Big Picture in Focus: ULOa

1. Share-based payment transactions. Is a transaction in which the entity acquires goods or services
and pays for them by issuing its own equity instruments or cash based on the value of its own equity
instruments.

a. Equity Settled share-based payment transaction. One in which the entity receives goods or services
and pays for them by issuing its shares of stocks or share options.

b. Cash Settled share-based payment transaction. One in which the entity receives goods or services
and either the entity or the counterparty is given a choice of settlement in the form of equity instruments or
cash based on the fair value of equity instruments.

I. Share Based Compensation (Share Options)

1.0 Share-based compensation plan – a compensation arrangement established by the entity whereby
the entity’s employees shall receive shares of capital in exchange for their services or the entity incurs
liabilities to the employees in amounts based on the price of its shares.

1.1 PFRS 2 (Share-based payment) sets out the measurement principles and specific requirements for
accounting of the following share-based compensation:
 Equity settled – entity issues equity instruments in consideration for services received, for
example, share options.

 Cash settled – entity incurs liability for services received and the liability is based on the entity’s
equity instruments, for example, share appreciation rights

2.0 Share Options – granted to officers and key employees to enable them to acquire shares of the entity
during a specified period upon fulfillment of certain conditions at a specified price.

2.1 Measurement
a. Fair Value Method - Compensation is equal to the fair value of the share options on the date of grant -
Method mandated by the Philippine Financial Reporting Standard 2.

b. Intrinsic Value Method - Compensation is equal to the intrinsic value of the shares - - Paragraph 24 of
PFRS 2 provides this can only be used if the fair value of the share option cannot be used.
Intrinsic Value = Market Price – Option Price

2.2 Recognition
a. If the share options vest immediately, the entity shall recognize the services received in full, with a
corresponding increase in equity.
b. If the share options DO NOT vest immediately until the counterparty completes a specified period of
service, the entity shall account for those services as they are rendered by the counterparty during the
vesting period, with a corresponding increase in equity

2.3 Definition of Terms

a. Grant date – the date at which the entity and another party (including an employee) agree to a share-
based payment
arrangement, being when the entity and the counterparty have a shared understanding of the terms and
conditions of the arrangement. At the grant date, the entity confers on the counterparty the right to cash,
other assets, or equity instruments of the entity, provided the specified vesting conditions, if any, are met.
If that agreement is subject to an approval process, grant date is the date when that approval is obtained.
b. Measurement date – the date at which the fair value of the equity instruments granted is measured. -
For transactions with employees and others providing similar services, the measurement date is the grant
date; - For transactions with parties other than employees, the measurement date is the date the entity
obtains the good or the counterparty renders service.
c. Performance condition – a vesting condition that requires: - the counterparty to complete a specified
period of service; the service requirement can be explicit or implicit; and - specified performance target(s)
to be met while the counterparty is rendering the service required.
d. Vest – means to become an entitlement. Under a share-based payment arrangement, a counterparty’s
right to receive cash, other assets or equity instruments of the entity vests when the counterparty’s
entitlement is no longer conditional on the satisfaction of any vesting conditions.
e. Vesting period – the period during which all the specified vesting conditions of a share-based payment
arrangement are to be satisfied.
f. Vesting condition – a condition that determines whether the entity receives the services that entitle the
counterparty to receive cash, other assets or equity instruments of the entity, under a share-based
payment arrangement.
g. Service condition – a vesting condition that requires the counterparty to complete a specified period of
service during which services are provided to the entity.
h. Market condition – a performance condition upon which the exercise price, vesting or exercisability of
an equity instrument depends that is related to the market price (or value) of the entity’s equity
instruments (or the equity instruments of another entity in the same group)
i. Non-market condition – a performance condition upon which the exercise price, vesting or
exercisability of an equity instrument depends that is not related to the market price (or
value) of the entity’s equity instruments such those based on growth in profit or earnings per share.

Sample problem (with service condition)

On January 1, 2019, Budotz Company granted 100 share options to 500 employees, conditional upon the
employees remaining in the entity’s employ during the vesting period. The fair value of each share option
is Php 4.
Case No. 1: Assume that share options vest immediately.
Case No. 2: Assume that instead the share options will vest over a three-year period and:
a. By the period of 2019, 30 employees have left and based on a weighted average probability, a further
20 employees will leave during the vesting period.
b. By the end of 2020, only 7 employees have left and a further 10 will leave during 2021. By the end of
2021, 15 employees left the company.
Solutions:
3.0 Acceleration of Vesting
PFRS 2, paragraph 28, provides that if an entity cancels or settles a grant of share options during the
vesting period, the entity shall account for the cancelation or settlement as an acceleration of vesting.
a. The entity shall recognize immediately the compensation expense that otherwise would have been
recognized for services received over the remainder of vesting period.
b. Any payment made to the employee on the cancelation or settlement of grant shall be accounted for as
the repurchase of equity interest, meaning, and deduction from equity.
If the payment exceeds the fair value of the share option, the excess shall be recognized as an expense.

Illustration
On January 1, 2014, an entity granted 50,000 share options to the employees. The option price is P60
and the par value of each share is P50. The vesting period is 4 years. The fair value of the share options
or total compensation expense to the vesting date on December 31, 2017 has been calculated at P4,
000,000. The entity has decided to settle the award early on December 31, 2016. The compensation
expense charged in the income statement since the date of grant on January 1, 2014 is as follows:
2014 1, 000,000
2015 1, 050,000

If the share options are canceled or settled during the vesting period, it is as if the vesting date had been
brought forward and the balance of the fair value not yet expensed is recognized immediately.
In other words, the entity shall recognize immediately in 2016 the compensation expense that otherwise
would have been recognized for service over the remainder of the vesting period.

Total compensation expense 4, 000,000

Cumulative compensation recognized in 2014 and 2015
(1,000,000 + 1,050,000) (2, 050,000)
Compensation expense in 2016 1, 950, 000

The journal entry to recognize the compensation for 2016 is:

Salaries 1, 950,000
Share options outstanding 1, 950,000

If the share options are exercised on December 31, 2016, the journal entry is:
Cash (50, 000 x 60) 3, 000,000
Share options outstanding 4, 000,000
Share capital (50, 000 x 50) 2, 500,000
Share premium 4, 500, 000
Let’s Check
Activity 1. Multiple Choice Questions (Theory)

1. For transactions with employees and others providing similar services, the fair value of the equity instrument granted is
measured on
a. Exercise date
b. Grant Date
c. End of Reporting Period
d. Beginning of the year of grant

2. It is a contract that gives the holder the right, but not the obligation, to subscribe to the entity’s share at a fixed or
determinable price for a specified period of time.
a. Share option
b. Share warrant
c. Share appreciation right
d. Share spilt

3. If the share options do not vest until the employee complete a specified service period, the compensation is
a. Not recognized as expense
b. Recognized as expense immediately
c. Recognized as expense over the service or vesting period.
d. Recognized as expense over a reasonable period not exceeding 10 years.

4. In what circumstances is compensation expense immediately recognized under a share option plan?
a. In all circumstances.
b. In circumstances when the options are exercisable within two years for services rendered over the next two
years.
c. In circumstances when the options are granted for prior services and the options are immediately
exercisable.
d. In no circumstances is compensation expense immediately recognized.

