Colegio de San Juan de Letran: Course Module On: ACC119: Principles and Methods of Teaching

Colegio de San Juan de Letran
College of Business Administration and Accountancy

Accountancy Area
COURSE MODULE ON:
ACC119: PRINCIPLES AND METHODS OF TEACHING
Course Overview This course provides students with the necessary understanding of the
roles of a teacher and equips them with the skills for planning and
delivering accounting lessons and making learning assessments. It
introduces accountants to a rewarding vocation of teaching. It focuses
on building a foundation for planning, teaching and assessment based
on outcome-based approach. It considers methods and approaches
applicable to teaching Accounting, Business and allied courses.
Course Intended Understand necessary recognition and measurements for specific

Learning account from agriculture, employee benefits, earnings per share, non-
Objectives current asset held for sale and discontinued operations.
(CILO) Gain knowledge in accounting for hyperinflationary economy and
current cost accounting for the entity.
Define and demonstrate understanding in Biological assets
Apply accounting for various entities relate to employee benefits of their
employees.
Comprehend calculations using general price indexes and constant peso
accounting.
Rationale: The objective of this module is substantially an asynchronous type of
teaching and learning activity. This module concentrates on the
formative and authentic learning as well as assessments for a self-
directed learner. Collegiate students are encouraged to explore, learn,
and be creative in the appreciation of this material that will guide and
enhance them in their attainment of the required basic course
competencies.
Learning After this module, the student shall be able to:

Competencies 1. Apply the recognition and measurement principles for
Required: agricultural-related accounts, employee benefits, earnings per
share, non-current asset held for sale and discontinued
operations.
2. Account for hyperinflation.
3. Apply computations using the general price indexes, constant
peso accounting, and current cost accounting.
Disclaimer: Please take note that this module is intended only for use of students enrolled under ACC119, 1 st
semester Academic Year 2020-2021. Furthermore, this module is a property of the Colegio. Reproduction,
distribution, and sharing in any form, without the proper consent of the Colegio, shall be strictly prohibited.
Also, may we ask you to revisit the enhanced student manual / handbook for further clarifications.
Thank you and Arriba!

1
Accountancy Area
Module 1: Accounting for Agricultural Entities

Lesson 1: Agriculture
Describe the nature of biological assets, bearer plants, agricultural produce,
and agricultural activity.
Measure biological assets upon initial recognition and after initial recognition
Objective: Measure agricultural produce upon initial recognition
Identify required disclosures related to biological assets and agricultural
produce
Introduction: IAS 41 Agriculture applies to the following when they relate to agricultural
activity:
a. Biological assets, except bearer plants;
b. Agricultural produce at the point of harvest. After harvest, IAS 2
Inventories or other applicable standard is applied.
IAS 41 Agriculture does not apply the following:

a. Land related to agricultural activity
b. Bearer plants except on the produce on bearer plants
Activating Assets owned by an entity must be accounted in accordance with PFRS.

Prior Different PFRS deals with different types of assets. For example, PAS 2 for
Knowledge inventories, PAS 16 for property, plant and equipment, etc.
Analysis Agricultural assets are accounted under PAS 41 Agriculture. Specific

accounting principles are set out under PAS 41 that is applied to agricultural
assets owned by an entity.
Acquiring New NATURE OF BIOLOGICAL ASSETS

Knowledge Biological asset is a living plant or animal. Biological assets can be either
consumable or bearer biological assets.
a. Consumable biological assets – those that are to be harvested as
agricultural produce or sold as biological assets.
 Examples:
 Livestock intended for the production of meat
 Livestock held for sale
 Fish in farms
 Produce on a bearer plant
 Trees being grown for lumber
 Crops such as maize and wheat
b. Bearer biological assets – those that are held to bear produce. Only
the produce is harvested while the bearer biological asset remains.
 Examples:
 Livestock from which milk is produced
 Fruit trees from which fruit is harvested
Living animals, whether consumable or bearer, are classified as biological

assets if they relate to agricultural activity. However, living plants are
classified as biological assets only if they are consumable. Bearer plants are
classified as property, plant and equipment.
2
Accountancy Area
NATURE OF BEARER PLANTS

A bearer plant is a living plant that:
a. Used in the production or supply of agricultural produce;
b. Expected to bear produce for more than one period; and
c. Has a remote likelihood of being sold as agricultural produce, except
for incidental scrap sales.
NATURE OF AGRICULTURAL PRODUCE

Agricultural produce is the harvested produce of the entity’s biological
assets.
AGRICULTURAL ACTIVITY
Agricultural activity is the management by an entity of the biological
transformation and harvest of biological assets for sale or for conversion into
agricultural produce or into additional biological assets. It covers a wide range
of activities, such as raising livestock, forestry, annual or perennial cropping,
cultivating orchards and plantations, floriculture and aquaculture.
The processes of growth, degeneration, production, and procreation that cause

qualitative or quantitative changes in biological assets are referred to as
biological transformation.
The detachment of produce from a biological asset or the cessation of a

biological asset’s life processes is called harvest.
RECOGNITION PRINCIPLE
An entity shall recognize a biological asset or agricultural produce when, and
only 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 or cost of the asset can be measured reliably.
MEASUREMENT PRINCIPLES
 A biological asset shall be measured on initial recognition and at
the end of each reporting period at its fair value less costs to
sell except where the fair value cannot be measured reliably. (IAS
40 par. 12)
 If the fair value cannot be measured reliably, the biological
asset shall be measured at its cost less any accumulated
depreciation less any accumulated impairment losses.
 Once the fair value of such a biological asset
becomes reliably measurable, an entity shall
measure it at its fair value less costs to sell.
 All costs incurred in biological assets that are measured at fair
value less cost to sell are recognized in profit or loss.
 Agricultural produce harvested from an entity’s biological assets
shall be measured at its fair value less costs to sell at the point of
harvest. Such measurement is the cost at that date. (IAS 40 par.
13)
 A gain or loss arising on initial recognition of a biological asset at
fair value less costs to sell and from a change in fair value less
costs to sell of a biological asset shall be included in profit or loss
3
Accountancy Area
for the period in which it arises. (IAS 40 par. 26)

 A gain or loss arising on initial recognition of agricultural
produce at fair value less costs to sell shall be included in profit
or loss for the period in which it arises. (IAS 40 par. 28)
Checkpoint #1:
Explain the measurement principles for biological assets and agricultural

produce.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
Biological assets acquired through government grant

 An unconditional government grant related to a biological asset
measured at its fair value less costs to sell shall be recognized in
profit or loss when, and only when, the government grant becomes
receivable. (IAS 40 par. 34)
 If a government grant related to a biological asset measured at its fair

value less costs to sell is conditional, an entity shall recognize the
government grant in profit or loss when, and only when, the
conditions attaching to the government grant are met.
FINANCIAL STATEMENT PRESENTATION

 Biological assets is presented under the non-current assets section of
the statement of financial position.
Application Determine whether each of the following items is a biological asset, bearer
plant, or agricultural produce.
1. Pig
2. Dog
3. Grape vines
4. Mango tree
5. Picked apples
6. Milk
7. Cotton plants
8. Sugarcane
9. Wool
10. Sheep
Problem 1:
Penny Horses, Inc. has the following assets:
Bearer plants 2,500,000

Bearer animals 1,500,000
Animals related to recreational activities 900,000
Agricultural produce growing on bearer plants 750,000
Agricultural produce harvested 600,000
4
Accountancy Area
Agricultural land 3,000,000
1. Which of the following would be classified as biological assets?

2. Which of the following would be accounted for as property, plant
and equipment?
Problem 2:
Koothrapali, Inc. is engaged in raising dairy livestock. The entity provided the
following information during 2019:
Biological asset, 1/1/2019 P250,000

Increase due to purchases 100,000
Gain arising from change in fair value less cost of disposal
attributable to price change 20,000
Gain arising from change in fair value less cost of disposal
attributable to physical change 30,000
Decrease due to harvest 42,500
Decrease due to sales 10,000
What amount shall be reported as biological asset on December 31, 2019?
Problem 3:
Cow-Wow Farms, Inc. has a herd of 15, one-year old animals on January 1,
2019. Two animals aged 1.5 years were purchased on July 1, 2019 and three
animals were born on July 1, 2019. No animals were sold or disposed of
during the period. Per unit fair value less cost to sell are summarized below:
One-year old animal at January 1, 2019 P4,500

1.5 year old animal at July 1, 2019 5,000
Newborn animal at July 1, 2019 3,000
One-year old animal at December 31, 2019 4,600
1.5 year old animal at December 31, 2019 5,200
Newborn animal at December 31, 2019 3,300
Two-year old animal at December 31, 2019 5,500
0.5 year old animal at December 31, 2019 3,400
1. What is the gain from changes in fair value less costs to sell due to
price change?
2. What is the gain from changes in fair value less costs to sell due to
physical change?
3. What is the total gain from changes in fair value less costs to sell
during 2019?
4. What is the carrying amount of the biological asset as of
December 31, 2019 to be presented in noncurrent section of the
statement of financial position?
5. Assuming two 2-year old animals were sold for a net proceeds of
P13,500 on December 31, 2019, what total amount shall be
reported as biological assets on December 31, 2019?
Module 2: Accounting for Employee Benefits

Lesson 1: Accounting for Employee Benefits
Objectives: Describe the nature and categories of employee benefits.
Record and measure short-term employee benefits.
5
Accountancy Area
Distinguish between defined contribution plans and defined benefit plans by

recording the costs under each type of plan.
Record the costs and the resulting liability or asset under both the defined
contribution plan and defined benefit plan.
Describe the principles for accounting for other long-term employee benefits and
termination benefit cost
Introduction Employees are increasingly becoming concerned not only on their periodic
: remuneration but also on their retirement planning. It is for this reason that many
employers have established pension plans and other employee benefit plans to
encourage their employees to stay with the company.
Activating The Conceptual Framework mentioned that an item shall only be recognized in
Prior the financial statements if it meets the definition of the elements of financial
Knowledge statements as defined therein.
Employee benefits are recognized as expense in the financial statements because

it meets the definition of the expense in the Conceptual Framework.
In this regard, the instructor likes you to answer the following:

1. What is the definition of expense according to the Conceptual
Framework?
2. State the expense recognition principle in accordance with the
Conceptual Framework.
Analysis The conceptual framework forms the theoretical foundation of accounting which
guides the accountants in understanding the accounting standards. In this lesson,
we will tackle the concepts and procedures in accounting for employee benefits
in accordance with PAS 19R Employee Benefits.
Acquiring NATURE OF EMPLOYEE BENEFITS

New Employee benefits are all forms of consideration given by an entity in exchange
Knowledge for services rendered by employees or for the termination of employment.
RECOGNITION PRINCIPLES
Employee benefits are recognized as expense when employees have rendered
service, except to the extent that the employee benefits form part of the cost of
another asset (e.g., salaries of factory worker are included in the cost of
inventories).
Employee benefits may arise from contractual agreements (e.g., employment

contracts), legislation (e.g., SSS contributions) or informal practices that create
constructive obligations.
Checkpoint #1:
Give at least three examples of employee benefits.

1. _______________________________
2. _______________________________
3. _______________________________
CATEGORIES OF EMPLOYEE BENEFITS UNDER IAS 19R

1. Short-term employee benefits
2. Post-employment benefits
6
Accountancy Area
3. Other long-term employee benefits

4. Termination benefits
SHORT-TERM EMPLOYEE BENEFITS

Short-term employee benefits are those that are due to be settled within 12
months after the end of the period in which the employees have rendered the
related services. Examples include:
a. Salaries, wages, SSS, Philhealth and pag-IBIG contributions
b. Paid vacation leaves and sick leaves
c. Profit-sharing and bonuses
d. Non-monetary benefits (e.g., free goods or services)
Short-term paid absences

Short-term paid absences include vacation, holiday (e.g., regular and
nonworking holidays), maternity, paternity and sick leaves. Entitlement to paid
absences may be either:
a. Accumulating
b. Non-accumulating
Accumulating paid absences are those that can be carried forward and used in
future periods if not used in the current period. Accumulating paid absences may
be either:
i. Vesting – unused entitlement are paid in cash when the employee
leaves the entity. (i.e., monetized)
ii. Non-vesting – unused entitlement are not monetized.
Non-accumulating paid absences are those that expired if not used in the current
period and are not paid in cash when the employee leaves the entity.
Compensated absences are recognized as follows:

a. Accumulating and vesting – all unused entitlement are accrued and
measured at the expected amount to be paid when those entitlement are
used or monetized in a future period.
b. Accumulating and nonvesting – only the unused entitlements that are
expected to be utilized are accrued, taking into account the possibility
that employees may leave before they utilize those entitlements.
c. Non-accumulating – unused entitlements are not accrued but recognized
only when the absences occur.
Checkpoint #2:
Explain the term “vesting” in its simplest form.

____________________________________________________________
____________________________________________________________
____________________________________________________________
POSTEMPLOYMENT BENEFITS
Postemployment benefits are employee benefits, other than termination benefits
and short-term employee benefits, which are payable after completion of
employment.
Postemployment benefit plans are classified as either:

(1) Defined contribution plans, or
7
Accountancy Area
(2) Defined benefit plans
Such plans may be contributory or noncontributory, and funded or unfunded.
Contributory plan (Ex. SSS, GSIS) Noncontributory plan (Ex. R.A. 7641)
The employer and employee make Only the employer makes
contributions to the retirement contributions to the retirement benefit
benefit plan. It is not necessary to plan.
contribute equal amounts.
Both the employer and employee The employer shoulders all the
share in the retirement benefit cost. retirement benefit cost.
Funded plan (Ex. SSS, GSIS) Unfunded plan (Ex. R.A. 7641)
The entity sets aside funds for future The entity retains the obligation for
retirement benefits by making the payment of retirement benefits
payments to a funding agency, such without the establishment of a
as a trustee, bank or insurance separate fund.
company.
The funding agency is then

responsible for the accumulation of
funds and for making payments to
retired employees when the benefits
become due.
Defined Contribution Plan (Ex. SSS, GSIS)

A defined contribution plan is a postemployment benefit plan under which an
entity pays fixed contributions into a separate entity known as the fund. The
contribution may be a fixed amount, a percentage of employer’s income, a
percentage of employee’s earnings or a combination of these. Simply stated, the
entity makes a specific or definite amount of contribution to a separate fund
without specifying the retirement benefit to be received by the employee.
The contribution is definite but the benefit is indefinite.
The entity will have no legal or constructive obligation to pay further

contributions if the fund does not hold sufficient assets to pay all employee
benefits relating to employee service in the current and prior periods. Once the
defined contribution is paid, the employer has no more obligation under the plan.
The employee bears the investment risk in a defined contribution plan. If the
plan provides exceptional investment performance, the employee will share in
the gain in the form of larger retirement benefit. If the plan does poorly, the
employee will share in the loss by receiving smaller retirement benefit.
Defined Benefit Plan (Ex. R.A. 7641)

Under the defined benefit plan, an entity’s obligation is to provide the agreed
benefits to employees. In other words, an employee is guaranteed specific or
definite amount of benefit which is usually related to his or her salary and years
of service.
The benefit is definite but the contribution is indefinite.

