COURSE FAR 3: INTERMEDIATE ACCOUNTING III

DEVELOPER This module is prepared by Mr. Jerry D. Mariano. He is a faculty member of Tarlac
AND THEIR State University College of Business and Accountancy-Accountancy Department. He is
BACKGROUND a Certified Public Accountant. He teaches financial accounting and tax courses.
COURSE This course is the culmination of financial accounting courses. This will cover
DESCRIPTION constructive accounting and special topics in financial accounting. This course shall
thoroughly cover recognition, measurement and valuation, presentation and
disclosure requirements for special topics such as post-employment benefits,
accounting for income tax, share-based compensation and noncurrent asset held for
sale, discontinued operation and accounting changes.
COURSE 1. Employee Benefits (Postemployment Benefits& Other Employee Benefits)
OUTLINE 2. Accounting for Income Tax
3. Share-based Payments/Compensation
4. Noncurrent Held for Sale, Discontinued Operation and Accounting Changes
CHAPTER # 4
TITLE Noncurrent Held for Sale, Discontinued Operation and Accounting Changes
RATIONALE This module covers the topic about noncurrent asset held for sale, discontinued
operation and accounting changes. The highlights of this topic include the
classification of asset into held for sale, recognition and presentation of a
discontinued operation in the income statement and changes in accounting estimate
and policies of the company. Inclusive also in the discussion of accounting changes the
prior period errors.
INSTRUCTION This module helps to understand the concept and principles of noncurrent asset held
TO THE USERS for sale, discontinued operation and accounting changes. In this module, illustrations
and sample problems are also provided in an informative and comprehensive manner
to be able to understand better the topics. To evaluate what the students have
learned, this module provides work exercises (activity) at the closure activities section.
To ensure that learning objectives are attained at the end of the semester, the
learner/students are evaluated based on attendance, portfolio journal (activity),
formative assessment and summative assessment. See evaluation for the details. For
further readings, see assignment/agreement section.
PRE-TEST
LEARNING 1. Define and explain- the recognition and conditions for the classification of a
OBJECTIVES noncurrent asset as held for sale and the concept of a discontinued operation and
accounting changes.
2. Identify and record the measurement of noncurrent asset held for sale, the
recognition of a discontinued operation and change in estimate, policy and prior
period errors.
3. Solve and compute for the recognition of writedown to fair value and and
subsequent increase in fair value of noncurrent asset held for sale and the recognition
of change in estimate, policy and prior period errors.
4. Classify and report for the presentation of discontinued operation and accounting
changes in the income statement, statement of financial position and statement of
cash flows
CONTENT The basic discussion of classifying accounts of the financial statements was already
PREPARATORY discussed in basic accounting and even the presentation of a complete set of financial
ACTIVITIES statements inclusive of the estimate and policies of company. In this module, the
students would learn on how to classify the noncurrent asset into held for sale
(current asset) and the presentation/disclosure of discontinued operation in the
income statement. In addition, change in accounting estimate (e.g depreciation) and

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 change in accounting policy and prior period errors will also be part of the discussion.
DEVELOPMENTAL ACTIVITIES
PFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
1.1. NON-CURRENT ASSET – an asset that does not meet the definition of a current asset.
1.2. DISPOSAL GROUP – group of assets to be disposed of, by sale or otherwise, together as a group in a
single transaction (including associated liabilities).
 PFRS 5: “…an entity shall classify a noncurrent asset (or disposal group) as held for sale If its carrying
amount will be recovered principally through a sale transaction"
2. CONDITIONS FOR CLASSIFICATION AS HELD FOR SALE
a. Available for immediate sale in its present condition subject only to terms that are usual and
customary (“sold as seen”)
b. Sale is highly probable (more likely than probable)
1. …commitment to a plan to sell
2. …active program to locate buyer
3. …marketed at reasonable price
4. …unlikely significant changes to the plan
5. …expected to be a completed sale within one year from date of classification
**exception to one year requirement
 delay is beyond entity’s control and the entity remains committed to sell the asset

3. MEASUREMENT OF NONCURRENT ASSETS HELD FOR SALE (NCAHFS) and DISPOSAL GROUP HELD
FOR SALE (DGHFS)
 at classification date, LOWER of carrying amount (CA) and fair value less cost to sell (FVLCTS)
CA > FVLTS =Impairment loss CA < FVLTS = Impairment Gain**
Note: The gain is not recognized at the point of initial recognition of classification as held for sale.
But any subsequent increase in FVLCTS is recognized as gain only to the extent of the recognized
impairment loss.