5. Which of the following statements is/are incorrect if there is an acceleration of vesting?

I. The entity shall recognize immediately the compensation expense that otherwise would have been
recognized for services received over the remainder of the vesting period.
II. Any payment made to the employees on the cancellation or settlement of the grant shall be accounted for as
repurchase of equity interest and any payment in excess of the fair value of share options shall be recognized
as expense.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

Let’s Analyze
Activity 1. Required Problems

Problem 1. On January 1, 2014, Hannah Company granted share options to each of the 100 employees.
The share options will vest at the end of 2016, provided the employees remain in the entity’s employ and
provided the sales increase at least by an average of 5% per year.
If the sales increase by an average of at least 5% per year, each employee shall receive 100 share
options. If the sales increase by an average of at least 10% per year, each employee shall receive 200
share options, if the sales increase by an average of at least 15% per year, each employee shall receive
300 share options.
The fair value of share option is P30. No employees have left during the three-year vesting period. The
sales during the vesting period increased 8% in 2014, 10% in 2015 and 18% in 2016.

Required:
Compute compensation expense for 2014, 2015 and 2016 as a result of the share options.

Problem 2. On January 1, 2014, Charm Company granted 10, 000 share options to the chief executive
officer, conditional upon the executive officer, conditional upon the executive’s remaining in the entity’s
employ until the end of 2016. The par value per share is P50 and the exercise price is P120.
However, if earnings increase by at least an average of 10% per year over the three-year period, the
exercise price is P120.On January 1, 2014 the entity estimated that the fair value of the share option is
P45 if the exercise price is P90. If the exercise price is P120, the fair value of the share option is P40.
The earnings of the entity increased over the three-year period as follows:
2014 10%
2015 11%
2016 3%
The share options were exercised on December 31, 2016.

Required:
1. Compute the compensation expense for 2014, 2015 and 2016 as a result of the share options.
2. Prepare journal entries to record the share options each year and the exercise of the share options on
December 31, 2016.

Big Picture in Focus: ULOb

1. Share-based payment transactions. Is a transaction in which the entity acquires goods or services
and pays for them by issuing its own equity instruments or cash based on the value of its own equity
instruments.
a. Equity Settled share-based payment transaction. One in which the entity receives goods or services
and pays for them by issuing its shares of stocks or share options.
b. Cash Settled share-based payment transaction. One in which the entity receives goods or services
and either the entity or the counterparty is given a choice of settlement in the form of equity instruments or
cash based on the fair value of equity instruments.

I. SHARE BASED COMPENSATION (SHARE APPRECIATION RIGHT)

1.0 Cash Settled Transaction

Cash settled transaction is share-based payment transaction whereby an entity incurs a liability for
services received and the liability is based on the entity’s equity instruments.
PFRS 2, paragraph 30, provides that for cash settled share-based compensation; the entity shall
measure the services acquired and the liability incurred at the fair value of liability.
Until the liability is settled, the entity shall remeasure the fair value of the liability at each reporting
date and at the date of settlement with any changes in fair value recognized in profit or loss for the period.
The best example of cash settled share-based compensation is the grant of share appreciation right
to employees.

2.0 Share appreciation right

A share appreciation right entitles an employee to receive cash, which is equal to the excess of the
market value of entity’s share over a predetermined price for a stated number shares.
In other words, a share appreciation right entitles the employee to cash payment equal to the increase
in the price of a given number of shares over a given period.
Like a share option, a share appreciation right is viewed as compensation for services rendered.
Unlike in a share option, the entity shall recognize a liability because a share appreciation right is
actually an obligation on the part of the entity to pay cash in the future on exercise date. Simply stated,
share appreciation right creates a liability.

2.1 Measurement of compensation

The compensation is based on the fair value of the liability at the reporting date and shall be re-
measured at every year-end until it is finally settled. Any changes in fair value are included in profit or loss.
Accordingly, during the vesting period from the date of grant to exercise date, if there are increases or
decrease in market value of the shares, the liability for the compensation shall be adjusted.
The fair value of liability is equal to the “excess of the market value of share over a predetermined
price for a given number of shares over a definite vesting period.”
Basically, the compensation in a share appreciation right is cash paid by the entity. This amount
becomes known only on exercise date, not on the date of grant.

2.2 Recognition of compensation

a. If the share appreciation right vest immediately, the compensation is recognized immediately on the
date of grant.
b. If the share appreciate right does not vest until the employee completes a definite vesting period, the
compensation is recognized over the service or vesting period.

Illustration
An entity granted a share appreciation right to the general manager on January 1, 2019. After a four-year
service period, the employee is entitled to receive cash equal to the appreciation in share price over the
market value on January 1, 2019.
Thus, the market value on January 1, 2019 is the predetermined price for purposes of determining the
compensation. The share appreciation right had the following terms:
a. Service period- January 1, 2019 to December 31, 2022.
b. Number of Shares- 20, 000 shares
c. Exercise Date- January 1, 2023

The quoted prices of the entity’s share are:

January 1, 2019 200
December 31, 2019 210
December 31, 2020 220
December 31, 2021 240
December 31, 2022 250

2019
Dec. 31 Salaries 50, 000
Accrued Salaries Payable 50, 000

Market Value on December 31, 2019 210

Predetermined price on January 1, 2019 200
Excess 10
Multiply by number of shares 20, 000
Total Compensation 200, 000

Compensation for 2019 (200, 000/ 4 years) 50, 000

2020
Dec. 31 Salaries 150, 000
Accrued Salaries Payable 150, 000

Market Value on December 31, 2020 220

Predetermined price 200
Excess 20
Multiply by number of shares 20, 000
Total Compensation 400, 000

Accrued Compensation on December 31, 2020

(400, 000/4 x 2 years) 200, 000
Accrued Compensation on December 31, 2019 ( 50, 000)
Compensation Expense for 2020 150, 000

2021
Dec. 31 Salaries 400, 000
Accrued Salaries Payable 400, 000

Market Value on December 31, 2021 240

Predetermined price 200
Excess 40
Multiply by number of shares 20, 000
Total Compensation 800, 000

Accrued Compensation on December 31, 2021

(800, 000/4 x 3 years) 600, 000
Accrued Compensation on December 31, 2020 (200, 000)
Compensation Expense for 2021 400, 000

2022
Dec. 31 Salaries 400, 000
Accrued Salaries Payable 400, 000

Market Value on December 31, 2022 250

Predetermined price 200
Excess 50
Multiply by number of shares 20, 000
Accrued Compensation on Dec. 31, 2022 1, 000, 000
Accrued Compensation on Dec. 31, 2021 (600, 000)
Compensation Expense for 2022 400, 000

2023
Jan. 1 To settle the share appreciation right:
Salaries 1, 000, 000
Accrued Salaries Payable 1, 000, 000
Note:
Suppose in the preceding illustration, the market value of the share unfortunately drops on December
31, 2022. Since, the predetermined price is also P200, the entity has no obligation because there is no
appreciation or increase in market value on exercise date.

In this case, the accrued compensation on December 31, 2021 of P600, 000 shall be reversed on
December 31, 2022 as follows:

Accrued Salaries Payable 600, 000

Gain on reversal os share appreciation right 600, 000

Another Illustration
On January 1, 2019, Module |Company granted 100 share appreciation rights to each of the 500
employees on condition that the employees remain in the employ of the entity during the three- year
vesting period.

