e ReSA.- The Review School of Uccourtanrcy. «Theorg of Accourte May 2016 Barc TA Mock Exam 1. Compensation expense resulting from a'compensatory share option plan is generally: A «4, allocated to the periods benefited by the employee's required service bb. allocated over the periods of the employee's service life to retirement ©. recognized in the period of exercise 4. recognized in the period of the grant 2. Under PERS 13, fair value is defined as “the price that would be received to sell an asset or to transfer a liability in ‘an orderly transaction between market participants at the measurement date.” Which of the Four measurement thases mentioned in the Conceptual Framework is essentially used fo mean fair value? B a, Current cost Present val b. Realizable value 4. Historical cost 3. Which body serves as the main author the current set of International Financial Reporting Standards (IFRSs)? A ‘4. Intemational Accounting Standards Board . International Accounting Standards Council Intemational Accounting Standards Committee 4. International Financial Reporting, Standards Board 4. Investments in Ordinary & Preference shares are accounted for using, B a, revaluation method and Equity method c. equity method only b. cast method only d. cost method and Equity method 5. Revenve of an operating segment includes A ‘sales to unaffiliated customers and intersezment sales >. only sales to unaffiliated eustomers ©. sales to unaflifiated customers and interest revenue sales to unafftiated customers and other revenue and gains 6. Depreciation is normally computed on the basis of the nearest A 11, full month and to the nearest peso. day and o the nearest peso. b. full month and to the nearest eentavo. 4. day and to the nearest centavo. 7. ‘The basic and diluted earnings per share must be presented in an entity's: A ‘4. Statement of profit or loss and other comprehensive income even if the amounts are negative b. Statement of financial position even if the amounts are ne; ©. Statement of changes in equity even ifthe amounts are negat 4. Statement of profit or loss and other comprehensive ineome only ifthe amounts are positive 8. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general ‘purpose financial reporting, statements prepared using historical costs are more DB relevant © ve of the ent ing power. b. verifiable. 4 ative 9. The income statement reveals —__ B 44, Resources and equities of a firm at a point in tims bb. Net earings (net income) ofa firm for a period of time, . Resourees and equ Net earnings (net income) ofa firm at « point in ime, 10, The Statement of Financial Position shall classify one of these as a non-current asset. ic 4 Cash funds that are set aside for payment of equipment to be delivered a month after the reporting period b. Amounts due from customers within a period of 12 to 18 months, extended within the usual credit terms ofthe enterprise fe. Cash funds that are set aside for payment of equipment to be delivered a month after the reporting period 4. Goods which are in process of production for sale in the ordinary course of business 11, Ifa business entity entered into certain related party transactions, it would be required to disclose all of the {following information, EXCEPT: D ‘nature ofthe relationship between the parties to the transactions. . peso amount ofthe transactions for each of the periods For which an income statement is presented ©. amounts due from orto related partes as ofthe date of each statement of financial postion presente nature of any future transactions planned between the parties and the tennis involved 12. A *seoret reserve” will be ereated if c ‘a. inadequate depreciation is charged ( income ¢. a eapital expenditure is charged to expense . liabilities are understated d. shareholders’ equity is overstated 13. The double-entry accounting system means A fa. ‘The dual effect of each transaction is recorded with a debit and a credit }b. Each transaction is recorded with two journal entries. Fach item is recorded in 1 journal entry, then in a general ledger account 4d. More than one of the above. 14. When preference shares share ritably with the ordinary shareholders in any profit distributions prescribed rate this is known as the _ © a. Cumulative feature, c. Participating feature b.Callable feature d. Redeemable featureReSlh. The Review School of Cccountoney, TA Mock Exam PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2016 Batch) Page 2 D 18. When a company has acquired a "passive interest” for the investment a. by using the equity method €. by consolidation '. by using the effective interest method 4. by using the fair value method 16. The accounting equation must remain in balance io ‘Only when formal financial statements are prepared. bb. Throughout each step inthe accounting eyele Only when journal entries are recorded {Only al the time the trial balance is prepared. 17. When treasury shares are purchased for more than the par value of the shares and the eost method is used to ‘account for treasury shares, what aecount(s) should be debited? ah Treasury shares for the par value and share premium for th ‘another corporation, the acquiring company should account excess of the purchase price over the par vale bb. Treasury shares for the purchase price. fc. Share premium for the purchase price. Treasury shares for the par valve and retained earnings for the excess of the purchase price over the par value. 18, Long-terin debt that matures wit jn one year and is to be converted into shares shoukd be reported ‘2, as non-current ifthe refinancing agreement is completed by the end of the year. b. asa.current liability. c. ina special section hetween liabilities and equity das part current and part non-current. 19, The amount of time that is expected to clapse until an asset is realized or converted into cash i referred to as a, solvency liquidity b. financial lexibili 4d. exchangeability 20, A segment ofa business enterprise ist be reported separately when the revenues of the segment exceed 109% of the ‘4, total combined revenues of all segments reporting profits b, total export and foreign sales © €._ combined net income ofall segments reporting profits PQ. total revenues of all the enterprise's industry segments 231. Anacounting system thot collects financial data on the basis ofthe underlying nature and extent of cost drivers is: a. Cycle-time costing Activity-based costing b. Variable costing d, Target costing D 22, The date on Which to measure the compensati rily is the date on which the employee _ ‘a. is granted the option bb. has performed all conditions precedent to exereising the option may first exereise the option dd, exereises the option 23, General-purpose financial reports Mh Are largely based on estimates and judgments rather than exact depiction bh. Are intended to provide information to a specifte group of users Are designed to show the value of the reporting entity ‘d, Can provide all the information that primary users need 24, Based on the Implementing Rules & Regulations of Republic Act 9298 (| element in q share option granted to a corporate employee ine Accountancy Act of 2004), how long is the renewable term of the chairman and members of Financial Reporting Standards Council (FRSC)? a. 6 years years b. Syears 4 3 years 25, Financial siatement of not-for-profit organization (NPO) focuses on _ ‘i Standardization of funds nomenclature Basic information for the organization as a whole ©. Inherent differences of notforsprfit organization that impact reporting presentations {L__Distnetions between current fund and noncurrent Fund 26. Which ofthe following should be disclosed i a "Summary of {t. Depreciation method followed b._‘Types of exceutdry contracts Claims of equity holders 4. Amount for eummulative effect of change in accounting policy 27. Which ofthe following steps inthe accounting eyele may be omitted? ‘Certain udjusting entries ae reversed ©. Entries 1. Financial statements are prepared Adjusting entries are jourmalized 28. Which of the following evenis occurring after the reporting period (ie. subsequent events) would require adjustments in the financial statements? ‘a. Purchase of an existing business ‘b. Dectine in net realizable vahie of inventory as result of fire 4 jean Accounting Policies?” Sale of a bond or share capital planned before the balance sheet dat Toss on an uncollectible trade receivable as a result of a customer's deteriorating financial condition Jeading to customer's bankruptcy subsequent to balance sheet dateRe SO. the Review School of Cecowmtomer TA Mock Exam PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2016 Batch) - Page 3 29. ‘The quality of information that means the numbers and descriptions match what really existed or happened is: D Neutrality €. Relevance, hb. Faithful representation a Compl 30. ‘The journal entry debiting accounts receivable and crediting allowance for doubtful aceounts would be made when c ‘4 customer pays its account balance 'b. customer delitults on its aecount ©. previously defaulted customer pays its outstanding balance d, estimated uncollectible receivables are too low 31. A company uses a two-way analysis for overhead variance: budget (controllable) and volume, The volume variance is based on the: D ‘a, Total overhead application rate ©. Variable or fixed overhead app! b. Variable overhead application rate Fixed overhead application rate 32. A corporation issues bonds with detachable warrants. The amount to be recorded as share premium is preferably B a.” zero bb. calculated as the excess of the proceeds over the fair value of the bonds c. ealeulated as the excess of the proceeds over the face value of the bonds d, equal to the market value of the warrants 33. When an intangible asset is acquired by an exchange of assets, which of the following measures will need to be considered in the determination of the cost A i. Fair value ofthe asst given up . _Carying amount of the asset received bb. Initial cost ofthe asset given up 4. Replacement cost ofthe aset received 34. The purpose of the Intemational Accounting Standards Board (IASB) isto A a. Develop a single set of high-quality Intemational Financial Reporting Standards, by. Issue enforecable standards which regulate the financial reporting of multinat ©. Arbitrate accounting disputes between auditors and international companies. 4 Develop a uniform currency in which the financial transactions of companies through-out the world would tl corporations. be measured. 35, What are consigned inventories? A ‘a, Goods that are shipped, but title remains with the shipper. +b, Goods that are sold, but payment is not required until the goods are sol. ‘c. Goods that have been segregated for shipment (0 4 customer. ‘d, Goods that are shipped, but title transfers to the receiver. 36. In an ABC system, what should be used 10 assign a department’s manufacturing overhead costs to products produced in varying lot sizes? © ‘a, Asingle cause-and-effect relationship Multiple cause-and-cflect relationships b les values of the products 4, A product's ability to bear cost allocations 37, The earnings per share computation is NOTrequired for: c a, Net income. , Gain on disposal of discan ©. Income from operations. d.__ Income from continuing operations. 38. One ofthe Follo NOT required to be measured at fair value plus transaction cost c ‘4. Available for sale financial assets © assets held for trading . Held-to-maturity securities a 1s and receivable 39. ‘The declaration and issuance of a share dividend: increases ordinary shares outstanding and increases total equity bb. decreases retained earnings but does not change total equity e. “may increase share premium but does not change total equity 4d, increases retained earnings and increases total equity 40. LENRV of inventory D should always be equal to net realizable value 'b. may sometimes be less than net realizable value should always be equal o net realizable valuc less costs 10 complete 4, is always either the net realizable value or its cost 4k. ‘The statement of financial position of NPO shall report separately 3 classes of net assets that EXCLUDE A a. Donated net assets €. Temporarily restricted net assets b, Unrestricted net assets 4. Permanently restricted net assets 42. When the cash proceeds from bonds issued with detachable share warrants execed the fair.value of the bonds without the warrants, the excess should be eredited t0 B ‘8, Share Premium —Ordinary Retained Famings b. Share Premium-Share Warrants d, A share liability account 43, The statement of financial position: Makes very limited use of judgments and estimates Uses fair Value for most assets and liabilit many items that are of financial value, All ofthe choices are correct regarding the statement of financial position jch of the following measurements is NOT a required disclosure for inventories? ‘a. The circumstances or events that lead to the reversal of write-downs. 'b. The circumstances or events that lead to the write-downs, a, ied operation, net of tax 44, Whi B rentories carried at fair value less costs to selReSlh The Review School of lccourtoney, TA Mock Exam PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2016 Batch) -Page 4 TS. Which of the following subsequent events would generally require disclosure, but NO adjustment of the financial fatements? Dd a. Retirement ofthe eompany president fh Settlement of litigation when the event that gave rise tothe litigation oceurred prior to the statement of Sinancial postion date Employee strikes Dividend preferences ¢, Conversion oF exereise prices b. Call prices <4. Liquidation preferences, Si. Under PAS 2 the fixed production overhead is allocated to the inventory units on the basis of the production facility's c ‘Weal eapacity Normal capacity be Actual capa 4. Theoretical capa 52, Dividends are NOTpaid on c ‘4. noncumulative preference shares &. treasury _nonparticipating preference shares all otthe choices 53. PAS Lidentfes its all changes in equity other than introduction and return of capital fo owners b a. Profi ce. Net income b. Total comprehensive income Other comprehensive income 54, Ofthe methods to reeord cash discounts related to aecounts receivable, whieh fs more theoretically corcet? A a. Netmethod c. Gross method bh Direct write-off method Allowance method 55, Joint eosts are used for Dd ‘4 ‘comtolling costs >, setting the selling price ofa product ¢. determining whether to continue producing an item 4. determining inventory costs for accounting purposes 456. Statement of financial postion information is useful for ull ofthe following, EXCEPT Dd a. assessing a company’ risk ‘_cvalating a company’s financial Mexiility b. evaluating company’s liquidity determining free cash flows 57. Which ofthe following is NOT a condition necessary t exclude a short-term obligation fram current Vibilities? c ‘4. Intend to refinance the obligation on a longsterm basis Obligation must be due within one year €. Subsequently refinance the obligation on a long-term basis Unconditional right to deer settlement of the liability for atleast 12 months. 58. Which of the following is NO necessarily reganded as onproft organizations? D Cooperatives ¥ ©. Labor unions b. Country clubs 4 59, ‘The balance in Ordinary Share Dividend Distributable should be reported as a(n) c “a deduction from share capital-—ordinary —-c:_-addifion to share eaptal—ordinary b. current lability «contra current asset 60. Which of the following adjusting entries will NOT affect both the balance sheet and income statement? © a Acerved income '. Uneamed income using the fabiity method ©. Nonvof the choices, bih statements are affected by adjusting journal entries 4. Prepayments using the expense metho! 61, Ifparmers dd not agree on any profit sharing scheme, the partnership profit shall be divided among them based on B ‘2. Equal sharing Follow-up investment Initial investment &. Existing capital 62. When a customer returns merchandise for cash refund, the seller enters the transaction in the b a. General jouimal 6 Cash receipts journal bb. Cash payments journal Salles journaloe ee Pe, a Ce ee ee © RSA. the Review School of lecorndemey TA Mock Exam PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2016 Batch) -Poge 5 63. For non-monetary exehange of plant assets, aecounting recognition should NOT be given to Dd 4 Alloss when the exchange has commercial substance . A gain when the exchange has commercial suhstance € loss when the exchange has no commercial substance. 4. A gain when the exchange has no commercial substance. 64. An entry is NOTmade on the D a date of declaration ©. dates of declaration, record and paym b. date of payment d. date of record 65. Which of the following is NOT an example ofa risk of ownership of an asset A Gains on the eventual sale of the asse €. Idle capacity b. Technical obsolescence 4. Uninstired damage 66, According to PAS 1, which of the following are NOT commonly required disclosures of accounting policies? B a, The measurement basis or bases used in the financial statem b. Personnel involved in drafting the summary of signifi ‘made the judgrments and estimations ©The nature of « company's operations and the policies that the users oF its financial statements would expect to be disclosed for that type of entity 4. Disclosures required by other IFRSs, like the reasons why the entity's ownership interest does not constitute control 67. What is the relationship between current li A 4, Liquidation of current liabilities is reasonably expecte: year if more). b. Current liabilities are the result of operating transactions Current liabitities can't exceed the amount incurred in one operating eyele. d. ‘There is no relationship between the two, 68. What is a purpose of having « Conceptual Framework? D To provide comparable information for different companies b. To segregate activities among competing companies, © To make sure that economic activity ean be identified with a particular legal entity. 4, To enable the profession to more quickly solve emerging practical problems and to provide a foundation from which to build more useful standards, 69, ment information would help in which of the following tasks? D a, Evaluate the solvency of « company, ‘¢. Evaluate the liquidity of a company. b, _ Bstimate future financial flexibility 4. Estimate future cash flows, 70. In considering interim financial reporting. how does PF'RS conclude that such reporting should be viewed”? B 4 Asa "special" type of reporting that need not follow international financial reporting standards b, Asreporting fora separate accounting period © Asuseful only ifactivity is evenly spread throughout the year so that estimates are unnecessary As reporting for an integral part of an annual peri 71. Activity-based costing (ABC) frst assigns costs to if accounting policies or, including those who within the company’s operating eyele (or one B a. Departments © Prod Activities 4 Overhead 72. Preparing the statement of cash flows, using the indireet method, involves all of the following, EXCEPT « cash provided by operat b. change in cash during the period ©. cash collections from customers during the period 4. cash provided by or used in investing and financing activities 73. Accounting for nonprofit organizations is essentially: dD a. State accounting Managerial accountin b. Commercial accounting d. Fund accounting 74. ‘The date on which tofal compensation expense is computed in a share option plan isthe date A a. of grant that the market price the option price b, of exercise 4, that the market price exceeds the option price 75. Joint product costs are generally allocated using the c Additional costs after split-off © Relative sales value b. _ Relative profitability 4. Direet labor hours 76, ‘The major difference between convertible debt snd share warrants is that upon exercise of the warrants: B ‘a2 the shares are held by the company for a defined period of time before they are isstied to the warrant + holder. b. the holder has to pay 4 nowt oF eash to obtain the volved ate restricted and ean only be sold by the recipient after a s be a part of the transaction. ted with preference shares include all of the following, EXCEPT ©. the shares i period of time no share premium e 77. The features most frequently ass A a. Callable at the option of the sharcholder. ©. Non-voting, b. Convertible into ordinary shares, 4. Preference as 10 assets in the event of liquidation inling to PAS 1, a required format for the presentation ofthe income statement is B a. not prescribed and nce is provided in the standard od in the standard for suitable format prescribed but guidance is prov €. __preseribed by the standard 4. not prescribed by the standard but details are found in the Corporations ActReSU. the Review School of lecomtaney TA Mock Exam PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2016 Batch) Page 6 79. Stundard cost variances are not closed (0 a B a, Work-in-process c. Finished goods b, — Dirwet materials d. Costs of goods sold 80, Under NGAS, itis the allotment by the Central office o its Regional offic Regular allotment .Subalfotment b. Ordinary Allotment Secondary’ Allotn SECOND SEt |. Liabilities which fai the reco, on criteria and where the possibilty of an outflow is remote should c 1. Be recognized as 1 contingent liability ‘e, Not he recognized in the financial statement b. * Be recognized as an acerual d. Be recognized as a provision 2. Its function is to assist the Financial Reporting Standards Council (FRSC) in establishing and improving financial reporting standards in the Philippines as it issues implementation guidance on existing Philippine Financial dards. B Education Task Foree Professional Regulations Commission Philippine Interpretations Committee 4, Board of Accountancy 3 vent of eash flows typi lose the effects of a. © 4, Ordinary shares issued at an amount gre Share dividends declared. Cash dividends paid, 4. In hyperinflationary: economy, balance sheet amounts not expressed in the date are restated by appl ‘Consumer pric string unit current at balance sheet ‘¢. Manulacturer price index b. Suggested retail pri General price index 5. The disclosure of accounting policies, is important to financial statement readers in determi B a. Net income for the year bh. Whether accounting policies are consistently applied trom year to year & The value oF obsote 4. Whether the working capital position is adequate for future operations. 