MODULE 1

1.1 Classification, Initial Recognition and Measurement

Equity instruments

At Fair Value through other

Comprehensive income
Inclusion Securities not held for trading for
which the elects to recognize
change in fair value through
other comprehensive income
At Fair Value through Profit or Loss
a. Securities held for trading
b. Securities not held for  trading for
which the enterprise did not elect
measurement at fair value though
other comprehensive income

Initial Recognition Purchase price plus transaction Purchase price; transaction costs
costs are taken to profit or loss (Expensed
outright)
Measurement after Fair value Fair value
initial recognition
None
a. Unrealized gains and losses
Amount taken to other b. Realized gains and losses,
comprehensive income with no recycling to profit or loss
(but may be transferred to
Retained Earnings)

a. Dividends that are considered

Amount taken to profit or Dividends that are considered return on investments
loss return on investments
b. Unrealized and realized gains
and losses

Debt instruments

At Fair Value through

At Fair Value through
At Amortized Cost Other Comprehensive
Profit or Loss
Income
Inclusion Debt investments that Debt investment that
are held within the are held within the a. Debt investment held
business model of business model of for trading
collecting contractual collecting contractual b. Debt investments
cash flows consisting cash flows and to sell, held within the
SPPI, and which the and which the business model of
enterprise did not elect enterprise elected to collecting contractual
to measure at fair value recognize the change cash flows consisting
in fair value through SPPI and which
 other comprehensive
income enterprise elected to
measure at fair value
c. Debt investments
held within the
business model
collecting contractual
cash flows and to sell,
and which the
enterprise did not elect
to recognize the
change in FV through
OCI
Initial Recognition At purchase price plus At purchase price plus At purchase price;
transaction costs transaction costs transaction costs are
taken to profit or loss
Measurement after At amortized costs, At fair value
initial recognition using the effective At fair value, in a two-
interest method step process
a. adjust to amortized
costs
b. adjust to fair value
through OCI
Amount taken to other None Unrealized gains and None
comprehensive income losses due to change in
fair value with recycling
to profit or loss when
realized
Amounts taken to profit
or loss a. Interest Revenue a. Interest revenue a. Interest revenue for
practicality based on
b. Realized gains and b. Realized gains and nominal interest
losses including losses (recycled from
impairment loss cumulative OCI), b. Unrealized and
including impairment realized gains and
loss losses

1.2 Internal Control Over Investment in Financial Instruments

The major elements of adequate internal control over the investment securities focus on the following:

 Separation of duties between the custody of the instruments, the maintenance of accounting
records and the authorization of purchases and disposals
 Joint Control (of at least two officials) over the investment securities, or the use of an independent
outside entity custodian
 Complete detailed records of all securities owned, and the related revenue from interest and
dividends
 Registration of securities in the name of the company 
 Periodic physical inspection of securities by an internal auditor or other independent official
 Preparation of a budget of investment revenue
 Formulation and implementation of investment policies

1.3 Audit Objectives for Investments in Financial Instruments

The auditor's objectives in the audit of investments in financial instruments are to:

 Consider internal control over financial instruments held by the client (TOC)
 Determine the existence of investments and that the client has rights to the instruments
(Existence)
 Determine that all financial instruments held by the entity are reported and that transactions
affecting the investments are properly accounted for.  (Completeness)
 Establish the proper measurement of investments in financial instruments (Valuation)
 Establish accuracy of the amounts recognized in profit or loss and other comprehensive income
relating to investments (Accuracy)
 Determine that the presentation and disclosure of the investments is adequate (Presentation and
Disclosure)

1.4 Audit Procedures for Investments in Financial Instruments

These are the audit procedures that an auditor can perform to achieve the audit objectives:

 Confirmation with trustee or broker the balances of the financial instruments if its custody are in
independent outside entity (Existence or Occurrence)
 Physical inspection and count of all securities on hand simultaneously (Completeness)
 Compare the serial number on securities with those recorded in the prior year's audit working
papers
 Confirmation with creditors for securities, held as collateral for loans, to be directly mailed to
auditor's office (Rights and Obligation)
 Cutoff Test of all investment transactions (Completeness)
 Analytical procedures such as recomputation of gains and losses 
 Verify the computation of dividends and interests revenue through independent computations
(Accuracy and Valuation)
 Validate the measurement by referring the published price quotation of securities
 Determine whether investments are properly classified and disclose according to accounting
standards 
 Determine whether the management has considered relevant information t determine the
existence of impairment indicators

1.4.1 Illustrative Problems

EQUITY INVESTMENTS
In your audit of the investments held by Rose Company, your client you found the following
transactions and other information for the year 2015:
a. The financial statements of the company for the year 2014 revealed the following investment
balances:
Financial Assets at Fair Value through Profit or Loss:

Instrument Number of Shares Balance

Daisy ordinary share 5,000 P84,000
Rosal ordinary share 2,000 P60,000

You found that the December 31 balances approximated the fair values of the securities
b. On April 3, Daisy Company distributed 20% bonus issue
c. On April 29, Rosal paid P5 cash dividend declared on March 30, 2015
d. On May 15, Rose sold 1,000 of Daisy ordinary at P20 per share
e. On June 1, the Rose Company purchased at P25 per share 2,000 of Waling-Waling ordinary. Rose
paid transfer taxes and commissions amounting to P2,500. The company exercised its option to
designate the Waling-waling shares as at fair value through other comprehensive income 
f. On October 1, Rose sold 500 of Rosal ordinary shares at P37 per share
g. On December 1, Rosal declared P3 dividend per share on its ordinary share, payable on January
15 to shareholders of record on December 15, 2015
h. Fair values on December 31, 2015 were as follows:
Daisy ordinary share                                P22
Rosal Company share                                 35
Waling-waling ordinary share               28

ANALYSIS OF INVESTMENT IN EQUITY SECURITIES 

 In the Statement of Financial Position
Current Assets:
Equity investments at FVtPL                                                                                          P162,500
Dividend Receivable                                                                                                           4,500
Noncurrent Assets:
Equity Investments at FVtOCI                                                                                            56,000
Shareholder's Equity:
Unrealized Cumulative Gain on Equity investment at FVOCI                            4,000
 