The employees exercised their share appreciation rights as follows:

December 31, 2021 100 employees

December 31, 2022 250 employees
December 31, 2023 150 employees

The fair value and intrinsic value of the share appreciation right are as follows:
Fair Value Intrinsic Value
December 31, 2019 15
December 31, 2020 18
December 31, 2021 20 15
December 31, 2022 21 20
December 31, 2023 25

The Intrinsic Value of the share appreciation right on the date of exercise is the amount paid out to the
employees.
Journal Entries
2019
Dec. 31 Salaries 250, 000
Accrued Salaries Payable 250, 000

Share Appreciation Rights

(500 employees x 100) 50, 000
Multiply by Fair Value 15
Total Fair Value 750, 000

Accrued Liability- 12/31/2019 (750, 000/ 3) 250, 000

2020
Dec. 31 Salaries 350, 000
Accrued Salaries Payable 350, 000
Share Appreciation Rights
(500 employees x 100) 50, 000
Multiply by Fair Value 18
Total Fair Value 900, 000

Accrued Liability- 12/31/2020

(9000, 000/ 3 x 2) 600, 000
Accrued Liability- 12/31/2019 (250, 000)
Compensation Expense for 2022 350, 000

2021
Dec. 31 Salaries 200, 000
Accrued Salaries Payable 200, 000

Share Appreciation Rights not yet exercised

(500-100 employees x 100) 40, 000
Multiply by Fair Value 20
Accrued Liability- 12/31/2021 800, 000
Accrued Liability- 12/31/2020 (600, 000)
Compensation Expense for 2021 200, 000
Salaries 150, 000
Cash 150, 000

Share Appreciation Rights exercised

(100 employees x 100) 10, 000
Multiply by Intrinsic value 15
Accrued Liability- 12/31/2021 150, 000

Share Appreciation Rights

not yet exercised 200, 000
Compensation paid for rights already
Exercised 150, 000
Total compensation expense for 2021 350, 000
2022
Dec. 31 Accrued Salaries Payable 485, 000
Salaries 485, 000

Share Appreciation Rights not yet exercised

(400-250 employees x 100) 15, 000
Multiply by Fair Value 21
Accrued Liability- 12/31/2022 315, 000
Accrued Liability- 12/31/2021 (800, 000)
Decease in Accrued Liability (485, 000)

Salaries 500, 000

Cash 500, 000

Share Appreciation Rights exercised

(250 employees x 100) 25, 000
Multiply by Intrinsic value 20
Total Payment 500, 000
Reversal of accrued liability related to
Rights not yet exercised (485, 000)
Compensation paid for rights already
Exercised 500, 000
Net compensation expense for 2022 15, 000

2023
Dec. 31 Salaries 60, 000
Accrued Salaries Payable 315, 000
Cash 375, 000

Share Appreciation Rights exercised

(150 employees x 100) 15, 000
Multiply by Intrinsic value 25
Total Payment in 2023 375, 000
Accrued Liabilit – 12/31/2022 (315, 000)
Net compensation expense for 2023 60, 000

3.0 Cash and share alternative

Some share-based payment transactions allow the employee the choice as to whether to settle the
transaction in cash, or by issuing equity shares. An employee may have the right to choose between.
a. Cash alternative – cash payment equal to the market value of a certain number of shares subject to
certain conditions.
b. Share alternative – equity shares given to the employee.

The accounting for this type of instrument depends on ‘which party has the choice of settlement”.
If the entity has the choice of settlement, there is no accounting problem. The entity shall account for
the instrument initially either as liability or equity, but not both.
In other words, if the entity has the choice of settlement, the instrument is not a compound financial
instrument.
However, if the employee has the right to choose the settlement, the entity is deemed to have issued
a compound financial instrument.
Thus, the compound financial instrument is accounted for as partly liability which is the cash
alternative and partly equity which is the share alternative.
The equity component is usually the fair value of the whole compound financial instrument minus the
fair value of the liability compound component. The equity component is always the residual amount.

Illustration
On January 1, 2014, an entity granted to an employee the right to choose either:
a. 12,000 shares (share alternative)
b. Cash payment equal to market value of 10,000 phantom shares (cash alternative)

The grant is conditional upon the completion of three years of service. If the employee chooses the share
alternative, the share must be held for three years after vesting date.
The par value of the share is P25 and grant date on January 1, 2014, the share price is P51.The share
prices for the three-year vesting period are P54 on December 31, 2014, P60 on December 31, 2015 and
P65 on December 31, 2016.

After taking into account the effects of post-vesting restrictions, the entity has estimated that the fair value
of the share alternative is P48 per share.PFRS 2, paragraph 38, requires that this compound financial
instrument shall be accounted for separately as liability and equity.

Fair value of share alternative (12,000 shares x P48) 576,000

Fair value of liability on grant date, January 1, 2014
(10,000 shares x 51) 510,000
Equity component 66,000

The fair value of the share alternative of P576, 000 is actually the fair value of the whole compound
financial instrument.

Journal entries
2014
Dec. 31 Salaries (66,000/3) 22,000
Share options outstanding 22,000
Allocation of the equity component equally over the three-year vesting period.

31 Salaries 180,000
Accrued salaries payable 180,000

Share basis 10,000

Multiply by fair value 54
Total liability 540,000
Accrued liability – 12/31/2014 (540,000/3) 180,000

2015
Dec. 31 Salaries 22,000
Share options outstanding 22,000
31 Salaries 220,000
Accrued salaries payable 220,000

Share basis 10,000

Multiply by market value 60
Total liability 600,000
Accrued liability – December 31, 2015
(600,000/3x2 years) 400,000
Accrued liability – December 31, 2014 (180,000)
Compensation for 2015 220,000

2016
Dec. 31 Salaries 22,000
Share options outstanding 22,000

31 Salaries 250,000
Accrued salaries payable 250,000

Share basis 10,000

Multiply by market value 65
Accrued liability – December 31, 2016 650,000
Accrued liability – December 31, 2015 (400,000)
Compensation for 2016 250,000

4.0 Final accounting

The method of settlement chosen by the employee will determine the final accounting.
If the employee has chosen the cash alternative, the journal entry on December 31, 2016 is:
Accrued salaries payable 650,000
Share option outstanding 66,000
Cash 650,000
Share premium 66,000
If the employee has chosen the equity alternative, the journal entry on December 31, 2016 is:
Accrued salaries payable 650,000
Share option outstanding 66,000
Cash 300,000
Share premium 416,000
Underscore that the entity issued 12,000 shares and not 10,000 phantom shares which serve the basis
only in computing the liability.

Another illustration
On January 1, 2014, an entity purchased an equipment for P5, 000,000.
The supplier can choose how the purchase is to be settled.
The choices are 50,000 shares with par value of P50 in one year’s time, or cash payment equal to the
market value of 40,000 phantom shares on December 31, 2014. At grant date on January 1, 2014, the
market price of each share is P110.
Since the supplier has the choice of settlement, the instrument issued for the purchase of the equipment is
compound financial instrument.

If the fair value of the asset received can be measured directly and easily, as in this case, the equity
component is the fair value of the asset minus the fair value of the liability.
Fair value of equipment 5,000,000
Fair value of liability (40,000 shares x P110) 4,400,000
Equity component 600,000

If the fair value of the asset received cannot be measured directly, the asset is recorded at the fair value of
the shares to be issued.
In such a case, the fair value of the equity component is fair value of shares to be issued minus the fair
minus of the liability.