8
Accountancy Area
The entity assumes the investment risk in a defined benefit plan. If the plan is
exceptionally good, the entity may take a “contribution holiday”, meaning stop
paying the contribution for a while. However, if the plan performs poorly, the
entity must make additional contributions for any expected shortfall in order to
satisfy the promised future benefits.
ACCOUNTING FOR DEFINED BENEFIT PLAN

The accounting for defined benefit plans is complex because actuarial
assumptions are necessary to measure the obligation on a discounted basis. This
results to actuarial gains or losses. Actuarial assumptions are estimates of
variables used in determining the ultimate cost of providing postemployment
benefits. These include the following:
(a) Demographic assumptions, and
(b) Financial assumptions
The discount rate used in measuring defined benefit obligations and costs is
based on high quality corporate bonds (or government bonds, in the absence of
high quality corporate bonds).
The accounting for defined benefit plans involves the following steps:
1. Determine the deficit or surplus
2. Determine the net defined benefit liability (asset)
3. Determine the defined benefit cost
Step 1: Determining the deficit or surplus

Deficit or surplus is computed as follows:
Present value of defined benefit obligation (PV-DBO) XX

Fair value of plan assets (FVPA) XX
Deficit (surplus) XX (XX)
If PV - DBO > FVPA  Deficit (underfunded)

If PV - DBO < FVPA  Surplus (overfunded)
 Present value of defined benefit obligation represents the entity’s

obligation for the accumulated retirement benefits earned by employees
to date. This is determined using an actuarial valuation method called the
projected unit credit method.
 Fair value of plan assets represents the balance of any fund set aside for
the payment of the retirement benefits.
Step 2: Determining the net defined benefit liability (asset)

The net defined benefit liability (asset) is the amount that is presented in the
statement of financial position.
 Deficit  net defined benefit liability

 Surplus  net defined benefit asset is the lower of: (1) surplus and (2)
asset ceiling
Asset ceiling is the present value of any economic benefits available in the form
of refunds from the plan or reductions in future contributions to the plan.
9
Accountancy Area
Components of Defined Benefit Cost

1. Service cost
- Current service cost
- Past service cost
- Gain or loss on settlement
2. Net interest
- Interest expense on DBO
- Interest income on plan assets
- Interest expense on excess over asset ceiling
3. Remeasurements
- Remeasurement of plan assets
- Remeasurement of DBO
- Rem. Of excess over asset ceiling
1 and 2 are P/L as component of employee benefit expense. Remeasurments are

OCI and not recycled to profit or loss
Treatment of past service cost

All past service costs is recognized as expense immediately in the period they
arise. Unvested past service costs shall not be deferred and amortized over the
vesting period.
G/L on settlement
PV of DBO being settled XX
Settlement price (XX)
G/(L) on settlement XX(XX)
PV OF DBO settled > SP  Gain on settlement

PV of DBO settled < SP  Loss on settlement
DBO per actuary > DBO, per books Actuarial Loss

DBO per actuary < DBO, per books Actuarial Gain
Actual return on > Expected return on PA (II on Actuarial Gain
PA PA)
Actual return on < Expected return on PA (II on Actuarial Loss
PA PA)
Checkpoint #3:
Explain why the remeasurement gain or loss are presented in other

comprehensive income rather than in profit or loss.
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
OTHER LONG-TERM EMPLOYEE BENEFITS

These are employee benefits, other than postemployment benefits and
termination benefits, that are due to be settled beyond 12 months after the end of
the period in which the employees have rendered the related service. Examples
10
Accountancy Area
are:
a. Long-term compensated absences, (e.g., sabbatical leave)
b. Jubilee or other long-service benefits
These are accounted similar to defined benefit plans, except that all the
components of the defined benefit cost is recognized in profit or loss, including
the remeasurements.
TERMINATION BENEFITS
Termination benefits are those provided as a result of either:
a. The entity’s decision to terminate the employee before normal retirement
date; or
b. The employee’s decision to accept the employer’s offer of benefits in
exchange for termination.
Unlike other types of employee benefits, the obligation to pay termination

benefits arises from the employer’s act of terminating an employee rather than
from employee service. Accordingly, benefits resulting from termination at the
employee’s request without the employer’s offer are not termination benefits but
rather postemployment benefits.
Application Problem 1: (Vacation leave)
XYZ Co. grants its employees 12 days paid vacation leave each year. Vacation
leaves not taken during a year can be carried over indefinitely.
ABC has 500 employees with an average salary of P1,000 per day. The average
annual pay increase is 5%. During 2020, total vacation leaves taken by
employees were 5,400 days. Based on past experience, 90% of unused vacation
leave for a year are taken in the immediate following year.
Case 1: Employee benefit is vesting.

1. How much should XYZ accrue as liability for unused vacation leave
on December 31, 2020?
2. How much is the vacation pay expense for 2020?
Case 2: Employee benefit is nonvesting.

Case 3: Employee benefit is non-accumulating.

Problem 2:
Echo Company has an employee benefit plan for compensated absences that
gives employees 10 paid vacation days and 10 paid sick days. Both vacation and
sick days can be carried over indefinitely. Employees can elect to receive
payment in lieu of vacation days. However, no payment is given for sick days
not taken.
At year-end, the unadjusted balance of liability for compensated absences was

P210,000. The company estimated that there were 150 vacation days and 75 sick
11
Accountancy Area
days available at year-end. The employees earn an average of P1,000 per day. At
year-end, what amount of liability for compensated absences is required to
be reported?
Problem 3: (Defined contribution plan)

Under XYZ Co.’s defined contribution plan, it agrees to make fixed annual
contributions of P200,000 to a retirement fund for the benefit of its employees.
Case 1: The defined contribution plan is funded (i.e., held by a trustee)
Requirement: Prepare the journal entries under each of the following

assumptions.
1. XYZ contributes P200,000 to the fund held by a trustee.
2. XYZ contributes only P80,000 to the fund held by a trustee.
3. XYZ contributed P230,000 to the fund held by a trustee.
4. An employee retired and was eligible to P30,000 retirement benefits
based on the operating efficiency and investment earnings of the
fund.
Case 2: The defined contribution plan is unfunded but with established separate
fund. (i.e., not held by a trustee)
Requirement: Prepare the journal entries under each of the following

assumptions.
1. XYZ contributes P200,000 to the fund.
2. XYZ contributes only P80,000 to the fund.
3. XYZ contributed P230,000 to the fund.
based on the operating efficiency and investment earnings of the
fund.
Case 3: The defined contribution plan is unfunded with no established separate

fund. (i.e., not held by a trustee)

based on the operating efficiency and investment earnings of the fund.
Prepare the required journal entries,
Problem 4:
At the beginning of current year, Iscariot Company had the following balances
related to a defined benefit plan:
Fair value of plan assets 5,750,000

Projected benefit obligation 6,500,000
The actuary provided the following data for the current year:
Current service cost 600,000

Settlement discount rate 10%
Actual return on plan assets 700,000
Contributions to the plan 900,000
Benefits paid to retirees 100,000
12
Accountancy Area
1. What is the employee benefit expense?

2. What is the remeasurement gain on plan assets?
3. What is the defined benefit cost?
4. What is the prepaid/accrued benefit cost on December 31?
Problem 5:
Caiaphas Company provided the following information during the current year:
Fair value of plan assets, January 1 6,000,000

Projected benefit obligation 5,000,000
Asset ceiling, January 1 700,000
During the current year, the following data are gathered:
Current service cost 700,000

Past service cost 200,000
Actual return on plan assets 900,000
Contribution to the plan 1,000,000
Decrease in projected benefit obligation due to change
in actuarial assumptions 500,000
Discount rate 10%
Asset ceiling on December 31 is P1,200,000.
1. What is the employee benefit expense?

2. What is the net remeasurement gain?
Problem 6: (Termination Benefits)

A company plans to close one of its branches in three months’ time. There are 20
employees in the branch. Because the company wants to fill in some pending
customer orders, the company offers its employees the following:
a. Each employee who stays and render service until the closure of the
branch will receive on the termination date a cash payment of P130,000.
b. Employees leaving before closure of the branch will receive P40,000.
The company expects that 5 employees will leave before closure.
1. How much is the liability for termination benefits?

2. How much is the short-term employee benefits?
Module 3: Earnings per Share

Lesson 1: Basic Earnings Per Share
Objectives: Define earnings per share.
Know the proper presentation of earnings per share.
Know the computation of basic earnings per share.
Determine the weighted average number of ordinary shares.
Introduction Earnings per share (EPS) is the portion of the company’s distributable profit
: which is allocated to each outstanding equity share (common share). Earnings
per share is a very good indicator of the profitability of any organization, and it
is one of the most widely used measures of profitability.
13
Accountancy Area
The earning per share is a useful measure of profitability, and when compared
with EPS of other similar companies, it gives a view of the comparative
earning power of the companies. EPS when calculated over a number of years
indicates whether the earning power of the company has improved or
deteriorated. Investors usually look for companies with steadily increasing
earnings per share.
Growth in EPS is an important measure of management performance because

it shows how much money the company is making for its shareholders, not
only due to changes in profit, but also after all the effects of issuance of new
shares (this is especially important when the growth comes as a result of
acquisition).
This lesson provides us the appropriate accounting and computation of basic

earnings per share and its objectives and uses.
Activating In your previous accounting courses, it was discussed that the result of the
Prior operations of a business is presented on the face of the statement of
Knowledge comprehensive income. One of the information needed in determining the
company’s EPS is the profit or loss of the company for the period. In this
regard, the instructor would like you to answer the following:
1. How is profit or loss computed?
2. Is profit or loss an indicator of a company’s performance during a
specific period?
3. In which financial statements does the EPS presented?
Analysis Earnings per share is necessary to be presented on the face of the financial
statements in order for the users to make informed decisions. Therefore, it is
necessary for us to study its concepts and procedures in accordance with IAS
33 Earnings per share.
Acquiring DEFINITION OF EARNINGS PER SHARE

New Earnings per share (EPS) – the amount expected to be received per share as a
Knowledge return on investment.
 Pertains only to ordinary shares.
 The objective of basic earnings per share information is to provide a
measure of the interests of each ordinary share of an entity in the
performance of the entity over the reporting period.
PRESENTATION OF EARNINGS PER SHARE

 EPS is presented on the face of income statement.
 EPS is presented even if the amount is negative (i.e., basic loss per
share)
TYPES OF EARNINGS PER SHARE

There are two types of EPS:
(1) Basic EPS, and
(2) Diluted EPS
This lesson covers only the basic EPS. Diluted EPS shall be discussed in the
next lesson.
COMPUTATION OF EARNINGS PER SHARE

14
Accountancy Area
Net income after tax−Preferred Dividends

Weighted Average Number of Ordinary Shares Outstanding
If the preference share is…

(1) Cumulative – Dividends on preference shares is deducted from net
income whether declared or not.
(2) Non-cumulative – Dividends on preference shares is deducted from
net income only when declared.
Note: In both cases, only the current year dividend on preference share is
deducted.
Checkpoint #1:
What is the reason behind why we ignore dividends in arrears on cumulative

preference shares when we are computing for earnings per share?
______________________________________________________________
______________________________________________________________
______________________________________________________________
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES

OUTSTANDING
 Weighted average number of ordinary shares outstanding
(WANOSO) during the period is the number of ordinary shares
outstanding at the beginning of the period, adjusted by the number of
ordinary shares bought back or issued during the period multiplied by a
time-weighting factor. Time-weighting factor is the number of days
that the shares are outstanding as a proportion of the total number of
days in the period.
 Shares are usually included in the weighted average number of shares
from the date consideration is received or receivable (which is
generally the date of their issue).
TREATMENT OF BONUS ISSUE AND STOCK SPLITS IN THE

COMPUTATION OF WEIGHTED AVERAGE NUMBER OF
ORDINARY SHARES OUTSTANDING
 Ordinary shares may be issued, or the number of ordinary shares
outstanding may be reduced, without a corresponding change in
resources (i.e., bonus issue, stock splits).
 In a bonus issue or a share split, ordinary shares are issued to existing
shareholders for no additional consideration. Therefore, the number of
ordinary shares outstanding is increased without an increase in
resources. The number of ordinary shares outstanding before the event
is adjusted for the proportionate change in the number of ordinary
shares outstanding as if the event had occurred at the beginning of the
earliest period presented.
- When ordinary shares are issued without a corresponding change in
resources, the EPS and the WANOSO during the period and for all
periods presented are adjusted retrospectively.
TREATMENT OF SUBSCRIBED ORDINARY SHARES IN THE

