 GOVERNMENT GRANTS

o Definition of government grants

 PAS 20, paragraph 3, government grant is the 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.
o Recognition of government grants
 It shall be recognized when there is reasonable assurance that (a) the entity will comply
with the conditions attaching to the grant and (b) the grant will be received.
o How are government grants recognized as income
 Government grant shall be recognized as income on a systematic basis over the period
in which an entity recognized as expenses the related costs for which the grant is
intended to compensate.

 BORROWING COSTS
o Definition of qualifying assets
 Qualifying asset is an asset that necessarily takes a substantial period of time to get for
the intended use or sale.
o Definition of borrowing costs
 Borrowing cost (PAS 23, paragraph 5) is the interest and other costs that an entity
incurs in connection with borrowing of funds.
o Requisites for borrowing costs to be capitalized.
 When the entity incurs expenditures for the asset
 When the entity incurs borrowing costs
 When the entity undertakes activities that are necessary to prepare the asset for the
intended use or sale.

 INVESTMENTS IN ASSOCIATES
o Definition of an associate, significant influence, control
 Associate is defined as an entity over which the investor has significant influence
 Significant influence is the power to participate in the financial and operating policy
decisions of the associate but not control or joint control over those policies.
 Control is the power over the investee or the power to govern the financial and
operating policies of an entity so as to obtain benefits; ownership directly or indirectly
through subsidiaries of more than half of the voting power of an entity.
o Definition of related party and examples of related party transactions
 Related party is when a party has (a) the ability to control the other party, (b) the ability
to exercise significant influence over the other party, and (c) joint control over the
reporting entity.

 IMPAIRMENT OF ASSETS
o Definition of impairment, impairment loss, value in use
 Impairment is a fall in the market value of an asset so that the recoverable amount is
now less than the carrying amount in the statement of financial position.
 Impairment loss occurs if the recoverable amount of an asset is less than the carrying
amount
 Value in use is measured as the present value or discounted value of the future net
cash flows expected to be derived from an asset
o Indications of impairment
 An entity shall assess at each reporting date whether there is any indication that an
asset may be impaired.
 If there is, the entity shall estimate the recoverable amount of the asset.
 Regardless whether there is an indication or not, intangible asset shall be tested with an
indefinite useful life or an intangible asset not yet available for use for impairment
annually by comparing the carrying amount with the recoverable amount
 It can be classified as external and internal sources of information.
o How are impairment losses recognized?
  It shall be recognized immediately by reducing the asset’s carrying amount to its
recoverable amount; recognized in profit or loss and presented separately in the income
statement.

 INTANGIBLE ASSETS
o Initial recognition of an intangible asset, what are the criteria?
 Identifiability, control, future economic benefits
o When can an intangible asset use the revaluation model for subsequent measurement?
 An intangible asset can only be carried at revalued amount if there is an active market
for the asset
o Amortization and impairment of intangible asset
 Amortization: Intangible assets with limited or finite life are amortized over their useful
life. Intangible assets with indefinite life are not amortized but are tested for
impairment at least annually and whenever there is an indication that it may be
impaired
 Impairment: Intangible asset with finite useful life are tested for impairment whenever
there is an indication of impairment at the end of reporting period. Intangible assets
with indefinite useful life are tested for impairment at least annually and whenever
there is an indication of impairment. An impairment loss on an intangible asset is
recognized if the recoverable amount is less than the carrying amount.
o When is intangible asset regarded as having an indefinite useful life?
 When there is no foreseeable limit to the period over which the asset is expected to
generate net cash flows
o Method of amortizing intangible asset
 Method of amortization shall reflect the pattern in which the future economic benefits
from the asset are expected to be consumed by the entity. However, if such pattern
cannot be determined reliably, the straight line method of amortization shall be used.
o When is the residual value of an intangible asset with a finite useful life shall be assumed zero?
 It shall be presumed to be zero except (a) when a third party is committed to buy the
intangible asset at the end of the useful life and (b) when there is an active market for
the intangible asset so that the expected residual value can be measured and it is
probable that there will be a market for the asset at the end of the useful life.
o Factors not considered in determining the useful life of an intangible asset (Below are the
factors that are used in determining the useful life of an intangible asset, so dun na lang ikaw
magbase)
o Factors in determining the useful life of an intangible asset
 Technical, technological, commercial or other type of obsolescence
 Expected action by competitors or potential competitors
 Expected usage of the asset by the entity
 Typical product life cycle for the asset
 Stability of the industry in which the asset operates
 Level of maintenance expenditure required to obtain the expected future economic
benefits from the asset
 The useful life of the asset may be dependent on the useful life of other assets of the
entity
 Period of control over the asset and legal and similar limits on the use of asset such as
expiry dates of related leases
o An intangible asset once recognized can be carried at which basis?
 Cost model or Revaluation model
o Disclosure requirements with respect to intangible assets (Intermediate Accounting 1 p 906)
o Accounting for research and development costs
 Research cost – shall be recognized as expense when incurred
 Development cost – incurred at a later stage in a project and the probability of success
may be more apparent; it may or may not be recognized as an intangible asset
depending on very strict criteria
 INVESTMENT PROPERTY
o Subsequent measurement (after initial recognition) for investment property
 An entity shall choose either fair value model or cost model which shall apply that policy
to all of the investment property
 Fair value model is carried at FV
 Cost model is carried at cost less accumulated depreciation and any accumulated
impairment losses
o How are changes in fair value of investment property accounted for?
 Changes in fair value of investment property are included in profit or loss.
o Determination of Gain or loss disposal on investment property
 Gain or loss from disposal of investment property shall be determined as the difference
between the net disposal proceeds and the carrying amount of the asset.
o Disclosure requirements for investment property under cost model and fair value model
 Whether the entity uses cost model or fair value model of measuring investment property
 The amount of rental income for the period along with the related expense
 Restrictions on the investment property either through rental or sale proceeds
 Contractual obligations to purchase or construct investment property