In the Statement of Comprehensive Income
Profit or Loss:
Dividend Income                                                                                                               14,500
Gain on Sale of Equity Investments                                                                                    9,500
Other Comprehensive Income:
Cumulative unrealized gain on equity investments at FVtOCI                          4,000
DEBT INVESTMENTS
The Riverside Company engaged your services to examine its financial statements for the year
ended December 31, 2015. It makes an early adoption of IFRS 9 issued by the IASB in 2014. You
identified from the trial  balance that its debt investment, consisting solely of ANC 8% bonds has a
balance of P925,250, representing ist acquisition cost of P1,084,250  of the P1,000,000 face value
bonds, due on December 31, 2019 and net of P159,000 proceeds from sale of the investments.
Interest is collectible every December 31. Riverside recorded the interest collected amounting to
P80,000 as credit to Interest Revenue. On December 31, after receiving the periodic interest,
Riverside sold P150,000 of the bonds to generate enough funds for settlement of its maturing
obligation. The selling price of P159,000 represents the fair value of the P150,000 bonds investments
sold. 
Because the entity holds these bonds in a portfolio of securities held for collection and also for sale in
response to financing requirements, the enterprise elected to designate the debt investments as at
fair value through other comprehensive income. 
You audit staff has calculated an effective interest rate on these investments at 6%, and has provided
you the following working paper for the computation of the correct amortized cost and interest
revenue. 
Amortization Table
Solution:
FV of the full debt investments before sale
P159,000\150,000=106%x 1,000,000=                                                   P1,060,000
Amortized Cost of the debt investments                                                     1,069,305
Unrealized loss on debt investments                                                                        9,305
Unrealized loss recycled to Profit or loss:
                 FV of investments sold                                   159,000
                Amortized cost of investment sold 
                  1,609,305 x 150,000\1,000,000=                  (160,396)                   (1,396)
Balance of unrealized loss remaining in equity                                                  P7,909
The entries that should have been made are as follows:
Upon receipt of the periodic interest on December 31:
Cash                                80,000
                     Debt investments at FVtOCI                      14,945
                     Interest Revenue                                  65,055
To adjust to fair value at December 31, before the sale:
Unrealized gain or loss on Debt investments at FVtOCI                9,305
                      Debt investments at FVtOCI                                                            9,305
To record the sale:
Cash                                                                  159,000
Loss on Sale of Debt investments                        1,396
                         Debt investments at FVtOCI                                                  159,000
                         Unrealized Gain or loss on Debt investments at FVtOCI             1,396
Audit Adjustments:
a. Interest Revenue                                      14,945
                         Debt investments at FVtOCI                            14,945
b. Unrealized G or L on Debt investments at FVtOCI                       9,305
                         Debt investments at FVtOCI                                                    9,305
c. Loss on Sale of Debt Investments              1,396
                        Unrealized G or L on Debt investment at FVtOCI               1,396
In Riverside's financial statements, the following items will be reported:
On the statement of financial position:
Noncurrent assets:
             Debt investments at FVtOCI                                 P901,000
Shareholder's Equity:
             Cumulative Net Realized Gain or Loss 
                    on debt investment at FVtOCI                               7,909
On the statement of comprehensive income:
In profit or loss section:
              Interest Revenue                                                              65,055
In other comprehensive income:
             Unrealized loss on debt investments 
                  at FVtOCI, net of P1,396 recycled to 
                 profit or loss                                                                          7,909

MODULE 2

2.1 Classification of Noncurrent Operating Assets

NON-CURRENT OPERATING ASSETS:

Property, Plant and Equipment- tangible assets with a useful life of more than one year, that are held
to be use in the production or supply of goods and services, for rental to others or for administrative
purposes. 
Investment Property- land or building, or both, held by the owner or  by the lessee under a finance
lease to earn rentals or for capital appreciation or both rather than for use in the production or supply
of goods or services or for administrative purposes or sale in the ordinary course of business 
Intangible Assets- identifiable non-monetary assets without physically substance, to which the
enterprise has economic control and from which economic benefits are expected to flow to the entity
in the form of revenue from sale ot products or services, cost savings, and other benefits resulting
from the use
2.2 Internal Control over Non-current Operating Assets

Internal Control Procedures over Non-current Operating Assets 

 Authorization for acquisition of, expenditures for and disposals of these assets 
 Fixing accountability and responsibility for units of operating assets leads to proper usage and
maintenance of the assets 
 Establish and maintain a subsidiary ledger of each class of non-current operating assets
(Valuation)
 Physical transfers of fixed assets shall be documented 
 Establish and implement appropriate policy requiring that purchases of long-lived assets be made
through normal  purchasing procedures. 
 Submit annual fixed asset report to the company's property custodian. 
 System of serially numbered retirement decisions and actions 

2.3 Audit Objectives for Non-current Operating Assets

In the audit of non-current operating assets, the auditor's objectives are to:

 Consider internal control over non-current operating assets (TOC)

 Substantiate the existence of recorded non-current operating asset (Existence)
 Substantiate the rights and obligations relating to these assets ( Rights and Obligation)
 Establish the completeness of recorded non-current operating assets (Completeness)
 Determine the correctness and accuracy of the recorded depreciation or amortization of and other
items affecting profit or loss relating to, non-current operating assets (Accuracy)
 Determine that the measurement of non-current operating assets is in accordance with accounting
standards (Valuation)
 Determine that the classification, presentation and disclosure of non-current operating assets is
appropriate (Presentation and Disclosure)

2.4 Audit Procedures for Non-current Operating Assets

The following are the audit procedures that an audit can perform:

 Verify changes during the current period

 Consider the internal control procedures adopted by the client for fixed assets
 The auditor can concentrate on additions, depreciation and amortization, change in fair value and
retirements during the year of audit 
 Examine invoices, deeds and titles of insurance policies
 Physical inspection of property acquired during the year
 Physical verification of non-monetary assets 
 Recalculation of ending balances
 Analyze the changes in repairs and maintenance expense whether costs are properly treated as
expensed rather than capitalized. 
 Determine whether old equipment was traded in or replaced by the new units
 Analyze the Miscellaneous Revenue account to locate cash proceeds from the sale of retires
assets
 Investigate retirements related to any discontinued product lines or services
 Make inquiries of executives and supervisors regarding retires assets 
 Examine retirement work orders prepared during the year
 Investigate any reduction of insurance coverage to determine whether this was caused by retired
assets 
 Analytical procedures such as review of methods in use, consistency and computations made
 Verify evidence of ownership and contractual rights over intangible assets 
 Trace the recorded revalued amount from the last revaluation report of the independent appraiser
and ensure that the revaluation and subsequent depreciation have been properly recorded in the
books
 Review the classification and presentation of the these assets

2.4.1 Illustrative Problem

Exude Company operates a factory that contains a large number of machines designed to produce
shoes and bags. These machines are generally depreciated at 10% per annum on a straight-line
basis, rounded to the nearest full month. At January 1, 2015, Exude has a total of 64 machines, and
the ledger balances showed a total cost of P4,200,000 and accumulated depreciation of P1,300,000.
During 2015, the following transactions occurred:

 On March 1, 2015, a new machine with an equivalent cash price of P150,000 was acquired. This
machine replaced two other machines. One of the two replaced machines was acquired on
January 1, 2009 for P86,400. It was traded in on the new machine, the company paying P120,000
on the transaction. The second replaced machine had cost of P90,000 on September 1, 2011 and
was sold for P73,000
 On July 1, 2015, a machine that had cost P40,000 on January 1, 2006 was retired from use and
sold as scrap for P4,000
 On July 1, 2015, a machine that had been acquired on January 1, 2011 for P70,000 was repaired
because its motor had been damaged from overheating. The motor was replaced at a cost of
P48,000. It was expected that this would increase the life of the machine by an additional two
years. The cost of the new motor approximates the cost of the old motor
 On October 1, 2015, Exude fitted a new form of arm to a machine used for putting special designs
into the shoes. The arm cost P15,000. The machine had been acquired on October 1, 2012 for
P100,000. The arm can be used on a number of other machines when required and has a 15-year
life. It will not be sold when any particular machine is retired, but retained for use on other
machines