COMPUTATION OF WEIGHTED AVERAGE NUMBER OF
15
Accountancy Area
ORDINARY SHARES OUTSTANDING

 Under the Corporation Code of the Philippines, subscribed shares are
entitled to participate fully in dividends. Therefore, subscribed shares
are included in EPS computations from the date when the shares are
subscribed or when the consideration is receivable.
ILLUSTRATIVE PROBLEM:
Date: Particulars: Shares:
1/1 Shares outstanding 50,000
2/28 Issued 25,000 additional shares for cash 25,000
6/1 Declared 30% bonus issue 22,500
8/31 Reacquired 10,000 shares (10,000)
11/1 Effected 2-for-1 stock split
11/30 Received subscriptions for 30,000 shares 30,000
Net income for the current year amounted to P 500,000. There were 10,000
shares of 10% P 10 par value preference shares outstanding. The par value per
ordinary share is P1.00.
Computation of WANOSO:
50,000 x 12/12 x 1.3 x 2 130,000
25,000 x 10/12 x 1.3 x 2 54,167
(10,000) x 4/12 x 2 (6,667)
30,000 x 1/12 2,500
WANOSO 180,000
Alternative solution:
50,000 x 2/12 x 1.3 x 2 21,667
75,000 x 6/12 x 1.3 x 2 97,500
87,500 x 3/12 x 2 43,750
205,000 x 1/12 17,083
WANOSO 180,000
CASE 1: The preference share is cumulative. Dividends are in arrears for three
years, including the current year.
500,000−10,000
Basic EPS=
180,000
Basic EPS = P 2.72
 Whether cumulative or not, only one year preferred dividend is

deducted from net income.
CASE 2: The preference share is non-cumulative. Dividends are in arrears for

three years, including the current year
500,000
Basic EPS=
180,000
16
Accountancy Area
Basic EPS = P 2.78
CASE 3: The preference share is non-cumulative. The BOD declared

dividends during the current year.
Basic EPS = P 2.72
CASE 4: The preference share is cumulative and fully participating. Dividends

are in arrears for three years, including the current year.
PS OS Total
Basic dividends
10,000 x P10 x 10% 10,000
205,000 x P1 x 10% 20,500 30,500
Excess
469,500 x 100/305 153,934
469,500 x 205/305 315,566 469,500
Total 163,934 336,066 500,000
500,000−163,934
Basic EPS=
180,000
Basic EPS = P1.87
ISSUANCE OF STOCK RIGHTS

 When stock rights are issued to shareholders in conformance with their
pre-emptive right, the exercise price is normally less than the fair value
of the shares.
 It includes a bonus element. Thus, for EPS computation, the number of
shares outstanding for all periods before the rights issue is multiplied
by an adjustment factor computed by using the following formula:
Adjustment Fair value of stocks immediately before the exercise of rights

=
factor Theoretical ex-rights fair value per share
Theoretical ex-rights fair value per share is determined as follows:

Fair value of stocks immediately before the exercise of rights + Proceeds from exercising the rights
Number of shares outstanding after the exercise of the rights
Alternatively, this may also be computed as follows:
Fair value of shares selling right-on XX

Less: Value of one right* (XX)
Theoretical ex-rights fair value per share XX
*Computed as follows:
Fair value of share right-on - Subscription price
No. of rights needed to purchase one share + 1
ILLUSTRATIVE PROBLEM
ABC Co. 100,000 ordinary shares outstanding on January 1, 2020. ABC Co.
17
Accountancy Area
offers rights issue to its existing shareholders that enable them to acquire one
ordinary share at a subscription price of P80 for every four rights held. The
rights are exercised on April 1, 2020. The market price of one ordinary share
immediately before exercise is P120. ABC Co. reported profit after tax of
P900,000 in 2020. Compute for the basic EPS for 2020.
To compute for the basic EPS in this case, the following steps are done:
1. Compute for the theoretical ex-rights fair value per share.
2. Determine the adjustment factor.
3. Compute for the WANOSO.
4. Compute for the basic EPS.
1st step: Compute for the theoretical ex-rights fair value per share.
Formula:
Fair value of stocks immediately before the exercise of rights + Proceeds from exercising the rights
Number of shares outstanding after the exercise of the rights
(100,000 shares x P120) + [(100,000 rights/4 rights per share) x P80]

100,000 shares + 25,000 shares acquired from exercising the rights
P12,000,000 + P2,000,000
125,000 shares
P14,000,000
125,000 shares
Theoretical ex-rights fair value per share = 112
Alternative formula:
Fair value of shares selling right-on 120
Less: Value of one right* (8)
Theoretical ex-rights fair value per share 112
*Computed as:
Fair value of share right-on - Subscription price
No. of rights needed to purchase one share + 1
120 – 80
4+1
40
5
Value of one right = 8
2nd step: Determine the adjustment factor

Adjustment Fair value of stocks immediately before the exercise of rights
=
factor Theoretical ex-rights fair value per share
18
Accountancy Area
Adjustment factor = 120/112
3rd step: Compute for the WANOSO

1/1 100T x 120/112 x 3/12 26,785.71
4/1 125T x 9/12 93,750.00
WANOSO 120,535.71
4th step: Compute for the basic EPS.
900,000.00
Basic EPS =
120,535.71
Basic EPS = P7.47

Application Problem 1:
RX Corp. had 50,000 ordinary shares outstanding on December 31, 2019.
During the current year, it had the following transactions related to share
capital:
1/1 Issued 10,000 shares at par value.

3/31 Received subscriptions for 15,000 shares at market price.
4/30 Received full payment on subscribed shares and these shares
were issued accordingly.
6/1 Purchased 8,400 of its own shares.
9/30 Reissued 4,000 of the treasury shares.
12/3 Issued 12,000 shares at full market price.
1
What is the weighted average number of shares outstanding for 2020?
Problem 2:
BGC Corporation had 200,000 ordinary shares issued and outstanding on
January 1, 2020. During the current year, BGC had the following transactions
related to ordinary shares:
2/28 Effected 2-for-1 stock split

4/1 Issued 40,000 shares for cash
6/30 Purchased 24,000 of its own shares
8/1 Declared and issued 10% bonus issue
10/1 Reissued 12,000 treasury shares
12/3 Effected 4-for-1 reverse stock split
1
What is the weighted average number of shares outstanding for 2020?
Problem 3:
HTC Co. had 300,000 ordinary shares issued and outstanding on December 31,
2015. During 2016, no additional ordinary shares were issued or subscribed.
On January 31, 2016, the company issued 175,000 preference shares at par
value. During 2016, the company declared and paid P 120,000 cash dividends
to ordinary shareholders and P 108,500 to preferred shareholders. Net income
for the year ended 2016 was P 1,194,500. Income tax rate was 30%. What
amount should be reported as basic earnings per share?
19
Accountancy Area
Problem 4:
JK Corporation had the following capital structure during 2015 and 2016:
6% Preference share capital, P 25 par P 625,000

Ordinary share capital, P 10 par 500,000
The corporation reported net income of P 425,000 for the year ended
December 31, 2016. JK paid no dividends on preference shares during 2015
and paid P 70,000 dividends on preference shares during 2016. The preference
share is cumulative. What amount should be reported as basic earnings per
share?
Problem 5:
NPO Co. had 600,000 shares of P 3 par value ordinary shares outstanding on
January 1, 2016. Issued 120,000 ordinary shares on May 1, purchased 60,000
treasury ordinary shares on July 31, and reissued 42,000 treasury ordinary
shares on November 1. In addition, outstanding during 2016 were 150,000
shares of P 25 par 12% preference shares. The last dividend payment made to
shareholders was in 2013. Operating income for 2016 was P 1,500,000. The
tax rate is 30%.
1. What is the weighted average number of ordinary shares

outstanding for 2016?
CASE 1: The preference share is cumulative.

2. What amount should be reported as basic earnings per share?
CASE 2: The preference share is non-cumulative.

Problem 6:
ARF Co. had 600,000 shares of P 3 par value ordinary shares outstanding and
150,000 shares of P 25 par 12% preference shares outstanding on January 1,
2016. Issued 120,000 ordinary shares on May 1, declared 20% bonus issue (on
both ordinary and preference shares) on June 1, purchased 60,000 treasury
ordinary shares on July 31, effected 3-for-1 stock split (on both ordinary and
preference shares) on September 30, and reissued 42,000 treasury ordinary
shares on November 1. The last dividend payment made to shareholders was in
2013. Net income for 2016 was P 2,325,000. The tax rate is 30%.

CASE 1: The preference share is cumulative.

CASE 2: The preference share is non-cumulative.

Problem 7:
SB Co. had one class of share capital outstanding. During 2015, 80,000 shares
were outstanding. In 2016, three distributions of additional shares occurred:
 On March 31, 12,000 treasury shares were sold.
20
Accountancy Area
 On June 1, a 2-for-1 reverse stock split was effected.

 On September 30, 40% stock dividend was declared and issued.
Net income for 2016 was P 186,900 and P 126,000 in 2015.
What amount should be reported as basic earnings per share in the

comparative income statement?
Problem 8:
Grand Corporation was incorporated in early 2014s. Grand Corporation had
100,000 shares of P 15 par value ordinary shares and 35,000 shares of 12%
cumulative P 40 par value preference shares outstanding on January 1, 2015,
the following ordinary share capital transactions took place:
2015
2/1 Issued 60,000 shares.
6/30 Declared and issued 25% stock dividends.
11/1 Received subscriptions for 75,000 shares at market value. Received

30% down payment. Shares will be issued after full payment is
received.
12/31 Purchased 30,000 shares to be held in treasury.
2016
2/1 Received full payment on subscribed shares. Accordingly, all
subscribed shares were issued.
3/31 Reissued 20% of the shares in the treasury.
6/30 Declared and issued 25% stock dividends.
9/30 Effected 2-for-1 stock split.
11/1 Reissued the remaining 80% treasury shares.
There were no additional issuance of preference share throughout the 2-year

period.
Grand reported the following:

2015 2016
Sales 1,500,00 1,800,000
0
Purchases 700,000 850,000
21
Accountancy Area
Inventory, 1/1 25,000 40,000

Freight in 30,000 45,000
Inventory, 12/31 ? 30,000
Sales discounts 5,000 5,000
Purchase returns & allowances 15,000 20,000
Cash operating expenses 340,000 391,000
Sales returns & allowances 25,000 25,000
Purchase discounts 10,000 14,000
Depreciation expense 125,000 125,000
Income tax rate was 30% for both years.
1. What is the weighted average number of ordinary shares for 2015?

2. What is the weighted average number of ordinary shares for 2016?
3. What amount should be reported as basic earnings per share for
the year 2015?
4. What amount should be reported as basic earnings per share for
the year 2016?
5. What is the weighted average number of ordinary shares for 2015
to be used for comparative financial statements at the end of 2016?
6. What is the weighted average number of ordinary shares for 2016
to be used for comparative financial statements at the end of 2016?
7. What amount should be reported as basic earnings per share in the
2016 comparative income statement?
Problem 9:
Krall Co. had 600,000 shares of P5 par value ordinary shares outstanding on
January 1, 2016. Issued 120,000 ordinary shares on May 1, purchased 60,000
treasury ordinary shares on July 31, and reissued 42,000 treasury ordinary
shares on November 1. In addition, outstanding during 2016 were 150,000
shares of P 25 par 12% preference shares. Net income for 2016 was P
1,200,000. The tax rate is 30%.

CASE 1: Preference share is cumulative and fully participating.

CASE 2: preference share is cumulative and participating up to an additional

3%.
Problem 10:
ABC Co. 200,000 ordinary shares outstanding on January 1, 2020. ABC Co.
offers rights issue to its existing shareholders that enable them to acquire one
ordinary share at a subscription price of P160 for every four rights held. The
rights are exercised on April 1, 2020. The market price of one ordinary share
immediately before exercise is P240. ABC Co. reported profit after tax of
P1,800,000 in 2020. Compute for the basic EPS for 2020.
Lesson Diluted Earnings Per Share

2:
22
Accountancy Area
Objectiv Define diluted earnings per share.

es:
Identify potential ordinary shares.
Distinguish dilutive and antidilutive securities.
Determine the computation of diluted earnings per share with the effects of
dilutive securities.
Introduc There are two types of capital structures, namely, simple capital structure and
tion: complex capital structure. A simple capital structure consists of only ordinary
shares and nonconvertible securities while a complex capital structure consists of
ordinary shares and potential ordinary shares. Potential ordinary shares are those
financial instruments or other contract that entitles the holder to ordinary shares
such as convertible preference shares, convertible bonds, share options and
warrants.
If the capital structure of a corporate entity is simple, it only needs to present basic
earnings per share (EPS) on the face of the income statement. If its capital
structure is complex, then the entity shall present both basic and diluted earnings
per share on the face of the income statement.
This lesson will present the computation process of diluted earnings per share.
Activati In our previous lesson, we discussed the nature, presentation, and computation of
ng Prior basic earnings per share. It was mentioned that one of the information needed in
Knowle determining the company’s EPS is the profit or loss of the company for the period.
dge In this regard, the instructor would like you to answer the following:
1. How is profit or loss computed?
2. Is profit or loss an indicator of a company’s performance during a specific
period?
3. In which financial statements does the EPS presented?
Analysis Earnings per share is necessary to be presented on the face of the financial
statements for the users to make informed decisions. Therefore, it is necessary for
us to study its concepts and procedures in accordance with IAS 33 Earnings per
share.
Acquiri NATURE OF DILUTED EARNINGS PER SHARE

ng New Diluted EPS is similar to the basic EPS in a sense that it only pertains to ordinary
Knowle shareholders. However, its computation is complicated because of the inclusions of
dge the effects of dilutive potential ordinary shares.
Dilutive securities vs. Antidilutive securities

 Potential ordinary shares are dilutive when its inclusion in the computation
of diluted EPS decreases the basic EPS or increases the basic loss per
share.
 Potential ordinary shares are antidilutive when its inclusion in the
computation of diluted EPS increases the basic EPS or decreases the basic
loss per share. These are ignored in the computation of diluted EPS.
COMPUTATION OF DILUTED EPS

Diluted EPS are computed based on the assumption that these potential ordinary
shares are actually converted into ordinary shares:
23
Accountancy Area
Convertible preference shares