6. Which of the following isa benefit of providing financial information? Diselosure to competition. ‘c. _ Iinproved allocation of resources b. Aad 4. Potential litigation. ing inventory 7. When accounting for a biological asset oF an agricultural produce, which of the following is NOT w cost to sell? c a. Commission to brokers Transfer costs to get assets to a market bh. Transter taxes ame! dies d._- Lovies by regulatory agen 8. PFRS for SMEs strictly requites disclosure of information abo Related party transactions €. Seginent inform 4. tnterim financial reports B Atter the statement of finane b. After the statement of finane Before the statement of financial post ted after that date Define the statement of financial position date, but dated as of that date 10. Which of the following is NOT related to profit distributions by a corporation? B ‘a. The amount distributed to owners must be in compliance with the laws governing corporations. 'b. The amount distributed in any one year can never exceed the net income reported for that year Profit distributions must be formally approved by the board of directors. Dividends must he in full agreement with the capital contracts as to preter 11. Which of the following is NOT considered an agricultural activity” restricto A ‘Ovean fishing Peart tn b, Fish farming Oyster & 12, Retained earnings are a component of: B a. Other equity, © Comtribu bh. Reserves 4. Comprehes 13, ‘The trial balance: A ‘a, Can be used to uncover errors in journalizing and postin, b, Is used to prepare the statement of fi income statement ©. Isa listing of all the accounts and their balances in the order the accounts appear on the st Finaneial position d. Has as its primary purpose to prove (check) that ull journal ncial position while the general ledger is used to prepare the sment of ries were made for the period. 14. At what amount per share should retained earnings be reduced for 8 20% share dividend’? c a. Zero Par value b, | Market value atthe date of declaration ‘d.— Market value at the date of issuance that most likely would have no ef¥eet on 2015 profit is the: 2001 deemed worthless in 2015 building contributed by 3 sh Colleetion in 2015 of a dividend fox d. Correction of a prior period error discovered in 2015 subsequent (0 15. The oceurrenes olde ssuance of the statementsReSA. the Review School of CecourFanen TA Mock Exam PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2016 Gatch) Page 7 a 16, 19, 20, 30. 1. Accounting for Build-Operate-Transfer (“BOT”) t The major problem of accounting, for intangibles is determining a. wefutlife separability b. fair value d. salvage value ment of cash flows, Sale of treasury stock at an umount greater than cust would be classified as ©. extraordinary a @. investing activity pensation expense is generally vie ®. not recognized because no excess of market price over the option price exists atthe date of b. allocated over the service period of the employees ¢. recognized in the period of the grant ized in the period of exercise Which of the following is iple of managing earnings u a ating warranty elaims. By facet crest WEE Bx tl cing lel i Decreacing ctloted aalvage value of equipment, and gross prof income and pretax income b. income from continuing operations d. discontinued operations & prior period errors Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the investor sells the investment investor declares dividends ¢. earnings are reported by the investee in its fi 4. _investee pays dividends An entity is requ relevant and provide more rel unless it is considered more ed 10 classify its assets and Tiabilities as current or non-currer able information to present them according to their: Age eV b. Liquidity Physical nature The statement of figancial position of nonprofit organization (NPO) displays the organization's 2 ? cc. Excess of assets over liabilities b. Assets, 4 Assets, liabilities and net assets Jn sesso hs sage elipoG.9 foe tc tex cnipcchgne cui ofan eat PAS 1 prescribes cms that are censier to hea sliien importance to warrant present ea fixed format for the pre 4d. the presentation of fine items comprising total expense ms comprising total revenue 11s an authorization issued by the DBM to government agencies to withdraw cash from the National Treasury through the issuance of Modified Disbursement System checks, a. Notice of Cash Allocation © b. Allotment 4 In comparison with firms that use plant-wide overhead rates a adopted activity-hased costing, will typically use: sntal overhead rates, companies that have 4. More cost pools and more éost drivers © Fewer cost pools and more cost drivers b, More cost pools and fewer cost drivers d. Fewer cast pools and fewer cost drivers ‘The “contractual adjustment account” of a nonprofit hospital is-a (an): ‘a. Expense account ©. Loss account b. Contra-revenue account Asset nccount A journal entry to record expenses out of the petty cash fund shall be done: 2, Upon disbursement ¢. - Upon replenishm b. Whenever the entity wishes d.Atthe end of the period nsactions is mostly covered by the eurre Philippine Reporting Standards based on: a IFRIC 12 (Service Concession Arrangements) b.- Exposure Draft on Turnkey Project Arrangements ©. PAS 11 (Construction Contracts) dd. TERIC LS (Agr Which of the following is an example of managing eamings down? ‘Changing estimated bad debts from 3% to 2.5% of sales. b, Not writing off obsolete inventory Revising the estimated life of equipms 4. Reducing research and development exy Direct material costs are: a. Prime a 'b. Prime and manufacturing costs 4 J conversion costs © Redeemable preference shares should be 3 4. included with ordinary s b, excluded from the sta position © included as a liability 4d. included as a contra item in sharcholders’ equityReSlh. the Review School of Cccormony, TA Mock Exam PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2036 Batch) - Page 8 33, PFS 5 requires that a single D 1 the post-tax profivoss. on discontinued operations and. the pre-tax od operational wssets protividss om disco discontinued operational assets. the pre-tax profivloss on diseon al assets mount be disclosed within the income statement for _ nued operations and the posttax ga ved operations andl the pre-tax g ‘operatio the posttax profivloss. on discontinued. operat discontinued operational assets ler the revised PERS 9, the cumulative balance of unrealized gain of Invest ‘Comprehensive Income shall be transferred to what equity account upon disposal Dd a Revaluation surplus bb. Share pret 4, Accumulated prof 35. The fll disclosure principle, as adopted by the account A 8. Disclosure of any ns and the post neial facts significant enough to influ informed reader. ice the judgment of uded. b. Information about each account by faotes to the: Financial ta © Enough information should be disclosed in the profitable decision business and operating objectives is required to be disc ice appearing in the financial statements is to be ris. ed 36, What would be an adv D a. Consistency ©. Lower preparation costs bh. Comparability 4, Comparability and lower pre 37. PAS 1 requires the following. items 10 appear vin the tace of the Statement of Changes in Equity 1: The net amount of eash from the issue of any securities daring the period Ti The cumulative effect of changes in avcounting policy and the correction of errors Ml: Total comprchensive income for the period tage of having all countries adopt and follow the same-accounting standards? TV: Profit or loss for the perioa! B a. Mand IV only e Lland Vv bo U,Mand 1V d.LOLIH and 1V 38. ‘The objective of financial reporting in the Conceptual Fr ‘4. Is the foundation for the Framework fs found on the thin level of Lower of cost or NRV © Biological asset > Fair value less costs b, _ Receivables > Cost 4, Inventories > Estimated amount collect 77, Under PAS 24, which of the following does NOY belong to the category “NOT nevessarily related parties”of the reporting entity? A ‘4, Post-employment benefit plans Public utilities b. Providers of finance d. Trade unions 78. ltems that are dissimilar in nature must be presented separately in financial statements, UNLESS: B ‘a. They are financial items in which ease they can be off-set b. They are immaterial The directors approve of an aggregation of the item d, The auditors approval to aggregate the items is obtained 79. PERS requires that a company report all to the following, EXCEPT c a, major customers ©. liquidity ratios segment assets and liabilities d. segment profits and loss and related information 80, To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own should be allocated on the basis of lost production, climinated completely from the cost of the asset ‘allocated on a pro rata basis between the asset and normal operations. 4d. allocated on an opportunity cost basis. ‘A contingent liability usually exists when a customer note receivable is a Pledged c. Assigned b. Discounted with recourse 4d, Discounted without recourse 2. In hyperinflationary economy, balance sheet amounts not expressed in the measuring unit current at balance sheet date are restated by applying the: D ‘a, Constimer price index © Manufacturer price index. b. Suggested retail price index a 3, The following statements pertain to the Capital and Capital Maintenance Concepts under the Conceptual Framework: Statement I. The principal diference between two concepts of capital maintenance isthe treatment of the effects ‘of changes in the prices of assets and liability ofthe entity. ratement I. The selection of the appropriate concept of capital by an entity should be based on the needs of the ‘users ofits financial statements. Statement IIT. The concept of capital maintenance chosen by an entity shall determine the acco inthe preparation of its financial statements 1g moxdel used c a, Only statement i false €. None of the foregoing statements is false 'b, Only statement I is false dd. Only statement I is false 4. Cash dividends received by the investor shall be treated as c ‘4. return on investment (cost method); return on inve' ~quily method) bb. _retum of investment (cost method): retumn on investment (equity method) . _retum on invesiment (cost method); return of investment (equity method) 4. return of investinent (cost method); retum of investment (equity method) 5. Which isan argument against using historical cost in accounting? A ‘4, Fair values are more relevant 1b. Historical costs are reliable. ¢, Fair values are subjective: 4. Historical costs are based on an exchange transaction. Information that is able to confirm or correct past evaluations that have been made by users of formation is an example of information that satisfies which of the following characteristics of information identified in The Framework? D a. Understandability Comparability b, Faithful representation ad. Relevance 7. A-company doing a bank reconciliation shall record a customer check marked as “NSF” by A 4. Debiting Accounts Receivable . Crediting Accounts Receivable b. Crediting Cash on Hand d.Debiting Cash in Bank 8 The accountant of John Company is preparing the Statement of Comprehensive Income and Statement of Financial Position at December 31, 2014. The January 1, 2014 merchandise inventory balance will appear: iG 1. Only as.an asset on the statement of financial post Asan addition in the cost of goods sold scetion of the statement of comprehensi . ‘current asset on the statement of financial position ‘é. Only in the cost of goods sold section of the statement of comprehensive ineome 4. As a deduction in the cost of goods sold scetion of the statement of comprehensive income and as a ‘current asset on the statement of financial position 9. Under NGAS, allotments by DBM are recorded in the registries A ‘a. Quarterly © Atthe beginning of the period b. Monthly di. Atthe end ofthe periodReSU. The Review School of ecowetoney, TA Mock Exam tch)-Page 12 jeal assets and there is no market price for that asset in its present ‘PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2016 the fair value of biolo condition, PAS 41 requires that: © a ‘measure the asset at cost b. The entity uses the contract prices for recent sales of similar assets adjusted for the effects of biological transformation « lity uses the present value of expected net cash flows from the asset discounted at» current od pre-tax rate uses sector benchmarks the cost assoctated with the Hiability is: n are cormeet srying amount of the related long-lived asset 12, Under PERS §, which of the following eriteria do not have to be mv discontinued”? c a. The operation should represent a separate line of business or geographical arca b. The operation is a subsidiary acquired exclusively with a view to resale © The operation mast be sold within three months after the balance sheet date d. The operation is part ofa single plan to dispose ofa separate major line of business or geographical area 13. Property developer must classify properties that it held for sale in the ordinary course of business as ‘onder for an operation to be classified as B & property, plant and equipment ©. finaneial assets bi inventory investment property 4. The journal entry to record the factoring of a customer receivable normally inchudes. D ‘4. Cash (debit) and Receivable from Factor (eredit) b. Receivable from Factor (debit) and Cash (cred © Accounts Receivable (debit) and Cash (ered d. Cash (debit) and Accounts Receivable (credit) 15. A retail store received cash and issued a gill certifi certificate was issued dD ‘a, Revenue account should be decreased Deferred revenue account should be decreased Revenue account should he increased Deferred revenue account should be increased that is redeemable in merchandise. When the 16, What might a manager do during the last quartér of a sco! var if she wanted to improve eu income? c 4. Delay shipments to customers until afer the end of the fiseal yeur bb. Delay purchases from supplicrs until after the end of the fiscal year. ©. Relax credit policies for customers, 4. Inerease research and development setivii 17. ‘The non-controlling interest section of the income statement is shown D a, below income from operations. above income tax. b. above other income and expenses 4d. below net income. 18, PAS 1 presents two alternative methods of classifying expenses in the income statement ‘Comprehensive Income. Which of these statements ivare correct? Statement I- Additional disclosure is required for the function of expense when the nature of expens. Statement Tk Additional disclosure is required for the nature ‘of expense when the function” of expense classification is used, B a Tony © Both Tand b. Monly 4. Neither Ener f 19, How frequent shall « government unit covered by NGAS prepare financial reports? A a. Quarterly ¢ Semiannually b. Monthly Annually turrent asset classified as held for sale under PFRS $ is lower than its fair When the carrying amount of 2 1 value less costs to sell, then A a, no impairment loss occurs 1b. _ impairment loss shall be recognized in prot ‘c. impairment Joss shall be recognized in other compre 4d. _ impairment gain shall be disclosed in the notes to the financial statements 21. Limitations of the income statenient include all of the following, EXCEPT A a. Only actual amounts are reported in determining. net incom. b. Income measurement involves judgment, €. Income numbers are affected by the uecounting methods employed. 4. Items thot cannot be measured reliably are not reported. 22, allocates depreciation to the separate pans ofan asset and each part is accounted for separately, the D on cost depreciation Segment depreciation d. Components depreciation 23. Whether a dividend is paid by a company depends on the decisions made by the: B a. Auditors of the company Creditors of the company b. Directors of the company 4. Shareholders of the companyDP ReSOs The Rim School of Hccowectancy TA Mock Exam PREWEEK MATERIALS in THEORY of ACCOUNTS (May 2016 Batch) -Page 23 D 24, 26. 30. 3 33 34. 35, 36, 37. 38 39. 2. PERS 8 on Operating Segments requ wntal axis. depreciation, expense" on the vertical axis and "vim" gn the hi A graph is set up with "yearly depreci ‘and sum-of-the-years-digi ‘Assuming linear relationships, how would the graphs for straight respectively, be drawn’? ‘Vertically and sloping down tothe right ——¢. “Horizontally and sloping up to the right b. Horizontally and sloping down to the right d. Vertically and sloping up 16 the right Unie a build-operate-transter (BOT) scheme covered by IFRIC 12, any borrowing costs incurred by the private ‘operator for infrastructure projects shall be &. Expensedl (Financial Asset model); Capitalized (Intangible Asset mode!) b. Pxpensed (Financial Asset model); Expensed (Intangible Asset model) © Capitalized (Financial Asset model); Expensed (Intangible Asset mode!) «Capitalized (Financial Asset model}: Capitalized (Intangible Asset model) Undeclared dividends are deducted from net income in the earnings per share computation for which type of preference shares? 4. Non-cunulative only. © Cumulative only: . Neither non-cumulative nor cumulative 4 Both non-cumulative and cumulative. Which of the following items, if it exists, does NOT have to be presented asa line item on the face of a statement ‘of profit oF loss and other comprehensive income? a. Closing inventory €.Posttax profit or loss of discontinued operations. b. Reve 4. Profitor loss attributable to non-controlling interests red by # corporation which are accounted for by recognizing unrealized holding gains or ent of equity are __ Equity investments ac losses as other comprehensive income and ss a separate com 4, trading investments where a company has holdings of less than 20% b. investments where a company has holdings of between 20% and 50% € fing where a company has holdings of less than 20% dd. investments where a company has holdings of more than 50% The application of Philippine Financial Reporting Standards with additional disclosure where necessary is presumed to result in financial statements th 4. Contain only material items ©. Are free from error and misstatement bb. Will result in fair presentation Are unbiased ‘A-company is legally obligated for the costs associated with the retirement of a long-lived asset only when it hires another party to perform the retirement act b. only ifit performs the activi . whether it hires another party to perform the retireme: activities or performs the activities itself 4. only. when the obligation arises atthe outset of the asset's use Shares that have a fixed per-share amount printed on each share certificate are called a.) par value shares fixed value shares b. stated value shares , where did the cash come from during the period? © what was the cash used for during the period’? d. what was the change in the eash balance during the period? 66, Which ofthe following is correct regarding Investment in trading equity securities? 