Analysis of Transactions 
Date Particulars Cost Accumulated Gain or (Loss) on
Depreciation Disposal
Jan 1 Balances P4,200,000 P1,300,000
March 1 Trade in of old (86,400) (53,280) P3,120
machine
New machine 150,000
acquired by trade
in
Sale of machine (90,000) (31,500) 14,500
July 1 Sale of machine (40,000) (38,000) 2,000
Oct 1 Acquisition 15,000
Dec 31 Depreciation for 416,050
2015
Dec 31 Balances per P4,148,600 P1,593,270 P19,620
audit

2015 Depreciation on Machines

On January 1, 2015 balances:
Still on hand on Dec 31, 2015
          Jan 1, balances                                                     P4,200,000
          Traded in                                                                   (86,400)
          Sold on March 1                                                         (90,000)
          Sold on July 1                                                             (40,000)
          On hand on Dec 31                                            P3,983,600
          Depreciation Rate                                                              10%
          Depreciation Expense                                         P398,360
On asset traded in:
        P86,400 x 10% x 2\12                                                    1,440
On asset sold on March 1
       P90,000 x 10% x 2\12                                                     1,500
On asset sold on July 1
      P40,000 x 10% x 6\12                                                      2,000
On new acquisitions:
      Acquired on March 1
           150,000 x 10% x 10\12                                           12,500
      Acquired on Oct 1
           15,000\15 x 3\12                                                             250
Total Depreciation Expense for 2015                  P416,050
 

MODULE 3

3.1 Financing Cycle

The financing cycle process refers to transactions and events that generate funds. The sources of
funds are debt and equity financing. Funds are received from the creditors and owners that increase
liabilities and equity. Funds obtained are used for operations and for investment purposes, which
provide the entity with earnings. The inflow of funds from operations and investments are used to
repay debt, distribute and or reacquire own equity instruments. 

3.2 Internal Control over Liabilities

Financing Cycle- Basic Internal Control

Authorization and Execution

Objective Error Internal Control Procedures

Investment in accord with
authorization
Sources of funds in accord with
criteria
Adjustments in accord with
criteria
Policy violation; higher risk
Funds with unfavorable terms
Misstated accounts; Covenant
violations
Selection, approval policies; list
approved investments
Policies
Policies, prenumbering,
authorization

Recording

Objective Error Internal Control Procedures

Recorded at correct amounts. Detailed records inaccurate, Processing , recording
proper period, properly misstated financial statements procedures, review board
classified minutes for directives and
schedules due dates

Custody of Assets

Objective Error Internal Control Procedures

Access restricted Securities lost, stolen,
destroyed, diverted
Access to forms, records Records lost, stolen; forms used
restricted to divert
Physical barriers, insurance,
files authorized signatures,
segregation of duties
Physical barriers; prenumber,
insurance, periodic accounting

3.3 Audit Objectives for Liability Account

The auditor's objectives in the audit of liabilities are to:

 Consider internal control over liabilities

 Determine the existence of liabilities
 Establish the completeness of recorded liabilities
 Determine that liabilities are measured appropriately 
 Determine that the presentation and disclosure of liabilities is appropriate
3.4 Audit Procedures for Liabilities

The following are audit procedures that an auditor can perform in auditing liability accounts:

 Obtain understanding of the internal control system to determine the nature, timing and extent of
audit procedure (TOC)
 Examine the records
 Authorized confirmation with creditors
 Analytical procedures such as computation of accounts payable turnover, ratio of accounts
payable to purchases and ratio of accounts payable to current liabilities
 Vouch sample of the balance to supporting vouchers, invoices, purchase orders and receiving
reports (Existence and Occurrence)
 Review unpaid voucher file 
 Examine contract or other documents that provide the basis for the accrual 
 Determine whether detailed accounting records have been maintained for this type of liabilities 
 Identify and evaluate the reasonableness of the assumptions that underlie the computation of the
liability
 Test the computations made by the client in setting up the accrual 
 Determine that accrued liabilities have been treated consistently at the beginning and end o the
period
 Inquiry to management regarding the accuracy of provisions
 Review disclosures regarding Contingencies 
 Determine if the provisions must be recognize or disclose only
 Review the income recognition if in accordance with revenue recognition principle
 Obtain copy of bond indenture 
 Confirmation with trustee if they are maintaining sinking fund
 Bank confirmation to obtain balance of notes payable and loans payable (Existence and
Occurrence)
 Comparison of closing balances with the corresponding figures for the previous year 
 Comparison of the payable turnover ratio of this year with that of the previous year 
 Comparison of actual ending balances of loans and other borrowings with the budgeted figures
 Aging of the accounts payable and comparing the results with statistical figures
 Determine whether the liabilities are properly presented and classified with complete disclosures

3.4.1 Illustrative Problem- Classification of Liabilities

Illustrative Problem- Classification of liabilities

Kobe Co. has the following liabilities as of December 31, 2016.
Additional information:

 Deducted from the trade accounts payable are 

Debit Balance in supplier's account          P20,000

Undelivered Checks                                               16,000
Postdated Checks                                                      8,000

 Excluded from the trade accounts payable are 

Goods received on consignment                                P18,000

Goods in transit, shipped FOB Shipping Point      17,500
Goods in transit, shipped FOB Destination            15,000

 Bonds mature in five equal semi-annual installment

 Security deposit was received from a lessee. The amount will be refunded on December 31, 2021
 The deferred tax liability arises form a temporary difference which will reverse in 2017

Required: Determine the amount to be reported in the December 31, 2016 financial statements as
a. Current Liability 
b. Non Current Liability
Solution:
a. Current Liabilities 
b. Noncurrent Liabilities 

Share Dividend Payable is not a liability but rather should be presented in Shareholder's Equity
Note: - Deferred Revenue is presumed to be current liability unless otherwise stated
             - Deferred Tax Liability is always noncurrent liability 