► If there are convertible preference shares outstanding, the computation of
diluted EPS assumes that these preference shares are converted into
ordinary shares.
► The net income is not reduced by the amount of preferred dividends on
convertible preference shares. The adjustment shall be made to WANOSO
only.
► The formula to compute for diluted EPS in this case is:
Net income attributable to ordinary shareholders + preference dividends to convertibl

Diluted EPS =
WANOSO + Incremental ordinary shares arising from the assumed conversion of convertible pre
Convertible bonds
► If there are convertible bonds outstanding, the computation of diluted EPS
assumes that these bonds are converted into ordinary shares. The
adjustments shall be made both to net income and WANOSO.
Net income attributable to ordinary shareholders + After tax interest on

Dilute convertible bonds
=
d EPS WANOSO + Incremental ordinary shares arising from the assumed conversion
of convertible bonds
Share options and warrants

► Share options and warrants are issued to enable the recipient to acquire
ordinary shares of the issuing entity at a specified price during a definite
period of time. That specified price is usually lower than the prevailing
market price.
► For share options, the exercise (or option) price is less than the fair value of
any services to be supplied to the entity in the future under the option plan.
► Options and warrants are included in the diluted EPS computation through
the treasury share method. This method is used to simplify the computation
of incremental ordinary shares that are assumed to be issued for no
consideration as a result of options and warrants.
 Procedures:
1. Options and warrants are assumed to be exercised at the beginning
of the current year or at the date issued during the current year.
2. The proceeds from the exercise of the options and warrants are
assumed to be used to acquire treasury shares at average market
price.
3. The number of incremental ordinary shares is equal to the options
shares minus the assumed treasury shares acquired.
Dilute Net income attributable to ordinary shareholders

= WANOSO + incremental shares arising from the assumed exercise of
d EPS
options and warrants
MULTIPLE POTENTIAL ORDINARY SHARES

► In considering whether potential ordinary shares are dilutive or
antidilutive, each issue or series of potential ordinary shares shall be
considered separately, rather than aggregate.
► In order to maximize the dilution of the basic EPS, each issue is considered
in sequence from the most dilutive to the least antidilutive. Potential
24
Accountancy Area
ordinary shares are ranked based on their contribution in terms of

incremental EPS.
 The potential ordinary share with the lowest incremental EPS is ranked
first, which is ,normally, the share options and warrants. Share options
and warrants do not have any effect on the net income of the entity.
Therefore, its incremental EPS is equal to zero.
Computation of incremental EPS

1. Convertible preference shares
Annual preference dividends on convertible preference shares

Incremental ordinary shares from conversion of preference shares
2. Convertible bonds
Interest expense on convertible bonds, net of tax

Incremental ordinary shares from conversion of bonds
3. Share options and warrants

Zero
Incremental ordinary shares from exercise of options and warrants
Applicat To assess your understanding of the lesson, answer the following problems:
ion
Problem 1:
Aragon Company had 400,000 ordinary shares of P100 par value and 10,000
shares of P200 par, 8% cumulative, convertible preference share capital
outstanding for the entire current year.
Each preference share is convertible into 10 ordinary shares. No preference shares

were converted during the current year. The net income for the current year was
P1,200,000. The company did not declare any dividends during the current year.

2. What amount should be reported as diluted earnings per share?
Problem 2:
MARY Company had 200,000 ordinary shares outstanding on January 1, 2018. On
March 1, 2018, the company issued 5,000 convertible, cumulative 6% preference
shares with P100 par. These preference shares were converted on October 1, 2018.
Each preference share was converted into five ordinary shares.
The preference dividends were paid in full before the conversion. The company
has no other potentially dilutive securities. Profit for 2018 was P1,500,000. Income
tax rate is 30%.

Problem 3:
On December 31, 2018, Pinya Co. had 200,000 ordinary shares outstanding with a
par value of P100 per share. In addition, Pinya had convertible preference shares
which are convertible into 30,000 ordinary shares. On December 31, 2018, Pinya
25
Accountancy Area
reported profit of P1,200,000 and paid P200,000 dividends to preference shares.
1. What amount of EPS should Pinya report in its 2018 income

statement?
Problem 4:
Jet Ski Company had 250,000 ordinary shares outstanding on January 1, 2018. An
additional 50,000 ordinary shares were issued on April 1, 2018, and 25,000 more
on July 1, 2018.
On October 1, 2018, the company issued 5,000, P1,000 face amount 8%

convertible bonds. Each bond convertible into 20 ordinary shares. No bonds were
converted into ordinary shares in 2018.
1. What is the number of shares that should be used in computing basic

earnings per share?
2. What is the number of shares that should be used in computing diluted
earnings per share?
Problem 5:
Mega Company had 100,000 ordinary shares outstanding on January 1, 2018. On
the same date, the company issued 5,000 convertible 10% bonds with P1,000 face
amount.
The bonds were converted on October 1, 2018 and 30 ordinary shares were issued
in exchange for each bond. Net income was P2,000,000 and the income tax rate is
30%.
1. What is the amount of basic earnings per share?

2. What is the amount of diluted earnings per share?
Problem 6:
Manny Company had 100,000 ordinary shares outstanding on January 1, 2018. On
February 1, the company issued 5,000 convertible 10% bonds with P1,000 face
amount.
The bonds were converted on October 1, 2018 and 30 ordinary shares were issued
in exchange for each bond. Net income was P2,000,000 and the income tax rate is
30%.

Problem 7:
Mean Girls Company had 30,000 ordinary shares issued and outstanding on
January 1, 2018. On July 1, 2018, an additional 5,000 ordinary shares were issued.
The company also had unexercised share options to purchase 36,000 ordinary
shares at P25 per share outstanding at the beginning and end of 2018.
No value was assigned to the share options. The average market price of ordinary
shares was P30 during 2018. Net income for 2018 was P1,000,000.
26
Accountancy Area
Problem 8:
JC Company reported the following on December 31, 2018:
Common stock 110,000 shares

Convertible, noncumulative preferred stock 20,000 shares
10% convertible bonds payable P2,000,000
Share options to purchase 20,000 shares at P15 were outstanding. Market price of
JC share was P25 at December 31, 2018 and averaged P20 during 2018.
The company paid the annual dividend of P5 on the preference share.
Each preference share are convertible into two common stocks. The 10% bonds are
convertible into 30,000 common stocks. The net income for 2018 is P650,000. The
tax rate is 30%.

Module 4: Noncurrent Assets Held for Sale and Discontinued Operations

Objectives: Identify and apply the criteria for assets to be classified as held for sale.
Formulate entries relating to assets held for sale.
Apply the principles for presentation and disclosures in the financial
statements of non-current assets held for sale.
Introduction The management of a company makes economic decisions that will work best
: to the interest of its shareholders. The economic benefits to be derived from
non-current assets are continuously assessed and when there is valid reason to
believe that the economic resource be best disposed of rather than
continuously used by the company, such assets may be held for disposal.
Activating In your intermediate accounting 1 course, you have tackled the discussions on
Prior non-current assets. By definition, these are long-term assets. Examples of
Knowledge these are land, building, machinery, equipment, furniture and fixtures, etc.
Your knowledge of the concepts on non-current assets will again be applied in

this lesson.
Analysis IFRS 5 prescribes the basis as to when to classify, how to measure and how to
present non-current assets held for sale in the financial statements.
Acquiring
New
Knowledge
Figure 4.1.1: Objective of IFRS 5
27
Accountancy Area
CLASSIFICATION OF NON-CURRENT ASSET AS HELD FOR SALE

An entity shall classify a non-current asset as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than
through continuing use.
CONDITIONS FOR CLASSIFICATION AS HELD FOR SALE

A noncurrent asset is classified as held for sale and presented as current asset
in the statement of financial position if both of the following conditions are
met:
(1) Available for immediate sale in its present condition subject only to
terms that are usual and customary for sales of such assets, and;
(2) Its sale must be highly probable.
 For the sale to be highly probable, the management must be:

1. Committed to a plan to sell the asset.
2. An active program to locate a buyer and complete the plan
must have been initiated. Further, the asset must be actively
marketed for sale at a price that is reasonable in relation to its
current fair value.
3. In addition, the sale should be expected to qualify for
recognition as a completed sale within one year from the date
of classification.
Exception to the rule

An extension of the period required to complete a sale does not preclude an
asset (or disposal group) from being classified as held for sale if the delay is
caused by events or circumstances beyond the entity’s control and there is
sufficient evidence that the entity remains committed to its plan to sell the
asset.
NON-CURRENT ASSET THAT ARE TO BE ABANDONED

An entity shall not classify as held for sale a non-current asset that is to be
abandoned. This is because its carrying amount will be recovered principally
through continuing use.
MEASUREMENT OF NON-CURRENT ASSETS HELD FOR SALE

An entity shall measure a non-current asset classified as held for sale at the
lower of its carrying amount and fair value less costs to sell Assets held for
sale are not depreciated.
Figure 4.1.2: Measurement of assets held for sale
CHANGES IN FAIR VALUE LESS COSTS TO SELL

Subsequent changes in fair value less costs to sell are recognized in profit or
loss as impairment losses or gains on reversal of impairment. However, a gain
on reversal of impairment is recognized only to the extent of cumulative
28
Accountancy Area
impairment losses that have previously been recognized.
Figure 4.1.3: Measurement of assets held for sale before and after
classification
Changes to a plan of sale or to a plan of distribution to owners

If an entity has classified an asset as held for sale, but the criterion for held for
sale are no longer met, the entity shall cease to classify the asset as held for
sale.
The entity shall measure a non-current asset that ceases to be classified as held
for sale at the lower of:
(a) Its carrying amount before the asset was classified as held for sale or
as held for distribution to owners, adjusted for any depreciation,
amortization or revaluations that would have been recognized had
the asset not been classified as held for sale, and
(b) Its recoverable amount at the date of the subsequent decision not to
sell or distribute.
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:
a. Represents a separate major line of business or geographical area of
operations.
b. Is part of a single coordinated plan to dispose of a separate major line
of business or geographical area of operations.
c. Is a subsidiary acquired exclusively with a view to resale.
A discontinued operation is accounted for as a disposal group classified as

held for sale.
TIMING OF REPORTING OF A DISCONTINUED OPERATION

A component of an entity is classified as discontinued operation at the date the
entity
a. Has actually disposed of the operation, or
b. When the operation meets the criteria to be classified as held for sale.
FINANCIAL STATEMENT PRESENTATION

1. Income statement
The results of discontinued operation, net of tax shall be shown as a single
amount in the income statement below the income from continuing
operations.
2. Statement of financial position

The assets of the component classified as held for sale shall be presented as a
29
Accountancy Area
single amount under current assets and the liabilities of the component shall
be presented as single amount under current liabilities.
Application To assess your understanding of the topic, answer the following:
Problem 1:
On December 31, 2019, Eric Company classified one of its equipment as held
for sale. The equipment had a cost of P200,000 and accumulated depreciation
of P72,000 on that date.
CASE 1: The fair value of the equipment was estimated at P105,000 and the
cost of disposal at P5,000. What amount should be reported as impairment
loss for 2020?
CASE 2: The fair value of the equipment was estimated at P140,000 and the
cost of disposal at P5,000. What amount should be reported as impairment
loss for 2020?
Problem 2:
On May 1, 2019, Kaizen Company classified one of its machines as held for
sale and decided to sell the machine within one year. On the same date, the
machine had a cost of P300,000, accumulated depreciation of P130,000 and
an estimated selling price of P150,000. It is estimated that selling cost
associated with the disposal of the machine will be P20,000.
CASE 1: On December 31, 2019, the estimated selling price of the machine
had increased to P180,000 with estimated selling cost of P30,000. What
amount should be recognized as gain on reversal of impairment on
December 31, 2019?
CASE 2: On December 31, 2019, the estimated selling price of the machine
had increased to P220,000 with estimated selling cost of P30,000. What
amount should be recognized as gain on reversal of impairment on
December 31, 2019?
Problem 3:
Tinkering Company acquired an equipment for P1,000,000 on January 1,
2017 with a useful life of 10 years and estimated residual value of P100,000.
On December 31, 2018, the company classified the equipment as held for sale.
The fair value of the equipment on December 31, 2018 was P750,000 and the
cost to dispose is estimated at P50,000.
On December 31, 2019, the company believed that the criteria for
classification as held for sale can no longer be met. Accordingly, the company
decided not to sell the asset but to continue to use it. On December 31, 2019,
the fair value of the equipment was P800,000 and the cost to sell is estimated
at P80,000. The value in use was determined at P740,000.
1. What is the impairment loss to be recognized on December 31,

2018?
2. What is the measurement of the equipment that ceases as held for
sale on December 31, 2019?
30
Accountancy Area
3. What amount should be recognized in profit or loss as a result of

the reclassification in 2019?
Problem 4:
Palmetto Company is a diversified entity with nationwide interests in
commercial real estate 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 revenue of P35,000,000 and expenses of

P27,000,000 for the period January 1 to September 30, and revenue of
P15,000,000 and expenses of P10,000,000 for the period October 1 to
December 31.
The carrying amount of the division’s net assets on December 31, 2019 was
P65,000,000 and the fair value less cost of disposal was P60,000,000.
The sale contract required Palmetto to terminate certain employees incurring

an expected termination cost of P4,000,000 to be paid by December 15, 2020.
The income tax rate is 30%. What amount should be reported as income
from discontinued operation for 2019?
Module 5: PFRS for Small- and Medium-Sized Entities (SMEs)

Lesson 1: PFRS for Small and Medium-Sized Entities (SMEs)
Objectives: State the basic purpose for the issuance of the PFRS for SMEs.
Explain the nature of an SME.
Discuss the adoption of PFRS for SMEs and its transition concepts.
Provide the distinct differences between the full PFRSs and the PFRS for
SMEs.
Introduction: Companies that are not publicly accountable because their ownership shares
and debt instruments are not traded in Philippine stock markets, and
companies whose assets and liabilities are less than P350 million and P250
million, respectively, constitute an overwhelming majority of private sector
companies in the Philippines.
Since the adoption of the full PFRSs issued by the IASB, national standard-
setters and regulators have received complaints, especially from entities
considered “small and medium-sized entities”, of apparent difficulties in the
application of the full PFRSs.
Activating In your previous accounting courses, the concepts and application of