 except for NCA measured under revaluation model;

 initial measurement is at fair value, but at subsequent year-end, measurement is at lower of
CA and FVLCTS
 Change in Classification, LOWER of carrying amount and recoverable amount ( FVLCTS)
a. prior to classification, the carrying amount shall be measured in accordance with applicable PFRSs
b. fair value is the price that would be received to sell an asset between market participants at the
measurement date
c.1. cost to sell refers to the incremental costs directly attributable to the disposal of an asset or
disposal group
c.2. cost to sell excludes finance costs and income tax expense
**if an entity acquired a noncurrent asset or disposal group with a view of subsequent disposal, the
asset is classified as NCAHFS if the “sale within one year” is met, otherwise, apply the applicable
PFRSs
**if criteria are met after the reporting period, no adjustments are needed, only disclosures (non-
adjusting event).
4. PRESENTATION OF NONCURRENT ASSETS HELD FOR SALE
 individual asset - separately as current assets
 disposal group - assets and liabilities are presented separately (cannot be offset)
a. NCAHFS (under current assets)
b. liabilities directly associated with NCAHFS (under current liabilities)

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5. DEPRECIATION, AMORTIZATION, IMPAIRMENT LOSS (& REVERSAL) and REVALUATION
a. an entity shall NOT depreciate (or amortize) a noncurrent asset while it is classified as NCAHFS
b.1. an entity shall recognize impairment loss for any initial or subsequent write-down of the asset to
FVLCTS
b.2. if the NCA is a disposal group, the impairment loss is apportioned across the assets. Any
goodwill is written off first and any remainder of the impairment loss is allocated prorata to the
noncurrent assets based on carrying amount.
b.3. any subsequent increase in FVLCTS is recognized as gain only to the extent of the recognized
impairment loss
c.1. revalue asset at FV before NCAHFS classification, any increase in FV is credited to revaluation
surplus
c.2. any related costs to sell is recognized as impairment loss in revaluation model.

6. ABANDONED NONCURRENT ASSETS

 Abandoned noncurrent assets are NOT classified as NCAHFS.
 Abandoned means:
a. to be used to the end of their economic life
b. to be closed rather than sold
**temporarily taken out of use does not mean abandoned

7. RECLASSIFICATION OF NONCURRENT ASSET HELD FOR SALE

 A noncurrent asset that ceases to be classified as held for sale shall be measured at LOWER of
a. Adjusted carrying amount (as if it was never classified as NCAHFS)
b. Recoverable amount (at date of decision not to sell)
**the adjustment is recognized in profit or loss

8. DISCONTINUED OPERATIONS
 “Component of an entity” that either has been disposed of OR is classified as held for sale, AND;
a.1. represents a separate major line of business or geographical area of operations
a.2. is part of a single coordinated plan to dispose a separate major line of business or geographical
area of operations
b. is a subsidiary acquired exclusively with a view to resale
**component of an entity – subsidiary/major line whose operations & cash flows are distinguishable
from the entity

 Classification as discontinued operations at the date of:

a. actual disposition
b. HFS classification
**no retroactive classification

 Presentation in statement of financial position & statement of cash flows

 Assets (@ lower of FVLCTS and CA) and liabilities are presented separately; no depreciation
 Cash flows from discontinued operations are presented separately

 Presentation in income statement

 Income/loss from discontinued operations under “income from continuing operations”, with
note disclosures
 Results of operations (within the current period) prior to classification as discontinued
operations are included as part of income/loss from discontinued operations
 Impairment loss & direct costs (e.g. employee termination costs) are part of the “I/L from

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 DO”
 Income/loss from discontinued operations are presented as net of tax
o Revenues
Less: Expenses
o Income/Loss from discontinued operations
Less: Termination (or other direct costs) and any impairment loss
o Total income/loss from discontinued operations (gross)
Less: Related income tax expense
o Income/loss from discontinued operations – net (presented in income statement)

SAMPLE PROBLEMS

PROBLEM #1. A Company accounts for noncurrent assets using the cost model. On July 1, 2019, the
entity classified an item of equipment as held for sale. At that date, carrying amount was P2,500,000,
the fair value was estimated at P1,750,000 and the cost of disposal at P50,000. On January 31, 2020, the
equipment was sold for net proceeds of P1,250,000.
1.1. What amount should be reported as NCAHFS on December 31, 2019? 1,700,000
CA (2,500,000) > FVLCTS (1,750,000-50,000)
Lower 1,700,000

1.2. What amount of impairment loss (if any) should be reported in 2019? 800,000
CA 2,500,000 – FVLCTS 1,700,000= Impairment loss 800,000

Impairment loss 800,000

Equipment held for sale 800,000

1.3. What is the journal entry to record the classification of the equipment as NCAHFS?
Equipment held for sale 2,500,000
Equipment 2,500,000

1.4 What is the gain/loss on disposal of equipment on 2020? (450,000 )

Cash 1,250,000
Loss on sale of equipment 450,000
Equipment held for sale 1,700,000

1.5. Assuming the fair value is P2,750,000, what is the journal entry to record the classification of the
equipment as NCAHFS?
Equipment held for sale 2,500,000
Equipment 2,500,000
**no impairment gain for the first time classification of NCA or disposal group when the FVLTS
exceeded the CA.