3.4.2 Illustration: Long-term debt falling due within one year

Illustrative Problem
Rajon Co. has the following liabilities on December 31, 2016:

a. The 8%, P2,000,000 Note Payable is due on January 1, 2017 and is to be settled by delivery of
merchandise to the holder
b. The 10%, P1,500,000 Note Payable matures on June 30, 2017. Interest on the loan is due every
June 30 and December 31. On December 15, 2016. Rajon Co. entered into a refinancing agreement
with a bank to refinance the note on a long-term basis. The refinancing and roll over transaction  was
completed on December 31, 2016
c. The 11%, P1,250,000 five-year Note Payable was obtained by Rajon from a bank. The agreement
requirses Rajon to maintain a current ratio of 3:1. If the current ratio falls below 3:1, the note becomes
payable on demand. As of December 3,1 2016, Rajon's current ration is 1.5:1. On December 31,
2016, the bank agreed not to collect the note in 2017
d. The 10%, P1,000,000 Loan Payable  is payable on demand. However, on December 31, 2016,
there is no indication that the payee on the loan will demand payment over the next 12 months
e. The 12%, P750,000 Loan Payable is maturing on July 1, 2017. Interest on the loan is due every
July 1 and December 31. On January 15, 2017, Rajon Co. entered into a refinancing agreement with
a bank to refinance the loan on a long-term basis. Both parties are financially capable of borrowing he
agreement's provisions. Rajon has the direction to refinance or roll over the loan for at least 12
months from December 31, 2016 under an existing loan facility
f. The 15% loan payable is due on June 30, 2017. Interest on the loan is payable every June 30 and
December 31. On December 15, 2016, Rajon and the creditor agree to settle the obligation by giving
the latter Rajon's long-term investment in another corporation
Ranjo's financial statements were authorized for issue on March 15, 2017. 
Required: Determine the amount of liabilities to be reported as current liabilities in the statement of
financial position
 
Solution
The following items shall be presented as current liabilities:
8% Note Payable (to be settled in 2017)             P2,000,000
10% Loan Payable (payable on demand)               1,000,000
15 Loan Payable ( to be settled in 2017                      500,000
Total current liabilities                                                   P3,500,000
The following items shall be presented as non-current liabilities:
10% Note Payable (refinancing agreement was completed on Dec 31, 2016)            P1,500,000
11% Note Payable (grace period was granted on Dec 31, 2016)                                       
1,250,000
12% Loan Payable (borrower's discretion)                                                                                   
750,000
Total noncurrent liabilities                                                                                                                       
P3,500,000
3.4.3 Illustration: Accounts Payable

Illustrative Problem: Determination of Initial Measurement and

Amount to be Remitted 
On June 1, 2016, Angelica sold merchandise with a list price of P5,000,000 to Ash. Angelica allowed
trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sael was made FOB shipping
point. Angelica prepaid P200,000 of delivery cost for Ash as an accomodation. 
Required: Using the data above, answer the following:
1. What amount shall be recognized as Accounts Payable assuming Ash records purchases under
the following methods:
a. Gross Method
b. Net Method
2. How much will be remitted by Ash to Angelica if payments are made under the following
independent situations:
a. June 11, 2016
b. June 16, 2016
Solution:
1. Initial Measurement

The invoice price the merchandise may also be computed as follows:

(5M x (100%-20%) x (100%-10%)= 3,600,000
2. Remittance 
 

Illustrative Problem: Determination of Accounts Payable Balance

On December 31, 2016, Bryant Co. has accounts payable of P4,000,000 before possible adjustment
for the following:
a. Goods in transit from a vendor to Bryant on December 31, 2016 with an invoice cost of P200,000
purchased FOB Shipping point was not yet recorded.
b. Goods shipped FOB shipping point from a vendor to Bryant was lost in transit. The invoice cost of
P80,000 was not yet recorded
c. Goods shipped FOB shipping point from a vendor to Bryant on the year-end physical count as
"goods in transit" 
d. Goods in transit from a vendor to Bryant on December 31, 2016 with an invoice cost of P40,000
purchased FOB destination was not yet recorded. The goods were received in January 2017
e. Goods with invoice cost of P60,000 was recorded and included in the year-end physical count as
"goods in transit". It was found out that the goods were shipped from a vendor under FOB destination
Required: Compute for the adjusted accounts payable on December 31, 2016
Solution:
Adjusted Balance                                                                                                                     
P4,000,000
a. Unrecorded Purchases                                                                                                      
200,000
b. Unrecorded payable on purchases lost in transit                                                        80,000
c. Purchases that should be recorded in the next accounting period                (60,000)
Total                                                                                                                            P4,220,000

Illustrative Problem: Bonus Calculation

Riel, president of the CPA Co., has an arrangement with the company under which she receives 10%
bonus each year. For the current year, the net income before deducting even the provision for income
taxes or the bonus ia P5,500,000. The bonus is deductible for tax purpose and tha tax rate is 30%. 
Required: Determine the amount of Riel's bonus and the appropriate provision for income tax for the
year under the following independent scenario.  
1. Bonus is calculated based on net income before bonus and income tax
2. Bonus is calculated based on net income after bonus and before income tax
3. Bonus is calculated based on net income after bonus and income tax
4. Bonus is calculated based on net income after income tax but before bonus 
Solution:
To compute for the amount of bonus, it is imperative to compute for the basis of bonus. 
To compute for the basis, we must first determine the equivalent percentage of the given net income
before bonus and income tax with the assumption that the basis has an assigned value of "100%"
From there, we can compute for the basis by dividing net income before bonus and income tax with
the percentile computed. 
1. Bonus= P5,500,000 x 10%
    Bonus= P550,000
2. Net income before bonus and tax                                   110%
    Less: Bonus                                                                     10%
   Net income after bonus but before tax                          100%
   Net income after bonus before tax  (P5,500,000 / 110%) = P5,000,000
   Bonus = P5,000,000 x 10%
   Bonus = P500,000

3. 

4. 

Illustrative Problem: Unearned Revenue- Delivery of Goods

Jordan Co. requires advance payments for its products. The records of Jordan shows the following:
Unearned revenue, January 1, 2016                                         P500,000
Cash received from advances during 2016                                2,500,000
Advances applied to orders shipped in 2016                             1,800,000
Advances applicable to orders cancelled in 2016                       200,000
Required: Compute for the amount to be reported as unearned revenue assuming the advance
payments received are non-refundable
Illustrative Problem: Unearned Revenue- Provision of Services
Scottie Company sells office equipment service contracts agreeing to service equipment for a two-
year period. Cash receipts from contracts are credited to unearned service contract and service
contract costs are charged to service contract expensed as incurred. Revenue from service contracts
to recognized as earned over the lives of the contracts. Additional information for the year ended
December 31, 2016 is as follows:
Unearned service contract at January 1                 P200,000
Cash receipts fro service contracts sold                    440,000
Service contract revenue recognized                         560,000
Service contract expense                                                  280,000
Required: Compute for the amount to be reported as unearned service contract revenue at December
31, 2016 by Scottie

Illustrative Problem: Expected Value 

Love Co. manufactures and sells motorcycle helmets. In 2016, the entry sold 1,000,000 units prior to
the discovery of a possible defect caused by malfunctioning factory equipment. The helmets were
recalled and will be repaired free of charge. Love is uncertain whether all helmets recalled will have
the possible defect. However, the following estimate was made by Love's management and was
approved by the board of directors. 