Prior accounting procedures in accordance with full PFRS were comprehensively
Knowledge discussed.
Your knowledge of these concepts and procedures will again be applied in

this lesson in addition to the new concepts and procedures to be discussed.
Analysis The PFRS for SMEs was primarily developed in response to the apparent
31
Accountancy Area
difficulties faced by some entities in adopting and applying the full PFRSs.
Such difficulties include:
a. Complexity of compliance with full PFRS by SMEs, or
b. High cost of implementation by SMEs.
Acquiring NATURE OF SMALL AND MEDIUM-SIZED ENTITIES

New Small and medium-sized entities (SMEs) are those entities that:
Knowledge ► Publish general purpose financial statements for external users, and
► Do not have public accountability.
 An entity has public accountability if:
 Its debt and/or equity instruments are traded in a public
market.
 It is in the process of issuing such instruments for trading in a
public market, or
 It holds assets in a fiduciary capacity for a broad group of
outsiders as one of its primary businesses (i.e., banks, credit
unions, insurance companies, etc.).
ADOPTION OF PFRS FOR SMEs and SMALL ENTITIES

► The PFRS for SMEs was adopted in the Philippines effective January
1, 2010.
► In the Philippines, per Securities and Exchange Commission (SEC)
guidelines, PFRS for SMEs shall cover corporation that:
(a) Have total assets of between P3,000,000 and P350,000,000 or
total liabilities of between P3,000,000 and P250,000,000;
(b) Are not required to file financial statements under SRC Rule
68.1;
 This rule pertains to listed entities or entities whose securities
are traded in an exchange market, and entities with assets of
at least P50,000,000 and have 200 or more holders each
holding at least 100 shares of a class of equity securities.
(c) Are not in the process of filing their financial statements for the
purpose of issuing any class of instruments in a public market;
(d) Are not holders of secondary licenses issued by a regulatory
agency, such as banks, investment houses, finance companies,
insurance companies, securities broker/dealers, mutual funds,
and pre-need companies; and
(e) Are not public utilities.
TRANSITION
To PFRS for SMEs
SMEs adopting the PFRS for SMEs for the first time are considered first-
time adopters. On initial adoption of the PFRS for SMEs, an entity shall
apply the size criteria using the entity’s audited financial statements for the
immediately preceding financial reporting period.
Date of transition
The date of transition to PFRS for SMEs is the beginning of the earliest
period for which full comparative information is presented in accordance
with PFRS for SMEs in the first annual financial statements that conform
with IFRS for SMEs.
Example: A first-time adopter presents the first annual financial statements
32
Accountancy Area
in conformity with IFRS for SMEs on December 31, 2020.
 In this case, the date of transition to IFRS for SMEs is January 1,

2019.
From PFRS for SMEs

Entities ceasing to qualify as SMEs shall adopt the full PFRS unless they
qualify as micro entities.
 Micro entities are entities that have total assets or liabilities below
P3,000,000. However, a micro entity may nevertheless elect to apply
the PFRS for SMEs or even the full PFRS if it chooses to.
Breaches of size criteria

► If in a current period, an SME that uses PFRS for SMEs ceases to
qualify as an SME because it exceeds the ceiling of the size criteria,
such entity should adopt the full PFRS in the subsequent period.
► If an SME ceases to qualify as an SME because its total assets or
liabilities falls below the floor of the size criteria, such entity may
transition to another acceptable accounting basis in the next
accounting period, unless the micro entity opts to adopt the PFRS for
SMEs.
 Other acceptable basis of accounting that may be used by a micro
entity are tax basis accounting and cash basis accounting.
NOTE: This transition must be made provided the event that caused the
change is considered significant and continuing.
 As a general rule, 20% or more of the total assets or total liabilities
would be considered significant.
NOTABLE DIFFERENCES BETWEEN FULL PFRS AND PFRS FOR

SMEs
FULL PFRS PFRS for SMEs

Financial statement presentation
Non- presentation of additional balance sheet
PAS 1 Presentation of Financial The PFRS for SMEs does not
Statements requires the presentation require the presentation of such
of an additional statement of additional statement of financial
financial position as at the position.
beginning of preceding period when
an entity:
(a) applies an accounting policy
retrospectively,
(b) makes a retrospective
restatement of items in its
financial statement, or
(c) when it makes
reclassification adjustments.
33
Accountancy Area

Option not to present a statement of comprehensive income
Under PAS 1, a statement of Under PFRS for SMEs, if an entity
comprehensive income is always has no items of other
presented when an entity prepares a comprehensive income in any
complete set of general-purpose periods for which financial
financial statements, either as: statements are presented, it may
single statement or as one of the present only an income statement,
components of a two-statement or it may present a statement of
presentation. comprehensive income in which the
“bottom line is labeled as profit or
loss.

Recognition of revenue from contracts with customers
PFRS 15 Revenue from contracts PFRS for SMEs requires a simpler
with customers requires the principle of “transfer of significant
application of a five-step principle risk and rewards” in revenue
when recognizing revenue from recognition.
contract with customers.

Components of other comprehensive income
Components of OCI that are The following are the components
reclassified subsequently to profit of OCI under the PFRS for SMEs:
or loss are the following: a. Changes in revaluation
1. Gain or loss from translating surplus
financial statements of a b. Actuarial gains and losses
foreign operation. c. Some gains and losses from
2. Unrealized gain or loss on translating FS of a foreign
derivative contracts operation.
designated as cash flow d. Some changes in fair values
hedge. of hedging instruments.
3. Unrealized gain or loss on
debt investment measured at NOTE: Unrealized gains and losses
FVOCI on FVOCI are not included because
FVOCI classification is not
Components of OCI that are not available for SMEs.
reclassified to profit or loss include
the following:
1. Unrealized gain or loss on
equity investment measured
at FVOCI
2. Change in revaluation
surplus
3. Remeasurements of defined
benefit plan
4. Change in fair value
attributable to credit risk of
financial liability at FVPL
34
Accountancy Area
Option not to present Statement of changes in equity / Option to present a

Statement of income and retained earnings.
PAS 1 requires that a statement of The PFRS for SMEs allows an
changes in equity shall always be entity to omit the statement of
presented when an entity prepares a changes in equity and, in lieu
complete set of general purpose FS. thereof, present a single statement
of income and retained earnings it
PAS 1 does not include an option to the only changes to equity during
present a statement of income and the periods for which financial
retained earnings. statements are presented arise from
a. Profit or loss
b. Payment of dividends
c. Correction of prior period
errors
d. Changes in accounting
policy

Non-current assets held for sale
Under PFRS 5 Non-Current Assets No similar classification is provided
Held for Sale and Discontinued under PFRS for SMEs
Operations, an entity shall classify
a non-current asset as held for sale
its carrying amount will be
recovered principally through a sale
transaction rather than continuing
use.
Property dividends in the form of

non-current asset held for
distribution to owners qualifies
under PFRS 5.

Non-disclosure of operating segment information and Earnings per share
PFRS 8 Operating Segments and PFRS for SMEs does not require
PAS 33 Earnings per Share require disclosures of segment information
listed entities to disclose segment and earnings per share.
information in their notes and
earnings per share on the statement
of comprehensive income,
respectively.
Interim Financial Reporting

Condensed financial statements
PAS 34 Interim Financial The PFRS for SMEs does not
Reporting provides guidance in the include similar provisions.
preparation of condensed financial
statement presentation for interim
period.
35
Accountancy Area
Financial Instruments
Classifications of financial instruments
Under PFRS 9 Financial Under PFRS for SMEs, financial
instruments are classified as either: instruments are either:
(a) Amortized cost; a. Basic, or
(b) FVOCI (mandatory); b. Non-basic
(c) FVOCI (irrevocable election);
or Basic financial instruments refer to
(d) FVPL on the basis of both the: non-complex financial instruments
(1) entity’s business model and
(2) the contractual cash flow Basic financial instruments are
characteristics of the subsequently measured using an
financial instrument. amortized cost model, except for
those that are publicly traded or
Entities are permitted to designate whose fair value can be measured
financial assets at FVPL if doing so reliably without undue cost or
eliminates “accounting mismatch.” effort, which are measured at
FVPL.
Non-basic financial instruments are

subsequently measured at FVPL,
except for those whose fair values
cannot be reliably determined
without undue cost or effort which
are permitted to be measured at cost
less impairment.
The FVOCI classification is not

permitted.
 PFRS for SMEs does not
include an option to
designate financial assets at
FVPL.
Investment in Associate
Choice of accounting policy on investment in associate
PAS 28 Investments in Associates Investment in Associate are
and Joint Ventures requires the use accounted for using one of the
of equity method in accounting for following:
investment in associate. a. Cost model
b. Equity model
PAS 27 Separate Financial c. Fair value model
Statements investments in
associates are accounted for in
separate financial statement either:
a. At cost,
b. Equity method, or
c. In accordance with PFRS 9
(i.e., fair value)
Investment in Associate
Implicit goodwill on acquisition
PAS 28, goodwill relating to an Goodwill is the excess of
36
Accountancy Area
associate is included in the carrying acquisition cost of the investment in

amount of investment. There is no associate over the investor’s interest
separate accounting required for the in the net fair value of the
implicit goodwill. Neither identifiable assets, liabilities and
amortization nor separate contingent liabilities shall be
impairment testing of the goodwill recognized as goodwill and shall be
is permitted. amortized over its estimated life, or
management’s best estimate but not
to exceed 10 years.
Different reporting periods

Under PAS 28, the difference PFRS for SMEs does not include
between the end of financial similar provision.
reporting shall not exceed 3 months.
Agriculture
Bearer plants
Bearer plants are excluded from the No equivalent provision.
scope of PAS 41 Agriculture and
are classified as property, plant and
equipment.
Agriculture
Measurement
PAS 41 Agriculture requires the Measure biological asset on initial
measurement of biological asset at and at each reporting period at it FV
FV less cost to sell. less cost to sell only when fair value
is readily determinable without
There is a rebuttable presumption undue cost or effort.
that fair value can be measured
reliably for a biological asset. A biological asset whose fair value
is not readily determinable without
Only when that presumption is undue cost or effort shall be
rebutted on initial recognition that measured at cost less any
an entity is permitted to measure its accumulated depreciation and
biological assets at cost less impairment losses.
accumulated depreciation.
Intangible asset (other than goodwill)

Accounting for research and development cost
Under PAS 38 Intangible Assets, Research and development cost are
research and development cost are recognized as expenses in the
generally expensed. period incurred unless they form
part of the cost of another asset.
However, development cost may be
capitalized if conditions for PFRS for SMEs does not provide
capitalization are met. conditions for capitalization.

Amortization of intangible assets
Only intangibles with finite life are All intangibles are considered to
amortized. have finite useful life. The useful
37
Accountancy Area
life of an intangible asset shall not

Intangibles with indefinite life are exceed its legal life, if any.
not amortized but tested for
impairment at least annually. If useful life is undeterminable,
useful life is best on management
best estimate but not to exceed 10
years.

Annual review of depreciation/amortization, useful life and residual value
PAS 16 and 38 requires an entity to An entity shall review these only if
review these at least at each there are indicators that there have
financial year-end. If there are been changes since the most recent
changes, the entity shall account for annual reporting date.
the changes as change in accounting
estimate.
Accounting for goodwill

Amortization of goodwill arising from business combination
Under PAS 36 Impairment of After initial recognition, the
Assets, goodwill arising from acquirer shall measure goodwill
business combination shall not be acquired in a business combination
amortized but rather tested for at cost less accumulated
impairment at least annually. amortization and accumulated
impairment losses.
If the useful cannot be determined,

the useful life shall be determined
based on management’s best
estimate but shall not exceed 10
years.
Government Grants
Classification and recognition of government grant
Under PAS 20, Accounting for PFRS for SMEs does not provide
Government Grants and Disclosure such classification. Government
of Government Assistance, grant are recognized as follows:
government grants are classified as a. Grant that does not impose
either: future performance, income
(a) grants related to assets or is recognized when it
(b) grants related to income. becomes receivable.
b. A grant that imposes
Government grants are recognized conditions, income is
over the period necessary to match recognized when conditions
income with the related cost, on a are met.
systematic basis. c. Grants received prior to
satisfying the revenue
If the grant intends to compensate recognition criteria are
for losses already incurred, the recognized as liability.
grant is immediately recognized as
38
Accountancy Area
income at grant date.
Government Grants
Measurement of government grant
Under PAS 20, monetary grants are Government grants are measured at
measured at: fair value of asset received or
a. Amount of cash received; receivable.
b. Fair value of amount
receivable No alternative, measurement basis.
c. Carrying amount of loans
forgiven; or
d. Discount on loans at below
market rate of interest.
While non-monetary grants are

measured at fair value, or nominal
amount plus direct costs incurred.
Borrowing cost
Under PAS 23 Borrowing costs, All borrowing cost are recognized
borrowing cost attributable to the as expense in the period they are
acquisition or construction of a incurred.
qualifying asset form part of the
cost of the asset. Other borrowing
cost are expensed.
Impairment of assets
Value in use computation
When computing value in use, cash Does not state specific time limit
flow projection shall cover before extrapolation is required.
maximum period of 5 years, unless The entity may extrapolate beyond
longer period can be justified. period covered by the most recent
Projections beyond 5 years shall be budgets or forecast.
extrapolated.
Employee benefits
Defined contribution plan
Employee benefits are measured on Obligation under defined
an undiscounted basis. contribution plan need not be
discounted.
Employee benefits
Measurement of defined benefit liability
PAS 19 requires the use of the The projected unit credit method
projected unit credit method. shall be use only if the entity is able
to do so without undue cost or
effort.
Leases
Accounting for leases by lessees
39
Accountancy Area
Lessee accounts for a lease by Lessee classifies a lease into a

recognizing a right-of-use asset and finance lease or an operating lease.
lease liability
Leases
Sale and leaseback
Under PFRS 16, both the seller- If sale and leaseback qualifies as
lessee and buyer-lessor determine if finance lease, the seller-lessee shall:
the transfer of asset under sale and a. Defer any gain from the sale
leaseback qualifies as a sale using and amortized over the lease
PFRS 15. If the transfer qualifies as term.
a sale, the seller-lessee shall: b. Recognized immediately
a. Measure the right-of-use any loss from sale
asset that relates to the right-
of-use retained by the seller- If the sale qualifies as operating
lessee; and lease the seller-lessee shall
b. Recognize gain or loss that observed the following guidelines:
relates to the rights a. If sale is at fair value, any
transferred to the buyer- gain or loss from sale shall
lessor. be recognized immediately.
b. If sales price is below fair
If the transfer do not qualify as a value, any gain or loss shall
sale, the parties shall account for be recognized immediately,
the sale and leaseback as an however, if the loss is
operating lease. compensated by future lease
payment below fair value,
the loss shall be deferred
and amortized over the lease
term.
c. If the sales price is above
fair value, the excess sales
price over fair value is
deferred and amortized over
the lease term.
Events after reporting period