PROBLEM #2. B Company accounts for noncurrent assets using the revaluation model. On October 1,
2019, the entity classified a freehold property as held for sale. At that date, the carrying amount of the
land was P2,500,000 and the balance in the revaluation surplus was P750,000. At same date, the fair
value of the land was estimated at P2,750,000 and the cost of disposal at P50,000. The land was sold on
January 31, 2020 for P3,000,000.

2.1. What would be the value of the land before classification as NCAHFS? 2,750,000
CA 2,500,000 + last revaluation of 250,000= CA 2,750,000, October 1, 2019

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2.2. What amount of impairment loss (if any) should be reported in 2019? 50,000 (cost of disposal)

2.3. What is the journal entry to record the classification of the land as NCAHFS?
Land 250,000
Revaluation surplus 250,000

Land held for sale 2,750,000

Land 2,750,000

Impairment loss 50,000

Land held for sale 50,000

2.4. What is the gain/loss on disposal of land on 2020? 300,000 gain

CA 2,700,000 – SP 3,000,000= 300,000 gain

2.5. At what amount should the revaluation surplus be reported on December 31, 2019? 1,000,000
Balance of revaluation surplus as of Oct 1, 2019 + Revaluation surplus during classification as HFS
700,000 + 250,000 = 1,000,000

PROBLEM #3. C Company purchased an equipment for P2,500,000 on January 1, 2019. The equipment
has a useful life of 5 years with no residual value. On December 31, 2019, the entity classified the asset
as held for sale. On such date, the fair value less cost of disposal of the equipment is P1,750,000.

On December 31, 2020, the entity believed that the criteria for classification as held for sale can no
longer be met. Accordingly, the entity decided not to sell the asset but to continue to use it. On
December 31, 2020, the fair value less cost of disposal of the equipment is P1,350,000.

3.1. What amount should be reported as NCAHFS on December 31, 2019? 1,750,000
CA-Jan 1, 2019 2,500,000
Depreciation (2,500,000/5 yrs) ( 500,000)
CA-December 31, 2019 2,000,000

Lower of CA vs FVLCTS (2,000,000 vs 1,750,000) 1,750,000, lower

3.2. What amount of impairment loss (if any) should be recognized in 2019? 250,000
CA 2,000,000- FVLCTS 1,750,000 = 250,000

3.3. What would be the measurement of the equipment after reclassification on December 31, 2020?
1,350,000

a. Adjusted carrying amount (as if it was never classified as NCAHFS)

CA-Dec 31, 2019 2,000,000
Depreciation that would have been recognized in 2020 (500,000)
CA-Dec 31, 2020 1,500,000

b. Recoverable amount (at date of decision not to sell) 1,350,000

Measurement of equipment – lower (1,500,000 vs 1,350,000) 1,350,000

Note : Refer to reclassification of asset discussion

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3.4. What amount should be included in profit or loss in 2020 as a result of the reclassification of the
equipment to PPE? 400,000 loss
Measurement of equipment-lower 1,350,000
CA per book of equipment HFS 1,750,000
Loss on reclassification 400,000

Loss on reclassification 400,000

Equipment held for sale 400,000

3.5. What is the journal entry to reclassify the NCAHFS to PPE?

Equipment 1,350,000
Equipment held for sale 1,350,000

3.6. What is the depreciation for 2021? 450,000

(1,350,000/ 3yrs remaining) 450,000

PROBLEM #4. D Company, a parent entity, approved on December 1, 2019 a plan to sell its subsidiary.
The sale is expected to be completed on March 31, 2020. The year-end is December 31, 2019 and the
financial statements were approved on March 1, 2020. The subsidiary had assets with carrying amount
of P7,500,000 including goodwill of P1,500,000 on December 31, 2019. The subsidiary made a loss of
P1,500,000 from January 1 to March 1, 2020 and is expected to make a further loss of P1,000,000 up to
the date of sale.

At the date of approval of the financial statements, the entity was in negotiation for the sale of the
subsidiary but no contract had been signed. The entity expected to sell the subsidiary for P4,500,000
and to incur cost of disposal of P250,000. The value in use of the subsidiary was estimated to be
P5,000,000.

In the December 31, 2019 statement of financial position, what is the measurement of the subsidiary
classified as a “disposal group held for sale”? 4,250,000

CA 7,500,000 vs FVLTS 4,500,000 -250,000

Follow PFRS 5 whichever is lower between CA vs FVLCTS.
Disregard value in use.

PROBLEM #5. On November 1, 2019, the management of E Company committed to a plan to dispose of
a major subsidiary. The disposal met the requirements for classification as discontinued operations. The
carrying amount of the subsidiary was P4,000,000 and management estimated the fair value less cost of
disposal to be P3,250,000. The subsidiary had revenues of P7,150,000 and expenses of P6,250,00.
Additional termination costs on employees is expected to be P200,000.