1. To record the purchase of the equipment on January 1, 2014:

Equipment 5,000,000
Accounts payable 4,400,000
Share options outstanding 600,000

2. To record the settlement assuming the supplier has chosen the cash alternative and market price of the
share is P130 on December 31, 2014.

Accounts payable 4,400,000

Share options outstanding 600,000
Interest expense 800,000
Cash 5,200,000
Share premium 600,000

Cash payment (40,000 x P130) 5,200,000

Fair value of liability- January 1, 2014 4,400,000
Implied interest 800,000

3. To record the settlement assuming the supplier has chosen the share alternative:

Account payable 4,400,000

Share options outstanding 600,000
Share capital (50,000 x 50) 2,500,000
Share premium 2,500,000

Let’s Check
Activity 1. Multiple Choice Questions (Theory)
1. These are transactions in which the enity acquires goods or services by incurring liabilities to the supplier of those
goods or services for amounts that are based on the price of the entity’s shares and other equity instruments.
a. Equity transactions.
b. Cash payment transactions.
c. Purchase transactions.
d. Cash settled share-based payment transactions.

2. For cash settled share-based payment transactions, an entity shall measure the goods or services received and the
liability incurred at the
a. Fair value of the goods and services received.
b. Fair value of the liability.
c. Either tha fair value of the goods or services received or the fair value of the liability.
d. Neither the fair value of the goods or services received nor the fair value of the liability.

3. For cash settled share-based payment transactions, until the liability is settled, the entity is required to re-measure the
fair value of the liability at each reporting date and at the date of settlement and any changes in fair value are
a. Included in profit or loss
b. Included in retained earnings
c. Treated as component of other comprehensive income
d. Not recognized

4. If share based payment transaction provides that the employees have the right to choose the settlement whether in
cash or shares, the entity is deemed to have issued.
a. A compound financial instrument.
b. An equity instrument.

c. A liability instrument.
d. Either an equity instrument or a liability instrument but not both.

5. If the entity has the choice of settlement in a “cash and share alternative”, the entity shall account for the instrument
initially as
a. Equity only
b. Liability only
c. Partly equity and partly liability
d. Either equity or liability but not both.
Let’s Analyze
Activity 1. Required Problems
Problem 1. On January 1, 2019, Generous Company offered the top management share appreciation rights with the
following terms:
Predetermined Price P50 per share
Number of shares 20, 000 shares
Service period 3 years
Expiration Date December 31, 2021

The share appreciation is to be paid upon exercise. The share appreciation rights were exercised on December 31, 2021.
The share prices are as follows:
January 1, 2019 50
December 31, 2019 56
December 31, 2020 68
December 31, 2021 71

Required:
Prepare journal entries in connection with the share appreciation rights.

Problem 2. On January 1, 2019, Ashley Company purchased inventory of P|1, 000, 000. The entity has offered the
supplier a choice of settlement alternatives as follows:
a. To receive 10, 000 shares with par value of P50, valued at P1, 100, 000 at the date of purchase.
b. To receive cash payment equal to the fair value of 8, 000 phantom share on December 31, 2019, with an estimated fair
value of P900, 000 at the date of purchase.

Required:
1. Prepare journal entry on January 1, 2019 to record the purchase of the inventory.
2. Prepare journal entry on December 31, 2019, assuming the supplier has chosen the cash alternative and the
market value of the share is P120 on this date.
3. Prepare journal entry on December 31, 2019, assuming the supplier has chosen the share alternative.

Big Picture in Focus: ULOc

1. Financial Statements. Are the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users.

I. FINANCIAL STATEMENTS

1.0 GENERAL purpose financial statements

PAS 1 prescribes the basis for the preparation of ’’general purpose’’ financial statements to ensure
comparability both with the entity’s financial statements of previous period and with the financial
statements of other entities.
General purpose financial statements are those statements intended to meet the needs of users who
are not in a position to require an entity to prepare reports tailored to their particular information needs.
Reports prepared at the request of an entity’s management or bankers are not general purpose
financial statements because they are prepared specifically to meet the needs of management bankers.

1.1 Components of financial statements

A complete set of financial statements comprises the following components;

1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other explanatory information
Many entities also present reports and statements such as environmental reports and value added
statements, particularly in industries in which environmental factors are significant and when employees
are regarded as an important user group.
However, such statements and reports are not components of financial statements and therefore
outside of the scope of PFRS.

2.0 Objective of financial statements

The objective of general purpose financial statements is to provide information about the financial
position, financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions.
Financial statements also show the results of the management’s stewardship of the resources
entrusted to it.
To meet this objective, financial statement provides information about the following:
1. Assets
2. Liabilities
3. Equity
4. Income and expenses, including gains and losses
5. Contribution by and distribution to owners in their capacity as owners
6. Cash flows
Such information, along with other information in the notes, would assist users of financial statements
in predicting the entity’s cash flows and in particular their timing and certainty.
However, financial statements do not provide all the information that users may need to make
economic decisions since they largely portray the financial effects of past events and do not necessarily
provide nonfinancial information.

3.0 Structure and Contents if Financial Statements

The entity shall display the following information prominently and repeat it when necessary for the
information presented to be understandable.
a. The name of the reporting entity or other means of identification, and any change in that information
from the end of the preceding reporting period.
b. Whether the financial statements are of an individual entity or a group of entities.
c. The date of the end of the reporting period or the period covered by the set of financial statements or
notes.
d. The presentation currency, as defined in PAS 21
e. The level of rounding used in presenting amounts in the financial statements.

Let’s Check
Activity 1. Multiple Choice Questions (Theory)
1. A complete set of financial statements includes all the following components, except
a. Statements of financial position, statements of comprehensive income and statements of cash flows.
b. Statements of changes in equity
c. Notes, comprising a summary of significant accounting policies and other explanatory information
d. Report and statements such as environmental reports and value added statements.
2. What is the objective of financial statements?
a. To provide information about the financial position, financial performance and changes in financial position of an entity
that is useful to a wide range of users in making economic decisions.
b. To prepare and present a statement of financial position, statement of comprehensive income, statement of cash flows
and statement of changes in equity.
c. To prepare and present relevant, reliable, comparable and understandable information to investors and creditors.
d. To prepare and present financial statements in accordance with all applicable PFRS and Interpretations.
3. To meet the objective of providing information about financial position, financial performance and cash flows
of an entity, financial statements should provide information about all of the following, except
a. Assets, liabilities and equity
b. Income and expenses, including gains and losses
c. Contributions by and distribution to owners in their capacity as owners.
d. Nature of the entity’s business activities
4. Which of the following statements is true concerning the objective of financial statements?
I. Financial statement do not provide all the information that users may need to make economic decisions since they are
largely portray the financial effects of past event and do not necessarily provide nonfinancial information
II. Financial; statements show the results of the stewardship of management for the resources entrust to it.
a. I only
b. II and I
c. Both I and II
d. Neither I nor II
5. The primary responsibility for the preparation and presentation of financial statements of an entity is exposed
in the
a. Management of the entity
b. Internal auditor
c. External auditor
d. Controller
Let’s Analyze
Activity 1. Multiple Choice Questions
1. An entity decided to extend the reporting period from year to a 15-month period. Which of the following is not
required in case of change in reporting period?
a. The entity shall disclose the reason for using a longer period than a period of 12 months.
b. The entity shall change the reporting period only if other similar entities in the geographical area I which it generally
operates have done so in the current year.
c. The entity shall disclose that comparative amounts used in the financial statements are not entirely comparable.
d. The entity shall disclose the period covered by the financial statements.
2. Which of the following is not a component of the financial statements?
a. Statement of financial position
b. Statement of changes in equity
c. Board of director’s report
d. Notes to financial statements
3. Which of the following is included in a complete set of financial statements?
a. A statements by the board of directors of compliance with local legislation
b. A statement of changes in equity
c. Summarized statements of financial position for the last five years
d. Value added statement
4. Financial statements include a statement of fianancial position, a statement of comprehensive income, a
statement of changes in equity and statement of cash flows. Which of the following is also included within the
financial statements?
a. A statement of retained earnings
b. Accounting policies
c. An auditor’s report
d. A directors’ report
5. An entity shall clearly indentify each financial statement and shall display all of the following information
prominently, except
a. Name of the reporting entity or other means of identification, and any change in that information from the previous year.
b. Names of major shareholders of the entity.
c. The presentation currency and level of rounding used in presenting the financial statements.
d. Whether the financial statements cover the individual entoty or a group of entities and the date of the end of reporting
period or the period covered by the financial statements.