Declaration of dividends after reporting period
Not recognized, disclosed only. Not recognized.
Related party disclosures

Key management personnel compensation
Under PAS 24 Related Party An entity is required to disclose key
Disclosures, an entity is required to management personnel
disclosed key management compensation in total only.
personnel compensation in total and
for each of the following categories:
a. Short-term employee
benefits;
b. Post-employment benefits;
c. Termination benefits; and
d. Share-base payment
40
Accountancy Area
Application To assess your understanding of the lesson, answer the following:
Multiple Choice Questions

1. The IASB defines SMEs as entities that
a. Do not have public accountability.
b. Have public accountability and publish general purpose financial
statements for external users.
c. Do not publish general purpose financial statements for external
users.
d. Do not have public accountability and publish general purpose
financial statements for external users.
2. All entities are publicly accountable, except

a. An entity whose shares are traded in a public market.
b. An entity whose debt instruments but not the shares are traded in
a public market.
c. An entity whose shares and debt instruments are traded in an
over-the-counter market.
d. An entity that is not in the process of issuing shares and debt
instruments for trading in a public market.
3. In the Philippines, which entity is not an SME?

a. A nonpublicly accountable entity with total assets between
P3,000,000 and P350,000,000.
b. A nonpublicly accountable entity with total liabilities between
P3,000,000 and P250,000,000.
c. An entity that is not a holder of a secondary license issued by a
regulatory agency.
d. A public utility
4. Entities with total assets or total liabilities below the floor threshold
of P3,000,000 are known as
a. Micro-business entities
b. Macro-business entities
c. Medium-sized entities
d. Small entities
5. If an SME that uses the PFRS for SMEs in the current year breaches
the ceiling of the size criteria at the end of the current year, the entity
is required to transition to full PFRS
a. At the current year-end.
b. At the current year-end if the event that caused the change is
significant and continuing.
c. In the next year if the event that caused the change is significant
and continuing.
d. At the discretion of management
6. What is considered significant change that requires transition to

PFRS for SMEs?
a. 20% or more of the total assets or total liabilities
b. 50% or more of the total assets or total liabilities
c. 10% or more of the total assets or total liabilities
d. No quantitative threshold can be made
41
Accountancy Area
7. What is the date of transition to IFRS for SMEs?

a. The beginning of the latest period in the most recent annual
financial statements under previous GAAP.
b. The end of the latest period in the most recent annual financial
statements under previous GAAP.
c. The beginning of the earliest period for which an entity presents
full comparative information under IFRS for SMEs.
d. The end of the earliest period for which an entity presents full
comparative information under IFRS for SMEs.
8. Which of the following should be recognized in other comprehensive

income of an SME?
a. Gain and loss from discontinued operation
b. Gain and loss from translation of a foreign operation
c. Gain on remeasuring equity investment at FVOCI
d. Extraordinary gain and loss
9. Inventories shall be measured at

a. Cost
b. The lower of cost and estimated selling price less cost to
complete and dispose
c. The lower of cost and fair value less cost to complete and dispose
d. The most recent purchase price
10. Under PFRS for SMEs, if the selling price less cost to complete and
sell is lower than cost of inventory, the write-down is recognized
a. As an impairment loss
b. As component of cost of goods sold
c. Component of other comprehensive income
d. Directly in retained earnings
11. Which statement is true in relation to the subsequent measurement of

basic financial instruments?
a. Basic debt instruments shall be measured at amortized cost using
the effective interest method.
b. Investments in nonconvertible nonputtable preference shares that
are publicly traded shall be measured at fair value through profit
or loss.
c. Investments in nonputtable ordinary shares that are not publicly
traded or whose fair value cannot be measured reliably without
undue cost or effort shall be measured at cost less impairment.
d. All of these statements are true in relation to subsequent
measurement of basic financial instruments.
12. An SME shall account for investments in associate after initial

recognition using
a. Cost model
b. Equity method
c. Fair value model
42
Accountancy Area
d. Any one of the cost model, equity method and fair value model
and using the same accounting policy for all investments in
associates
13. Which statement is true in relation to the initial measurement of

investment in associate?
a. Under the cost model, the investment in associate is initially
measured at the transaction price plus transaction cost.
b. Under the equity method, the investment in associate is initially
measured at the transaction price plus transaction cost.
c. Under the fair value model, the investment in associate is initially
measured at the transaction price excluding transaction cost.
d. All of these statements are true,
14. Under the cost model, the investment in associate is subsequently

measured at
a. Cost
b. Cost less accumulated impairment loss
c. Fair value
d. Fair value less cost of disposal
15. Under the fair value model, the investment in associate is

subsequently measured at
a. Cost less accumulated impairment loss
b. Equity
c. Fair value less cost of disposal
d. Fair value
16. Investments in associates must be tested for impairment if the entity

uses
a. The cost model, equity method or fair value model
b. The cost model or the equity method
c. The cost model or the fair value model
d. The equity method or the fair value model
17. An SME must measure an investment property after initial

recognition
a. At either fair value or the cost-depreciation impairment model
and using same accounting policy for all investment property.
b. At either fair value or the cost-depreciation impairment model
elected item by item
c. At fair value.
d. At fair value, for property whose fair value can be measured
reliably without undue cost or effort on an ongoing basis and the
cost-depreciatio-impairment model for all other investment
property.
18. A building is held by a subsidiary to earn rentals under an operating

lease from the parent. The parent manufactures products in the rented
building. The fair value of the building can be measured reliably
without undue cost or effort on an ongoing basis. What is the
accounting treatment of the building?
a. Accounted for as property, plant and equipment by the subsidiary
43
Accountancy Area
and an investment property by the group

b. Accounted for as property, plant and equipment
c. Accounted for as investment property.
d. Accounted for as an investment property by the subsidiary and
property, plant and equipment by the group
19. An entity shall measure government grant at

a. The amount of cash received
b. The amount of cash received or receivable
c. The fair value of the asset received or receivable.
d. NIL
20. An SME must recognize a government grant that a does not impose
specified future performance condition
a. In income when the grant proceeds are receivable
b. In income over the periods necessary to match it with the related
costs.
c. By applying an approach depending upon the accounting policy
adopted by the entity.
d. In retained earnings.
21. An SME must recognize a government grant that imposes specified

future performance conditions
a. In income when the grant proceeds are receivable
b. In income over the periods necessary to match it with the related
costs.
c. In income only when the performance conditions are met.
d. In other comprehensive income.
22. An SME must recognize government grant received before the

income recognition criteria are satisfied
a. In income when the grant proceeds are received
b. In equity
c. As a liability
d. As component of other comprehensive income
23. An SME must recognize all borrowing costs

a. As an expense when incurred.
b. As capitalizable when directly attributable to qualifying asset.
c. In retained earnings.
d. In other comprehensive income.
24. An SME must measure an intangible asset after initial recognition

using
a. Fair value model
b. Cost model
c. Revaluation model
d. Either cost model or revaluation model
25. What is the useful life of a trademark acquired by an SME with a

remaining legal life of five years but renewable every ten years at
little cost?
a. Five years
44
Accountancy Area
b. Based on best estimate of management but not exceeding 10

years.
c. Fifteen years
d. Indefinite
26. The useful life of the intangible asset of an SME is

a. Either finite or indefinite
b. Finite
c. Indefinite
d. Ten years
27. What is the accounting for research and development costs incurred
by an SME?
a. All research and development costs are capitalized.
b. All research and development costs are expensed.
c. All research costs are expensed when incurred and all
development costs are capitalized.
d. All research costs are capitalized and all development costs are
expensed when incurred.
28. An SME entered, as lessee, into a five-day noncancelable lease of a

motor vehicle that has an economic life of five years and nil residual
value. Lease payments are on a daily basis. At the end of the lease
term, the lessee returns the motor vehicle to the lessor. The lease is
accounted for
a. As a finance lease
b. As an operating lease
c. Either as a finance lease or an operating lease
d. Neither as a finance lease nor an operating lease
29. Depreciation of a leased machine is

I. Recognized by the lessee where the lessor and the lessee have
classified the lease as finance lease.
II. Recognized by the lessor where the lessor and the lessee have
classified the lease as an operating lease.
a. I only
b. II only
c. Either I or II
d. Neither I nor II
30. A lessee that paid a certain amount to a broker for arranging a finance
lease must
a. Account for the fee as an expense in the period in which the fee
was incurred.
b. Include the fee in the cost of the leased asset.
c. Defer recognition of the expense and recognize the fee on the
straight line method over the lease term.
d. Include the fee in the principal lease liability.
PROBLEMS
Problem 1:
45
Accountancy Area
On January 1, 2020, SME acquired 25% of the equity of each of entities A,

B and C for P1,000,000, P1,500,000 and P3,000,000 respectively.
Transaction costs of 10% of the purchase price were incurred by SME.
On January 15, 2020 entity A paid dividend of P100,000.
On December 31, 2020, entity B paid dividend of P800,000.
For the year ended December 31, 2020, entities A and B recognized net
income, respectively of P500,000 and P1,800,000.
However, entity C recognized net loss of P2,000,000.
Published price quotations do not exist for the shares of entities A, B and C.
Using appropriate valuation techniques SME determined the following fair

value of the investments in associates on December 31, 2020:
Investment in associate A 1,400,000

Investment in associate B 2,800,000
Investment in associate C 2,000,000
The costs of disposal are estimated at 5% of fair value:
Investment in associate A (5% x 1,400,000) 70,000

Investment in associate B (5% x 2,800,000) 140,000
Investment in associate C (5% x 2,000,000) 100,000
1. Under the cost model, what is the total carrying amount of the
investments in associates on December 31, 2020?
2. Under the cost model, what amount should be reported as
impairment loss?
3. Under the equity method, what is the total carrying amount of
the investments in associates on December 31, 2020?
4. Under the equity method, what amount should be reported as
impairment loss?
5. Under the fair value model, what is the total carrying amount of
the investments in associates on December 31, 2020?
Problem 2:
On January 1, 2020, an SME acquired a 30% interest in the ordinary shares
of an investee for P15,000,000. On this date, the carrying amount of the net
assets acquired is P13,250,000.
The carrying amount of the net assets acquired equaled fair value except for
equipment whose fair value exceeded the carrying amount by P2,500,000.
The remaining useful life of the equipment is five years.
Any implicit goodwill is amortized over the maximum allowed by SME

standard.
On December 31, 2020, the investee reported net income of P20,000,000 and
46
Accountancy Area
paid cash dividend of P7,500,000.
The fair value of the investment in associate is P21,250,000 on December

31, 2020 and there is no published price quotation.
SME elected to use the equity method.
1. What is the implied goodwill from the acquisition?

2. What is the investment income for 2020?
3. What is the carrying amount of the investment in associate on
December 31, 2020?
Lesson 2: PFRS for Small Entities

Objectives: Understand the meaning of Small Entities as defined by the Securities and
Exchange Commission.
Provide the distinct differences among full PFRSs, PFRS for SMEs and
PFRS for Small Entities.
Discuss the adoption of PFRS for SEs and its transition concepts.
Introduction: Companies that are not publicly accountable because their ownership shares
and debt instruments are not traded in Philippine stock markets, and
companies whose assets and liabilities are less than P350 million and P250
million, respectively, constitute an overwhelming majority of private sector
companies in the Philippines.
Since the adoption of the full PFRSs issued by the IASB, national standard-
setters and regulators have received complaints, especially from entities
considered “small and medium-sized entities”, of apparent difficulties in the
application of the full PFRSs.
Activating In your previous accounting courses, the concepts and application of

Prior accounting procedures in accordance with full PFRS were comprehensively
Knowledge discussed. Also, the concepts and application of accounting procedures in
accordance with PFRS for SMEs were also discussed in our preceding
lesson.