What amount should be presented as pretax loss from discontinued operations for the current year?
(50,000)
Revenue 7,150,000
Expenses (6,250,000)
Impairment loss (750,000)
Termination cost (200,000)
Loss from discontinued operation (50,000)

PROBLEM #6. F Company is a diversified entity with nationwide interests in commercial real estate

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development, banking, mining and food distribution. The food distribution division was deemed to be
inconsistent with the long-term direction of the entity.

On October 1, 2019, the board of directors voted to approve the disposal of this division. The sale is
expected to occur in August 2020. The food distribution had the following revenue and expenses in
2019: January 1 to September 30, revenue of P35,000,000 and expenses of P25,000,000; October 1 to
December 31, revenue of P10,000,000 and expenses of P12,000,000. The carrying amount of the
division’s assets on December 31, 2019 was P50,000,000 and the recoverable amount was estimated to
be P55,000,000.

The sale contract required the entity to terminate certain employees incurring an expected termination
cost of P1,000,000 to be paid by December 15, 2020. Income tax rate is 30%.

What amount should be reported as income from discontinued operations for 2019? 4,900,000
Revenue (35,000,000 + 10,000,000) 45,000,000
Expenses (25,000,000 + 12,000,000) (37,000,000)
Impairment loss (1,000,000)
Income before tax 7,000,000
Income tax (7,000,000 x .30) (2,100,000)
Income from Discontinued operation 4,900,000

PAS 8- Accounting Changes

Philippines Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by the
Financial Reporting Standards Council (FRSC). They comprise the following:
a. Philippines Financial Reporting Standards (PFRSs);
b. Philippines Accounting Standards (PASs); and
c. Interpretations

PFRS are accompanied by guidance to assist entities in applying their requirements. All such guidance
states whether it is an integral part of PFRSs. Guidance that is an integral part of the PFRSs is
mandatory. Guidance that is not integral part of the PFRSs does not contain requirements for financial
statements.
Absence of a standard or an interpretation
In the absence of a PFRS that specifically applies to a transaction, other event or condition, management
must use its judgment in developing and applying an accounting policy that results in information that is
relevant and reliable.

Hierarchy of reporting standards

1. PFRS
2. Judgment
When making the judgment:

 Management shall consider the following:

a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual
Consistency Framework
of accounting policies
Accounting policies shall be selected and applied consistently for similar transactions, unless a PFRS
 Management shall consider the following:
specifically requires or permits categorization of items for which different policies may be appropriate.
In such a.cases, an appropriate
Pronouncements accounting
issued policy shall be selected
by other standard-setting bodies and applied consistently to each
category.
b. Other accounting literatures and industry practices

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There are two types of accounting changes accounted for under PAS 8 namely:
1. Changes in accounting policy, and
2. Changes in accounting estimate

Change in accounting policies

An entity shall change an accounting policy only if the change:
a. Is required by a PFRS; or
b. Results to a more relevant and reliable information about an entity’s financial position and cash
flows.

Examples of changes in accounting policies:

1. Change from FIFO cost formula for inventories to the Average cost formula.
2. Change in method of recognizing revenue from long-term construction contracts.
3. Change to a new policy resulting from requirement of a new PFRS.
4. Change of financial reporting framework such as from PFRS for SMEs to compliance with full PFRSs.
5. Initial adoption of the revaluation model for property, plant and equipment and intangible assets.
6. Change from the cost model to the fair value model of measuring investment property.
7. Change in business model for classifying assets resulting to reclassification between financial asset
categories.
The following are not changes in accounting policies:
a. The application of an accounting policy for transactions, other events or conditions that differ in
substance from those previously occurring.
b. The application of a new accounting policy for transactions, other events or conditions that did not
occur previously or were immaterial.
 Changes in accounting policies are accounted for under specific transitional provisions, if any, in a
PFRS.
 In the absence of specific transitional provisions, or in case of a voluntary change in accounting
policy, changes in accounting policies are accounted for by retrospective application.

Retrospective application means adjusting the beginning balance of each affected component of equity
(e.g, retained earnings) for the earliest prior period presented and the other comparative amounts
disclosed for each prior period presented as if the new accounting policy had always been applied.
Illustration: Change of cost formulas
During 20x1, ABC Co. Decided to change from the Average cost formula for inventory valuation to the
FIFO cost formula. Inventory balances under each method are as follows:
Average FIFO
January 1 1,000,000 1,200,000
December 31 2,000,000 2,100,000
Income tax rate is 30%.
Requirement: What is the net cumulative effect of the accounting change in ABC’s opening retained
earnings balance?
Solution:
Average inventory-January 1 1,000,000
FIFO inventory-January 1 1,200,000
Cumulative effect-gross of tax (increase) 200,000

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 Multiply by: (100%-Tax rate of 30%) 70%
Cumulative effect- net of tax (increase) 140,000

 Retrospective application of a change in accounting policy is not required if it is impracticable to

determine the cumulative effect of the change.
Change in reporting entity
 A change that results in FS that, in effect, are those of a different entity
1. presenting consolidated or combined FS in place of FS of individual entities
2. Changing of specific subsidiaries that make up the group of entities for which consolidated FS are
presented
3. Changing the entities included in combined FS.