4. Cash dividends received should be recognized as income and presented in the statement of comprehensive b. Gain on sale isthe excess of net selling price over the cost of the securities sold cc. The initial carrying value of investment is always the total amount paid related to the acquisition of investment d. Any changes in fair value of investment during. the current ‘period are reported in the statement of financial position (67. events that occur aller the December 31, 201Sstatement of financial postion date (but before the statement of Financial poston is authorized to be issusd) and provide aitional evidence about conditions that existed atthe statment of Financial position date and affet the realizability of accounts receivable should he a diveussed ony in the Management commentary section of the annual report 1. disclosed only in the Notes to the Financial Statemen ©. used to record an adjustment to Accounts Reveivsble wt De {1 used to record an adjustment dieetly to the Retained Faring 68, Under NGAS, the standard residual value of depreciable assets is equal to & Wot Cost © P1000 b. Zero a» 5000 69, Application ofthe Tul detosure principle fi is demonstrated by the wse of sipplcrentary information explaining the effects of financing arangements. b is by comsisictt std comparable ©. istheorctcally desirable but not pretical hecauss the costs of complete disclosure exceed the bene {is violated when important inane information shied i the noes tothe nancial sate 10, PERS 13 “Fair Value Measurements reauited o be applied ‘4 Prospectvely rom the date ofits initial application b ‘ofthe annual reporting period of its initial application vely from the date ofits initial application 4 Retrospestively from the beginning ofthe sual reporting period of i 71, PERS 13 does NOT a. Define fi value Identity accounts toe measured ut air vali ©. Regie diselosures about fair ve al Set out ina single PERS a framework for measuring far value 72, PERS 13 nga “fair value” as tial application An exit price ©. A bargain price b. ” Anentry price dA negotiated price 73. Under PFRS 13, which is NOT an allowed valuation technique to measure fair value? a. Cost approach © Income approach b. Market approach Expense approach 74, Under PPRS 13, “Level I inputs” in the fair hy refers to ‘a, Quoted price in an active market for identical assets or liabil 1b, Quoted price in an active market for similar assets or liabilities (Level 1) ‘6. Quoted price in an inactive market for identical assets or liabilities (Level 11) 4d. -Unobservable inputs available under the circumstance (Level IH) 75. Which of the following is NOT considered as a countertrade.? a. Barter ec. Buyback b. Switch trading dd Leasehack COUNTERTRADE (bilateral trade") means exchanging goods which are paid for with ther goods, rather than with money. monetary valuation can however he use in eounter trade for aecounting purposes There ae six main variants of eountertade Barter - Exchange of goods directly for other goods without the use of money as means of purehase or pay Switch trading = Practice in which one company sells another its obligation to make a purchase ina given country Counter purchase = Sale of goods to one company in enother country by a company that promises to make a future purchase of @ specific product ftom the same company in tht eountry Buyback = Oceurs when a firm builds » plant in » country and payment forthe contract, Diset = Agreement by one nation to buy 8 produet trom another. subjest 0 the pl ‘materials from the bayer othe finished prosoc, of the assembly of such preduc in the buyer nation ‘Compensation trade -A form of barter in which one ofthe Hows i= party goods and partly in hard currency: ENDO ros take certain percentage of the plant’ cups as paral hase of som all ofthe components sd raveKeS0- the Keriew School of Gacourdtamey » Theory of Gccourts @) 1 QBoanvial , 2) Mrcal FicQr7U0} Foxton Content me i pa Theory of Accounts easel gute en CegeeGSbECTURE NOTES > teeming“ e nena gl? hy) ) Ace ;Metroh ,congieene nt 6 ei Brett ehiton® 04° Feed, Prudence sConpieen en (=) THE CONci RK CF eraeet 7 ‘a pars aaraman Dern ; The Conceptual Framewor Se Gut the concepts used ifthe preparation and presentation of nancial be ad statements (FS) for external users, fy 2. The Conceptual Framework 's not a PFRS! -- it does not define standards for any particular Pe Reeet ECE" aeasurement or dsclosure issue; nothing in the Concentsal Hamewees ce ‘any specific PERS. Th auvtret F607 25° case of conic, the requirements of PERS prevail over the Conceptual Framework. 3, The purposes of the Conceptual Framework are. AA) Assist FRSC’ in developing PFRS and its review and adoption of existing International Financial ees Reporting Standards (IFRS) * Treats gt ©) ASsist preparers of FS In applying PFRS and in dealing with topice that have yet to form the ends pt ©) A pone Lee © ©) Assist auditors in forming an opinion on whether FS comply with PFRS ? ) Assist users in interpreting Information contained in the FS: ; Werth (we) E) Provide interested parties with information about formulation of PFRS by FRSC he Feet 4s 94 OES. The following are some of the major diferences between the eld and new wersicas of the Conceptual a Framework | Official Titles @): OLD version oan a “ONCEPIWAL FRAMEWORK "NEW version La ets, *haey | 1) “Conceptual Framework uf Aecouning Y)Conceptual Framework for Financial Reporting’ 2) Faith! Representation (FUNDAMENTAL ) ¥ Freedom from Error ¥ Neutrality ¥ Complet 2 “Framework for Preparation & Presentation uf 8" | _2)The PELRSIERS Framework | | weit Scape ap eee ee = | santeurt MECEF 1) Objective uf Financial Statements |. 1) Objectives of Financial Reporting j wee oe ive Characteristics of Financial Statements | 2) Qualitative Chamstersies ott Rod sof Financial Statements |. 3) Flemonts of nancial Statcments Lares | 4) Concepts oF Capital and Capita Maint Yate i | _s) TheSeporting Entity (NOTE: deta not yr alae guns ae een : } : tc of Veit Finca nora sla et sWHHFE 1) Reeve dea wth CONTENT) 1) Relevance (PUNDAMENEAE carters) : “Timeliness protictive Palos | chet i Pradence | 3)Comparability (ENHANCING characteristic) Y Neutrality 4) Understandability (ENHANCING) ¥ Completeness 5) Timeliness (ENIANCINC 3) Comparability (deals with PRESENTATION), (6) Meritiabifity (ENLANCING) |__4) Understundabitity (deals with PRESEN VATION) | — a | iying Assumptions (2) ve Underiving Assumption; Going concen 1) Accrual basis | (NOTE: decrual hasis of accounting is. mentioned | 2) Going concer [ ander the section *ob | ves of financial report") 5. ‘The OBJECTIVE of financial reporting forms the foundation of the Conceptual Framework + Overall objective: to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. + Specific objectives: to provide information about entity resources, claims and changes in resources and claims useful in making decisions about providing resources to the entity and in assessing the Prospects of future net cash flows to the entity. 6. Financial Position refers to information about the entity's economic resources and claims against the Feporting entity (e.9,, liquidity, solvency, need for financing) while changes in these economic resources and claims result from the entity's Financial Performance! and fron other transactions Based on PAS 1. paragraph 7; the erm *PERS' (Philippine Financial Reporting Stindards) shall be conposed of (a) PE: (b) Philippine Accounting Standards (PAS), and (©) Interpretations of PAS und PERS; PERS is presently the 1 of Generally Accepted Accounting Principles (GAAP) in the Philippines. (See paige 10 for further detailss FRSC (Financial Reporting Standards Council). which replaces the ASC (Accouimtine Standards, Council), is the ‘uecounting standant-setting body in the Philippines; FRSC issues ‘PERS" while ASC in the past issued what used to bs called as *SFAS" (Statements of Financial Accounting Standards); SFAS. was previously superseded by PAS. whichy eventually cvalved into PFRS. (See page 10 for further details) Under the Conceptual Framework, financial performance is reflected by (1) accrual accounting (2) past cash flows ACCRUAL accounting depicts the effeets of transactions on a reporting entity's economie resources shad clans fi th? periods in which those effects occuif even if the nDe gti ts i ha Nee ee em ReMi TCE icc MiaDEN CNS C RS - the Review School of Gecomnitanen, Page 2 LECTURE NOTES in THEORY of ACCOUNTS 7. Users of financial information: + Primary Users: existing and potential investors lenders and other creditors + Other Users: employees, customers, governments and their agencies and the public. 8. The Conceptual Framework is concerned with general-purpose financial statements, including consolidated financial statements of all commercial, industrial and business entities ---- public or private; not-for-profit entities and special purpose financial reports are outside the scope of the Conceptual Framework. 9. General purpose financial reports cannot provide all of the information that users need; they are not designed to show the value of entity but they provide information to help the primary users estimate the value of the entity; these reports are, to a large extent, based on estimates and judgment rather than exact depiction 10. Information is material if its omission or misstatement could influence economic decisions of users taken on the basis of the financial statements; it is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report. 11. COST is a pervasive constraint on the information that can be provided by financial reporting; reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that formation. 12, The ELEMENTS of financial statements: + Financial position: (1) Assets (2) Liabilities (3) Equity + Performance: (4) Income (includes revenue and gains) (5) Expenses (include losses) 13. An item that meets the definition of an element should be recognized if A) PROBABLE: it is probable that any future economic benefit associated with the item will flow to or from the entity, and B) MEASURABLE: the item has a cost or value that can be measured with reliability. Four different measurement bases are used to measure the elements of FS: (1) Historical cost (2) Current cost (3) Realizable value (4) Present value 14, Two CAPITAL CONCEPTS: 1) Financial concept (most common) and 2) Physical concept (uses “current cost’ basis). The concept of CAPITAL MAINTENANCE provides the linkage between the concepts of * capital and concepts of profit since it provides the point of reference by which profit is measured. PAS 1; PRESENTATION OF FINANCIAL STATEMENTS: 1. COMPONENTS OF FINANCIAL STATEMENTS (FS). A complete set of FS is composed of, {A)_ Statement of financial position (balance sheet) - as at the end of the period 8B) Statement of comprehensive income* ~ for the period ©) Statement of cash flows - for the period D) Statement of changes in equity ~ for the period E) Notes, comprising a summary of significant accounting policies & other explanatory information F). Statement of financial position ~ as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively” or makes a retrospective restatement of items in its FS. The term “Comprehensive Income” refers to all changes in equity, except those resulting from contributions from and distribution to owners; hence, the Statement of Comprehensive Income shall include two (2) major categories: 1. Components of profit or fass~ these are income and expense accov ly found inthe traditional income statement. As # minimum requirement, the line tems to be presented are: (PAS 1, par. 82) > Revenue > Finance costs > Share in the income oF los of associates und joint venture accounted for using the equity method > Tax expense > Postax profit or loss on discontimied operations > Profit or loss 2. Components of other comprehensive income ~ ese are income and expense aecounts not recapatized in profi or Toss and are usually required by PFRS to be recognized dineetly in the equity section ofthe statement of financial position {balance sheet). Examples include: (PAS 1. par; 7) > Unrealized gain or loss 0 (PAS 39) Gain or loss from translating the financial statements of « foreign operation (PAS 21) ‘Change in revaluation surplus (PAS 16 and 38) Unrealized gain or foss on trom derivative contracts designated as cash flow hedge (PAS 39) ‘Actuarial gain of loss on defined benefit pension plans (PAS 19. par. 93) “An entity has two options of presenting comprehensive income: (PAS 1. par. 81) ‘Option I: SINGLE STATEMENT The components of profit or Joss and components of other comprehensive income are show it comprehensive income. Option 2: TWO STATEMENTS. > Am income statement sho > A-statement of comprehensive income beginning with profit or loss as shown in the income statement plus oF minus the componenis of other compred > ngle statement of comporients of profit or lossKeS the Review School of becountamey Page 3 LECTURE NOTES in THEORY of ACCOUNTS 2, HEADINGS AND TITLES. An entity may use other tities for the statements other than those used in PFRS and shall present with equal prominence all of the FS and distinguish them from other information in the same published document. Ip addition, the following information shall be displayed prominently: A) The name of reporting entity 8) Whether the financial statements cover the individual entity or @ group of entities The date at the end of reporting period or the period covered by the set of financial statements 1} The presentation currency (as defined in PAS 21) ) The level of rounding (also known as ‘truncation’) used in presenting amounts in the FS 3. GENERAL FEATURES in presenting FS. + FAIR PRESENTATION, Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. The application of PFRS is presumed to result in FS that achieve a fair presentation, FS that comply with PFRS should include in the notes to FS an explicit and unreserved statement of such compliance. ‘+ GOING CONCERN. An entity shail prepare FS on a going concern basis unless management either Intends to liquidate the entity or to cease trading, or has no realistic alternative but to do So. + ACCRUAL BASIS OF ACCOUNTING. Aj entity shall prepare its FS, except for cash flow information, using the accrual basis of accounting, + MATERIALITY and AGGREGATION. An entity shall present separately each material class of similar items and shall present separately items of dissimilar nature or function unless they are immaterial, + OFFSETTING. An entity shall not offset assets and liabilities or income and expenses, unless offsetting is required or permitted by PFRS. + COMPARATIVE INFORMATION. An entity shall disclose comparative’ information in respect of the previous period for all amounts reported in the current period's FS and shall include comparative information for narrative and descriptive information when it is relevant to an understanding the current period FS. + FREQUENCY OF REPORTING. An entity shall present a complete set of FS at least annually. When an entity presents FS for a period longer or shorter than one year, an entity shall disclose : (A) the period covered by the FS (8) the reasons for using a longer or shorter period, an¢ (C) the fact that comparative amounts for FS are not entirely comparable. i + CONSISTENCY OF PRESENTATION. An entity shall retain the presentation and classification of items in the FS from one: period to the next unless: (A) it is apparent, following a change in the nature of the entity's operations or a review of its FS, that another presentation or classification would be more appropriate; or (B) a specific PFRS requires a change in presentation.» 4, INCOME STATEMENT PRESENTATION. When items of income and expense are material, an entity shall disclose their nature and amount separately. in addition, an entity. shall present’ an. analysis. of expenses using a classification based on either (1) nature of expense method or (2) function of expense” method, whichever provides, more reliable and relevant information 5. EXTRAORDINARY ITEMS. An entity shall not present any income or expense 8s extraordinary items, in the statement of comprehensive. income, or separate income statement (if presented), or in the notes ,to the financial statements, 6. BALANCE SHEET (BS) PRESENTATION. An entity shall present current and non-current assets, and current and non-current liabilities, except when a presentation based on liquidity provides more reliable and relevant information. When this exception applies, all assets and liabilities shall be presented broadly in order of liquidity. 2. CURRENT vs. NONCURRENT ASSETS. An entity shail classify an asset as current when A) The asset is a cash or cash equivalent (unless restricted for at least 12 months after 8S date) 8) It holds the asset primarily for the purpose of trading ©) Ik expects to realize the asset within 12 months after the reporting period (BS date) 1) _It expects or intends to realize or consume it within the entity's normal operating cycle" ‘An entity shall classify all other assets as'non-current. 8. CURRENT vs. NONCURRENT LIABILITIES. An entity shall classify a liability as current when: ‘A) The liability 's due to be settled within 12 months after the reporting period (BS date) B) It holds the liability primarily for the purpose of trading ©). It expects to settle the liability within the entity's normal operating cycle DY The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (BS date) x An entity shall classify all other liabilities as non-current Retrospective application ofa change in accounting policy. is coveréd by PAS 8, (See pate 6 for mone details) Inappropriate accounting policies are wot rectified either by disclosure of the accounting policies used or by explanatory notes. (PAS 1, par. 18) ‘An entity that uses the fimetion of expense method (a.k-. “cost of sales” method) shall disclose pdivional information on the nature of expenses, including depreciation and amortization expense and emplovee benefits expwnse. (PAS |, par 14) ® The eperating cycle of an entity isthe time between the acquisition of assets for processine and theit realization jn cash or ble, its ‘cash equivalents. When the on i assumed to he twelve ‘months. (PAS 1, par. 68) ity’s normal operating eye js not clearly ideReSU - the Kevrew School of lcconmioney Page 4 LECTURE NOTES in THEORY of ACCOUNTS 9) BALANCE SHEET LINE ITEMS. As a minimum requirement, the face of the statement of financial position “shall include line items that present the following amounts A). Property, plant and equipment B) Investment property? €) Intangible assets D) Financial assets” (excluding amounts shown under E, H and 1) £) Investments accounted for using the equity method F) Biological assets (defined as “living animals or plants” under PAS 42) G) Inventories H) Trade and other receivables 1). Cash and cash equivalents 3} Total assets held for sale (Including assets of disposal groups held for sale under PERS 5) K). Trade and other payables f Provisions (defined as “habilites of uncertain timing or Amount” under PAS 37) M) Financial liabilities” (excluding amounts showri under K and L) NN) abilities and assets for current tax 0) Deferred tax liabilities and deferred tax assets, not to be presented as current (PAS 1, par. 56) P) Noti-controlling (minority) interest, presented within equity’ )_ Issued capital and reserves attributable to equity holders of the parent 10, FINANCIAL LIABILITIES, An entity classifies its financial liabilities as current when they are due to be settled within twelve months after the balance sheet date, even if ‘A)_ The original term was for a period longer than twelve months; and 8) An agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period (BS date) and before the FS are authorized for issue”. 11 EFFECTS OF BREACHES. When an’entity breaches a provision of a long-term loan agreement on or before the end of reporting period (BS date) with the effect that the liability becomes payable on demand, the liability is classified as current, even if the lender has agreed not to demand payment as @ consequence of'the breach’ 12. STATEMENT OF CHANGES IN EQUITY (SCE). An entity shall present a SCE showing: 'A) Total comprehensive income for the period, showing separately the total amounts attributed to ‘owners of the parent and to non-controlling (minority) interest 8) For each component of equity, the effects of retrospective application/restatement under PAS 8, ©) The amount of transactions with owners in their capacity as oviners, showing separately contributions by end distributions to owners. ‘2)-Foreach-component-of equity, a reconcihation of the between the carrying amount at the beginning and the end of the period, disclosing each change separately. 