Repair Cost Probability

40,000,000 10%
30,000,000 20%
20,000,000 30%
10,000,000 40%
100%

Required: Determine the amount of liability to be accrued on December 31,2016

Solution:
Repair Cost Probability Provision
40,000,000 10% 4,000,000
30,000,000 20% 6,000,000
20,000,000 30% 6,000,000
10,000,000 40% 4,000,000
20,000,000
 

Illustrative Problem: Premiums

During 2016, Curry Company sold 100,000 boxes of cake mix under a new sales promotional
program. Each box contains one coupon. These coupons entitle the customer to a baking pan upon
remittance of ten coupons and P350. The entity pays P500 per pan and P25 for handling and
shipping. The entity estimated that 80% of the coupons will be redeemed even though only 50,000
coupons had been predented during 2016. 
Required: Determine the amount of liability to be reported on December 31, 2016

1. The 100,00 coupons are computed as follows:

100,000 coupons = (100,000 boxes x 1 coupon) ÷ 1 box
2. The net cost of coupons is computed as follows:
Net Cost = Cost per pan + handling and shipping - customer remittance 
P175 = P500 + P25 - P350
3. The premium expense is computed as follows:
Premium expense = ((100,000 coupons x 80%) ÷ 10 coupons) x P175
Premium expense= P1,400,000
4. The number of coupons redeemed is computed as follows:
50,000 coupons = (50,000 boxes x 1 coupon) ÷1 box 
5. Net Cost of coupons redeemed 
Net Cost of coupons redeemed = (50,000 coupons ÷  10 coupons) x P175 
Net Cost of coupons redeemed= P875,000

Illustrative Problem: Warranties 

George Company sales motorcycles that carry a two-year warranty against manufacturer's defects.
Based on entity's experience, warranty costs are estimated at P5,000 per unit. During the current
year, the entity sold 1,000 units and paid warranty costs of P3,400,000
Required: Determine the amount of liability to be reported  
NOTE: I KNOW THIS IS TOO MUCH TO PROCESS, TAKE IT SLOW AND DON'T FORCE
YOURSELF TO UNDERSTAND EVERYTHING IN ONE SHOT. YOU CAN DO THIS :)

MODULE 4

PFRS 16 Leases

Overview
 
PFRS 16 specifies how an PFRS reporter will recognize, measure, present and disclose leases. The
standard provides a single lessee accounting model, requiring lessees to recognize assets and
liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low
value. Lessors continue to classify leases as operating or finance, with PFRS 16’s approach to lessor
accounting substantially unchanged from its predecessor, PAS 17.
 
PFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1
January 2019.
 
Objective
 
PFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of
leases, with the objective of ensuring that lessees and lessors provide relevant information that
faithfully represents those transactions. [PFRS 16:1]
Scope
 
PFRS 16 Leases applies to all leases, including subleases, except for: [PFRS 16:3]
 
    leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
leases of biological assets held by a lessee (see PAS 41 Agriculture); service concession
arrangements (see IFRIC 12 Service Concession Arrangements); licences of intellectual property
granted by a lessor (see PFRS 15 Revenue from Contracts with Customers); and rights held by a
lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and
copyrights within the scope of PAS 38 Intangible Assets
 
A lessee can elect to apply PFRS 16 to leases of intangible assets, other than those items listed
above. [PFRS 16:4]
Recognition exemptions
 
Instead of applying the recognition requirements of PFRS 16 described below, a lessee may elect to
account for lease payments as an expense on a straight-line basis over the lease term or another
systematic basis for the following two types of leases:
 

1. i) leases with a lease term of 12 months or less and containing no purchase options – this election
is made by class of underlying asset; and

1. ii) leases where the underlying asset has a low value when new (such as personal computers or
small items of office furniture) – this election can be made on a lease-by-lease basis.

 
[PFRS 16:5, 6 & 8]
Identifying a lease
 
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a
period of time in exchange for consideration. [PFRS 16:9]
 
Control is conveyed where the customer has both the right to direct the identified asset’s use and to
obtain substantially all the economic benefits from that use. [PFRS 16:B9]
 
An asset is typically identified by being explicitly specified in a contract, but an asset can also be
identified by being implicitly specified at the time it is made available for use by the customer.
 
However, where a supplier has a substantive right of substitution throughout the period of use, a
customer does not have a right to use an identified asset. A supplier’s right of substitution is only
considered substantive if the supplier has both the practical ability to substitute alternative assets
throughout the period of use and they would economically benefit from substitution. [PFRS 16:B13-
14]
 
A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. a floor of a
building). A capacity or other portion of an asset that is not physically distinct (e.g. a capacity portion
of a fibre optic cable) is not an identified asset, unless it represents substantially all the capacity such
that the customer obtains substantially all the economic benefits from using the asset. [PFRS 16:B20]
Separating components of a contract
 
For a contract that contains a lease component and additional lease and non-lease components,
such as the lease of an asset and the provision of a maintenance service, lessees shall allocate the
consideration payable on the basis of the relative stand-alone prices, which shall be estimated if
observable prices are not readily available.
 
As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease
components from lease components and instead account for all components as a lease. [PFRS
16:13-15]
 
Lessors shall allocate consideration in accordance with PFRS 15 Revenue from Contracts with
Customers.
Key definitions
 
[PFRS 16: Appendix A]
Interest rate implicit in the lease
The interest rate that yields a present value of (a) the lease payments and (b) the unguaranteed
residual value equal to the sum of (i) the fair value of the underlying asset and (ii) any initial direct
costs of the lessor.
 
Lease term
The non-cancellable period for which a lessee has the right to use an underlying asset, plus:

a) periods covered by an extension option if exercise of that option by the lessee is reasonably
certain; and

 b) periods covered by a termination option if the lessee is reasonably certain not to exercise that
option
 
Lessee’s incremental borrowing rate
 
The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar
security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar
economic environment.
Accounting by lessees
 
Upon lease commencement a lessee recognizes a right-of-use asset and a lease liability. [PFRS
16:22]
 
The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct
costs incurred by the lessee. Adjustments may also be required for lease incentives, payments at or
prior to commencement and restoration obligations or similar. [PFRS 16:24]
 
After lease commencement, a lessee shall measure the right-of-use asset using a cost model, unless:
[PFRS 16:29, 34, 35]
 

1. i) the right-of-use asset is an investment property and the lessee fair values its investment
property under PAS 40; or

1. ii) the right-of-use asset relates to a class of PPE to which the lessee applies PAS 16’s revaluation
model, in which case all right-of-use assets relating to that class of PPE can be revalued.

 
Under the cost model a right-of-use asset is measured at cost less accumulated depreciation and
accumulated impairment. [PFRS 16:30(a)]
 
The lease liability is initially measured at the present value of the lease payments payable over the
lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate
cannot be readily determined, the lessee shall use their incremental borrowing rate. [PFRS 16:26]
 
Variable lease payments that depend on an index or a rate are included in the initial measurement of
the lease liability and are initially measured using the index or rate as at the commencement date.
Amounts expected to be payable by the lessee under residual value guarantees are also included.
[PFRS 16:27(b),(c)]
 
Variable lease payments that are not included in the measurement of the lease liability are
recognized in profit or loss in the period in which the event or condition that triggers payment occurs,
unless the costs are included in the carrying amount of another asset under another Standard. [PFRS
16:38(b)
 
The lease liability is subsequently remeasured to reflect changes in: [PFRS 16:36]
 
    the lease term (using a revised discount rate); the assessment of a purchase option (using a
revised discount rate); the amounts expected to be payable under residual value guarantees (using
an unchanged discount rate); or future lease payments resulting from a change in an index or a rate
used to determine those payments (using an unchanged discount rate).
 
