes up to date of acquisition cost related to the acquisition.
d. Interest, mortgage, liens and other c. Insurance while in transit
encumbrances on the building assumed by d. Installation Cost
the buyer. e. Cost of testing and trial run necessary
e. Payments to tenants to vacate the in preparing the machinery for its
building. intended use.
f. Any renovating or remodelling costs f. Initial estimate of cost of dismantling
incurred to put a building purchased in and removing the machinery and restoring
its condition. the site on which it is located, and for
When Constructed: which the entity has a present obligation.
a. Materials used, labour employed and g. Fee paid to consultants for advice on
overhead incurred during the construction. the acquisition of the machinery.
b. Building permit or license h. Cost of safety rail and platform
c. Architect fee surrounding the machine.
d. Superintendent fee i. Cost of water devise to keep machine
e. Cost of Excavation cool.
f. Cost of temporary buildings used as  Tools
construction offices and tools or 1) Machine Tools- Drills and Punches
materials shed. 2) Hand Tools- Hammer and saw
g. Expenditures incurred during the Note; Need to be segregated to Machinery
construction period such as interest on account
construction loans and insurance.  Patterns and dies
h. Expenditures for service equipment and It is used in designing or forgoing out a
particular product and also depreciated
fixtures made a permanent part of the over useful life.
structure.
 Equipment
i. Cost of temporary safety fence around
 Delivery Equipment
construction site and cost of subsequent  Cars
removal thereof. However, the construction  Trucks & other vehicles (business
operations)
of a permanent fence after the completion  Note: Motor Vehicle Registration
of the building is recognized as land Fees should be expensed.
 Store and Office Equipment
improvement.  Computers
j. Safety inspection fee  Typewriters
 Cash register
 Calculator
Chapter 28  Furniture and Fixture
 Showcases
Machinery  Counters
 Shelves
Capital and Revenue  Display Fixtures
Expenditure  Cabinets
 Partitions
Machinery Account  Safes
 Desks
Costs of Machinery:
 Tables
Returnable Containers

Container in big units or great bulks

classified as property, plant and
equipment

Containers that are small and individually

involve small amount classified as other
noncurrent assets.

Capital expenditure and revenue

expenditure

Expenditure only the current period

- Expense

Expenditure benefits current and future

period

- Asset

Future Economic Benefit

 Extends the life

 Increases the capacity
 Improves the efficiency and safety

Subsequent Cost

a) Additions- Increase physical size or

capacity of an asset.
 An entirely new unit
 An expansion, enlargement or
extension of the old asset.
b) Improvements or betterments- Increase
the service life or the capacity of the
asset.
c) Replacements- Involve substitution but
the new asset is not better than the
old asset when acquired.
d) Repairs- those expenditures used to
restore asset to good operating
condition upon their breakdown
 Extraordinary Repairs- material
replacement of parts, involving
large sums and normally extend the
useful life of the asset.
(Capitalized)
 Ordinary Repairs- Minor replacement
of parts, involving small sums and
are frequently encountered.
(Expense)
e) Rearrangement cost- is the relocation
or redeployment of an existing
property, plant and equipment.