Analysis Philippine Financial Reporting Standards for Small Entities (PFRS for SEs)
was developed in response to feedback of small entities that PFRS for Small
and Medium-sized Entities (PFRS for SMEs) is too complex to apply. By
reducing choices for accounting treatment, eliminating topics that are not
generally relevant to small entities, simplifying methods for recognition and
measurement, and reducing disclosure requirements, the PFRS for SEs
allows small entities to comply with the financial reporting requirements
without undue cost or burden.
Acquiring NATURE OF SMALL ENTITIES

New The SEC defined small entities as those entities:
Knowledge ► With total assets between P3,000,000 and P100,000,000 or total
liabilities between P3,000,000 and P100,000,000.
► That are not required to file financial statements under SRC Rule 68.
47
Accountancy Area
► That are not in the process of filing financial statements for the
purpose of issuing any class of instruments in a public market.
► That are not holders of secondary license issued by a regulatory
agency, such as bank, investment house and other financial
institutions.
COMPONENTS OF FINANCIAL STATEMENTS OF A SMALL

ENTITY
A complete set of financial statements of a small entity shall compose of the
following:
1. Statement of financial position
2. Statement of income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes to financial statements
NOTE: The statement of income and changes in equity can be combined as

one if the only changes are:
a. Profit or loss
b. Payment of dividend
c. Correction of prior period errors
d. Change in accounting policy
A small entity does not recognize other comprehensive income. All income
and expenses are recognized in profit or loss.
ACCOUNTING CHANGES
Change in accounting policy

A small entity shall account for a change in accounting policy as follows:
a. Any cumulative effect shall be recognized as an adjustment to the
opening balance of retained earnings or any other component of
equity of the current period.
b. Comparative information shall not be restated.
Change in accounting estimate

Full PFRS, PFRS for SMEs, and PFRS for Small Entities have the same
provisions and requirements with respect to changes in accounting estimates.
Correction of prior period errors

The treatment of correction of prior period errors is essentially the same as
that of the change in accounting policy.
BASIC FINANCIAL INSTRUMENTS

According to PFRS for Small Entities, the following are the basic financial
instruments:
1. Cash
2. Bank deposits
3. Trade receivables and payables
4. Notes and loans receivable and payable
5. Investments in nonconvertible preference shares and nonputtable
ordinary shares
48
Accountancy Area
Initial measurement
► Transaction price including transaction cost.
► If the arrangement contains a financing element, the basic financial
instrument is initially measured at the present value of future
payments discounted at the market rate of interest for similar
financial instrument.
Subsequent measurement
► Debt instruments are measured at amortized cost using the effective
interest method.
► Investments in unquoted shares shall be carried at cost less
impairment.
► However, investment in shares traded in an active market shall be
measured at the lower of cost or fair value, with changes in fair value
recognized in profit or loss.
► Impairment of financial instrument
(a) If the financial asset is measured at amortized cost, the
impairment loss is the excess of carrying amount over the present
value of cash flows.
(b) If the financial asset is measured at cost, the impairment loss is
the excess of carrying amount over the best estimate of selling
price.
INVENTORIES
► Initial measurement
 At cost
► Subsequent measurement:
 Lower of cost and market value
 If the market value is lower than cost, the difference is
accounted for as an impairment loss.
INVESTMENT IN ASSOCIATES
► An investor shall account for its investments in associates using one
of the following:
(a) Cost model
(b) Equity method
INVESTMENT PROPERTY AND PROPERTY, PLANT AND

EQUIPMENT
 At cost
► Subsequent measurement
 Either cost model or fair value model
 If the measurement of fair value is no longer available without
undue cost or effort for an investment property or PPE, the
property is accounted for using the cost model. The carrying
amount on that date becomes the initial cost of the property.
GOVERNMENT GRANTS
Monetary government grants

a. A monetary grant that does not impose future performance conditions
is recognized as income when it becomes receivable.
49
Accountancy Area
b. A monetary grant that imposes conditions is recognized as income

only when the conditions are met.
c. Monetary grants received prior to satisfying the revenue recognition
criteria are recognized as liability.
Nonmonetary government grants

► A small entity has an accounting policy using either:
(a) Non recognition
(b) Recognition at fair value
BORROWING COSTS
► All borrowing costs are expensed as incurred.
INTANGIBLE ASSETS
 At cost
► Subsequent measurement
 Cost model
NOTE:
► All intangible assets have finite life.
► All intangible assets (including goodwill) are amortized over the
useful life.
 If the useful life of an intangible asset cannot be estimated, the
life shall be determined based on the best estimate of
management but not to exceed 10 years.
IMPAIRMENT OF ASSETS
► An asset is considered impaired if its recoverable amount is less than
its carrying amount.
 The recoverable amount is the higher between:
(a) Value in use
(b) Fair value less cost of disposal
► Impairment loss is recognized in profit or loss.
BIOLOGICAL ASSETS
► Cost model
► Current market price model
Note:
► All changes in current market price is recognized in profit or loss.
► Agricultural produce shall be measured at current market price at
point of harvest. Such measurement is cost at that date when the
harvested agricultural produce is accounted for as inventory.
LEASES
► All leases shall be accounted as operating leases.
INCOME TAX
► An entity shall make an accounting policy choice using either:
(a) Taxes payable method – under this method, a small entity shall
not recognize deferred tax asset or liability. Only the current tax
asset or liability is recognized.
50
Accountancy Area
(b) Deferred taxes method – under this method, a small entity shall
recognize deferred tax assets and liabilities for future deductible
amount and future taxable amounts in addition to current liability.
POSTEMPLOYMENT BENEFITS
► Postemployment benefits are accounted for using the accrual method
in accordance with the minimum retirement benefit under R.A. 7641
or the Philippine Retirement Pay Law.
 This approach is applied by determining the expected liability as
of reporting date using the current salary level of the employee
and the years of service.
 No consideration is made for changes in future salary and service
period. Moreover, there is no recognition of actuarial gains and
losses.
► Any company policy is followed if this is higher than the minimum
requirement of R.A. 7641.
EQUITY SETTLED SHARE-BASED PAYMENTS

► A small entity shall measure the goods or services received and the
corresponding increase in equity with reference to the net asset value
of the equity instrument granted.
 Net asset value (NAV) = (Total assets – Total liabilities)/Number
of shares outstanding at measurement date.
 For transaction with employees, the NAV of the equity
instrument shall be measured at date of grant.
TRANSITION TO PFRS FOR SMALL ENTITIES

► The date of transition to PFRS for Small Entities is the beginning of
the earliest period for which full comparative information is
presented in accordance with PFRS for Small Entities.

1. Define small entities in accordance with SEC definition.
2. Enumerate the components of financial statements of small entities.
3. Explain the measurement of inventories of small entities.
4. Explain the accounting for investment in associates of small entities.
5. Explain the measurement of investment property of small entities.
6. Explain the measurement of property, plant and equipment of small
entities.
7. What is the treatment of borrowing costs under PFRS for Small
Entities?
8. Explain the measurement of intangible assets of small entities.
9. Explain the amortization of intangible assets of small entities.
10. Explain the accounting for leases under PFRS for Small Entities.
11. Explain the measurement of postemployment benefits in accordance
with PFRS for Small Entities.
12. Explain the measurement of equity settled share-based compensation
transaction under PFRS for Small Entities.
13. What is the date of transition to PFRS for Small Entities?
Module 6: Hyperinflationary Economy

Objectives: State the characteristics that may indicate hyperinflationary economy.
51
Accountancy Area
State the requirement for financial reporting in a hyperinflationary economy.

Understand the constant peso accounting.
Distinguish between monetary and nonmonetary items.
State the procedures for restating historical financial statements in terms of
current price level.
Determine gain or loss on purchasing power.
Understand current cost accounting in contrast to constant peso accounting
Know the meaning of current cost.
Determine realized and unrealized holding gain or loss
Introduction: PAS 29 Financial Reporting in Hyperinflationary Economies applies where
an entity's functional currency is that of a hyperinflationary economy. The
standard does not prescribe when hyperinflation arises but requires the
financial statements (and corresponding figures for previous periods) of an
entity with a functional currency that is hyperinflationary to be restated for
the changes in the general pricing power of the functional currency.
Activating In your economics course, inflation is defined as the general increase in the
Prior prices of goods and services in a specific country. The purchasing power of
Knowledge money decreases if there is inflation.
As discussed in your Conceptual Framework for Financial Reporting,

inflation is normally disregarded in accounting due to the monetary unit
concept.

Analysis The objective of PAS 29 is to establish specific standards for entities

reporting in the currency of a hyperinflationary economy, so that the
financial information provided is meaningful.
Inflation is normally ignored in accounting due to the stable monetary unit

assumption. However, when inflation is very high (hyper), it can no longer
be ignored. This is because financial statements are stated in terms of money
and when money losses its purchasing power at a very high rate, the
financial statements become misleading. The financial statements therefore
must be restated otherwise they are useless.
Acquiring HYPERINFLATION
New PAS 29 does not prescribe an absolute rate at which hyperinflation is
Knowledge deemed to arise. This is a matter of judgment. Instead, PAS 29 provides the
following indicators which an entity considers when determining the
existence of hyperinflation:
(a) The general population prefers to keep its wealth in non-monetary
assets or in a relatively stable foreign currency. Amounts of local
currency held are immediately invested to maintain purchasing
power;
(b) The general population regards monetary amounts not in terms of the
local currency but in terms of relatively stable foreign currency.
Prices may be quoted in that currency;
(c) Sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period, even
52
Accountancy Area
if the period is short;

(d) Interest rates, wages and prices are linked to price index; and
(e) The cumulative inflation rate over three years is approaching, or
exceeds, 100%.
FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMY

Although indicators have been enumerated by PAS 29, it also states that
judgment may be used in determining whether restatement of financial
statements is required.
The basic principle in PAS 29 is that the financial statements of an entity that
reports in the currency of a hyperinflationary economy should be stated in
terms of the current measuring unit at the balance sheet date. Comparative
figures for prior period(s) should be restated into the same current measuring
unit.
The restatement of financial statements of an entity that reports in the

currency of a hyperinflationary economy is accomplished by means of:
(a) Constant peso accounting
(b) Current cost accounting
Constant peso accounting

► The restatement of historical financial statements in terms of the
current purchasing power of the peso through the use of index
number.
► Under this method, accounts are classified into two categories:
(1) Monetary items
 These are money held and assets and liabilities to be received
or paid in fixed or determinable amount of money.
 These items remain the same regardless of the change in the
general price level.
(2) Nonmonetary items
 These are items not classified as monetary.
 The essential feature of these items is the absence of a right to
receive or an obligation to deliver a fixed or determinable
amount of money.
► Only nonmonetary items are restated. The formula for restatement is:
Index number at end of reporting period

Historical cost x
Index number on acquisition date
Price index
► There are two types of price index:
(a) General price index (GPI)
 This is designed to show how much the overall level of prices
in the economy has changed over time.
 This is the index number used for restatement.
 An increase in the GPI is known as inflation. This means that
there is a general increase in prices and decrease in the
purchasing power of money.
 A decrease in the GPI is known as deflation. This means that
there is a general decrease in prices and increase in the
purchasing power of money.
53
Accountancy Area
(b) Specific price index

 The change in the price of a specific good or service.
 This occurs because of change in supply and demand for a
particular good or service. The law of supply and demand is
in operation in the case of a specific price change.
Gain or loss on purchasing power

We can describe purchasing power as the amount of goods and services
money can buy.
► Inflation
 Monetary assets  purchasing power loss
 Monetary liabilities  purchasing power gain
► Deflation
 Monetary assets  purchasing power gain
 Monetary liabilities  purchasing power loss
To summarize, financial statements are restated by applying a general price

index as follows:
Statement of financial position

Monetary items Not restated
(assets and liabilities)
Non-monetary items
(assets and liabilities)
Measured at cost Restated
Measured at fair value or NRV General rule: Not restated because it is
already stated at its current value.
Exception: If the fair value or NRV

was determined at a date other than the
end of the current reporting period, it
will be restated from the date it was
determined.
Statement of Comprehensive Income All items are restated

and Statement of Cash Flows
The corresponding figures for prior periods, whether monetary or non-

monetary, are all restated. The gain or loss on the net monetary position
resulting from the restatements is recognized in profit or loss.
When it is impracticable to determine the historical price indices, such as for

transactions recurring very frequently, an entity may use the average price
index for the period.
Consolidated financial statements

If any of the entities belonging to a group entity reports in a
hyperinflationary economy, the financial statements of that entity need to be
restated first before they are consolidated in the group’s financial statements.
If foreign operation reports in a hyperinflationary economy, its financial

statements are also restated first under PAS 29 before they are translated in
accordance with PAS 21.
54
Accountancy Area
Current cost accounting

► A method of restating items at current cost at the end of reporting
period.
► Its essence is the recognition of holding gains and losses.
(a) Replacement cost > historical cost  holding gain
(b) Replacement cost < historical cost  holding loss
NOTE:
► Holding gain or loss are classified as realized or unrealized.
 Realized  if the asset is already sold or used.
 Unrealized  if the asset is still unsold or unused.
DISCLOSURE REQUIREMENTS
► The fact that financial statements and other prior period data have
been restated for changes in the general purchasing power of the
reporting currency.
► Whether the financial statements are based on an historical cost or
current cost approach.
► Identity and level of the price index at the balance sheet date and
moves during the current and previous reporting period.
Problem 1:
Slovakia Company reported the following assets in the statement of financial
position:
Cash in bank 4,000,000
Accounts Receivable 8,000,000
Inventory 3,000,000
Financial asset at fair value 1,000,000
Patent 2,000,000
Advances to employees 400,000
Advances to suppliers 800,000
Prepaid expenses 200,000
Required: In preparing financial statements in a hyperinflationary economy,

what total amount should be classified as monetary assets?
Problem 2:
Bart Company reported the following liabilities in the statement of financial
position:
Accounts payable 500,000
Accrued expenses 250,000
Bonds payable 1,500,000
Financial lease liability 2,000,000
Unearned revenue 150,000
Advances from customers 600,000
Estimated warranty liability 100,000
Deferred tax liability 200,000
55
Accountancy Area
Required: In preparing financial statements in hyperinflationary economy,

what total amount should be classified as monetary liabilities?
Problem 3:
Mandaue Company was formed on January 1, 2014. Selected balances from
historical cost statement of financial position on December 31, 2020 were:
Land purchased on January 1, 2014 1,200,000

Investment in long-term bond purchased
on January 1, 2017 600,000
Long-term debt issued on January 1, 2014 800,000
The general price index was 120 on January 1, 2014, 150 on January 1, 2017
and 300 on December 31, 2020.
1. What amount should be reported in a hyperinflationary
statement of financial position for land?
statement of financial position for investment in bonds?
statement of financial position for long-term debt?
Problem 4:
Escobar Company provided the following information on December 31,
2018:
Property, plant and equipment 450,000

Inventory 1,350,000
Cash 175,000
Share capital issued December 31,2014 200,000
Noncurrent liabilities 250,000
Current liabilities 350,000
Retained earnings 1,175,000
The index number on December 31 of each year are 2014 – 100, 2015 – 130,
2016 – 150, 2017 – 240 and 2018 – 300.
The property, plant and equipment were purchased on December 31, 2016.
The noncurrent liabilities were loans raised on December 31, 2017.
1. What is the amount of total assets after restatement for

hyperinflation?
2. What is the amount of total assets after restatement for
hyperinflation?
3. What is the balance of retained earnings after adjusting for
hyperinflation?
Problem 5:
Trucker Company reported the following historical income statement for
2017:
Sales 10,000,000
Inventory – Jan 1 700,000
56
Accountancy Area
Purchases 5,000,000
Inventory – Dec 31 1,000,000
Expenses 4,000,000
Depreciation 4,000,000
 Sales are earned and expenses are incurred evenly throughout the
year.
 Inventory was acquired during the last week of each year.
 Depreciable assets have a 5-year life and were acquired on Jan 1,
2015
 The general index numbers were 125 on Jan 1, 2015, 140 on Jan 1,
2018, 360 on December 31, 2018.
1. What is the amount of sales after restatement for hyperinflation?