The remeasurements are treated as adjustments to the right-of-use asset. [PFRS 16:39]
 
Lease modifications may also prompt remeasurement of the lease liability unless they are to be
treated as separate leases. [PFRS 16:36(c)]
Covid-19-related rent concessions
 
A lessee may elect not to assess whether a COVID-19-related rent concession is a lease
modification. A lessee that that applies the exemption accounts for COVID-19-related rent
concessions as if they were not lease modifications. [PFRS 16:46A, 46B]
IBOR reform
 
A lessee accounts for modifications required by the IBOR reform (modifications required as a direct
consequence of the IBOR reform and made on an economically equivalent basis) by updating the
effective interest rate. All other modifications are accounted for using the applicable requirements.
[PFRS 16:105-106]
Accounting by lessors
 
Lessors shall classify each lease as an operating lease or a finance lease. [PFRS 16:61]
 
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental
to ownership of an underlying asset. Otherwise a lease is classified as an operating lease. [PFRS
16:62]
 
Examples of situations that individually or in combination would normally lead to a lease being
classified as a finance lease are: [PFRS 16:63]
 
    the lease transfers ownership of the asset to the lessee by the end of the lease term the lessee has
the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at
the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain
that the option will be exercised the lease term is for the major part of the economic life of the asset,
even if title is not transferred at the inception of the lease, the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the leased asset the leased assets
are of a specialised nature such that only the lessee can use them without major modifications being
made
 
Upon lease commencement, a lessor shall recognize assets held under a finance lease as a
receivable at an amount equal to the net investment in the lease. [PFRS 16:67]
 
A lessor recognizes finance income over the lease term of a finance lease, based on a pattern
reflecting a constant periodic rate of return on the net investment. [PFRS 16:75]
 
At the commencement date, a manufacturer or dealer lessor recognizes selling profit or loss in
accordance with its policy for outright sales to which PFRS 15 applies. [PFRS 16:71c)]
 
A lessor recognizes operating lease payments as income on a straight-line basis or, if more
representative of the pattern in which benefit from use of the underlying asset is diminished, another
systematic basis. [PFRS 16:81]
Sale and leaseback transactions
 
To determine whether the transfer of an asset is accounted for as a sale an entity applies the
requirements of PFRS 15 for determining when a performance obligation is satisfied. [PFRS 16:99]
 
If an asset transfer satisfies PFRS 15’s requirements to be accounted for as a sale the seller
measures the right-of-use asset at the proportion of the previous carrying amount that relates to the
right of use retained. Accordingly, the seller only recognizes the amount of gain or loss that relates to
the rights transferred to the buyer. [PFRS 16:100a)]
 
If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease
payments are not market rates, the sales proceeds are adjusted to fair value, either by accounting for
prepayments or additional financing. [PFRS 16:101]
Disclosure
 
The objective of PFRS 16’s disclosures is for information to be provided in the notes that, together
with information provided in the statement of financial position, statement of profit or loss and
statement of cash flows, gives a basis for users to assess the effect that leases have. Paragraphs 52
to 60 of PFRS 16 set out detailed requirements for lessees to meet this objective and paragraphs 90
to 97 set out the detailed requirements for lessors. [PFRS 16:51, 89]
Effective date and transition
 
An entity applies PFRS 16 for annual reporting periods beginning on or after 1 January 2019. Earlier
application is permitted if PFRS 15 Revenue from Contracts with Customers has also been applied.
[PFRS 16:C1]
 
As a practical expedient, an entity is not required to reassess whether a contract is, or contains, a
lease at the date of initial application. [PFRS 16:C3]
 
A lessee shall either apply PFRS 16 with full retrospective effect or alternatively not restate
comparative information but recognize the cumulative effect of initially applying PFRS 16 as an
adjustment to opening equity at the date of initial application. [PFRS 16:C5, C7]

PAS 12 Income Tax

PAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of accounting
for income taxes which recognizes both the current tax consequences of transactions and events and
the future tax consequences of the future recovery or settlement of the carrying amount of an entity's
assets and liabilities. Differences between the carrying amount and tax base of assets and liabilities,
and carried forward tax losses and credits, are recognized, with limited exceptions, as deferred tax
liabilities or deferred tax assets, with the latter also being subject to a 'probable profits' test.
Summary of PAS 12
Objective of PAS 12
 
The objective of PAS 12 (1996) is to prescribe the accounting treatment for income taxes.
 
In meeting this objective, PAS 12 notes the following:
 
 It is inherent in the recognition of an asset or liability that that asset or liability will be recovered or
settled, and this recovery or settlement may give rise to future tax consequences which should be
recognized at the same time as the asset or liability An entity should account for the tax
consequences of transactions and other events in the same way it accounts for the transactions or
other events themselves.
 
Key definitions
 
[PAS 12.5]
Tax base               The tax base of an asset or liability is the amount attributed to that asset or liability
for tax purposes
Temporary differences Differences between the carrying amount of an asset or liability in the
statement of financial position and its tax bases
Taxable temporary differences Temporary differences that will result in taxable amounts in
determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability
is recovered or settled
Deductible temporary differences            Temporary differences that will result in amounts that are
deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the
asset or liability is recovered or settled
Deferred tax liabilities    The amounts of income taxes payable in future periods in respect of taxable
temporary differences
Deferred tax assets         The amounts of income taxes recoverable in future periods in respect of:
 
    deductible temporary differences the carryforward of unused tax losses, and the carryforward of
unused tax credits
 
Current tax
 
Current tax for the current and prior periods is recognized as a liability to the extent that it has not yet
been settled, and as an asset to the extent that the amounts already paid exceed the amount due.
[PAS 12.12] The benefit of a tax loss which can be carried back to recover current tax of a prior
period is recognized as an asset. [PAS 12.13]
 
Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from)
taxation authorities, using the rates/laws that have been enacted or substantively enacted by the
balance sheet date. [PAS 12.46]
Calculation of deferred taxes
 
Formulae
 
Deferred tax assets and deferred tax liabilities can be calculated using the following formulae:
Temporary difference     =            Carrying amount                -             Tax base
Deferred tax asset or liability        =            Temporary difference     x             Tax rate
 
The following formula can be used in the calculation of deferred taxes arising from unused tax losses
or unused tax credits:
Deferred tax asset            =            Unused tax loss or unused tax credits       x             Tax rate
 
Tax bases
 
The tax base of an item is crucial in determining the amount of any temporary difference, and
effectively represents the amount at which the asset or liability would be recorded in a tax-based
balance sheet. PAS 12 provides the following guidance on determining tax bases:
 