Big Picture B
Big Picture in Focus: ULOa

1. Statement of Financial Position. A statement of financial position is a formal statement showing the
three elements comprising financial position, namely asset, liabilities and equity.
2. Liquidity. Is the ability to the entity to meet currently maturing obligations.
3. Solvency. Is the availability of cash over the longer term to meet maturing obligations.

I. STATEMENT OF FINANCIAL POSITION

II.
1.0 Concept
A statement of financial position is a formal statement showing the three elements comprising
financial position, namely asset, liabilities and equity.
Investors, creditors and other statement users analyze the statement of financial position to evaluate
such factors as liquidity, solvency and the need of the entity for additional financing,
Information about priorities and payment requirements of existing claims can help users to predict
how future cash flows will be distributed among those with a claim against the entity.
In other words, information about liquidity and solvency is useful in predicting the ability of the entity to
comply with its future financial commitments.

2.0 Current and noncurrent distinction

PAS 1, paragraph 60, provides that an entity shall present current and noncurrent assets, and current
and noncurrent liabilities, as separate classifications in the statement of financial position.
However, an entity shall present all assets and liabilities in order of liquidity when such presentation
provides information that is faithfully represented and more relevant.
When an entity supplies goods or services within a clearly identifiable operating cycle, the separate
classification of current and noncurrent assets and liabilities is useful information by distinguishing
between net assets that are continuously circulating as working capital from the net assets used in long-
term operations.
It also highlights assets that are expected to be realized within the current operating cycle, liabilities
that are due for settlement within the same period. For some entities, such as financial institutions, a
presentation of assets and liabilities in increasing or decreasing liquidity provides information that is
faithfully represented and more relevant that current and noncurrent presentation.
Financial institutions do not supply goods or services within a clearly identifiable operating cycle.

2.1 Assets
Assets are defines as “resources controlled by the entity as a result of past transactions and events and
from which future economic benefits are expected to flow to the entity.
In layman’s language and in short, assets are properties owned.
The essential characteristics of an asset are:
a. The asset is controlled by the entity.
b. The asset is the result of a past transaction or event.
c. The asset provides future economic benefits
d. The cost of the asset can be measured reliability.

2.1.1 Current assets

PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:
a. The asset is cash or a cash equivalent unless that asset is restricted from being exchanged or used to
settle a liability for at least twelve month after the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting period.
d. The entity expects to realize the asset or intends to sell or consume it within the entity’s normal
operating cycle.
Nature of Current Assets
1. Cash and Cash Equivalents
2. Held for trading
3. Expected to be realized within twelve months

Presentation of Current Assets

Current assets are usually listed in the statement of financial position in the order of liquidity.
Minimum line items under current assets:
a. Cash and cash equivalents.
b. Financial Asset at fair value, such as trading securities and other investments in quoted equity
instruments.
c. Trade and other receivables.
d. Inventories.
e. Prepaid Expenses.

2.1.2 Assets
PAS 1, paragraph 66, simply states that “an entity shall classify all other assets not classified as
current as noncurrent assets”.
In other words, what is not included in the definition of current assets is deemed excluded. All others
are classified as noncurrent assets. Accordingly, noncurrent assets include the following:
a. Property, plant and equipment.
b. Long Term Investments
c. Intangible Assets
d. Other Noncurrent Assets

2.1.3 Other Noncurrent Assets

Other noncurrent assets are those assets that do not fit into the definition of the previously mention
noncurrent assets. Examples of other noncurrent assets include long term advances to officers, directors,
shareholders and employees, or abandoned property and long term refundable deposit.

2.2 Liabilities
Are defined as “present obligations of an entity arising from past transactions or events, the
settlement of which is expected to result in an outflow from the entity of resources embodying economic
benefits”.

a. The liability is the present obligation of a particular entity.

b. The liability arises from past transactions.
c. The settlement of the liability requires an outflow of resources embodying economic benefits.

2.2.1 Current Liabilities

An entity shall classify a liability as current liabilities, when:
a. The entity expects to settle the liability within the entity’s normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period.

Presentation of Current Liabilities

The standard provides that as a minimum, the face of the statement of financial position shall include
the following line items for current liabilities:
a. Trade and other payables.
b. Current provisions.
c. Short term borrowing
d. Current portion of long term debt
e. Current tax liability.

2.2.2 Noncurrent Liabilities

All liabilities not classified as current liabilities are classified as noncurrent liabilities.

Examples:
a. Noncurrent portion of long term debt.
b. Finance lease liability.
c. Deferred tax liability.
d. Long term obligations to entity officers.
e. Long term deferred revenue.

2.3 Shareholder’s Equity

Is the residual interest of owners in the net assets of a corporation measured by the excess of assets over
liabilities.
1. Share capital. The portion of the paid in capital representing the total par or stated value of the shares
issued.
2. Subscribed share capital. The portion of the authorized share capital that has been subscribed but
not yet fully paid and therefore still unissued.
3. Subscription receivable. Preferably be reflected as a deduction from the related subscribed share
capital.
4. Share Premium. The capital contributed by the shareholders in excess of the par or stated value of the
shares subscribed and issued.

2.4 Retained Earnings

Retained earnings(or accumulated earnings) or accumulated losses is the amount of earnings
accumulated from previous periods. Retained earnings increase by the amount of net income for a period
and decrease on account of dividend payments and restatement, if any.
Retained earnings at the start of a period + Net income for the period - Dividends paid ± Restatement on
account of accounting policy changes or errors = Retained earnings at the end of a period.