13. DIVIDENDS, An entity shall present either in the statement of changes in equity or in the notes, the amount of dividends recognized as distributions to owners and the related amount per share 14, NOTES TO THE FS. The notes are normally presented in the following order, which assists users in Understanding the FS and comparing them with FS of other entities: ‘A) Astatement of compliance with PFRS 8) A-summary of significant accounting policies applied", which shall include: : >The measurement bases used in preparing FS | & The other accounting policies used that are relevant to an understanding of the FS 6). Supporting information for items shown on the face of each FS, in the order in which each statement and each line item \s presented D) Other disclosures, including > Contingent liabilities and un-ecognized contractual commitments > Non-financial disclosures (e.9., the entity's financial risk under PFRS 7) ‘An investment property is @ property (land or building) held by the owner or by the fessew under finance ease to rentals or for capital appreciation of both, rather than for use orale (PAS 40) 19 A financial asset iy any asset that is cash, an equity instrument of another entity, a contractual right to receive cash ot ‘another financial asset from another entity. (PAS 32) 11 Ginaneiat liability is any liability thet is a contractual obligation 4 deliver cash or unother financial asset to another entity. (PAS 32) 42 Non-controlling inferests (previously known as minority interest) shall be presented in the consolidated! balance sheet ‘within equity, separately from the parent shareholders’ equity. (PAS 27. par. 27) "han entity expects, and has the diseretion, to. refinange or roll ever an. obligation for at least twelve months alter the balance sheet date tinder an existing, loan facility, it classifies the obfigution as non-current, even iC it would otlierwise be ddue within « shorter period. (PAS 1: pur. 73) 14 The liability i classified as non-current ifthe lender agreed by ihe balance sheet date-to provide grace period ending at least {2 months after the balunce sheet date, within which the enlty can rectify the breaeh-aind duting which the lender ‘cannot demand immediate payment. (PAS 1, par, 75) 15 ‘An entity is required 10 diselove the jisdemems: that management has made in the process of applying the entity's ‘accounting policies and that have the most significant efleet on the amounts recognized in the PS. (PAS 1. par. 122) In addition, the notes shall contain ey assumptions concerning the future and other key sources of estimation that will pose u significant risk of causing a material adjustment to the amount of assets and liabilities within the next period. In he uotes shall inchude nature, amount snd other details of yueh assets und liabilities. (PAS 1, par. 125), ‘ ReSU - The Rerrew School of Cccounamey Page 5 LECTURE NOTES in THEORY of ACCOUNTS PAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS + OBJECTIVE: The objective of PAS 8 is to prescribe the criteria for selecting and changing ACCOUNTING POLICIES,"* changes in ACCOUNTING ESTIMATES and CORRECTION OF ERRORS to enhance relevance, reliability and comparability of FS of an entity over time as well as with FS of other entitice. + SELECTION OF ACCOUNTING POLICIES. When a standard specifically applies to a transaction, the accounting policy applied to an affected account shall be determined by applying the sendad ti ‘ne absence of a standard that applies to a transaction, management shall use its judgment’ in developing ard applying accounting policy that is relevant and reliable. + CONSISTENCY OF ACCOUNTING POLICIES. Once selected, accounting policies must be applied consistently for similar transactions, unless a standard specticaly ‘requires otherwise. An entity’ shall chore, oy accounting policy if the change (1) is required by a standard, or (2) resuits in the FS providig race relevant and reliable financial information. + CHANGES IN ACCOUNTING POLICIES. A change in accounting policy that is required by a standard shall be applied in accordance with the transitional provisions therein, if a standard contains no taremorn Provisions or if an accounting policy is changed voluntarily, the change shall be applied retrospectively (as if the policy hed always been applied) as adjustment to the opening balance of each affected component of ‘equity (e.g., retained earnings) for the earliest prior period presented For purposes of PAS 8, the following are NOT considered as changes in accounting policies: 1. Application of accounting polices for events that differ in substance from those previously occurring. 2. Application of a new accounting policy for transactions that did not occur previously or were immaterial, + EXCEPTION to the RULE. When it is impracticable" for an entity to apply a new sccounting policy retrospectively (Le. it cannot determine the cumulative effect of applying the policy to all prior periods), the entity applies the new policy prospectively from the start of the earliest period prectreable: + APPLICATION of NEW STANDARDS. When an entity has not applied @ new standard thot hos been Issued but ls not yet effective, the entity shall disclose this fact, and the reasonably estimable lntormaten ean to assessing the possible impact that application of the new standard will have on the entitr’s Fe ie ohe period of initial application. + GHANGES in ESTIMATES'®. The effect of a change in an accounting estimate shall be recognized prospectively by Including it in the profit or loss during the period of the change {if the change affeck, thot period only) or the period of the change and future periods (if the change affects both), + EXAMPLES of CHANGES in ESTIMATES. Due to uncertainties inherent in business activities, many items in FS cannot be measured with precision but can only be estimated. Estimation involves judgments brece oe the latest available, reliable information. Common examples of accounting estimates maine 4. Bad debts and inventory obsolescence 2. Fair value of financial assets or financial liabilities 3. Useful lives of depreciable assets; and 4. Provision for warranty obligations A change in the measurement basis applied is a change in an accounting policy, and is not a change in an accounting estimate. When it is difficult to distinguish a change in an accounting policy from # charge in an accounting estimate, the change is treated as a change in accounting estimate. + CORRECTION OF ERRORS.”” An entity shall correct material prior period errors retrospectively as an adjustment to the opening balances of retained earnings and affected assets and lablitics’ if corparsticc statements are presented, the FS of prior period shall be restated to reflect the retrospective apoligation of the ptlor period errors. If the error occurred before the earliest period presented, ‘he openine balances of assets, liabilities and equity for the earliest period presented shall be restated + MATERIALITY”, In applying the concept of materiality: 1. Accounting policies in the PFRSs need not be applied when the effect of applying them is immaterial 2. FS do not comply with PFRSs if they contain material errors, whether due to omissions or misstatements. 3. Material prior period errors should be corrected retrospectively in the first set of FS authorized for issue after thelr discovery 18 Accounting policies are the specific principles, bases, conv ‘resenting financial statements. In making judgments, management shall refer to the following sources in descending ord: 1). The requirements and guidance in standards dealing with similar and related issues 2) The definition, recognition criteria and measurement concepts sct forth in the Conceptual Framework {In making the judgment, management may also consider the most recent pronounéements of other standand-scting bodies that use similar conceptual framework to develop accounting standards, other accounting literature and accepted txlosty practices, to the extent that these do not conflict with PERS and the Conceptual Framework, Applying a requirement is impracticable when the enity cannot appli alter making every reasonable effort to do so. ‘A change in accounting estimates results from new information of developments and, hence, are not cornections of errs, The concept of “fundamental erro’ has been eliminated, Instead. PAS & uses and defines term “prior period ever” Price Petiod errors are omissions and misstatements inthe FS for one or more periods; they are commie th peor pesiods bot ane discovered only inthe current period ms are material, if they could, individually or collectively, influence the economic decisions of users taken on the basis of the FS. Materiality depends on the size and nature ofthe otnissim or tmisetavement Judged in the surrounding circumstances. . ules and practice adopted hy an entity in preparing and 1ReSQ - the Review School of Cecowmaneg, Page 6 LECTURE NOTES in THEORY of ACCOUNTS PFI 2 2% 2 RS 5: NON-CURRENT ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS NON-CURRENT ASSETS HELD FOR SALE. ‘An entity shall classify separately from other assets a non-current asset (or disposal group”) as held for sale if its carrying amount will be recovered principally through a sale” transaction rather than through continuing use. ‘The following conditions must be met for a non-current asset to be classified as held for sale: Management is committed to a plan to sell the asset or disposal group. ‘An active program to locate a buyer and complete the plan must have been initiated. ‘The asset must be available for immediate sale. ‘The sale is highly probable within one year from the date of classification as held for sale. The asset is being actively marketed for sale at a price that is reasonable in relation to its fair value. ‘Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn. ‘An entity shall measure @ non-current asset classified as held for sale at the fower of its carrying amount or fair value less costs to sel, Non-current assets held for sale shall NOT be depreciated from the date lassified as such. ‘an entity shall present @ non-current asset classified as held for sale and the assets of a disposal group lassified as held for sale separately from other assets in the balance sheet. The liabilities of @ disposal Group classified as held for sale shall be presented separately from other liabilities in the balance sheet. ‘Those assets and liabilities shall NOT be offset and presented as a single amount. The major classes of assets and liabilities classified as held for sale shall be separately disclosed either on the face of the balance sheet or in the notes. An entity shall measure @ non-current asset that ceases to be classified as held for sale at the lower of its carrying amount®® (before the asset was classified as held for sale) and its recoverable amount (at the date of subsequent decision not to sell). DISCONTINUED OPERATIONS. ‘A discontinued operation is a component of an entity”” that either has been disposed of, or is classified as held for sale, and 1. Represents a separate major line of business or geographical area of operations 2) Is part of a single coordinated plan to dispose a separate major line of business or geographical area of ‘operations, or 3. Isa subsidiary acquired exclusively with a view to resell (for resale) ‘A component of an entity is classified as discontinued operation at the date the entity has actually disposed of the operation or when the operation meets the criteria to be classified as held for sale. An entity shall disclose a SINGLE amount”® on the face of income statement comprising the total of: 1. The post-tax profit or loss of discontinued operations and 2. The post-tax gain or loss recognized: |A) On the measurement to “fair value less costs to sell?” OR B) On the disposal of the assets constituting the discontinued operations, ‘A group of assets posibly to be disposed of; by sales or otherwise, together as a group faa single transaction. and Tabs direetlyaswocited with tone ase tha wil be transfered inthe ransacton, he asset (or disposal group) must be available for immediate sale in is present condition and the sale must be igh probable. Hlighiypeobable™ mcans that the probabifty ofthe future sale is higher than ‘more fikely than no” An eaity Eyal nou clan a held foe slew no-current asset (or disposal group) that ito he shandoned Tia non-current asct within the scope of PFRS $ is part oa disposal group, the measurement requrementy of PERS $ pny wo the group as whole o hat the group is measured at lower offs carrying, amount and fair vlc Tess costs to el The write-down fat vale les cost sll rated 38 an impairment loss The canying amount is adjusted for depreciation, amortization or revaluations that would have been recognized had the asset not been classified as held for sale Recoverable amount is measured as the higher of an asset"s fir value less costs to sell and its value in use, This is well emphasized in PAS 36 on impairment of assets, ‘A component of an entity may. be a subsidiary, a major line of business or geographical segment whose operations and ‘cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity in the income statement separately To explain the details of this single amount, the following should be diselosed in the notes tothe F 1. ‘The amount of revenue, expenses and income or loss attributable to the discontinued oper period and the related income tax. 2, Any impairment loss (as the fair value less cost to sell of the net assets of the discontinued operations is lower than their carrying amounts). the carrying amount is lower, the expected gain isnot recognized but only disclose. 3. The termination cost of employees dnd other costs that are directly incurred as a result ofthe discontinuance. 4 Any gain or loss from theactual disposal ofthe assets and settlement of liabilities of a discontinued operation. “Coss to sell” is the incremental costs directly attributable to the disposal of an asset (or disposal group), exchicing finance 7 eo” mv during, the currentKeSU - the Keriew School of lecoAamey, Page 7 LECTURE NOTES in THEORY of ACCOUNTS PAS 24: RELATED Party DiscLosuRES + PURPOSE. Related party relationships are a normal feature of commerce and business, Related parties may enter into transactions that unrelated parties would not, Also, transactions between related parties may not bbe made at the same amounts as between unrelated parties. (e.g., an entity that sells goods to its parent. company at cost might not sell on those terms to another customer). For these reasons, knowletoe of related party transactions, outstanding balances and relationships may affect assessments of an entity's operations by users of financial statements, including assessments of the risks and opportunities facing the entity; hence, related party disclosures are necessary. + RELATED PARTY. A party is related to an entity if A) Directly, of indirectly through one or more intermediaries, the party: > has the ability to contro, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries) » has an interest in the entity that gives it significant influence® aver the entity » has a joint contro!” over the entity 8) ‘The party is an associate of the entity C) The party is a joint venture in which the entity is 2 ventucer ©) The party is a member of the key maragernent personnel” of the entity or its parent &) The party is a close family member of any individual referred to in A or D F) The party is an entity that is controlled, jointly controlled or significantly influenced by any Individual referred to in D oF € G) The party is a post-employment benefit plan for the benefit of employees of the entity, or of art entity that Is a related party of the entity + NOT NECESSARILY RELATED PARTIES. Under PAS 24, the following are NOT necessarily related parties: A) Two entities simply because they have a common director or other common member of key management personnel. 8) Two venturers simply because they share joint control over a joint venture. €) Providers of finance, trade unions, public utilities, goverment department and agencies, simply by Virtue of their normal dealings with an entity. D) A customer, supplier, franchisor, distributor, or general agent with whom an entity transacts a significant volume of business, merely by virtue of the resulting economic dependence. + RELATED PARTY TRANSACTION. A related party transaction is a transfen of resources, services or obligations between related parties, regardiess whether a price ts charged or not. + CLOSE FAMILY MEMBERS OF AN INDIVIDUAL. Close family members of an individual are those family members who may be expected to influence, or be influenced by that individual, in their dealinge with the entity. They may include: A). The individual’s domestic partner and children B) Children of the individual's domestic partner C)_Dependents of the individual or the individual's domestic partner + PARENT & SUBSIDIARIES. Relationships between parents and subsidiaries shall be disclosed irrespective of whether there have been transactions between those related parties. An entity shall disclose the nane of the entity's parent and, if different, the ultimate controlling party. + COMPENSATION. An entity shall disclose key management personnel compensation in total and for each | of the following categories: A) Short-term employee benefits (¢.9., wages, social security contributions, paid leaves, bonuses) B) Post-employment benefits (e.g. pensions, retirement benefits) C) Other long-term benefits (e.g, long-service leave, long-term disability benefits) D) Termination benefits: E)_ Equity compensation benefits + RELATED PARTY DISCLOSURES. If there have been transactions between related parties, an entity shill disclose the nature of the related. party relationship as well as information about the transactions and Gutstanding balances necessary for the understanding of the potential effect of the relationship on the F's At the minimum, disclosures shall include: ‘A) The amount of the transactions B) The amount of outstanding balances and > Their terms and conditions, and whether they are secured or unsecured » The nature of settlement consideration, and details of guarantees given or received ‘A) Provisions for bad debts related to the amount of outstanding balances . 8) Expense recognized in respect of bad debts due from related parties over the financial and operating policies of an entity s0 as to obtain benetits from is activities. © sControt” is Whe power 1 (@PAs27) 7 Significant influence’ is the power to participate in the financial and operating policy decisions of an entity, but 3s mot conitol over those poticies: Significant influence may be gained by share ownership, satute or agsvenncin (PAS 28) 2 Joint contrs is a contractually agreed sharing of control over an economic activity. PAS 31) * *Key management personnel’ refer to those persons having authority and responsibility tor plabinihy, dirwcting, unl controlling the activities of an entity, directly or indirectly, and inelule dircctors (executive or otherwise) of the « *- Compeasation’ includes all employee benelits. which include all forms of consideration puid, payable or provided by dhe “emtty, ron behalf ofthe entity, in exchange for services rendered la the entity: (PAS. 19) ”ReSU - the Review School of lccowtorey Page 8 LECTURE NOTES in THEORY of ACCOUNTS + EXAMPLES OF RELATED PARTY TRANSACTIONS REQUIRING DISCLOSURES. The follawing are examples of transactions that are disclosed if they are made with a related party A) Purchases or sales of goods (finished or unfinished) 8) Purchases or sales of property and ather assets, ©) Rendering or receiving of services ©) Leases E) Transfers of research and development F) Transfers of license agreements. G) Transfers under finance arrangements (including loans and equity contributions in cash or in kind) H) Provision of guarantees or collateral 1). Settlement of liabilities on behalf of the entity or by the entity on behalf of another party Items of similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the FS of the entity. a 10: EVENTS AFTER THE BALANCE SHEET DATE (EVENTS AFTER THE REPORTING PERIOD) EVENTS AFTER THE BALANCE SHEET DATE" are favorable and unfavorable events that occur between the balance sheet date and the date when the FS are authorized for issue; FS shall disclose the date when the FS were authorized for issue, and who gave that authorization” + ADIUSTING EVENTS after the balance sheet date (i.e., those that provide evidence of conditions that ‘existed at the balance sheet date) should be recognized in the FS. Examples are (among others): '2) Resolution or settlement after BS date of @ court case that confirms that the entity had @ present obligation at the BS date b) Bankruptcy of a customer that occurs after 8S date, confirming that a loss existed at the BS date on a trade receivable, ©) Sale of inventories after the 8S date that may give evidence on net realizable value (NRV) at the BS date. 4d) Determination after the 8S date of the cost of assets purchased, or the proceeds from assets sold, before the BS date. €) Determination after the BS date of the profit sharing or bonus payment if the enterprise had the present obligation at the BS date to make such payment. ‘The discovery of fraud or errors that show the FS are incorrect. An entity shall adjust amounts recognized in its FS to reflect adjusting events after the BS date. If