Assets. The tax base of an asset is the amount that will be deductible against taxable economic
benefits from recovering the carrying amount of the asset. Where recovery of an asset will have no
tax consequences, the tax base is equal to the carrying amount. [PAS 12.7] Revenue received in
advance. The tax base of the recognized liability is its carrying amount, less revenue that will not be
taxable in future periods [PAS 12.8] Other liabilities. The tax base of a liability is its carrying amount,
less any amount that will be deductible for tax purposes in respect of that liability in future periods
[PAS 12.8] Unrecognized items. If items have a tax base but are not recognized in the statement of
financial position, the carrying amount is nil [PAS 12.9] Tax bases not immediately apparent. If the tax
base of an item is not immediately apparent, the tax base should effectively be determined in such as
manner to ensure the future tax consequences of recovery or settlement of the item is recognized as
a deferred tax amount [PAS 12.10] Consolidated financial statements. In consolidated financial
statements, the carrying amounts in the consolidated financial statements are used, and the tax
bases determined by reference to any consolidated tax return (or otherwise from the tax returns of
each entity in the group). [PAS 12.11]
 
Examples
The determination of the tax base will depend on the applicable tax laws and the entity's expectations
as to recovery and settlement of its assets and liabilities. The following are some basic examples:
 
Property, plant and equipment. The tax base of property, plant and equipment that is depreciable for
tax purposes that is used in the entity's operations is the unclaimed tax depreciation permitted as
deduction in future periods Receivables. If receiving payment of the receivable has no tax
consequences, its tax base is equal to its carrying amount Goodwill. If goodwill is not recognized for
tax purposes, its tax base is nil (no deductions are available) Revenue in advance. If the revenue is
taxed on receipt but deferred for accounting purposes, the tax base of the liability is equal to equal to
nil (as there are no future taxable amounts). Conversely, if the revenue is recognized for tax purposes
when the goods or services are received, the tax base will be equal its carrying amount Loans. If
there are no tax consequences from repayment of the loan, the tax base of the loan is equal to its
carrying amount. If the repayment has tax consequences (e.g. taxable amounts or deductions on
repayments of foreign currency loans recognized for tax purposes at the exchange rate on the date
the loan was drawn down), the tax consequence of repayment at carrying amount is adjusted against
the carrying amount to determine the tax base (which in the case of the aforementioned foreign
currency loan would result in the tax base of the loan being determined by reference to the exchange
rate on the draw down date).
 
Recognition and measurement of deferred taxes
 
Recognition of deferred tax liabilities
The general principle in PAS 12 is that a deferred tax liability is recognized for all taxable temporary
differences. There are three exceptions to the requirement to recognize a deferred tax liability, as
follows:
 
 liabilities arising from initial recognition of goodwill [PAS 12.15(a)] liabilities arising from the initial
recognition of an asset/liability other than in a business combination which, at the time of the
transaction, does not affect either the accounting or the taxable profit and at the time of the
transaction, does not give rise to equal taxable and deductible temporary differences. [PAS 12.15(b)]
liabilities arising from temporary differences associated with investments in subsidiaries, branches,
and associates, and interests in joint arrangements, but only to the extent that the entity is able to
control the timing of the reversal of the differences and it is probable that the reversal will not occur in
the foreseeable future. [PAS 12.39]
 
Example
An entity undertaken a business combination which results in the recognition of goodwill in
accordance with IFRS 3 Business Combinations. The goodwill is not tax depreciable or otherwise
recognized for tax purposes.
 
As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly, a
taxable temporary difference arises in respect of the entire carrying amount of the goodwill. However,
the taxable temporary difference does not result in the recognition of a deferred tax liability because
of the recognition exception for deferred tax liabilities arising from goodwill.
 
Recognition of deferred tax assets
A deferred tax asset is recognized for deductible temporary differences, unused tax losses and
unused tax credits to the extent that it is probable that taxable profit will be available against which
the deductible temporary differences can be utilised, unless the deferred tax asset arises from: [PAS
12.24]
 
    the initial recognition of an asset or liability other than in a business combination which, at the time
of the transaction, does not affect accounting profit or taxable profit.
 
Deferred tax assets for deductible temporary differences arising from investments in subsidiaries,
branches and associates, and interests in joint arrangements, are only recognized to the extent that it
is probable that the temporary difference will reverse in the foreseeable future and that taxable profit
will be available against which the temporary difference will be utilised. [PAS 12.44]
 
The carrying amount of deferred tax assets are reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow
the benefit of part or all of that deferred tax asset to be utilised. Any such reduction is subsequently
reversed to the extent that it becomes probable that sufficient taxable profit will be available. [PAS
12.37]
 
A deferred tax asset is recognized for an unused tax loss carryforward or unused tax credit if, and
only if, it is considered probable that there will be sufficient future taxable profit against which the loss
or credit carryforward can be utilised. [PAS 12.34]
 
Measurement of deferred tax
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the
period when the asset is realised or the liability is settled, based on tax rates/laws that have been
enacted or substantively enacted by the end of the reporting period. [PAS 12.47] The measurement
reflects the entity's expectations, at the end of the reporting period, as to the manner in which the
carrying amount of its assets and liabilities will be recovered or settled. [PAS 12.51]
 
PAS 12 provides the following guidance on measuring deferred taxes:
Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets or
settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred taxes is
consistent with the way in which an asset is recovered or liability settled [PAS 12.51A] Where
deferred taxes arise from revalued non-depreciable assets (e.g. revalued land), deferred taxes reflect
the tax consequences of selling the asset [PAS 12.51B] Deferred taxes arising from investment
property measured at fair value under PAS 40 Investment Property reflect the rebuttable presumption
that the investment property will be recovered through sale [PAS 12.51C-51D] If dividends are paid to
shareholders, and this causes income taxes to be payable at a higher or lower rate, or the entity pays
additional taxes or receives a refund, deferred taxes are measured using the tax rate applicable to
undistributed profits [PAS 12.52A]
 
Deferred tax assets and liabilities cannot be discounted. [PAS 12.53]
Recognition of tax amounts for the period
 
Amount of income tax to recognize
 
The following formula summarises the amount of tax to be recognized in an accounting period:
Tax to recognize for the period    =            Current tax for the period              +            Movement in
deferred tax balances for the period
 
Where to recognize income tax for the period
 
Consistent with the principles underlying PAS 12, the tax consequences of transactions and other
events are recognized in the same way as the items giving rise to those tax consequences.
Accordingly, current and deferred tax is recognized as income or expense and included in profit or
loss for the period, except to the extent that the tax arises from: [PAS 12.58]
 
 transactions or events that are recognized outside of profit or loss (other comprehensive income or
equity) - in which case the related tax amount is also recognized outside of profit or loss [PAS
12.61A] a business combination - in which case the tax amounts are recognized as identifiable assets
or liabilities at the acquisition date, and accordingly effectively taken into account in the determination
of goodwill when applying IFRS 3 Business Combinations. [PAS 12.66]
 