Change in accounting estimate

By its nature, the revision of an estimate does not relate to prior periods and is not a correction of an
error.
Estimates may be required for the following:
a. Bad debt expense
b. Inventory obsolescence
c. Fair value of financial asset or financial liabilities
d. Useful lives, or expected pattern of consumption of the future economic benefit embodied in,
depreciable assets; and
e. Warranty obligations

 Change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or

the amount of the periodic consumption of an asset, that results from the assessment of the
present status of, and expected future benefits and obligations associated with, assets and
liabilities. Changes in accounting estimates result from new information or new developments and,
accordingly, are not corrections of errors.

Change in accounting policy Change in accounting estimate

 Normally results from a change  Normally results from changes
in measurement basis (e.g., on how the expected inflows of
FIFO to Average, Cost to Fair economic benefits from assets
Value, etc.) are realized or how the
expected outflows of economic The following are changes
benefits from liabilities are in accounting estimates:
incurred. Examples of changes in
expected pattern of
realization of inflows of economic benefits from assets include:
1. Change in depreciation or amortization methods
2. Change in estimated useful lives of depreciable assets
3. Change in estimated residual values of depreciable assets
4. Change in required allowances for impairment losses and uncollectible accounts
5. Changes in fair values less cost to sell on non-current assets held for sale and biological assets
6. Change in currency exchange rates for foreign currency denominated cash and receivables

Examples of changes inn expected pattern incurrence of outflows of economic benefits from liabilities
include:
1. Change in estimated warranty obligations
2. Change in estimated losses from purchase commitments

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3. Change in estimated losses from litigation
4. Change in estimated restructuring provisions
5. Change in estimated restoration and decommissioning costs

Accounting for changes in accounting estimates

The effect of a change in an accounting estimate shall be recognized prospectively by including it in
profit or loss:
i. In the period of the change, if the change affects that period only; or
Ii. In the period of the change and future periods, if the change affects both.

Illustration: Change in depreciation method, estimated useful life, and residual value
On January 1, 20x1, ABC Co. acquired an equipment for P1,000,000. The equipment will be depreciated
using the straight-line method over 20 years. The estimated residual value is P100,000.
In 20x6, following a reassessment of the realization of the expected economic benefits from the
equipment, ABC Co. changed its depreciation method to sum-of-the-years digits (SYD). The remaining
useful life of the asset is estimated to be 4 years and the residual value is changed to P50,000.
Solution:
Historical cost 1,000,000
Residual value (100,000)
Depreciable amount 900,000
Divide by: estimated useful life (EUL) 20
Annual depreciation expense based on SL method 45,000

Historical cost 1,000,000

Accumulated depreciation (45,000x 5 years) (225,000)
Carrying amount- January 1, 20x6 775,000

Carrying amount-January 1, 20x6 775,000

Residual value (50,000)
Revised depreciable amount 725,000
Multiply by: SYD rate* 4/10
Depreciation expense for 20x6 290,000

The entry to record the effect of the change in estimate in 20x6 in profit or loss is as follows:

Dec. 31 20x6 Depreciation Expense 290,000

Accumulated depreciation 290,000

Prior period errors

Material errors are sometimes not discovered until a subsequent period, these are prior period errors
which should be corrected in the comparative information presented in the financial statements for that
subsequent period.
Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one
or more prior periods arising from a failure to use, or misuse of, reliable information that:
a. was available when financial statements for those periods were authorized for issue; and
b. could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.
Errors include the effect of:
a. Mathematical mistakes
b. Mistakes in applying accounting policies
c. Oversights or misinterpretations of facts; and

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d. Fraud

Prior period errors shall be corrected retrospectively by adjusting the opening balances of retained
earnings and affect assets and liabilities. When it is impracticable to determine the cumulative effect at
the beginning of the current period of an error on all prior periods, the entity shall restate the
comparative information to correct the error prospectively from the earliest date practicable.
Illustration:
During 2019, an entity discovered that certain goods that had been sold during 2018 were incorrectly
included in December 31, 2018 inventory in the amount of P300,000.

The accounting records for 2019 before adjustment revealed sales of P5,000,000 and cost of goods sold
of P3,000,000.

The adjustment on December 31, 2019 to correct the prior period error is:

Retained earnings 300,000

Inventory, January 1 (or COGS) 300,000

Accordingly, the partial income statement for 2019 would appear as follows:
Sales 5,000,000
Cost of goods sold (3,000,000-300,000) 2,700,000
Gross income 2,300,000

CLOSURE ACTIVITIES
Noncurrent Asset Held for Sale, Discontinued Operation and Accounting Changes
The following work exercises intend to evaluate what the learners have learned in this topic. Write
your answers in your portfolio journal. Show your computation in good form.