Let’s Check
Activity 1. Multiple Choice Questions (Theory)
1. The financial statements most frequently provided include all of the following, except
a. Statement of financial position
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings
2. The major financial statements include all of the following, except
a. Statement of financial position
b. Statement of changes in financial position
c. Statement of comprehensive income
d. Statement of shareholders’ equity
3. Which of the following represents a form of communication through financial reporting but not through
financial statements?
a. Statement of financial position
b. President’s letter
c. Income statement
d. Notes to financial statements
4. The statement of financial position is useful for analyzing all of the following, except
a. Liquidity
b. Solvency
c. Profitability
d. Financial flexibility
5. The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is
referred to as
a. Solvency
b. Financial Flexibility
c. Liquidity
d. Exchangeability
6. The statement of financial position contributes to financial reporting by providing a basis of all of the
following, except
a. Computing rate of return
b. Evaluating the capital structure
c. Determining the increase in cash due to operations
d. Assessing the liquidity and financial flexibility of the entity
7. The information reported in the statement of financial position is useful for all of the following, except
a. To compute rate of return
b. To analyze cash inflows and outflows for the period
c. To evaluate capital structure
d. To assess future cash flows
8. One criticim not normally aimed at the statement of financial position prepared using current accounting and
reporting standards is
a. Failure to reflect current value information
b. The extensive use of separate classifications
c. An extensive use of estimates
d. Failure to include items of financial value that cannot be recorded objectively
9. The statement of financial position
a. Omits many items that are of financial value
b. Makes very limited use of judgment and estimate
c. Uses fair value for most assets and liabilities
d. All of the choices are correct regarding the statement of financial position.
10. Which of the following is limitation of the statement of financial position?
a. Many items that are of financial value are omitted
b. Judgment and estimate are used.
c. Current fair value is not reported
d. All of these are considered limitation of the statement of financial position.

Let’s Analyze
Activity 1. Easy Company provided the following information on December 31, 2019:

Accounts Payable 350, 000

Accounts Receivable 450, 000
Property, Plant and Equipment 5, 600, 000
Accumulated Depreciation 1, 200, 000
Mortgage payable, due in 5 years 1, 500, 000
Share Capital, P100 par 4, 000, 000
Share Premium 500, 000
Cash and Cash Equivalents 800, 000
Accrued Expenses 100, 000
Inventories 900, 000
Long Term Investments 950, 000
Note Payable, long term debt 500, 000
Note payable, short term debt 200, 000
Office supplies unused 50, 000
Patent 800, 000
Prepaid Rent 150, 000
Retained Earnings 1, 350, 000

Required:
Prepare in good form a properly classified statement of financial position in accordance with Philippine Financial
Reporting Standards.
2. The accounts and balances shown below were gathered from Zechariah Corporation’s trial balance on December
31,2015. All adjusting entries have been made:

Wages Payable P 25,600

Cash 17,700
Mortgage Payable 151,600
Dividends Payable 14,000
Prepaid Rent 13,600
Inventory 81,800
Sinking fund assets 52,400
Short-term investments 15,200
Premium on bonds payable 4,600
Stock investment in Subsidiary 102,400
Taxes Payable 22,800
Accounts Payable 24,800
Accounts Receivable 36,600

A. The amount that should be reported as current assets on Zechriah Corporation’s statement of financial
position is
a. a. P 151,300 b. P 217,300 c. P 164,900 d. P 267,300
B. The amount that should be reported as current liabilities on Zechriah Corporation’s statement of financial
position is
a. P 91,800 b. P 238,800 c. P 87,200 d. P 73,200
Big Picture in Focus: ULOb
1. Notes to Financial Statements. Provides narrative description or disaggregation of items presented in
the financial statements and information about items that do not qualify for recognition.
I. NOTES TO FINANCIAL STATEMENTS
1.0 Concept
Notes contain information in addition to that presented in the statement of financial position, income
statement, statement of comprehensive income, statement of changes in equity and statement of cash
flows.
In other words, notes to financial statements are used to report information that does not fit in the
body of the statements in order to enhance the understandability of the statements.
Notes provide additional information and help clarify the items presented in the financial
statements.PAS 1, paragraph 113, provide that an entity shall, as far as practicable, present notes in a
systematic manner.
Each item on the face of the statement of financial position income statement, statement of
comprehensive income, statement of changes in equity and statement of cash flows shall be cross-
referenced to any related information in the notes.
The notes to financial statement shall be highly detailed, precise, complete and easily understood by
a reader who has a reasonable understanding of business affairs and is willing to study the financial
statements.

2.0 Purpose of notes to financial statements

The purpose of notes to financial statements is “to provide the necessary disclosures required by
Philippine Financial Reporting Standards.”
Specifically, PAS 1, paragraph 112, provides that the notes to financial statements shall:
a. Present information about the basis of preparation of the financial statements and the specific
accounting policies used.
b. Disclose the information required by Philippine Financial Reporting Standards that is not presented in
the financial statements.
c. Provide additional information which is not presented in the financial statements but is relevant to an
understanding of the financial statements.

3.0 Order of presenting the notes

PAS 1, paragraph 114, provides that an entity normally presents notes in the following order to assist
users understand the financial statements and to compare them with financial statements of other entities:
a. Statement of compliance with PFRS
b. Summary of significant accounting policies used
c. Supporting information or computation for line items presented in the financial statements
d. Other disclosures, such contingent liabilities, unrecognized contractual commitments and nonfinancial
disclosures.

In some circumstances, it may be necessary or desirable to vary the order of specific items within the
notes. However, the entity must retain the systematic presentation and structure of the notes as far
practicable.

3.1 Compliance with PFRS

PAS 1, paragraph 16, provides that an entity whose financial statements comply with Philippine
Financial Reporting Standards shall make an explicit and unreserved statement of such compliance in the
notes.
An entity shall not describe financial statements as complying with PFRS unless they comply with all
the requirements of each applicable Philippine Financial Reporting Standard.

3.2 Accounting policies

Accounting policies are defines as “the specific principles, methods, practices, rules, bases and
conventions adopted by entity in preparing and presenting financial statements.”
Accounting standards set out the required recognition and measurement principles that an entity shall
follow in preparing its financial statements, and shall often prescribe the accounting policy to be adopted.

3.3 Significant accounting policies

The summary of significant accounting policies shall disclose the following:
a. The measurement basis used in preparing the financial statements.
b. The accounting policies used that are relevant to an understanding of the financial statements.

3.4 Disclosure of Measurement Basis

It is important for an entity to inform users of the measurement basis used in the financial statements
because the basis on which the entity prepares the financial statements significantly affects the users’
analysis.
The measurement bases include historical cost, current cost, realizable value and present value. The
most common measurement basis is historical cost.
3.5 Disclosure of Accounting Policies
In deciding whether a particular accounting policy should be disclosed, management shall consider
whether the disclosure would assist users in understanding how transactions, other events and conditions
are reflected in the financial statements.
Disclosure of particular accounting policies is especially useful to users when those policies are
selected from alternatives allowed in Philippine Financial Reporting Standards.

3.6 Disclosure of Judgments

The standard provides that an entity shall disclose in the summary of significant accounting policies
the judgments that management has made in the process of applying accounting policies and that have a
significant effect on the amounts recognized in the financial statements.
Specifically, management makes judgments in determining the following:
a. Whether financial assets are to be measured at fair value or at amortized cost.
b. Whether substantially all the significant risks and rewards of ownership of the leased asset are
transferred to the lessee.
c. Whether in substance particular sales of goods are product financing arrangement and therefore do not
give rise to revenue.
3.7 Disclosure of Estimation Uncertainty
The standard provides that an entity shall disclose information about the assumptions it makes about
the future, and other major sources of uncertainty at the end of reporting period that have a significant risk
of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial
year.