2. What is the cost of goods sold after restatement for
hyperinflation?
3. If the entity is operating in a hyperinflationary economy, what
amount should be reported as net loss?
Problem 6:
Wrath Company provided the following information for the current year:
Monetary assets:
January 1 500,000
December 31 1,400,000
Monetary liabilities:
January 1 200,000
December 31 600,000
Increase in net monetary items as 7,000,000
restated for hyperinflation
Decrease in net monetary items as 6,000,000
restated for hyperinflation
General price index:
January 1 125
December 31 300
Required: What is the gain or loss on purchasing power for the current
year?
Problem 7:
Eudora Company purchased land on January 1, 2018 for P1,000,000 cash.
On December 31, 2018, the land has a current replacement cost of
P1,200,000.
On December 31, 2019, the land has a current replacement cost of

P1,500,000.
The entity sold the land for P2,000,000 cash on December 31, 2020. On this
date, the current replacement cost of the land is P1,600,000.
1. What is the unrealized holding gain to reported in 2018?

2. What is the unrealized holding gain to reported in 2019?
57
Accountancy Area
3. What is the realized holding gain to reported in 2020?

4. What is the gain on sale of land to be reported in 2020?
Problem 8:
Minsitthar Company acquired an equipment on January 1, 2018 for
P10,000,000.
Depreciation is computed using the straight-line method. The estimated

useful life of the equipment is 5 years with no residual value.
The current cost of the equipment is P15,000,000 on December 31, 2018.
1. What is the amount of depreciation that should be reported in

the current cost income statement for 2018?
2. What is the realized holding gain on the equipment to be
reported in 2018?
3. What is the unrealized holding gain on the equipment to be
reported in 2018?
Problem 9:
Hark Company reported the following property, plant, and equipment on
December 31, 2018:
Year Percent Historical Current

Acquired depreciated Cost Cost
2016 30 1,000,000 1,400,000
2017 20 300,000 380,000
2018 10 400,000 440,000
The entity calculated depreciation at 10% straight line. There were no

disposals of property.
A full year depreciation was charged in the year of acquisition and no

depreciation in the year of disposal.
Required: What total amount should be reported as net current cost of the
property, plant and equipment on December 31, 2018?
Problem 10:
Elijah Company provided the following information for 2018:
Historical
cost Units
Inventory, January 1 530,000 20,000
Purchases during the year 2,790,000 90,000
Goods available for sale 3,320,000 110,000
Inventory, December 31 (1,260,000) (40,000)
Cost of goods sold 2,060,000 70,000
58
Accountancy Area
The current cost per unit of inventory was P58 on January 1, 2018 and P72
on December 31, 2018.
1. In the income statement for 2018 restated to current cost, what

amount should be reported as cost of goods sold?
2. In the income statement for 2018 restated to current cost, what
amount should be reported as realized holding gain?
3. Under current cost accounting, what amount should be reported
as inventory on December 31, 2018?
4. What amount should be reported as unrealized holding gain on
December 31, 2018?
Module MODULE 1: Accounting for Agricultural Entities

Summary  Biological asset is a living plant or animal. Biological assets can be
either consumable or bearer biological assets.
 A bearer plant is a living plant that is used in the production or supply
of agricultural produce; expected to bear produce for more than one
period; and has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales. This is classified as
property, plant and equipment instead of biological asset.
 Agricultural produce is the harvested produce of the entity’s
biological assets.
 A biological asset shall be measured on initial recognition and at the
end of each reporting period at its fair value less costs to sell except
where the fair value cannot be measured reliably.
 A gain or loss arising on initial recognition of a biological asset at
fair value less costs to sell and from a change in fair value less costs
to sell of a biological asset shall be included in profit or loss for the
period in which it arises.
 Agricultural produce harvested from an entity’s biological assets
shall be measured at its fair value less costs to sell at the point of
harvest. Such measurement is the cost at that date.
 A gain or loss arising on initial recognition of agricultural produce at
fair value less costs to sell shall be included in profit or loss for the
period in which it arises.
 Biological assets is presented under the non-current assets section of
the statement of financial position.
MODULE 2: Accounting for Employee Benefits

 Employee benefits are all forms of consideration given by an entity in
exchange for services rendered by employees or for the termination
of employment.
 Employee benefits are recognized as expense when employees have
59
Accountancy Area
rendered service, except to the extent that the employee benefits form
part of the cost of another asset.
 The different categories of employee benefits under IAS 19 are short-
term employee benefits, post-employment benefits, other long-term
employee benefits, and termination benefits.
 Short-term employee benefits are those that are due to be settled
within 12 months after the end of the period in which the employees
have rendered the related services.
 Postemployment benefits are employee benefits, other than
termination benefits and short-term employee benefits, which are
payable after completion of employment.
 Postemployment benefit plans are classified as either (a) defined
contribution plans, or (b) defined benefit plans.
 A defined contribution plan is a postemployment benefit plan under
which an entity pays fixed contributions into a separate entity known
as the fund.
 Under the defined benefit plan, an entity’s obligation is to provide the
agreed benefits to employees.
 The accounting for defined benefit plans is complex because actuarial
assumptions are necessary to measure the obligation on a discounted
basis.
 The accounting for defined benefit plans involves the following
steps: (1) Determine the deficit or surplus; (2) Determine the net
defined benefit liability (asset); (3) Determine the defined benefit
cost.
 Other long-term employee benefits are employee benefits, other than
postemployment benefits and termination benefits, that are due to be
settled beyond 12 months after the end of the period in which the
employees have rendered the related service.
 Termination benefits are those provided as a result of either (a) the
entity’s decision to terminate the employee before normal retirement
date; or (b) the employee’s decision to accept the employer’s offer of
benefits in exchange for termination.
MODULE 3: Earnings Per Share

 Earnings per share (EPS) is the amount expected to be received per
share as a return on investment. It only to ordinary shares.
 EPS is presented on the face of income statement and it is presented
even if the amount is negative.
 EPS is of two types: (1) basic EPS and (2) diluted EPS
 Diluted EPS is similar to the basic EPS in a sense that it only pertains
to ordinary shareholders. However, its computation is complicated
because of the inclusions of the effects of dilutive potential ordinary
shares. Antidilutive securities are ignored in the computation of
diluted EPS.
 Diluted EPS are computed based on the assumption that the potential
ordinary shares are actually converted into ordinary shares.
 Potential ordinary shares are: (1) convertible preference shares, (2)
convertible bonds, and (3) share options and warrants.
MODULE 4: Noncurrent Assets Held for Sale and Discontinued

Operations
60
Accountancy Area
 An entity shall classify a non-current asset as held for sale if its

carrying amount will be recovered principally through a sale
transaction rather than through continuing use.
 An entity shall measure a non-current asset classified as held for sale
at the lower of its carrying amount and fair value less costs to sell
Assets held for sale are not depreciated.
 A discontinued operation is accounted for as a disposal group
classified as held for sale.
 The results of discontinued operation, net of tax shall be shown as a
single amount in the income statement below the income from
continuing operations.
MODULE 5: PFRS for Small- and Medium-Sized Entities (SMEs)

 Small and medium-sized entities (SMEs) are those entities that
publish general purpose financial statements for external users and do
not have public accountability.
 SMEs are those enterprises that have total assets of between
P3,000,000 and P350,000,000 or total liabilities of between
P3,000,000 and P250,000,000. Small entities as those entities with
total assets between P3,000,000 and P100,000,000 or total liabilities
between P3,000,000 and P100,000,000. Micro entities are entities
that have total assets or liabilities below P3,000,000.
 On initial adoption of the PFRS for SMEs, an entity shall apply the
size criteria using the entity’s audited financial statements for the
immediately preceding financial reporting period.
 The date of transition to PFRS for SMEs and SEs is the beginning of
the earliest period for which full comparative information is
presented in accordance with PFRS for SMEs and SEs.
MODULE 6: Hyperinflationary Economy

 PAS 29 does not prescribe an absolute rate at which hyperinflation is
deemed to arise. This is a matter of judgment. Instead, PAS 29
provides certain indicators which an entity considers when
determining the existence of hyperinflation.
 The basic principle in PAS 29 is that the financial statements of an
entity that reports in the currency of a hyperinflationary economy
should be stated in terms of the current measuring unit at the balance
sheet date. Comparative figures for prior period(s) should be restated
into the same current measuring unit.
 The restatement of financial statements of an entity that reports in the
currency of a hyperinflationary economy is accomplished by means
of constant peso accounting or current cost accounting.
 Constant peso accounting is the restatement of historical financial
statements in terms of the current purchasing power of the peso
through the use of index number.
 Current cost accounting is a method of restating items at current cost
at the end of reporting period.
References: Books:
Valix, C., Peralta, J. & Valix, C. (2020). Intermediate Accounting Volume 1.
Manila: GIC Enterprises
61
Accountancy Area

Robles, N. & Empleo, P. (2019). The Intermediate Accounting Series
Volume 2. Manila: Millenium Books, Inc.
Robles, N. & Empleo, P. (2019). The Intermediate Accounting Series
Volume 3. Manila: Millenium Books, Inc.
Millan, Zeus Vernon (2019); Intermediate Accounting 1. Baguio: Bandolin
Enterprises
Enterprises
Enterprises
Online References:
www.ifrs.org
www.ifrsbox.com
Faculty Member INSTR. BRIAN CHRISTIAN S. VILLALUZ
CONSULTATION Email Address brianchristian.villaluz@letran.edu.ph

SCHEDULE Consultation Hours Tuesday and Friday
Time and Venue 2:00 – 3:00PM
PREPARED BY RECOMMENDING APPROVAL APPROVED BY
____________________________________ ____________________________________ ____________________________________

INSTR. BRIAN CHRISTIAN S. ASST. PROF. MICHAEL STEVE M. ASST. PROF. KENJI M. ASANO, JR.,
VILLALUZ CRUZ, CPA, MBA CPA, MBA, CMA, MICB, RCA, CAT
Faculty Chairperson Dean
Date completed: September 29, 2020
62

Colegio de San Juan de Letran: Course Module On: ACC119: Principles and Methods of Teaching

Uploaded by

Copyright:

Available Formats

You might also like

Colegio de San Juan de Letran: Course Module On: ACC119: Principles and Methods of Teaching

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Colegio de San Juan de Letran: Course Module On: ACC119: Principles and Methods of Teaching

Uploaded by

Copyright:

Available Formats

Colegio de San Juan de Letran

College of Business Administration and Accountancy

COURSE MODULE ON:

ACC119: PRINCIPLES AND METHODS OF TEACHING

Course Intended Understand necessary recognition and measurements for specific

Learning After this module, the student shall be able to:

Thank you and Arriba!

Module 1: Accounting for Agricultural Entities

IAS 41 Agriculture does not apply the following:

Activating Assets owned by an entity must be accounted in accordance with PFRS.

Analysis Agricultural assets are accounted under PAS 41 Agriculture. Specific

Acquiring New NATURE OF BIOLOGICAL ASSETS

Living animals, whether consumable or bearer, are classified as biological

NATURE OF BEARER PLANTS

NATURE OF AGRICULTURAL PRODUCE

The processes of growth, degeneration, production, and procreation that cause

The detachment of produce from a biological asset or the cessation of a

for the period in which it arises. (IAS 40 par. 26)

Explain the measurement principles for biological assets and agricultural

Biological assets acquired through government grant

 If a government grant related to a biological asset measured at its fair

FINANCIAL STATEMENT PRESENTATION

Bearer plants 2,500,000

Agricultural land 3,000,000

1. Which of the following would be classified as biological assets?

Biological asset, 1/1/2019 P250,000

What amount shall be reported as biological asset on December 31, 2019?

One-year old animal at January 1, 2019 P4,500

Module 2: Accounting for Employee Benefits

Distinguish between defined contribution plans and defined benefit plans by

Employee benefits are recognized as expense in the financial statements because

In this regard, the instructor likes you to answer the following:

Acquiring NATURE OF EMPLOYEE BENEFITS

Employee benefits may arise from contractual agreements (e.g., employment

Give at least three examples of employee benefits.

CATEGORIES OF EMPLOYEE BENEFITS UNDER IAS 19R

3. Other long-term employee benefits

SHORT-TERM EMPLOYEE BENEFITS

Short-term paid absences

Compensated absences are recognized as follows:

Explain the term “vesting” in its simplest form.

Postemployment benefit plans are classified as either:

(2) Defined benefit plans

Such plans may be contributory or noncontributory, and funded or unfunded.

The funding agency is then

Defined Contribution Plan (Ex. SSS, GSIS)

The contribution is definite but the benefit is indefinite.

The entity will have no legal or constructive obligation to pay further

Defined Benefit Plan (Ex. R.A. 7641)

The benefit is definite but the contribution is indefinite.

ACCOUNTING FOR DEFINED BENEFIT PLAN

Step 1: Determining the deficit or surplus

Present value of defined benefit obligation (PV-DBO) XX

If PV - DBO > FVPA  Deficit (underfunded)

 Present value of defined benefit obligation represents the entity’s

Step 2: Determining the net defined benefit liability (asset)

 Deficit  net defined benefit liability