Part I - Multiple Choice

1. On January 1, 2016, Chandler Company committed to a plan to sell its other building and classified
this asset as held for sale. The carrying value of the building as of January 1, 2016 is P5,000,000.
Chandler Company priced the building at P5,500,000, which is equal to its fair market value. During
2016, the market conditions that existed at the date the building was classified initially as held for
sale deteriorate and as a result, the asset is not sold at the end of 2016.

During 2016, the company actively solicited but did not receive any reasonable offers to purchase the
building and, in response, reduced the price to P4,800,000. The building continues to be actively
marketed at a price that is reasonable given the change in market conditions.

In Chandler Company’s December 31, 2016 balance sheet, the building

a. Should be included as property, plant and equipment valued at P4,800,000.
b. Should be included among the property, plant and equipment at P5,000,000.
c. Should be reported separately as noncurrent asset held for sale and valued at P4,800,000.
d. Should be reported separately as noncurrent asset held for disposal and valued at P5,500,000.

2. On December 31, 2016, Potter Company’s warehouse has a carrying value of P3,500,000 with a
remaining useful life of 10 years, but its fair market value was P3,300,000. As of December 31, 2016,
Potter Company intends to sell the warehouse to a buyer after it vacates the warehouse. The time
necessary to vacate the warehouse is usual and customary for sales of such assets.

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In its December 31, 2016 statement of financial position, Potter Company should include the warehouse
as
a. Property, plant and equipment valued at P3,300,000.
b. Property, plant and equipment valued at P3,500,000.
c. Noncurrent asset held for sale and valued at P3,300,000.
d. Noncurrent asset held for disposal and valued at P3,500,000.

3. Which of the following would most likely would be considered a discontinued operation?
a. Shifting of production from one location to another.
b. A sporting goods manufacturer with a bicycle division decides to outsource the manufacture of the
bicycles.
c. The unprofitable brands of a beauty products component of an entity that manufactures and sells
consumer products are discontinued.
d. An entity that is a franchisor in the quick-service restaurant business that are unprofitable in a certain
region and, as a result, the entity decides to exit both the quick-service business as well the entity-
owned restaurants in that region.

Noncurrent Asset Held for Sale (Problems A-E)

Problem A-On October 1, 2019, Builder Company has a building with a cost of P4,000,000 and
accumulated depreciation of P3,100,000. The company commits to a plan to sell the building and it is
anticipated by February 1, 2020 the building will be disposed by sale. On October 1, 2019, the building
has an estimated selling price of P800,000, and it is estimated that selling costs associated with the
disposal of the building will be P120,000. On December 31, 2019, the estimated selling price of the
building has increased to P1,200,000, with estimated selling costs remaining at P120,000.

1. At the time of classification as held for sale, what amount should the noncurrent asset held for sale be
recognized?

2. What amount of loss should Builder Company recognize at the time the building was classified as held
for sale?

3. As of December 31, 2019, what amount of gain on recovery should Builder Company recognize
related to the asset held for sale?

4. What is the carrying amount of the noncurrent asset held for sale after the reversal?

Problem B- On December 31, 2019, ABC Co. classified its building with a historical cost of P1,000,000
and accumulated depreciation of P600,000 as held for sale. All of the criteria under PFRS 5 are complied
with. On that date, the building has a fair value of P350,000 and cost to sell of P20,000.

5. Give the adjusting journal entry to record the classification of noncurrent asset to held for sale.

Problem C- On December 31, 2019, ABC Co. classified its building with a carrying amount of P400,000
and fair value less costs to sell of P330,000 as held for sale. Impairment loss of P70,000 was recognized
on that date. The building has a remaining useful life of 4 years and it was depreciated using the
straight-line method.

As of December 31, 2020, the building was not yet sold and management decided not to sell the

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building anymore. The fair value less cost to sell of the building on December 31, 2020 is P310,000 while
the value in use is P305,000.

6. Compute for the measurement of the building upon its reclassification back to PPE on December 31,
2020.

7. Give the journal entry to record the reclassification of held for sale to PPE.

Problem D- B Company accounts for noncurrent assets using the revaluation model. On October 1,
2019, the entity classified a freehold property as held for sale. At that date, the carrying amount of the
land was P2,500,000 and the balance in the revaluation surplus was P750,000. At same date, the fair
value of the land was estimated at P2,750,000 and the cost of disposal at P 100,000. The land was sold
on January 31, 2020 for P2,900,000.

8. What is the journal entry to record the classification of the land as NCAHFS?
9. What is the gain/loss on disposal of land on 2020?

Problem E- C Company purchased an equipment for P2,500,000 on January 1, 2019. The equipment has
a useful life of 5 years with no residual value. On December 31, 2019, the entity classified the asset as
held for sale. On such date, the fair value less cost of disposal of the equipment is P1,750,000.

On December 31, 2020, the entity believed that the criteria for classification as held for sale can no
longer be met. Accordingly, the entity decided not to sell the asset but to continue to use it. On
December 31, 2020, the fair value less cost of disposal of the equipment is P1,350,000.