With respect to those assets and liabilities, the notes shall include the nature and carrying amount of
the assets and liabilities at the end of the reporting period.

3.8 Other Disclosures

The standard provides that an entity shall disclose the following:
a. The domicile and legal form of the entity, its country of incorporation and the address of the registered
office or principal place of business.
b. A description of the nature of the entity’s operations and its principal activities.
c. The name of the parent and the ultimate parent of the group.

Example of Notes to Financial Statements

Note 1- Compliance with PFRS

The financial statements have been prepared in compliance with the Philippine Financial Reporting
Standards and rules and regulations of the Philippine Securities and Exchange Commission.
The accounting policies adopted in the preparation of financial statements have been applied on a
consistent basis.

Note 2- Significant Accounting Policiies

Measurement Basis- The financial statements have been prepared on the basis of historical cost, and
except where stated, do not take into account changing prices and current cost of non-current assets.
Inventories- Inventories are measured at the lower of FIFO cost and net realizable value.
Property, plant and equipment- Property, plant and equipment are recoreded at cost. The straight line
method is used in recording depreciation on the basis of the estimated useful life of the assets.
Capital Expenditures- Expenditures incurred subsequent to the acquisition of property, plant and
equipment are expensed outright if the amounts are P5, 000 and below. Such expenditures amounted to
100, 000 in 2019 and 30, 0000 in 2018 on the aggregate.
Cash Equivalents- The entity considers all highly liquid investments with maturities of three months or
less when purchased as cash equivalents.
Intangible Assets- Goodwill represents the difference between the purchase prices of an acquired entity
and the related fir values of net assets acquired. Goodwill is not amortized but tested for impairment
annually.
Research and Development- All expenditures for research and development are charged to expense in
the year incurred.
Income Taxes- Income taxes include deferred income taxes that result from all taxable and deductible
temporary differences between carrying amounts for financial reporting and tax base for tax reporting of
assets and liabilities.
Earnings per Share- Earnings per share amounts are based on the weighted average number of ordinary
shares outstanding after recognition of preference dividends. Potential ordinary share are not material

Note 3- Inventories
The components of year-end inventories are as follows:

Dec. 31, 2019 Dec. 31, 2018

Finished Goods 3, 000, 000 2, 500, 000
Goods in Process 2, 000, 000 1, 800, 000
Raw Materials 1, 500, 000 1, 200, 000
Manufacturing Supplies 400, 000 300, 000
Allow, for Inv. Writedown ( 700, 000) ( 500, 000)
6, 200, 000 5, 300, 000

Note 4- Contingent Liability

The entity is a defendant in a patent infringement suit seeking damages of P2, 000, 000. The suit is still
pending and the entity’s legal counsel firmly belived that the case will not prosper.
Note 5- Long Term Debt
The bonds payable of P5, 000, 0000 mature on December 31, 2022, pay annual interest of 12% on June
30 and December 31. The bonds require sinking fund deposit of P1, 000, 000 annually, starting December
31, 2019.
Let’s Check
Activity 1. Multiple Choice Questions (Theory)
1. Which of the following is not a purpose of notes to financial statements?
a. To present information about the basis of preparation of the financial statements and the specific accounting policies
used.
b. To disclose the information required by Philippine Financial Rep[orting Standards that is not presented elsewhere in the
financial statements.
c. To provide additional information which is not presented in the financial statements but that is necessary for a fair
presentation.
d. To provide information about financial position, financial performance and cash flows of an entity that is useful to a wide
range of users in making economic discussions.
2. What is the proper order of presenting the notes to financial statements?
I. Statement of compliance with PFRS
II. Other disclosures, such as contingent liabilities, unrecognized contractual commitments and other nonfinancial
disclosures.
III. Supporting information for items presented on the face of financial statements.
IV. Summary of significant accounting policies.

a. I, II, III and IV

b. I, IV, III and II
c. I, III, IV and II
d. I, IV, II and III
3. The disclosure of accounting policies is important to financial statement readers in determining
a. Net income for the year.
b. Whether accounting policies are consistently applied from year to year.
c. The value of obsolete items included in ending inventory.
d. Whether the working capital position is adequate for future operations.
4. The presentation of the notes to financial statements in a systematic manner
a. Is voluntary.
b. Is mandatory
c. Is mandatory, as far as practicable.
d. Depends on the industry.
5. An entity shall disclose in the summary of significant accounting policies
a. The measurement basis is used in preparing the financial measurements.
b. All the measurement bases specified in PFRS irrespective of whether they were used by the entity in preparing the
financial statements.
c. The measurement basis used in preparing the financial statements and the accounting policies used that are relevant to
an understanding of the financial statements.
d. All of the measurement bases and the accounting policy choices available to th entity specified in PFRS irrespective of
whether they were used by the entity in preparing the financial statements.

Let’s Analyze
Activity 1.
1. Explain fully “notes to financial statements” an enumerate the order of disclosures.

2. What is the purpose of notes to financial statements?

3. Specifically, what information shall be disclosed in the notes to financial statements?

Big Picture in Focus: ULOc

1. Related Parties. Are considered to be related if one party has:
a. The ability to control the other party.
b. The ability to exercise significant influence over the other party.
c. Joint contol over the entity.

I. RELATED PARTIES

1.0 RELATED PARTY TRANSACTIONS

A related party transaction is a transfer of resources or obligations between related parties, regardless of
whether a price is charged.
Related Party – Parties are considered related if one party has:
a. The ability to control the other party
- Control is the power over the investee or the power to govern the financial and operating policies of an
entity so as to obtain benefits.
b. The ability to exercise significant influence over the party
- Significant influence is the power to participate in the financial and operating policy decision of an entity,
but not control of those policies.
c. Joint control over the entity.
- Joint control is the contractually agreed sharing of control over an economic activity

1.1 Examples of related parties:

1. Associates – an entity over which the investor has significant influence.
2. Entities that directly or indirectly through one or more intermediaries, control or are controlled by or
under one common control with the reporting entity.
3. Key management personnel are those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly.

2.0 Related Party Disclosures

Pas 24, paragraph 12, requires disclosure of related party relationships where control exists irrespective
of whether there have been transactions between the related parties.

2.1 Disclosure of related party transaction

As a minimum, the disclosures of related party transactions shall include:
a. The amount of transaction
b. The amount of outstanding balance, terms and conditions, whether secured or unsecured, and nature
of consideration to be provided in settlement.
c. The allowance for doubtful accounts related to the outstanding balance.
The expense recognized during the period in respect of doubtful accounts due from related parties.

2.2 EXAMPLE OF RELATED PARTY DISCLOSURES

Jambalaya Company reported the following remuneration and other payments made to the entity’s chief
executive officer during the current year:

Annual salary P 2,000,000

Share options and other share-based payments 1,000,000
Contributions to retirement benefit plan 500,000
Reimbursement of travel expense for business trips 1,200,000

What total amount should be disclosed as compensation to key management personnel?