an entity receives information after the BS date about conditions that existed at the BS date, it shall update disclosures that relate to those conditions, in the light of the new information + NON-ADJUSTING EVENTS” after the balance sheet date (i.e., those that are indicative of conditions that arose after the balance sheet date) are not recognized but are disclosed in the notes to the FS. Examples are (among others): '2) Major business combination or disposing of a major subsidiary after the BS date b) Announcement of a plan to discontinue an operation )_ Major purchase and disposal of assets, or expropriation of major assets by government 4) Destruction of major production plant by.e fire after the BS date. @) Announcement of a major restructuring ) Major ordinary share transactions and potential ordinary share transactions after BS date. 9) Abnormally large changes after the BS date in asset prices or foreign exchange rates. h) Changes in tax rates or tax laws enacted or announced after the BS date. i) Entering into significant commitments or contingent liabilities, for example, by issuing guarantees. §) Commencing major litigation arising solely from events the occurred after the BS date. Decline in market value of investments between the BS date and the date when the FS are authorized for issue. + DIVIDENDS. Dividends on equity shares declared after the balance sheet date should not be recognized as a liability at the balance sheet date. Such dividends are disclosed in the notes to the FS ((.e., a non-adjusting subsequent event) + GOING CONCERN. Deterioration in operating results and financial position after the balance sheet date may indicate a need to consider whether the going concern is still appropriate; an entity should not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the entity or cease trading, or that it has no realistic alternative but to do so. This is previously called as *subseqn the BS date until the date of FS issuance 36 IF the entity's owners (or other parties) have the power to amend the F'S after issue, the entity shall divelose this fuet, The process involved in authorizing the FS for issue will vary depending upon the management structu ‘events’. Subsequent events, as defined pre are events that happened after statutory requirements and procedures followed in preparing and finalizing the PS. 37 Anentity shall disclose the following for each material category of non-adjusting event after the BS date +The nature of the event ‘+ Anestimate ofits financial effect, ora statement that such an estimate cannot be made A restructuring is & program, planned and controtled by management, that m business undertaken by un enterprise or the manner in which that business is conducted. (PAS 37) sially changes cither the scope of aReSU - The Review School of Accormtiomcy Page 9 LECTURE NOTES in THEORY of ACCOUNTS PAS 37: PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS 1. PROVISIONS are liabilities of uncertain timing or amount. A provision should be recagnized when: > An entity has a present obligation (legal or constructive) as a result of a past event, » It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and > The amount of obligation can be measured reliably. Provisions should not be recognized for future operating losses: If an enterprise has a contract that is onerous”, the present obligation under the contract should be recognized as a provision. 2, An OBLIGATION EVENT Is an event. that creates a legal or constructive obligation that results in an entity having no realistic alternative but to settie the obligation created by the event. 3. ALEGAL OBLIGATION is an obligation that is derived from a contract, legislation, or other operation of law. 4, A CONSTRUCTIVE OBLIGATION {s an obligation that derives from an enterprise's actions where ‘A)_ The enterprise has indicated to other parties that it wil accept certain responsibilties, and 8) The enterprise has created a valid expectation on the part of other parties that it will discharge certain responsibilities 5. A CONTINGENT LIABILITY is either: > A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, OR > A-present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle obligation or the amount of the obligation cannot be measured with sufficient reliability. Hence, an enterprise should not recognize a contingent liability on the face of FS. A contingent liability is required to be disclosed in the notes to the FS, unless the possibility of an outflow of economic benefits is remote. 6. A CONTINGENT ASSET is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one of more uncertain future events not wholly within the control of the entity Hence, an enterprise should not recognize a contingent asset. A contingent asset is required to be disclosed in the notes to the FS, where an inflow of economic benefits is probable. However, when the realization of income. is virtually certain, then the related asset is not a contingent asset and Is. therefore recognized. Consider the following: (assuming the amounts can be measured rellably) Probability (%) | CONTINGENT LIABILITY | CONTINGENT ASSET] PROBABLE | More than 50% | Recognize (as Provision) | Disclose (in thie Notes) _ POSSIBLE | 5% to 50% | Disclose (in the Notes) EMOTE | Less than 5% ‘No requirement | 7. MESUREMENT of PROVISION. The amount recognized as a provision should be the BEST ESTIMATE of the expenditure required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the circumstances that relate to the provision + Where the provision being measured involves a large population of items, the obligation is estimated by weighing all possible outcomes by their associated probabilities. This statistical method of estimation is known as the EXPECTED VALUE, + Where there is a continuous range of possible outcomes, and each point within the range |s as likely as.any other, the MID-POINT of the range is used. + Where the effect of the time value of money is material, the amount of a provision should be the PRESENT VALUE of the expenditures expected to be required to settle the obligation. 8. REIMBURSEMENT. Where some or all of the expenditures required in setting @ provision is expected to be reimbursed by another party, the reimbursement should be recognized as a separate asset when its virtually certain that reimbursement will be received if the entity settles an obiigation. The amount recognized for the reimbursement should not exceed the amount of the provision. in the income statement, the expense relating to a provision may be presented net of the amount recognized for @ reimbursement. 9. RESTRUCTURING". A provision for restructuring costs is recognized only when the general criteria for a provision are met (see item no. 1). A restructuring provision should not be associated with ongoing activities of the enterprise and should not include costs such as retraining or relocating continuing staff, marketing or investment in new systems and distribution networks. 29 An qnerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the ‘economic benefits to be received under it. The termn “onerous” literally means burdensome The discount rate should a pre-tax rae that reflects current market assessments of the time value of money and the risks specific to the liability. ‘The discount rate should not reflect risks for which future cash flow estimates have been adjusted (PAS 37, par 47) A restructuring is @ program, planned and controlled by management, that materially changes either the scope of @ business undertaken by an enterprise or the manner in which that business is conducted,ReSU The Review School of lccommtancy Page 10 LECTURE NOTES in THEORY of ACCOUNTS EXCERPTS ON PHILIPPINE ACCOUNTANCY ACT OF 2004's IMPLEMENTING RULES AND REGULATIONS (IRR) + HISTORICAL BACKGROUND. Republic Act No. 9298 or otherwise known as The Philippine Accountancy Act of 2004 repeals Presidential Decree No. 692 or otherwise known as The Revised Accountancy Law. The new Act was passed during the 3° regular session of the 12" Philippine Congress from the consolidation of Senate Bill No. 2748 (passed 6 February 2004) and House Bit! No. 6678 (passed 7 February 2004). Former President Gloria Arroyo signed and approved it on 13 May 2004, the day the consolidated bill became law. + RATIONALE, ‘The Philippine Accountancy Act provides for the set of rules governing the practice of accountancy in the Philippines. The Professional Regulatory Board of Accountancy (BoA), one of the professional boards under the Professional Regulation Commission (PRC), is mandated by the Act to. promulgate rules pertaining to the supervision, control and regulation of the practice of accountancy in the Philippines.” In November 2004, BoA issued and approved a set of rules and regulations implementing RA’9298, now known as Implementing Rules and Regulations (IRR). + FINANCIAL REPORTING STANDARDS COUNCIL. Within 90 days from the effectivity of the IRR for the Philippine Accountancy Act of 2004, the Financial Reporting Standards Council (FRSC) shall be created. The FRSC replaces the ASC and evaluates the TAS and IFRS that shall be adopted in the Philippines. Other than the chairman’, the FRSC shall be compased of 14 members representing the following organizations: Professional Regulatory Board of Accountancy (BoA) 1 member Securities and Exchange Commission (SEC) i member Bangko Sentral ng Pilipinas (BSP) i member Bureau of Internal Revenue (BIR) i member ‘A major organization composed of FS preparers and users 1 member Commission on Audit (CoA) i member ‘Accredited Professional Organization (APO) ‘8 members* The 8 representatives from Accredited Professional Organization (APO) shall be equally divided among the ‘accounting sectors: public practice (2 members), commerce and industry (2 members), education (2 members), government (2 members). At present, BoA recognizes 'PICPA' as the accredited professional ‘organization (APO) of CPAs in the Philippines, + ACCOUNTING STANDARDS COUNCIL (ASC). The -ASC.was.the ‘author’ of whatused tobe known 2s SFAS. (Statements. of Financial, Accounting Standards). Formed to establish the generally accepted accounting principles in the Philippines, the ASC had Performed its function since November 1981 until it was replaced by the Financial Reporting Standards Council, pursuant to the IRR of the new accountancy law. ASC was composed of eight members, nominated by the following organizations: Philippine Institute of Certified Public Accountants 4 members Securities and Exchange Commission 1 member Bangko Sentral ng Pilipinas 1 member Board of Accountancy 1 member Financial Executives Institute of the Philippines, i member In 1997, the ASC made a decision to harmonize accounting standards in the Philippines with International Accounting Standards (IAS), which later evolved into International Financial Reporting Standards (IFRS) Consequently, IFRS becomes the basis of the Philippine Financial Reporting Standards (PFRS)"" + PHILIPPINE INTERPRETATIONS COMMITTEE (PIC) The FRSC formed the Philippine Interpretations Committee (PIC) in August 2006 to assist the FRSC standards in establishing and improving financial reporting standards in the Philippines. The role of the PIC {s principally to issue implementation guidance on PFRSs. The PIC members are appointed by the FRSC and include accountants in public practice, the academe and regulatory bodies and users of financial statements. “The FRSC Chairman, who had been or presently a senior accounting practitioner in any scope of accounting practice, shall tbe appointed by the PRC upon the recommendation of BOA in coordination with PICPA as the accredited professional ‘organizations. The Chairman and members of FRSC shall have a term of zhree 3) years renewable for another term {RSs are standards isued by the International Accounting Standards Board (IASB); the IASB replaced the International Accounting Standards Conimittee (IASC) in 2001 Based on paragraph 7 of PAS 1, the erm “PFRS" shall be composed of (a) PFRS (b) Philippine Accounting Inerpretations. PFRS sets out the recognition, measurement, presentation and disclosure requirements dealing. with transactions and events that are important in general purpose FS. A PERS is developed through a due process that normally involves the following: (4) Consideration ofthe pronouncement of IASB. (©) Formation ofa task force, when deemed necessary, 0 pive advice to FRSC (©) Issuing for comment an exposure draft approved by atleast eight (8) FRSC members; comment period will be ut Jeast 60 days, uitless a shorter peti (not les than 30 days) is considered appropriate by FRSC. a (4) Consideration of all comments received within the comment period and, when appropriate, preparing. the ‘comment letter to the IASB (©) Approval of a standard by atleast eight (8) of the FRSC membersKeSU - The Review School of Gcconedameg Page 11 LECTURE NOTES in THEORY of ACCOUNTS PAS 34: INTERIM REPORTING + ENTITIES COVERED BY INTERIM REPORTING STANDARDS. 1, Certain companies required by Securities and Exchange Commission (SEC) & the Philippine Stock Exchange (PSE) to publish interim FS’. 2. Certain companies that-lact-ta publish an interim financial report + INTERIM FINANCIAL REPORT. AS An interim financial report means a financial report containing either ¢ complete set of FS or a set of pasos. £S.for-an interim period", 7S a minhunn requirement, an interim fmanclal repor should include the following components: 1, Condensed balance sheet 2, Condensed income statement 3. Condensed statement showing either changes i 4. Condensed cash flow statement 5. Selected explanatory notes Basic and diluted earnings per share should be’ presented’ on the face of an income statement, complete or “condensed, for an interim period, 7 a + SELECTED EXPLANATORY NOTES”. An enterprise should include the following information, a5 a minimum, in the notes to its interim FS, if material and if not disclosed elsewhere in the interim financial report 1, A statement that the same accounting policies and methods of computation are followed in the interim FS as compared with the most recent annual FS or, if those policies or methods have been changed, @ description of the nature and effect of the change. 2. Explanatory comments about the seasonality or cyclicality of interim operations 3. The nature and amount of items affecting assets, llablities, equity, net income or cash flows that are unusual because of their nature, size or incidence 4, The nature and amount of changes in estimates of amounts reported in prior interim periods of the current financial year or changes in the estimates of amounts reported in prior financial years if those changes have a material effect in the current interim period. 5. Issuances, repurchase and repayments of debt and equity securities 6. Dividend paid (aggregate or per share) separately for ordinary shares and other shares 7. Segment revenue and segment result for business segments or geographical segments, whichever is the primary basis of segment reporting 8. Material events subsequent to the end of the interim period that have not been reflected in the FS for the interim period 9. The effect of changes in composition of the enterprise during the interim period, including business combinations, acquisition or disposal of subsidiaries and long-term investments, restructurings, and discontinued operations. - 10. Changes in contingent liabilities or contingent assets since the last annual BS date. + PERIODS for which INTERIM FS are REQUIRED to be PRESENTED. Interim reports should Include interim FS for periods as follows: 1, Balance sheet as of the end of the current interim period and a comparative BS as of the end of the immediately preceding financial year. 2. Income statements for the current interim period and cumulatively for the current financial year to date, with comparative income statements for the comparable interim periods (current and year-to- date) of the immediately preceding financial year. 3. Statement showing changes in equity cumulatively for the current financial year to date, with comparative statement for the comparable year-to-date period of the immediately preceding financial year. 4. Cash flow statement cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year. ity or comprehensive income 'SE require companies covered by the reportorial requirements of Revised Sewurities Aci to file quarterly reports within 45 days afler the end of each of the first three quarters. Also, the SEC requires companies covered by the Rules on Commercial Papers and Financing Act to file quarterly financial reports within 45 days after each year-end, An interim period is a financial veporting period shorter than 4 full financial year. Interim financial reports may be presented monthly, quarterly or semiannually ‘Au example of kinds of disclosures as required by PAS 34, par 17 are as follows: (a) write-down of inventories to net realizable value upd the reversal of such a writedown (b) recognition of loss from the impairment of PPE and intangibles and the reversal of such an impairment loss (©) reversal of any provision for the costs of restructuring, (@) sequisitions’and disposals of tems of PPE, (©) comimitments for the purchase of PPE: (0) litigation settlements (g) corrections of fundamental errors in previously reported financial dats (h)any debt defiult or breach ofa debt covenant that has not been corrected subsequently (related party transactions. eoRSQ - The Revrew School of becomcenay Page 12 LECTURE NOTES in THEORY of ACCOUNTS Pree 8: OPERATING SEGMENTS. RATIONALE. ‘An entity shall disclose information to enables users of FS to evaluate the nature and financial effects of the business activities In which it engages and the economic environments in which it operates. + ENTITIES COVERED BY OPERATING SEGMENT STANDARDS. 1. Entities whose equity or debt securities are publicly traded. 2. Entities that are in the process of issuing equity or debt securities in public securities market. In the case of group of companies (i.e., parent and subsidiaries), PFRS 8 applies to the consolidated financial statements of the group only. + OPERATING SEGMENTS, An operating segment is a component of an entity: ‘A) That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity).. 8) Whose operating results are regularly reviewed by the entity's chief operating decision maker" to make decisions about resources to be allocated to the segment and assess its performance, and (C)_ For which discrete financial information is available. + REPORTABLE SEGMENTS ‘An entity shall report separately information about an operating segment that meets any of the following ‘quantitative thresholds A) Its reported revenue, including both sales to external customers and Intersegment ales or transfers, ‘s 10% or more of the combined revenue, internal and external, ofall operating segments. 8) The absolute amouat of its reported profit or loss is 10% or more of the greater, in absolute amount, of (1) combined reported profit of all operating segments that did not report a loss and (2) combined reported loss of all operating segments that reported a loss. ©) Its assets are 10% or more of the combined assets of all operating segments. If the total external revenue reported by operating segments is less than 75% of the entity's revenue, additional operating segments should be identified as reportable segments, even if they do net meet the 10% thresholds, until at least 75% of entity's revenue is included in reportable segments. + AGGREGATION OF OPERATING SEGMENTS. Two or more operating segments may be aggregated into a single operating segment if the segments have similar economic characteristics and are similar in each of the following respects: A) the nature of the products and services, 8) the nature of the production processes, C) the type or class of customer for their products and services, D) the methods used to distribute their products or provide their services, E).and if applicable, the nature of regulatory environment, for example, banking, insurance or public utilities, + DISCLOSURE OF OPERATING SEGMENT INFORMATION. ‘An entity shall disclose the following for each period for which an income statement is presented A) General information*” about the operating segment. B) Information about segment profit or loss, segment assets* and segment liabilities. C) Reconciliations of the totals of segment revenue, segment profit or loss, segment assets, segment liabilities and other material segment items to correspanding entity amounts. + ENTITY-WIDE DISCLOSURES. Entity-wide disclosures are additional information that \s required to be disclosed by all entities if such information is not provided as part of the reportable segment information. An’ entity. shall report information about: 1) products and services, 2) geographical areas and 3) MAJOR CUSTOMERS” The chief operating decision maker identifies 4 fimetion, not necessarily tw allocate resources to and assess the performance of the opera manager with a specific title, That function is ni of an entity. (PERS 8, par. 7) ‘9 An cntity shall disclose the following general information about an operating segment: (PERS &, par. 22) 1. Factors used 10 identify the reportable sesments, including the basis of organization. (eg, whether management has chosen to organize the entity around ditferences in products and serves, geographical areas, regulatory environme ‘ora combination of factors, and whether operating segraents have been aggregated.) 