10. What would be the measurement of the equipment after reclassification on December 31, 2020?
11. What is the journal entry to reclassify the NCAHFS to PPE?

Discontinued Operation (Problems F-H)

Problem F- On September 30, 2019, when the carrying amount of the net assets of segment C was
P7,000,000, X Company signed a binding contract to sell segment C for P12,000,000. The sale is
expected to be completed by January 31, 2020. In addition, prior to January 31, 2020, the sale contract
obliges X Company to terminate certain employees of segment C incurring termination cost of
P2,000,000 to be paid on June 30, 2020. The company continued to operate segment C throughout
2016. Revenue of segment C was P8,000,000, operating cost was P4,000,000.

12. How much income should be reported as income from ordinary activities of the discontinued
segment for 2019, before tax?

Problem G-Lugar Company operates two restaurants, one in Pampanga and one in Tarlac. The
operations and cash flows of each of the two restaurants are clearly distinguishable. During 2019, Aral
Company decided to close the restaurant in Tarlac and sell the property. It is probable that the disposal
will be completed early next year. The revenue and expense of Lugar Company for 2019 and for the
preceding two years are as follows:

2019 2018 2017

Sales-Pampanga 60,000 48,000 40,000
Cost of goods sold-Pampanga 26,000 22,000 18,000
Other expenses-Pampanga 14,000 13,000 12,000
Sales-Tarlac 23,000 30,000 52,000

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Cost of goods sold-Tarlac 14,000 19,000 20,000
Other expenses -Tarlac 17,000 16,000 15,000

The other expenses do not include income tax expense. During the later part of 2019, Lugar Company
sold some of the kitchen equipment of the Tarlac restaurant and recognized a pretax gain of P15,000 on
the disposal. The income tax rate is 30%.

13. What amount should Lugar Company report as income or loss from discontinued operation for
2019?

Problem H- In 2019, Toyota Company decided to discontinue its Apparel Division, a separately
identifiable component of Toyota’s business. On December 31, 2019, the division has not been
completely sold. However, negotiations for the final and complete sale are progressing in a positive
manner and it is probable that the disposal will be completed within a year.

Analysis of the records for the year disclosed the following relative to the Apparel Division:

Expected gain in 2020 on disposal of division 2,000,000

Operating loss for the year 8,000,000
Loss on disposal of some Apparel Division assets during 2019 500,000
Expected operating loss in 2020 preceding final disposal 1,000,000

14. What amount should be reported as pretax loss from discontinued operation in 2019?

Accounting Changes (Problems I-O)

Problem I-Mabawasan has used the FIFO method of inventory valuation since it began operations in
2017. Mabawasan decided to change to the weighted-average method for determining inventory costs
at the beginning of 2020. The following schedule show year-end inventory balances under the FIFO and
weighted average methods:

Year FIFO Weighted average

2017 45,000 54,000
2018 78,000 71,000
2019 83,000 78,000

15. What amount, before income taxes, should be reported as an adjustment to the January 1, 2020,
retained earnings balance for the cumulative effect of the change in accounting policy or principle?
Problem J- During 2019, Orca Corp. decided to change from the FIFO method of inventory valuation to
the weighted average method. Inventory balances under each method were as follows:
FIFO Weighted average
January 1, 2019 71,000 77,000
December 31, 2019 79,000 83,000

Orca’s income tax rate is 30%?

16. In its 2019 financial statements, what amount should Orca report as the cumulative effect of this
accounting change?
Problem K- On January 1, 2015, Nice Inc., acquired equipment for P100,000 with an estimated 10-year
useful life. Nice estimated a P10,000 residual value and used the straight-line method of depreciation.
During 2019, after its 2018 financial statements had been issued, Nice determined that, due to

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obsolescence, this equipment’s remaining useful life was only four more years and its residual value
would be P4,000.
17. In Nice’s December 31, 2019, balance sheet, what was the carrying amount of this asset?
Problem L- On January 2, 2016, Blue Co. purchased a machine for P264,000 and depreciated it by the
straight-line method using an estimated useful life of eight years with no residual value. On January 2,
2019, Blue determined that the machine had a useful life of six years from the date of acquisition and
will have a residual value of P24,000. An accounting change was made in 2019 to reflect the additional
data.
18. The accumulated depreciation for this machine should have a balance at December 31, 2019 of?
Problem M- Cyrus Company purchased a machinery on January 1, 2016 for P7,200,000. The machinery
had useful life of 10 years with no residual value and was depreciated using the straight line method.
In 2019, a decision was made to change the depreciation method from straight line to sum of years’
digits method. The useful life and residual value remained unchanged.
19. What is the carrying amount of the machinery on January 1, 2019?
20. What is the depreciation for 2019?
Problem N- Luzon Company reported the following events during the year ended December 31, 2019:
 A counting error relating to the inventory on December 31, 2018 was discovered.

This required a reduction in the carrying amount of inventory at that date of P280,000.