 AGRICULTURE
o Characteristics of a bearer plant
 A bearer plant is a living plant that (a) is used in the production/supply of agricultural
produce, (b) is expected to bear produce for more than one period, and (c) has a remote
likelihood of being sold as agricultural produce, except for incidental scrap sales.
o As per IASB, how are bearer plants and bearer animals accounted for?
 Bearer plants should be accounted for in the same way as PPE because the operation
of bearer plants is similar to that of manufacturing.
 Bearer animals may be held solely for the produce that they bear, however they will
continue to be accounted for under IAS 41 (Biological asset)
o Measurement basis of bearer plants
 Measurement-immature bearer plants (bearer plants before maturity) are measured
at accumulated cost. It ceases when the bearer plants already reach maturity.
 Measurement-mature bearer plants require judgment and accounting policy to be
determined. To measure, it can be either cost model or revaluation model. The carrying
amount is depreciated on a systematic basis over the useful life and its useful life is the
years it bears agricultural produce
o How are animals used primarily for recreational activities accounted for?
 Animals related to recreational activities shall be accounted in accordance with PAS 16,
PPE.
o Criteria requirements for the recognition of biological assets
 An entity shall recognize a biological asset or agricultural produce when (a) the entity
controls the asset as a result of past event, (b) probable that future economic benefits
associated with the asset will flow to the entity, and (c) the fair value or cost of the asset
can be measured reliably.
o How are changes in fair value of biological assets accounted for?
 A gain or loss arising on initial recognition of a biological asset at fair value less cost of
disposal and any subsequent changes in fair value less cost of disposal shall be
included in profit or loss.
 An entity shall disclose the aggregate gain or loss arising on the initial recognition of
biological asset and agricultural produce and from the change in fair value less cost of
disposal of biological asset.
o How are harvested agricultural produce accounted for?
  Harvested agricultural produce is measured at fair value less cost of disposal at the
point of harvest and is deemed as cost of inventory.

 PROVISION, CONTINGENT LIABILITY AND ASSET

o Definition of a contingent liability
 Possible obligation that arises from past event and whose existence will be confirmed
only by the occurrence or nonoccurrence of one or more uncertain future events not
wholly within the control of the entity
 Present obligation that arises from past event but is not recognized because it is not
probable that an outflow of resources embodying economic benefits will be required to
settle the obligation or the amount of the obligation cannot be measured reliably
o Event likelihood types: probable, possible, remote
 Probable: more than 50% likely to occur
 Possible: 50% or less likely to occur
 Remotely: 10% or less likely to occur or very slight occurrence
o How are contingent liabilities reported in the financial statements?
 It shall not be recognized in the financial statements but disclosed only. (Required
disclosures can be found on p. 507)
 If a contingent liability is remote, no disclosure is necessary
o How are general or unspecified contingencies reported?
 There is no need to create provisions for contingencies regarding general and
unspecified business risks.
o Recognition of contingent assets
 A contingent asset shall not be recognized because this may result to recognition of
income that may never be realized
 However, when the realization of income is virtually certain, the related asset is no
longer contingent asset and its recognition is appropriate.
 Only disclosed when probable
 If only possible or remote, no disclosure is required

 FINANCIAL INSTRUMENTS
o Definition of a financial instrument
 Financial instrument as defined by PAS 32, paragraph 11, is any contract that gives
rise to both a financial asset of one entity and a financial liability or equity instrument of
another entity.
 Encompasses financial asset, financial instrument, and equity instrument
o Definition of a financial asset and liability
 Financial asset (Ex. cash or currency) if it represents medium of exchange and is basis
on which all transactions are measured and recognized in financial statements. (Ex.
deposit of cash with a bank) if it represents contractual right of depositor to obtain cash
from bank or draw check against the balance in favor of a creditor in payment of a
financial liability.
 Financial liability is any liability that is a contractual obligation (a) to deliver cash or
other financial asset to another entity and (b) to exchange financial instruments with
another entity under conditions that are potentially unfavorable.
o What are convertible bonds
 Convertible bonds give the holders the right to convert their bond holdings into share
capital of the issuing entity within a specified period of time.
 Conceived as compound financial instruments
o Accounting for convertible bonds
 Issuance of convertible bonds shall be accounted for us partly liability and partly
equity.
 Issue price of this bonds shall be bonds payable and conversion privilege
  Allocation of issue price:
 bonds assigned on amount equal to the market value of the bonds without the
conversion privilege
 the residual amount/remainder of the issue price shall then be allocated to the
conversion privilege or equity component

o Accounting for compound financial instruments

 PAS 32 mandates that compound financial instrument shall be accounted separately
also known as split accounting; consideration received from the issuance of the
compound financial instrument shall be allocated between liability and equity
components
 FV of liability component is first determined; then deducted from the total consideration
received from the issuance of the compound financial instrument
 Residual amount is allocated to the equity component

 INCOME TAXES
o Definition of Taxable and Accounting income
 Taxable Income
- income for the period determined in accordance with the rules established by the
taxation upon which income taxes are payable or recoverable
- income appearing on the income tax return and computed in accordance with the
income tax law
- excess of taxable revenue over tax deductible expense and exemptions for the period as
defined by the BIR.
 Accounting Income
- also financial income; net income for the period before deducting income tax expense
- appears on the traditional income statement and computed in accordance with
accounting standards
o Entities required to apply deferred tax accounting
 Deferred tax accounting is applicable to all entities, whether public or not.