2. Types of products and services from which each reportable sement derives its revenue, ‘An entity shall disclose the following if included in the measure of profit or loss: (PFRS 8, par. 23) (a) Revenues from external customers and transactions with other operating segments of the same entity (b) Interest revenue and interest expense {¢) Depreciation and amortization (d) Material items of income and expenses and material noneash items other than depreeiation (©) Interest in profit or loss of associntes and joint venture uceounted ‘or by the equity method (4) Income tax expense ‘An entity sball disclose the following about each reportable segment if the specified amounts are ‘of segment assets reviewed by chief operating oftieer: (PERS 8, par. 24) (a) The amount of investments in associates and joint venture accounted for by the equi amortization (b) The amounts of additions to non-current assets other than Financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts 5% 1f revenues from transactions with a single extemal customer amount 10 10% or more of att entty’s revere, Uhe enily shall disclose that fact, tolal amount of revenues trom each major customer, and the identity of the segments reporting the revenues. The entity need not disclose the identity of a major eustomer or the amount of revenues that cach segment reports from that customer.ROS. Th Revie School of Cocoa, Page 13 LECTURE NOTES in THEORY of ACCOUNTS PAS 41: AGRICULTURE » SCOPE PAS 41 applies to the following items, wh 1, Biological assets* 2) Agricultural produce'* at the point of harvest 3. Government grants* related to 2 biological asset PAS 41 does not apply to: > Land related to agricultural activity, which is covered by PAS 16 (Property, Plant and Equipment) and PAS 40 (Investment Property). > Intangible assets related to agricultural aetivity, which are covered by PAS 38 (Intangible Assets), on they relate to agricultural activity: PAS 41 applies to agricultural produce only at the point of harvest, Thereafter, PAS 2 Inventories or another standard shall be applied; PAS 41 does not deal with the processing of agricultural produce after harvest. While processing may be @ logical and natural extension of agricultural activity, and the events taking place may bear some similarity to biological tranbformation, processing of agricultural produce is not within the definition of agricultural activity” in PAS 4 + EXAMPLES, Biological assets | Agricultural produce | oducts that ate the result of ‘processing after harvest Yarn, carpet | Lumber Thread, clothing [oh Sete ra he ot Togs (Felled trees) | Trees ia planenton forest tants, a Harvested cane foe hd a { I Dairy cattle | { Pigs oe Sausages, cured hams — oc Bietes | Ree aie wba i Vines Grapes Wine t Fruit trees Picked fruit Processed fruit ‘© RECOGNITION CRITERIA. ‘An entity shall recognize a biological asset or agricultural produce when ‘A) The entity controls the asset as a result of past events; B) It is probable that future economic benefits associated with the asset will flow to the entity; and C) The fair value oF cost of the asset can be measured reliably. + MEASUREMENT BASIS. ‘A BIOLOGICAL ASSET shall be measured on initial recognition and at each balance sheet date (reporting period) at fair value™ less costs to sell.”” AGRICULTURAL PRODUCE harvested from an entity’s biological assets shall be measured at the point of harvest at its fair value less estimated costs to sell. ‘Any gain or loss®° on the initial recognition of biological assets at fair value less costs to sell and any changes in the fair value less costs to sell of biological assets during the reporting period are included in profit or loss for the period. All costs related to biological assets that are measured at fair value are recognized in profit or loss when incurred, except for those costs incurred to purchase biological assets. Any gain on the initial recognition of agricultural produce at fair value less costs to sell will be included in the profit or loss for the period to which it relates. ® Biological assets are living animals and plants $4 Agricultural produce is the harvested product of the entity's biological assets 55 HHarvest is te detachment of produce fron a biological assct or the cessation ofa biological asset's like provesses. 5 Government grants are wssistance by government in the form of transfers of resources to, an entity in return for past or fiture compliance with certain conditions relating to the operating activities of the entity. (PAS 20) 57 Agricultural activity is the management by an entity of the biological transformation of biological assets ngricultural produce, or into additional biological assets (Examples of agricultural activity are raising livestock, perennial cropping, cultivating orchards aid plantation, floriculture, aquaculture, including fish farming); biviogical Iransformotion relates to the processes of growth, degeneration, production, and procteation 1 qualitative or quantitative naty 5 Fair value is the amount for which an asset ¢ or ligbility setiled, between knowledgeable, willing parties in an arm’s length transaction, 5 Coats to sell are the incremental costs directly attributable to the disposal of an asset; examples are cowrimissions to brokers and deulers, fevies by regulatory agencies and commodity exchanges, and transfer taxes and duties: costs to sell exchde financing charges, wansport and other casts. necessary to get assets fo tharkel © A foss may arise on initial recognition of a purchased biological asset as their fair valuc less estimated point-of-sale eosts are likely to be tess than the purchase price plus any transaction and transportation costs; a sain may arise om initial nition of a biological asset, such as when a calf is bom. (PAS 41, par, 27) aReSU - the Rervew School of Gecowritancy Page 14 LECTURE NOTES in THEORY of ACCOUNTS ‘+ GUIDELINES IN DETERMINING FAIR VALUE, > In deciding on the fair value for @ biological asset or agricultural produce, it is possible to group together items in accordance with, for example, their age or quality, > Entities often contract to sell their biological assets or produce at a future date. These contract prices do not necessarily represent fair value, The fair value of a biological asset or agricultural produce is not necessarily adjusted because of the existence of a contract. > If an active market®' exists for @ biological asset or an agricultural produce, the quoted price in that ‘market 1s the appropriate basis for determining the fair value of that asset, > If.an entity has access to different active markets, the entity uses the most relevant one. > If-an active market does not exist, then the following methods can be used to determine fair value: A) The most recent market transaction price 8) Market prices for similar assets with adjustment to reflect differences; and ©) Any sector benchmark such as the value of cattle per kilogram or value of a farmland per hectare. > In some cases, market prices or values may not be available for an asset in its present condition. In these cases, the ‘entity can use the present value of the expected net cash flow from the asset discounted at a current market pretax rate, » In some cases, costs may, be an indicator of fair value, especially where little biological transformation has taken piace or the impact of biological transformation on the price is not expected to be significant, + ABSENCE OF FAIR VALUE There is a presumption that fair value can be measured reliably for a biological asset®?, However, this presumption can be rebutted for a biological asset that, when first recognized, does not have @ quoted market price in an active market and for which other valuation methods are clearly inappropriate and unreliable. In this case, the biological asset shall be measured at its costs less any accumulated depreciation and impairment iosses”. Unlike 2 biological asset, agriculture produce is afways assumed to have a measurable fair value. + CHANGES IN FAIR VALUE The fair value less costs to sell of a biological asset can change due to both 1) PHYSICAL changes, and 2) PRICE changes in the market. An entity is encouraged (but not required) to have a separate disclasure of physical and price changes that is useful in appraising current period performance and future prospect, particularly when there is a production cycle of more than one year. Biological transformation results in a number of types of physical change -- growth, degeneration, production, and procreation, each of which is observable and measurable. Each of those physical changes hhas a direct relationship to future economic benefits. A change in fair value of a biological asset due to harvesting is also physical change. Agricultural activity is often exposed to climatic, disease and other natural risks. If an‘ event otcurs and Gives rise to a material item of income or expense, the nature and amount of that item are disclosed in ‘accordance with PAS 1 Presentation of Financial Statements. Examples of such an event include an outbreak of a virulent disease, a flood, a severe drought or frost, and a plague of insects, + GOVERNMENT GRANTS, ‘An unconditional government grant related to a biological asset measured at its fair value less costs to sell shall be recognized as income when the government grant becomes receivable. If a government grant related to a biological asset measured at its fair value less costs to sell is conditional, including where @ government grant requires an entity not to engage in specified agricultural activity, an entity shall recognize the government grant as income when the conditions attaching to the government grant are met. If a government grant related to biological asset measured at its cost less any accumulated depreciation and impairment losses, then PAS 20 (Accounting for Government Grants and Disclosure of Government Assistance) Is applied. An active marker is-a matket where all the following conditions exist 4) The item traded within the market are homowencous: b) Willing buyers and sellers can normally be found at any times and €) Prices ane available to the pul Wa noneurrcat biological asset meets accordance with PFRS 8, then itis presumed that the fair value ean be measured reliably. (PAS AI pan, 30) In determining, cost, accumulated depreciation snd aecumutated impairment losses, an enlity considers PAS 2 liventories, PAS 16 Property, Plant & Equipment and PAS 36 Impairment of Assets (PAS 41, par. 33) We eriteria to be classified as held for sale or i$ inehided én a disposal roup inFAB Da Rite! Soil labawctongs Page 16 LECTURE NOTES in THEORY of ACCOUNTS PFRS 10; CONSOLIDATION OF FINANCIAL STATEMENTS & PAS 27: SEPARATE FINANCIAL STATEMENTS + Aparent company shall present consolidated F5” that includes FS of all subsidiaries of the parent company. + “In preparing consolidated F5, the following consolidation rules and procedures are normally followed: > Combine like items of assets, liabilities, equity, income; expenses and cash flows of the parent with those of its subsidiaries > Offset (eliminate) the carrying ammount of the ps partion.of equity of each subsidiary > Eliminate in full intragroup assets, \iabilities, equity, incorne and expenses and cash flows relating to transactions between entities of the group; profits and loss resulting from intragroup transactions that nized in assets, such as inventory and fixed assets, are eliminated in full > Consolidated FS should’ be prepared using uniform accounting policies for like transactions and other events in similar circumstances: > Parent and subsidiaries are required to have the same reporting dates; When FS used in consolidation are drawn up from different reporting dates, adjustments should be made and the difference between the date of subsidiary’s FS and that of the consolidated FS shall be no more than three months. =A parent company shall present NON-CONTROLLING INTERESTS in its consolidated statement of Financial position within equity, separately from the equity of the owners of the parent +A parent |s NOT required to present consolidated FS when > The parent is itself a wholly-owned subsidiary, of a partialiy-owried subsidiary and its other owners do not object to the parent not presenting consolidated FS > The parent's debt and ‘equity instruments are NOT traded in a public market'~ a domestic or foreign stock exchange or an over-the-counter market > The parent did not file or is not in the process of filing its FS with a securities commission or other regulatory body for the purpose of \ssuing any class of instruments in.@ public market.” + The ultimate of any intermediate parent of the parent produces consolidated FS available for public use that comply with PFRS. + A subsidiary #3 NOT excluded from consolidation simply because: > The investoris'a venture capital organization, mutual fund, unit trust or similar entity. > The subsidiary’s business activ sissimilar from those of the other entities within the group, % The subsidiary 1s guffering trom heavy josses and/or incurring large amount of debt. + An investor CONTROLS aii investee if and orly ifthe investor has all of the following elements: > Power over the investee, |.e. the investor has the existing Hohts that give it the ability to direct the ‘relevant activities that significantly tffect the nvegtee’s returns > Exposure, of rights, to vatiable returns from its involvement with the investee 5 Abllty to use its power over the investee to atfect the amount of the investor's returns. + Control is presumed to exist even when parent owns haif or less of the voting power of an entity but has the power: Over more than half of the voting rights by virtue.of an agreement with other investors, > Jo govern the financial ana operating policies of entity under a statute or an agreement. > To appoint or remove the majority of the members of the board of directors, > Torcast majority of votes at meetings of the poard of directors or equivalent governing body. The existence of potential voting rights currently exercisable (e.g., share warrant) are considered when ‘assessing whether an entity has the péwer to govern the financial & operating policies of another entity + Changes in a parent's ownership interest in a subsidiary that do nat result in.a loss of control” are accounted for as equity transactions (j.e., transactions with owners in their capacity as owners.) + When an entity prepares separate FS’, it shall account for investments in subsidiaries, joint ventures and associates either: A) at cost, B) in accordance with PAS 39/PFRS 9, or C) equity method under PAS 28.” The same accounting (poligy) shall be applied for- each category of investments; investments that are Classified as held for sale or for distribution shall be accounted for under PFRS 5. (See PFRS 5 notes on p. 6) + Where an entity meets the definition of en INVESTMENT ENTITY”, it does not consolidate its subsidiaries, nor apply PFRS when it obtains control of another entity; an investment entity is required to measure an investment in a subsidiary at fair value through profit oF loss in accordance with PAS 39/PFRS 9. efit’s investment in each subsidiary and the parent’s 79 ‘Consolidated FS" ore the FS » in which the assets, liabifities, equity, Uacome, expenses and cash flows of the parent and. its. subsidiaries are: presented as those of a single economic entity. (GROUP — a parent and all of its subsidiaries; PARENT ~ an entity thal has one or more subsidiaries; SUBSIDIARY — an entity that is controlled by ‘another entity) 7A parent can lose control of subsidiary with or without 4 change in ebsolute or relative ownetship levels. This vould ‘occur, for example, when 2 subsidiary becomes subject 10 the control of « government. court, administrator or regulator: it ‘could also occwr as a result ofa contricwual agreement or in (v0 oF mote arrangements 7 ‘Separate FS" are FS presented by an entity in which vse entity could elect to account for its investments in subsidiaries, joint ventures and associates either at cost, in accordance with PAS 39/PFRS 9, of using the equity method under PAS 28 1-4 amendment to PAS 27 allows the use of EQUITY method as described in PAS 28 (Investment j esidinent took effect 01 Jaimaary 2016, that: }) obtain fund The August 2 ‘Associates & Joint Ventures); this ° kn INVESTMENT ENTITY is anc these investors with investment mana, funds solely for retums trom capital appreciation andor inyestment income and 3) measures and evalua performance of substantially all ofits investments on in One oF more investors for the purpose of providing its business purpose is 10 invest es ie ea Gs) - KY)ReSU- the Review School of GecowrTouevey Page 17 LECTURE NOTES in THEORY of ACCOUNTS PFRS for Small & Medium Entities (SMEs) HISTORICAL BACKGROUND The Philippine Financial Reporting Standard for Small and Medium Entities (PERS for SMEs) is the answer to the long-felt need for the standards of financial reporting for small and medium-size entities, which as a consequence do not have to comply with full PFRS. Many of the principles in full PERS for recognizing and measuring assets, liabilities, income and expenses have been simplified, topics that are not relevant to small and medium entities (SMEs) have been omitted, and the required disclosures in full PFRS have been significantly reduced : In the Philippines, the FRSC (Financial Reporting Standards Council) and SEC (Securities and Exchange Commission) set the rules and regulations pertinent to financial reporting for SMEs: ¥ 13 October 2009 - FRSC adopts "PFRS for SMEs” from "IFRS for SMEs" issued in July 2009 by IASB. ¥ 3 December 2009 ~ Philippine SEC adopts "PFRS for SMES” as part of its rules and regulation. ¥ 2 January 2010 ~ Effective date of application of "PERS for SMES” in the Philippines WHAT ARE SMALL & MEDIUM ENTITIES? SMEs are knawn by a variety of terms, including small and mediuin-sized entities (SMEs), private entities, and non-publicly accountable entities (NPAEs). Consider the following definition provided by Section 1 of the PERS for SMEs: “SMALL & MEDIUM-SIZED ENTITIULS are entities that Do not have public accountability Publish general purpose fina cial statement for external users ity has public accountability (a) Its debt or equity instruments arc traded in @ public market or it isin the process of issuing such instruments for trading in a public market (a domes ian stock exchange or an over-the-counter market, including, local and regional markets), or (b) Iwholds assets in a fiduciary capacity for a broad group of outsiders as one of typically the ease for hanks, credit unions, insurance companies, securities brikervdeale investment banks.” 