 The provision for uncollectible accounts receivable on December 31, 2018 was P300,000.

During 2019, P500,000 was written off related to the December 31, 2018 accounts receivable.

21. What adjustment is required to restate earnings on January 1, 2019?

Problem O- World Company failed to accrue warranty cost of P100,000 on December 31, 2018. In
addition, a change from straight line to accelerated depreciation made at the beginning of 2019 resulted
in a cumulative effect of P60,000 on retained earnings.
22. What pretax amount should be reported as prior period error in 2019?

SYNTHESIS / GENERALIZATION
NONCURRENT ASSET HELD FOR SALE
1.1. NON-CURRENT ASSET – an asset that does not meet the definition of a current asset.
1.2. DISPOSAL GROUP – group of assets to be disposed of, by sale or otherwise, together as a group in a
single transaction (including associated liabilities).
 PFRS 5: “…an entity shall classify a noncurrent asset (or disposal group) as held for sale If its carrying
amount will be recovered principally through a sale transaction"
CONDITIONS FOR CLASSIFICATION AS HELD FOR SALE
a. Available for immediate sale in its present condition subject only to terms that are usual and
customary (“sold as seen”)
b. Sale is highly probable (more likely than probable)
1. …commitment to a plan to sell
2. …active program to locate buyer
3. …marketed at reasonable price
4. …unlikely significant changes to the plan
5. …expected to be a completed sale within one year from date of classification
**exception to one year requirement
 delay is beyond entity’s control and the entity remains committed to sell the asset

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3. MEASUREMENT OF NONCURRENT ASSETS HELD FOR SALE (NCAHFS) and DISPOSAL GROUP HELD
FOR SALE (DGHFS)
 at classification date, LOWER of carrying amount (CA) and fair value less cost to sell (FVLCTS)
CA > FVLTS =Impairment loss CA < FVLTS = Impairment Gain**
Note: The gain is not recognized at the point of initial recognition of classification as held for sale.
But any subsequent increase in FVLCTS is recognized as gain only to the extent of the recognized
impairment loss.

 except for NCA measured under revaluation model;

 initial measurement is at fair value, but at subsequent year-end, measurement is at lower of
CA and FVLCTS
 Change in Classification, LOWER of carrying amount and recoverable amount ( FVLCTS)
a. prior to classification, the carrying amount shall be measured in accordance with applicable PFRSs
b. fair value is the price that would be received to sell an asset between market participants at the
measurement date
c.1. cost to sell refers to the incremental costs directly attributable to the disposal of an asset or
disposal group
c.2. cost to sell excludes finance costs and income tax expense
**if an entity acquired a noncurrent asset or disposal group with a view of subsequent disposal, the
asset is classified as NCAHFS if the “sale within one year” is met, otherwise, apply the applicable
PFRSs
**if criteria are met after the reporting period, no adjustments are needed, only disclosures (non-
adjusting event).

DISCONTINUED OPERATIONS
 “Component of an entity” that either has been disposed of OR is classified as held for sale, AND;
a.1. represents a separate major line of business or geographical area of operations
a.2. is part of a single coordinated plan to dispose a separate major line of business or geographical
area of operations
b. is a subsidiary acquired exclusively with a view to resale
**component of an entity – subsidiary/major line whose operations & cash flows are distinguishable
from the entity
ACCOUNTING CHANGES
There are two types of accounting changes accounted for under PAS 8 namely:
1. Changes in accounting policy, and
2. Changes in accounting estimate

Change in accounting policies

An entity shall change an accounting policy only if the change:
A. Is required by a PFRS; or
B. Results to a more relevant and reliable information about an entity’s financial position and cash
flows.

Change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the
amount of the periodic consumption of an asset, that results from the assessment of the present status
of, and expected future benefits and obligations associated with, assets and liabilities. Changes in
accounting estimates result from new information or new developments and, accordingly, are not
corrections of errors.
Prior period errors

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Material errors are sometimes not discovered until a subsequent period, these are prior period errors
which should be corrected in the comparative information presented in the financial statements for that
subsequent period.
Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one
or more prior periods arising from a failure to use, or misuse of, reliable information that:
a. was available when financial statements for those periods were authorized for issue; and
b. could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.
EVALUATION

The student/learner’s performance in the module is evaluated as follows:

20% Attendance (Active participation in the class)

20% Portfolio Journal (Answers to Portfolio Journal)
20% Formative Examination (One online/offline written quiz covering Chapter 3 & 4)
40% Summative Examination (This topic is included in the Online/Offline Written
Midterm Examination)
ASSIGNMENT / The next topic is Operating Segment (Start of Final Term Topic). Student is advised to
AGREEMENT read in advance the topic in the book of Valix, Peralta, Financial Accounting 3, 2019
edition.
For further reading: Milan Financial Accounting 3, 2019 edition
REFERENCES Valix, Peralta, Financial Accounting Volumes 3, 2019 edition
Millan, Intermediate Accounting Part 3, 2019 edition

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