Annual salary P 2,000,000
Share options and other share-based payments 1,000,000
Contributions to retirement benefit plan 500,000

Compensation P 3,500,000
Dean Company acquired 100% of Morey Morey
Company in the prior year. During the
year, the individual entities included in
their financial statements the following:
Dean
Key officer’s salaries P 750,000 P 500,000
Officer’s personal 200,000 100,000
expenses
Loan’s to officers 1,500,000 500,000

Let’s Check
Activity 1. Multiple Choice Questions (Theory)
1. Related parties include all of the following, except
a. Between related parties when a price is charged.
b. Associate
c. Key mangenebt personnel and close family members of such key management personnel.
d. Two venturers simply because they share joint control over a joint venture
2. A related party transaction is a transfer of resources or obligations
a. Between related parties when a price is charged.
b. Between related parties, regardless of whether a price is charged.
c. Between unrelated parties when a price is charged.
d. Between unrelated parties, regardless of whether a price is charged.
3. Unrelated parties include all of the following, except
a. Providers of finance in the course of their normal dealings with an entity by virtue only of those dealings.
b. Government agencies.
c. Single customer with whom an entity transacts a significant volume of business merely by virtue of the resulting
economic dependence.
d. Postemployment benefit plan for the benefit of employees of the entity.
4. Close family members of an individual include all of the following, except
a. The individual’s spouse and children
b. Children of the individual’s spouse.
c. Dependents of the individual or individual’s spouse.
d. Brothers and Sisters of the individual.
5. The minimum disclosures about related party transactions necessary for an understanding of the financial statements
include all of the following, except
a. The amount of transactions
b. Amounts of outstanding balances
c. Allowance for doubtful accounts related to the outstanding balance.
d. Nature of the relationship

Let’s Analyze
Activity 1
1. During the year 2012, an entity paid the following to its chief executive officer:
 Annual salary of P2 million
 Share options and other share-based payments valued at P1 million
 Contributions to retirement benefit plan amounting to P0.8 million
 Reimbursement of his travel expenses for business trips totalling P1.2 million

The entity should disclose key management personnel compensation of

Activity 2
1. Explain Related Party Disclosures.

2. Explain key management personnel compensation.

3. What are the circumstances where related party disclosures are not required?

Big Picture in Focus: ULOd

1. Events after Reporting Period. Those events, whether favorable or unfavorable, that occur between
the end of reporting period and the date on which the financial statements are authorized for issue.
I. Events after Reporting Period

1.0 ADJUSTING AND NON-ADJUSTING EVENTS

PAS 10, paragraph 3, defines events after the reporting period as those events, whether favorable or
unfavorable, that occur between the end of reporting period and the date on which the financial
statements are authorized for issue
1.1 Types of events after reporting period:
a. Adjusting events – after the reporting period are those that provide evidence of conditions that exist at
the end of reporting period
b. Non adjusting events – after reporting period are those that indicative of conditions that arise after the
end of reporting period.

1.1.1 Examples of adjusting events:

1. Settlement after the reporting period of a court case because it confirms that entity already had a
present obligation at the end of reporting period.
2. Bankruptcy of a customer which occurs after the reporting period.
3. The discovery of fraud or errors that show the financial statements were incorrect.

1.1.2 Examples of non-adjusting events:

1. Plan to discontinue an operation
2. Destruction of a major production plant by a fire after the reporting period
3. Major purchase and disposal of asset or expropriation of major asset by government.

1.2 EXAMPLE OF ADJUSTING AND NON-ADJUSTING EVENTS

The audit of Anne Company for the year ended December 31, 20x7 was completed on March 1, 20x8.
The financial statements were signed by the managing director on March 15, 20x8 and approved by the
shareholders on March 31, 20x8.
The following events have occurred:
1. The entity’s issued share capital comprised 100,000 ordinary shares with P100 par value.

The entity issued additional 25,000 shares on March 1, 20x8 at par value. (Non-adjusting entry)
2. Specialized equipment with carrying amount of P525, 000 was destroyed by fire on December 15,
20x7.
The entity has booked a receivable of P400, 000 from the insurance entity.
After the insurance entity completed the investigation on February 1, 20x8, it was discovered that the fire
took place due to negligence of the machine operator.
As a result, the insurer’s liability was zero to claim. (Adjusting entry)

Let’s Check
Activity 1. Multiple Choice Questions (Theory)
1. Financial statements are authorized for issue
a. When the board of directors reviews and authorizes the financial statements for issue.
b. When the shareholders approve the financial statements at their annual meetings.
c. When the financial statements are filed with Securities and Exchange Commission.
d. When a supervisory board made solely of nonexecutives approves the financial statements issued by the management
of an entity

2. Adjusting events after the reporting period include all of the following, except
a. The settlement of a court case after the issuance of the financial statements that confirms that the entty had already a
present obligation.
b. Bankruptcy of a customer which occurs after the end of reporting period but before issuance of financial statements.
c. Discovery of fraud or errors that show that the financial statements were incorrect.
d. Determination after the end of reporting period and before issuance of financial statements of the cost of asset
purchased before end of reporting period.
3. Non-adjusting events after reporting period which will require disclosure include all of the following, except
a. Plan to discontinue an operation.
b. Expropriation of asset by government after end of reporting period.
c. Destruction of a major production plant by fire at the end of the reporting period.
d. A business combination after end of reporting period.
4. Which of the following events after the end of the reporting period would generally require disclosure but no
adjustment of the financial statements?
a. Retirement of the president.
b. Settlement of litigation when the event gave rise to the litigation occurs prior to the end of reporting period.
c. Strike of employees.
d. Issue of a large amount of ordinary shares.
5. Which of the following events after the reporting period would require adjustment before issuance of the
financial statements?
a. Loss of plant as a result of fire.
b. Change in the quoted market price of securities held as investment.
c. Loss on an uncollectible account receivable resulting from a customer’s major flood loss.
d. Loss on a lawsuit the outcome of which was deemed uncertain at year-end.

Let’s Analyze
Activity 1.Problem Solving
1. The draft financial statements of Unleashed Company for the year ended December 31,2014 are currently
under consideration by the directors. The Shareholders equity for the year is shown as P 2,600,000. Since
December 31,2014 the following events have occurred but have not reflected in any way in the draft financial
statements to that date.

Item A- It was discovered that an error was made in writing at the inventory figure at December 31, 2014. Inventory which
had a cost of P 300,000 with a net realizable value of P 400,000 were omitted. .
Item B- In December 2014 plans to merge with Sahara Company were announced and the company will be issuing
ordinary share with a total value of P 3,000,000.
What is the adjusted amount of shareholders equity should Unleashed Company report in its December 31,2014
statement of financial position?
2. 33. The audit of Goodness Company for the year ended December 31, 2015 was completed on March 1, 2016.
The financial statements were signed by the managing director on March 15, 2016 and approved by the
shareholders on March 31, 2016. The next events have occurred.
 On January 15, 2016, a customer owing P900,000 to Goodness filed for bankruptcy. The financial statements
include an allowance for doubtful debts pertaining to this customer of P100,000

 Specialized equipment costing P525,000 purchased on September 1, 2015 was destroyed by fire on December
15, 2015. Goodness Company has booked a receivable of P400,000 from the insurance company. After the
insurance company completed its investigation on February 1, 2016, it was discovered that the fire took place due to
the negligence of the machine operator. As a result, the insurer’s liability was zero on this claim.

Goodness Company’s issued capital comprised 100,000 equity shares with P100 par value. The company issued
additional 25,000 shares on March 1, 2016.
What amount should Goodness Company should report as net amount of “adjusting events” on December 31,
2015?

Activity 2.
1. Explain “Events after the Reporting Period”

2. Explain at least example of adjusting events.

3. Explain at least example of non-adjusting events.