5 primary businesses. This is taal funds and ‘The Securities and Exchange Commission (SEC), in its En Banc Resolution dated August 13, 2009, adopted a definition of small and medium sized entities’ that includes a size criterion: “An entity is an SME if The entity has a total assets of between P3 inillion and P3S0 million or total liabilities of between P3 million and P280 million. (b) It is not required to file finaneial state Regulations Code (SRC) Rule 68.1 — a rule ‘requiring certain companies to tile audited financial statements with SEC (6) tis notin the process of filing ils financial statements for the purpose of issuing an public market; (4) Iis not a holder of secondary livense issued by a regu investment house, ppre-need compu (e) Itis nota public utility.” finance company, an insurance comps and PFRS for SMEs vs. FULL PFRS With the adoption of PFRS for SMEs, the term “PFRS” shall now be composed of twp groups of financial reporting standards: FULL PFRS PFRS: PERS for SMEs ‘The PFRS for SMEs was developed by. ‘+ extracting fundamental concepts in the Conceptual Framework and principles from full PERS: + considering modifications, appropriate on the basis of users’ needs and cost-benefit consideration It is important to note that while the PFRS for SMEs Is mainly patterned after full PFRS, PFRS.for SMEs is a completely stand-alone set of standards. The only “fallback” option to full PERS is the option to use PAS 39 instead of the financial instruments sections of PFRS for SMEs. Moreover, there are certain standards in full PFRS that were not included as part of PFRS for SMEs. Examples include interim reporting, operating segments, insurance, earnings per share and non-current assets held for sale. The PFRS for SMEs has a total of 35 sections, organized by topic. No bold font was used (unlike full PFRS) and itis simplified. MICRO-BUSINESS ENTITIES Micro-business entities are entities whose total assets or total liabilities are below the P 3 M floor threshold. In preparing their financial statements, micro-business entities have the option to use any of the following: 1) Full PFRS, 2) PFRS for SMEs, 3) Other acceptable basis of accounting (e.g., cash basis) o"Re SU - the Rovew School of lccowmtaray Page 18 LECTURE NOTES in THEORY of ACCOUNTS TET REVIEWEES ~The following section’ of the lecture notes is not an exhaustive discussion of the standards contained in ~ the PERS for SMEs; the important poilits and highlights of each of the 35 sections are emphasized. %) aritions and deviations from full PERS as well as exclusive or unique accounting rules applicable to SMES are indicated anid highlighted inside boxes. SECTION 1: Small and Medium Sized Entities + SMEs are entities that are not publicly accountable, and they publish general purpose financial statements for external users, such as creditors and owners whd are not \nvelved in. managing the business. + Listed companies shall not use PFRS for SMEs no matter how small they are. + If @ publicly accountable entity uses PFRS for SMEs,. its financial statements’ shall not be described as conforming to the PFRS for SMEs - even if law or regulation in its jurisdiction permits or requires PFRS for SMEs to be used by publicly accountable entities, : + A subsidiary whose parent uses full PFRS is allowed to use PFRS for SMEs in its own FS provided that the subsidiary does not have public accountability +) Ifa subsidiary’s FS are described as confarming to the PFRS for SMEs, it must comply with all the provisions Of thISPERS SECTION 2: Concepts and Pervasive Principles + The objective of FS of SMEs is to’ provide information about the finaricial position, performance and cash flows of an entity that is useful In economic decision-making by a broad range of users. + Financial: statements also show the results of stewardship .of management ~ the accountability of management for the resources entrusted to it {> "10 qualitative characteristics of FS: understandabiity, relevance, materiality, relabilty, substance over |_form, prudence, completeness, comparability, timeliness, and balance between benefit and cost. ‘The elements that make up the financial position of SMEs; asset, liability and equity. The main indicators of performance are: profit ot loss and total comprehensive income. The elements that make up the perfornjance of SMEs. income.and expenses, The requirements for recognizing and measuring assets, habilities, income ad expenses in PERS for SMES are based on pervasive penciples that from the C "tre reepanition citer oF FS elements 1) probable, ang 7] measurable + An entity shall not recognize a contingent asset as an asset, However, when the flow of future economic benefits to the entity is virtually certain, then the related asset is-not « contingent asset, and its recognition 's appropriate + Acontingent liability 1S either a possible obligatiox! or a present obligation that fails to meet one or both of the recognition criteria of a liability. An entity shall Not recognize @ contingent liability as a ability, except for contingent liabilities of an acquire > Two measurement bases: historical cost ahd fair valu + Amortized historical-cost Is the historical cost of an asset or liability plus or minus that portion of its historical cost previously recognized as expense or incoine ‘+ SMEs. shall prepare financial statements, except for'cash flow tion, using the accrual basis of ‘accounting. NOTE: Under PFRS for SMEs, there is no,mention, of going concern as underlying assumption. ‘+ INITIAL RECOGNITION: an entity shail initially measure assets, and liabilities at historical cost unless @ PFRS for SMEs requires initial measurement on another basis Such as fair value. + An entity measures basic financial assets and hasic financial Habilities (as defined in Section. 14 on BASIC Financial Instruments) at amortized cost less inpairment except for investments in non-convertible and. non-puttable preference and ordinary shares.that are publicly traded whose fair value can otherwise be measured reliably, which are measured at fair value with changes in fair value recognized in profit oF loss. + An entity generally measures ali other financial assets and financial liabilities at fair value, with changes in fair value recognized 1 profit oF [oss, unless, PFRS for SMEs requires or permits measurement on another basis such as cost or amortized cost z |+ Most non-financial assets that an entity Yecoghizes at historia] cost aye subsequently measured on other measurement bases. For exaiple {a) Anenttity measures property, pl ‘amount {) An entity measures inventories at the lower of cast aid Selling price less cost to complete and sell {@)"An entity recognizes an impairment logs telating to non-fmancial assets that are in use or held for sale Measurement of assets at those lower amounts Is \ntended tn ensure that an asset is not measured at an nt and equipment al the lower of depreciated cost and recoverable ‘amount greater than the'entity expects to recover trorn the sale or use of that asset + For the following types ofinoa:financial assets, PFI°S tor SMEs permits/requires measurement at fair value: (a) Investments in associates ancl jornt venture ‘entity Measures at fair value (See Section 14 & 15). ‘ (b) Investment property that an entity meas {€) Agricultural assets (biological assets and agric.ttural |___"_ measures at fair valu ated costs to sell (SeeiSection 24: ese +7 An entity shall nat offset assets and liapilities, o/ come and expenses, unless required or permitted by PERS for SMEs, (See Section 16) produce at the point of harvest). that an entityRSC - the Review School of Cccorritaney Page 19 LECTURE NOTES in THEORY of ACCOUNTS SECTION 3: Financial Statement Presentation + The application of PFRS for SMEs, with additional disclosures when necessary, is presumed to result in FS that achieve a fair presentation of the financial position, financial performance and cash flows of SMEs + Financial statements shall not be described as complying with the PFRS for SMEs unless they comply with all the requirements of this PFRS. + complete set of FS shall include all of the following: (a) Statement of Financial Position (balance sheet) (b) Either @ single Statement of Comprehensive Income (showing “profit or loss” and items of “other comprehensive income") or two statements: Income Statement & Statement of Comprehensive Income {c) Statement of Changes in Equity! (0) Statement of Cash Flows (e) Notes, comprising a summary of signifi -ounting policies and other explanatory information If an entity has no items of other comprehensive income (OCH), it can present only an Income Statement, Or it may present a Statement of Comprehensive Income in which the bottom line is profit oF loss.” + Ifonly changes to equity arise from profit or loss, payments of dividends, corrections of prior period errors, and changes in accounting policy, the entity may present a single Statement of Income and Retained Earnings (SIRE). (See Section 6) + The most common OCI items under PERS for SMEs are: ¥- Some foreign exchange translation gains and losses (See Section 30) ¥ Some changes in fair values of hedging instruments (See Section 12) + Some actuarial gains and losses (See Section 28) SECTION 4: Statement of + PERS for SMEs allows this report to be called the "Balance Sheet.” + The minimum line items for SMEs are basically the same as full PFS, except that non-current assets held for sale is not among the minimum line items of the balance sheet for SMES. + Current/non-current distinction Is not required iF entity concludes liquidity approach (ascending or descending) is better. > ifan entity's normal operating cycle js not clearly determinable, its duration is assumed to be 12 months, + PERS for SMEs does not prescribe sequence or format in which items are to be presented; It simply provides a list of minimum items that are sufficiently different in nature or function to warrant separate presentation in the statement of financial position. ~ SECTION 5: Statement of Comprehensive Income and Income Statement + Single-statement approach: Statement of Comprehensive Income shall Include all items of income and expenses recognized for the period + Two-statement approach: The Income Statement shall display items considered in determining profit or loss and the Statement of Comprehensive Income shall begin with profit or loss as its first line and shall display items of OCI (See Section 4) with the total comprehensive income as its bottom line + A change from the single-statement approach to the two-statement approach, or vice-versa, 1 8 change Ta accounting policy to which Section 10 applied. SECTION 6: Statement of Changes in Equity and Statement of Income and Retained Earnings (SIRE) _ + An entity is allowed to present a statement of income & retained earnings (SIRE) in leu of Both statement of comprehensive income and statement of changes in equity ifthe only changes in equity arise from: ¥ Profit or loss % Payment of dividends % Correction of prior period errors ¥ Changes in accounting policy + An entity shall present in the “SIRE” the following infermation ¥ Retained earnings (at the beginning of the reporting period) ¥ Dividends declared and paid or payable (during the period) ¥ Restatement of retained earnings far corrections of prior period errors ¥_ Restatement of retained earnings for changes in accounting policy ¥_ Retained earnings (at the end of the reporting period) SECTION 7: Statement of Cash Flows + Cash flows must be classified according to operating, investing and financing activities. + An entity shall present cash flows from operating activities using either the direct or indirect method. NOTE: This section of the PFRS for SMEs is mostly patterned after PAS 7 on ‘Statement of Cash Flows. SECTION 8: Notes to Financial Statements + An entity ngrmally presents the notes in the following order: (2) A statement that the FS have been prepared in compliance with PFRS for SMEs (b) A summary of significant accounting policies applied (including the measurement basis used in Preparing the FS and other accounting policies used that are relevant to an’ understanding of the FS) (€) Supporting information for items presented in the FS (4) Any other disclosures relevant to the understanding of the FS + Anventity shall disclose information about judgments that management has made in the process cf applying accounting policies, Key assumptions concerning future, and other key sources of estimation uncertainties,ReSUh - the Review School of lecomednny Page 20 LECTURE NOTES in THEORY of ACCOUNTS SECTION 9: Consolidated and Separate Financial Statements + A parent entity shall present consolidated financial statements which include all subsidiaries of the parent. * A subsidiary is an entity controlled by the parent and includes unincorporated entities like partnerships. * _ Consolidation of FS is required when there is a parent-subsidiary relationship, except under 2 exemptions: Exemption 1: The, subsidiary was acquired with intent to sell or dispose within one year Exemption 2: The parent itself js a subsidiary and the ultimate or intermediate’ parent produces consolidated FS that comply with full PFRS or PERS for SMEs. + An entity sball prepare consolidated FS that inciude the entity and any Special Purpose Entities® that are controlled by that entity. + SPECIAL PURPOSE ENTITIES (SPEs) are created to accomplish a narrow objective (e.g., tb effect a lease, undertake research and development activities or securitize financial assets); SPEs may take the form of a corporation, trust, partnership or unincorporated entity. SPEs are created with legal arrangements that impose strict requirements over the operations of the SPE + An entity shail present non-controliing interest in the consolidated statements of financial position within ‘equity, separately from the equity of the owners of the parent. Unlike PAS 27, however, there Is NO OPTION ‘or accounting policy choice to account for non-controlling interest at fair value at acquisition, + PERS for SMEs does not require presentation of separate financial statements for the parent entity or for the individual subsidiaries; if the parent prepares separate FS and describes them as conforming to PFRS for SMEs, those statements shall comply with al the requirement of the PERS for SMEs + Inthe separate FS, the parent shall adopt a policy of accounting for its investments in subsidiaries either at: (2) Cost less impairment, or (b) Fair value with changes in fair value recognized in profit or loss. SECTION 10: Accounting Policies, Estimates and Errors ‘An entity need not follow a requirement in PERS for SMEs if the effect of doing so would not be material. + IF PERS for SMES does not address an issue, judgment shall be used in developing ah accounting policy that results in most relevant and reliable information. In making the judgment, an entity shall refer to the: (2) Requirements and guidance in PFRS for SMEs dealing with similar and related issues (2) Concepts and pervasive principles in Section 2° In making the judgment, management may also consider the requirements and guidance in fuli PFRS dealing with similar and related issues. However, management is not required to do so. = Change in accounting policy: If mandated, follow the transitional provisions If voluntary, effect retrospective application, + Change in accounting estimates is accounted for prospectively. + Correction of prior period error “By restating the comparative amounts for the prior periods presented which the error occurred, ¥ By adjusting the retained earnings at the beginning of the year of discovery of the error. SECTION 11: Basic | Instruments BASIC financial instruments are less complex financial instruments and apply to all entities, OTHER financial instruments under Section 12 are more: complex financial instruments and transactions. Each entity needs to assess whether its FS falls under the scope of Section 11 (BASIC) or Section 12 (OTHER) or both, + An entity has the option to use PAS 39 instead of Sections 11 and 12; however, even if PAS 39 is followed, Sections 11 and 12, not PFRS 7, are used for the required disclosures on financial instruments, + Examples of BASIC financial instruments covered by Section 11 include: ¢ Cash Bank accounts (demand and fixed deposits) Commercial paper and bills Accounts, loans and notes receivable Accounts, loans and notes payable Bonds and debt instruments where return t6 the holder is fixed or referenced to an observable rate Investments in non-convertible and non-puttable ordinary and preference shares Commitments to receive a foan if the commitment cannot be net settled in cash + The AMORTIZED COST model is required for all basic financial instruments, except for investments in non- convertible and non-puttable preference shares and non-puttable ordinary shares that are publicly traded or whose fair value can be measured reliably + When 2 financial asset-or liability is recognized initially, an entity shall measure it at the transaction price (including transaction costs, except in the initial measurement of financial assets and liabilities that are measured at fair value through profit or loss) + At the end of each reporting period, an entity shall measure financial instruments as follows: ¥ Debt instruments - at amortized cost using the effective interest method ¥ Commitments to receive'a loan - at cost (which is sometimes nil) less impairment Investment in non-convertible preference shares and non-puttable ordinary or preference shares - at fair value (with changes recognized through profit or loss) oF cost less impairment (if fair value cannot be measured reliably). + At the end of each reporting period, an entity shall assess whether there an objective evidence of impairment of any financial assets that are measured at cost or amortized cost, If there Is objective evidence of impairment, the entity shall recognize an impairment loss in profit or foss immediately. Reversal of impairment losses in subsequent periods may be effected as necessary. So ;RESO ~The Review School of Ceconntomeg Page 21 LECTURE NOTES in THEORY of ACCOUNTS SECTION 12: Other Financial Instrument fssues Examples of financial instruments covered by Section 12 inclade: “Investments in’ convertible and puttable ordinary and preference shares ¥ Options, rights, warrants, futures. contracts, forward contracts and interest rate swaps that can be settled in cash or by exchanging another financial instrument. Financial instruments that qualify and are designated as hedging instruments Commitment to make a loan to another entity. Commitments to receive a loan if the commitment can be net settied in cash Asset-backed securities such as mortgage obligations, repurcliase agreements and securitized packages of receivables + When a financial asset or financial lability under Section 12'1s recognized initially, an entity shall measure it at its fair vatue, which is normally the transaction price. + At the end of each reporting period, an entity shall measure all financial instruments within the scope of Section £2 at fair value and recognize changes in fair value in profit or loss, except for equity instruments that are not publicly traded and whose fair value cannot otherwise be meastred reliably shall be measured at cost less impairment: + Ifa reliable measure of fair value is no longer available for an equity Instrument that is not publicly traded but is measured at fair value through profit or loss, its fair value at the last date the instrument was reliably measurable |s treated as the cost of the instrument. The entity shall measure the instrument at cost less impairment until a reliable measure of fair value becomes available, and a hedged item in such a way to qualify for hedge accounting. SECTION 13: Inventories + Measurement principle: Inventories are measured at lower of cost or net realizable value. (Net realizable value is selling price less cost to complete and sell) . + Cost formulas include (a) specific identification method, (b) first-in, first-out (FIFO) method and (c) . weighted average method. Last-in, first-out method (LIFO) is not permitted. . (a) FAIR VALUE mode! - fair value through profit or loss [if impracticable, use cost model} (b) COST model ~ cost less impairment [when there is published price quotation, use fair value model) (©) EQUITY method NOTE: cost model and fair value mode! are not allowed unider full PFRS (PAS 28). + An investor shall classify investments in associates as non-cufrent assets. SECTION 15: Investment in Joint Ventures: +. Ajoint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control, Joint ventures can take the form of jointly controlled operations, jointly controled assets_or jointly controled enti 7 Measurement Principle (for interests in jointly controlled entities): option to use (a) FAIR VALUE mode! - fair value through profit or loss {if impracticable, use cost model} (b) COST model - cost less impairment {when there js published price quotation, use fair value model) (c) EQUITY method NOTE: cast mode! and fair value model are not allowed! under full PFRS (PAS 31/PFRS 11), PAS 31 allows the use of either the equity method or proportionate consolidation method. SECTION 16: Investment Property + An entity shall measure investment property at ts cost at milal recognition: + Investment property whose fair value can be measured reliably without undue cost or effort shall be ‘measured at fair value at each reporting date with changes in fair value recognized in profit.or loss + An entity shall account for all other investment properties (j.e., properties without reliable fair value) as property, plant and equipment using the cost-depreciation-impairment moder in Section 17 — SECTION 17: Property, Plant and Equipment (PPE) + _An entity shall measure an item of PPE at initial recognition at its cost An entity shall measure all items of PPE at the BS date at cost less any accumulated depréciation and any accumulated impairment losses. NOTE: the revaluation ode/ under PAS 16 is not allowed for SMEs. + An entity shall allocate the depreciable amount of an asset ona systematic Basis over its usef + Depreciation methods: straight-line method, diminishing balance method, units of prodyction method. SECTION 18: Intangible Assets other than Goodwill ‘An entity shall measure an intangible asset initially at cost +__Internally generated intangibles shall nox be recognized as intangible assets + An entity shall measure intangible assets at the BS date at cost fess any accumulated arnertization and any accumulated impairment losses, NOTE: the revaluation model under PAS 38 Is not allowed for SMES. + An entity shall allocate the amortizable amount of intarigible assets On a systematic basis over its useful Ife +All intangible assets are considered to have a finite usefal We; Wan entity 1s unable to make a reliable | estimate of the useful life of an intangible asset, the life shall be presumed to be ten years,Reh - The Revrem School of Cconncfnmy Page 22 LECTURE NOTES in THEORY of ACCOUNTS By applying the purchase method. + The acquirer shall measure the cost of a business combination as the aggregate of; (2) The fair values of assets given, liabilities incurred and equity instruments issued by the acquirer, in ‘exchange for control of the acquiree, plus (b) Any costs directly attributable to the business combination, + Any difference between the cost of the business combination. and the acquirer's interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities recognized shall be accounted for 5 goodwill or ‘negative goodwill’ + Alter initial recognition, the acquirer'shall measure goodwill acquired in a business combination at cost less ‘accumulated amortization and accumulated impairment losses + fan entity is unable to make a reliable estimate of the useful life of goodwill, the life shall be presumed to be ten years. + If the acquirer's interest in the riet fair value of the identifiable assets, liabilities and provisions. for contingent liabilities recognized exceeds the cost of the business combination (sometimes referred to as “negative goodwil’), the acquirer shall: (2) reassess the identification and measurement of the acquiree’s assets, liabilities and provisions for contingents liabilities and the measurement of the cost of the combination, and (b) recognize immediately in profit or loss any excess remaining after that reassessment. SECTION 20: Leases + Classification of leases into finance and operating lease is similar to PAS 17 + A lease is classified as a finance lease if it transfers substantially all the risk and rewards incidental to ‘ownership; otherwise, it is classified as an operating lease, * ‘Under an operating lease, a lessee shall recoynize lease payments under operating leases (excluding costs for services such as an insurance arid maintenance) as an expense on a straight-line basis. + Under @ finance lease, a lessee shall recognize the leased asset and lease liabilities at lower amount between the fair value of the leased property: and present value of minimum lease payments, Any initial direct costs of the lessee (incremental costs that are directly attributable to negotiating and arranging a lease) are added to the amount recognized as an asset. + A lessee shall apportion minimum lease payments between the finance charge and the reduction of the outstanding liability using the effective interest method. SECTION 21: Provision and Contingencies ‘Most provisions of this Section are similar to PAS 36, * An entity shall recognize provision as a liability and shall recognize the amount of the provision as an expense, unless another section of the PFRS for SMEs requires the cost to be recognized as part of the cost of an asset such as inventories or property, plant and equipment. SECTION 22: Liabilities and Equity Equity is the residual interest in the assets of an entity after deducting all its liabilities. + Alliability is 9 present obligation of the entity arising from past,events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. + An entity shail recognize the issue of shares or equity instruments as equity when it issues those instruments and another party is obliged to provide cash or other resources to the entity in exchange for the instruments. + Anentity shall account for the transaction costs of an equity transaction as a deduction from equity, net of any related income tax benef. + A capitalization. or bonus issue (sometimes referred to as a stock dividend) i& the issue 6f new shares to shareholders in proportion to their existing holdings, For example, an entity may give its shareholders one dividend or bonus share for every five shares held + A share split (sometimes referred to as. stock split) Is the dividing of an entity's existing shares into multiple shares. For example, in a share split, each shareholder may receive one additional share for each share held. Tn some cases, the previously outstanding shares are cancelied and replaced by new shares, + Capitalization and bonus issues and share splits do not change total equity + Treasury shares are the equity instruments of an entity that have been issued and subsequently reacquired by the entity. An entity shall deduct from equity the fair value of the consideration given for the treasury shares. The entity shall not recognize a gain or oss in profit or loss on the purchase, sale, Issue oF cancellation of treasury shares. SECTION 23: Revenue Most provisions of this Section are similar to PAS 11 and 18. + An entity shall measure revenue at the fair value of the consideration recelved or receWable + The percentage-of-completion method is used to recognize revenwe from rendering services and from construction contracts + Arh entity shall recognize revenue on the following bases % Interest shall be recognized using the effective interest method % Royalties shall be recognized on an accrual basis in accordance with the substance of the agreement, ¥ Dividends shall be recognized when the shareholder’s right to receive payment Is established co» wn ig e"RSA - The Review School of Vcowetoney Page 23 LECTURE NOTES in THEORY of ACCOUNTS i SECTION 24: Government Grants + ‘Most provisions of this Section are similar to RAS 20. ( + An entity shall measure grants at the fair value of the asset received or receivable. + An entity shall recognize government grants as follows: (8) A grant that does not impose specified futtire performance conditions on the recipient is recognized in income when the grant proceeds are receivable. : (b) A grant that imposes specified future performance conditions on the recipient is recognized in income ‘oniy when the performance conditions are met. (©) Grants received before the revenue recognition criteria are Satisfied are recognized as a liability: SECTION 25: Borrowing Costs *~ An entity shall recognize all borrowing costs as an expense Ih proft or Toss In the period Ih which they are) incurred. (Hence, capitalization of borrowing costs is NOT allowed. ) SECTION 26: Share based Payment + Most provisions of this Section are similar to PFRS 2, + For equity-settled share-based payment transactions, an entity’ shall measure the goods or services received, and the corresponding increase in equity, at the fair value of the goods or services received; I the fair value cannot be estimated reliably, then the entity shall measure the value by reference to the fair value of the equity instruments granted. + For cash-settled share-based payment transactions, an entity shall measure the goods and services acquired and liability incurred at the fair value of the liability, + Some share-based payment transactions give either the entity or the supplier of those goods or services with @ choice of whether the ertity settles the transaction in cash (or other assets) or by issuing equity instruments. tn such a case, the entity shall account for the transaction as a cash-settled share-based payment transaction. SECTION 27: Impairment of Assets - 4 + This Section is divided into two: (1) impairment of inventories (2) impairment of assets other than inventories. + Impairment of inventories: > ¥ An entity shall assess at each reporting date whether any inventories are impaired, ¥ An entity measures impairment by comparing the carrying amount of each item of inventory with its selling price less costs to complete and sell ¥ If an item of inventory is impaired, the entity shall reduce the carrying amount of the inventory to its selling price fess costs to complete and sell; the reduction is an impairment loss and it is recognized immediately in profit or loss. + Timpairment of assets other than inventories; ¥ If the recoverable amount of an asset is less than its Carrying amount, an entity shall reduce, the carrying amount of the asset to its recoverable amount. ¥- The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. ¥ An entity shall recognize an impairment loss ichmediately ih profit or loss SECTION 28: Employee Benefits + An entity shall recognize the cost of all employee benefits to which its employees have become entitled as a result of service rendered to the entity during the reporting period: (2) As a liability, after deducting amounts that have been paid either directly to the employees or as @ Contribution to an employee benefit fund. {b) As an expense, unless another section of PERS for SMEs requires the cost to be recognized as part of the cost of an asset, + Employee benefits are classified as: (a) Short-term employee benefits (€.9., wages, paid annual leave and short-term non-monetary benefits) {b) Post-employment benefits (e.9., defined contribution plans and defined benefit plans) {c) Other long-term employee benefits (e.9,, long-term compensated absences stich as sabbatical leave) (d) Termination benefits + Under defined benefit plans, an entity shall recognize all actuarial gains and losses in the period in which they occur, as part of either (1) profit or loss or (2) other comprehensive income. As a consequence, the corridor approach under PAS 19 is not allowed, SECTION 29: Income Tax * An entity shall recognize a current tax lability for tax payable on taxable profit for the current and past periods. If the amount paid for the current and past periods exceeds the amount payable for those periods, the entity shall recognize the excess as a current tax asset, + Anentity shall recognize a deferred tax asset or /lability for tax recoverable or payable in future periods as a result of past transactions or events. Such tax arises from the difference between the amounts recognized for the entity's assets and liabilities and the recognition of those assets and liabilities by the tax authorities. + Deferred tax assets and liabilities are classified as non-current. * Discounting and offsetting of current or deferred tax assets and liabilities are not allowed,ReSU - the Review School of lecontoneg Page 24 LECTURE NOTES in THEORY of ACCOUNTS SECTION 30: Foreign Currency Translation ‘An entity shall record a foreign currency transaction by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. + An entity shall translate its results and financial position into 2 different presentation currency using the following procedures: ¥ Assets and liabilities shail be translated at the closing sate. Y Income and expenises shall be translated at the exchange rates at the dates of the transactions. (Fhe use of average rate is allowed if this approximates the exchange rates at the transaction dates) ¥ All resulting exchange differences shall be recognized in other comprehensive income. SECTION 31: Hyperinflation ‘All amounts in the financial statements of an entity whose functional currency \s the currency of @ hyperinflationary economy shall be stated in terms of the measuring unit current at the end of the reporting period (i.e., an entity shall prepare general price level adjusted financial statements} +The restatement of financial statements requires the use of a general price index that reflects changes in general purchasing power, + Non-monetary items are restated while. monetary items are not restated because they are expressed in terms of the measuring unit current at the end of the reporting period SECTION 32: Events after the End of the Reporting Period + Most provisions of this Section are stmilarto PAS 10, See page 8 of the TA Lecture Notes, + _ Two.types of events after the reporting period: Type [ Events (adjusting) - provide evidence of conditions existing at the end of the reporting period Type IT Events (non-adjusting) ~ indicative of conditions arising after the end of the reporting period SECTION 33: Related Party Disclosures + Mast provisions of this Section are similar to PAS 24. See pages 7 and § of the TA Lecture Notes. + In considering each possible related party relationship, an entity shall assess the substance of the relationship and not merely the legal form. SECTION 34: Specialized activities This section provides guidance on financial reporting by SMEs involved in three types of specialized activities: (1) agneulture, (2) extractive activities, and (3) seryice concessions. + An entity engaged In agricultural activity stiall determine #3 accounting policy for each class of its biological assets as follows: (a) The entity shall use the FAIR VALUE modi determinable without undue cost of effort for those biological assets for which fair value is readily (b) The entity shall use the COST mode} for all other biological assets, Agricultural produce harvested from an entity's biological assets shall be measured at its fair value less costs to sell at the point of har = An entity engaged In the exploration for, evaluation or extraction of mineral resources (extractive activities) shall account for expenditure on the acquisition or development of tangible or intangible assets for use in extractive activities by applying Section 17 Property, Piant and Equipment and Section 18 Intangible Assets ‘other than Goodwill, respectively + Under a service concession arrangement, the private cperator Shall recognize a financial asset to the extent that it has unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services: 7 The private operator shall measure the financial asset at fair value, Thereafter, it shall follow Section 11 Basie Financial Instruments and Section 12 Otier Financial inétruments Issues in accounting: for the | financial asset to charge users of the public service. The operator shal! initially measure the intangible asset at fair | value. Thereafter, it shail follow Section 3 | SECTION 35: Transition to the PFRS for SMEs "La eane tees [= A first-time adopter of PFRS Tor SMEs shall apply © st FS that conform to PFR: 2 Section 35 requires an entity to prepare comparative FS covering the current year and at least one prior ‘year using PFRS for SMEs. + An entity’s date of transition to PERS for SMEs 1s the beginning of the earliest period for which the entity present full comparative information in accordance with PFRS for SMEs in its first FS that conform to PERS for SMEs. Section 35 cites many exemptions for restating specific cems \n its fist PFRS for SME based FS, It is important to note that while the PFRS for SMEs is. mainly patterned after full PFRS, PERS for SMEs is a completely stand-alone set of standards. The only ‘fallback’ option to full PFRS is the option to use PAS 39 instead of the financial instruments sections of PFRS for SMCs. Moreover, there are certain standards in full PFRS that were not included as part of PFRS for SMEs. (Examples: segment reporting, interim, reporting, insurance, earnings per share and fon-current assets held for sale.) The PERS for SMES has a total of 35 sections, organized by topic. No bold font was used (unlike full PFRS) and it is simplified,RSA - The Review School of Gecouedtancy LECTURE NOTES in THEORY of ACCOUNTS PAS 7: STATEMENT OF CASH FLOWS’S + SCOPE. 8 All entities, regardless of the nature of activities, should, pr fa cash flow, statement and present it as an «+ integral part of its financial statements, + BENEFITS. A, cash flow statement) when used in conjunction with the rest of the financial statements, provides additional Information to users of FS: 1, A better insight into the financial structure ean entity, including its liquidity and solvency, and its «| ability to affect the amounts and timing of Maer to sdeet io changino ofeumstances ena ‘opportunities 2; Enhanced information for purposes of evaluate In assets, liabilities, and equity of an entity. 3. |The statement enhances the comparability Moperatina performance by Siferen anties aeane R einines Vie eee aly cere treatments for similar transactions. 4, The statement serves as indicator of the amount, timing and reasonable certainty of future cash flows. + PRESENTATION ‘The cash flow statement shali report cash flows during the period classified! by ‘operating, investing and. financing activities: 4, OPERATING ACTIVITIES ~ are the principal revenue-producing activities of an entity and other activities thet age not Investing or financing actives. Cosh Nee ty Gperating actives’ generally result fom the transactions and other events that enter into the determination of profit or loss” 2. INVESTING ACTIVITIES ~ are the acquisition and disposal of long-term assets and other investments 1 ‘ot included in cash equivalents. ‘Investing’ cash flows represent the extent to which expenditures have been made for resources intended to generate future income and,cash flows. 3. FINANCING ACTIVITIES - are activities that result in changes in size and composition of contributed equity and borrowings of the entity. ‘An Entity shall disciose the components of cash end cash equivalents ond shall present a reconciliation of the amounts in its cash flows statement with the equivalent items reported in the balance sheet + DIRECT vs. INDIRECT METHOD. ‘An entity shall report cash flows from operating activities using either direct or indirect method: 1. DIRECT METHOD - major classes of gross cash receipts and gross cash payments are disclosed. 2. INDIRECT METHOD ~ profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals and accruals ot past oF future operating cash receipts or payments, and items of income and ‘expense associated with invasting or financing cash flows”, + cINTERESTS and DIVIDENDS, Cash flows from interests and dividerids received and paid shall e@ch be disclosed separately. Each shall be classified in a consistent manner from period to penod using the following guidelines: 1. INTEREST PAID, Interest paid Is usually classified as operating cash flows because it enters into the determination of profit or loss, Alternatively, it may be classified as a financing cash flow because itis a cast of obtaining financial resources. 2, INTEREST and DIVIDENDS RECEIVED. Interest and dividends received are usually classified . as operating cash flows becauise they enter into the determination of profit or loss. Alternatively, both may be classified as investing cash flows because they both represent returns on investments, 3, DIVIDENDS PAID. Dividends. paid are usually classified as financing cash flows because they represent costs of obtaining financial resources. Alternatively, dividends pald may be classified as a component of cash flows from operating activities in order to assist users to determine the ability of an entity to pay dividends out of operating cash ows. + NON-CASH TRANSACTIONS, Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a cash flow statement. Such transactions shall be disclosed elsewhere in the financial statements (e.9., notes to the financial statements) ina way that provides all the relevant information ‘about these investing and financing activities. Examples are’ 1, The acquisition of assets either by assuming directly related liabilities or by means of a finance lease 2) The acquisition of an entity By means of an equity issue, and 3. The conversion of debt to equity © “Cash flows are inflows wus outtlows of Cash and ash equivalents. Cayh comprises of cash om hand and demand deposits, ‘Cash equivatems ave short-term, highly liquid investment that are readily conyentibte to known amounts of cash and which fare subject (0 an insignificant risk of changes in value ‘An entity may hold securities and'Yoans for trading purposes, in Which case they are similar to inventory acquired specifically for resale. Therefore, cash Nows arising from the purchase and. sale of *rdtimg securities are classified as ‘operating activities. Similsely, clash advances and louns made by financial institutions are usually classified a operating activities since they relate to the main reyenue-producing activity ofthat entity ‘Some transactions, such as the sale of an item of plant, give rise [0 a gain or loss that is inchided in the determination of profil or loss. However, the cash lows relating to stich transactions are cash lows from investing activities. Cash flows arising from tanes'on income shall he classified a8 cashflows from operating activities unless they can be specifically ‘dentitied with financing and investing aetiviies. ‘Alternatively, the. iet cash flow from operating, activities may be presented tinder the indirect metbod by showing the revenues and expenses disclosed in the income statement and the chines dori the period in inventories and operating receivables and payables %6 3