PAS 12 provides the following additional guidance on the recognition of income tax for the period:
 
    Where it is difficult to determine the amount of current and deferred tax relating to items recognized
outside of profit or loss (e.g. where there are graduated rates or tax), the amount of income tax
recognized outside of profit or loss is determined on a reasonable pro-rata allocation, or using
another more appropriate method [PAS 12.63] In the circumstances where the payment of dividends
impacts the tax rate or results in taxable amounts or refunds, the income tax consequences of
dividends are considered to be more directly linked to past transactions or events and so are
recognized in profit or loss unless the past transactions or events were recognized outside of profit or
loss [PAS 12.52B] The impact of business combinations on the recognition of pre-combination
deferred tax assets are not included in the determination of goodwill as part of the business
combination, but are separately recognized [PAS 12.68] The recognition of acquired deferred tax
benefits subsequent to a business combination are treated as 'measurement period' adjustments (see
IFRS 3 Business Combinations) if they qualify for that treatment, or otherwise are recognized in profit
or loss [PAS 12.68] Tax benefits of equity settled share based payment transactions that exceed the
tax effected cumulative remuneration expense are considered to relate to an equity item and are
recognized directly in equity. [PAS 12.68C]
 
Presentation
Current tax assets and current tax liabilities can only be offset in the statement of financial position if
the entity has the legal right and the intention to settle on a net basis. [PAS 12.71]
 
Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position
if the entity has the legal right to settle current tax amounts on a net basis and the deferred tax
amounts are levied by the same taxing authority on the same entity or different entities that intend to
realise the asset and settle the liability at the same time. [PAS 12.74]
 
The amount of tax expense (or income) related to profit or loss is required to be presented in the
statement(s) of profit or loss and other comprehensive income. [PAS 12.77]
 
The tax effects of items included in other comprehensive income can either be shown net for each
item, or the items can be shown before tax effects with an aggregate amount of income tax for groups
of items (allocated between items that will and will not be reclassified to profit or loss in subsequent
periods). [PAS 1.91]
Disclosure
 
PAS 12.80 requires the following disclosures:
 
    major components of tax expense (tax income) [PAS 12.79] Examples include:
        current tax expense (income) any adjustments of taxes of prior periods amount of deferred tax
expense (income) relating to the origination and reversal of temporary differences amount of deferred
tax expense (income) relating to changes in tax rates or the imposition of new taxes amount of the
benefit arising from a previously unrecognized tax loss, tax credit or temporary difference of a prior
period write down, or reversal of a previous write down, of a deferred tax asset amount of tax
expense (income) relating to changes in accounting policies and corrections of errors.
 
PAS 12.81 requires the following disclosures:
aggregate current and deferred tax relating to items recognized directly in equity tax relating to each
component of other comprehensive income explanation of the relationship between tax expense
(income) and the tax that would be expected by applying the current tax rate to accounting profit or
loss (this can be presented as a reconciliation of amounts of tax or a reconciliation of the rate of tax)
changes in tax rates amounts and other details of deductible temporary differences, unused tax
losses, and unused tax credits temporary differences associated with investments in subsidiaries,
branches and associates, and interests in joint arrangements for each type of temporary difference
and unused tax loss and credit, the amount of deferred tax assets or liabilities recognized in the
statement of financial position and the amount of deferred tax income or expense recognized in profit
or loss tax relating to discontinued operations tax consequences of dividends declared after the end
of the reporting period information about the impacts of business combinations on an acquirer's
deferred tax assets recognition of deferred tax assets of an acquiree after the acquisition date.
 
Other required disclosures:
 
    details of deferred tax assets [PAS 12.82] tax consequences of future dividend payments. [PAS
12.82A]
 
In addition to the disclosures required by PAS 12, some disclosures relating to income taxes are
required by PAS 1 Presentation of Financial Statements, as follows:
 
    Disclosure on the face of the statement of financial position about current tax assets, current tax
liabilities, deferred tax assets, and deferred tax liabilities [PAS 1.54(n) and (o)] Disclosure of tax
expense (tax income) in the profit or loss section of the statement of profit or loss and other
comprehensive income (or separate statement if presented). [PAS 1.82(d)]

PAS 19R Employee Benefits

Overview
 
PAS 19 Employee Benefits (amended 2011) outlines the accounting requirements for employee
benefits, including short-term benefits (e.g. wages and salaries, annual leave), post-employment
benefits such as retirement benefits, other long-term benefits (e.g. long service leave) and termination
benefits. The standard establishes the principle that the cost of providing employee benefits should
be recognized in the period in which the benefit is earned by the employee, rather than when it is paid
or payable, and outlines how each category of employee benefits are measured, providing detailed
guidance in particular about post-employment benefits.
 
PAS 19 (2011) was issued in 2011, supersedes PAS 19 Employee Benefits (1998), and is applicable
to annual periods beginning on or after 1 January 2013.
 
Objective of PAS 19 (2011)
 
The objective of PAS 19 is to prescribe the accounting and disclosure for employee benefits,
requiring an entity to recognize a liability where an employee has provided service and an expense
when the entity consumes the economic benefits of employee service. [PAS 19(2011).2]
Scope
 
PAS 19 applies to (among other kinds of employee benefits):
 
    wages and salaries compensated absences (paid vacation and sick leave) profit sharing and
bonuses medical and life insurance benefits during employment non-monetary benefits such as
houses, cars, and free or subsidised goods or services retirement benefits, including pensions and
lump sum payments post-employment medical and life insurance benefits long-service or sabbatical
leave 'jubilee' benefits deferred compensation programmes termination benefits.
 
PAS 19 (2011) does not apply to employee benefits within the scope of IFRS 2 Share-based
Payment or the reporting by employee benefit plans (see PAS 26 Accounting and Reporting by
Retirement Benefit Plans).
Short-term employee benefits
 
Short-term employee benefits are those expected to be settled wholly before twelve months after the
end of the annual reporting period during which employee services are rendered, but do not include
termination benefits.[PAS 19(2011).8] Examples include wages, salaries, profit-sharing and bonuses
and non-monetary benefits paid to current employees.
 
The undiscounted amount of the benefits expected to be paid in respect of service rendered by
employees in an accounting period is recognized in that period. [PAS 19(2011).11] The expected cost
of short-term compensated absences is recognized as the employees render service that increases
their entitlement or, in the case of non-accumulating absences, when the absences occur, and
includes any additional amounts an entity expects to pay as a result of unused entitlements at the end
of the period. [PAS 19(2011).13-16]
Profit-sharing and bonus payments
 
An entity recognizes the expected cost of profit-sharing and bonus payments when, and only when, it
has a legal or constructive obligation to make such payments as a result of past events and a reliable
estimate of the expected obligation can be made. [PAS 19.19]
Types of post-employment benefit plans
 
Post-employment benefit plans are informal or formal arrangements where an entity provides post-
employment benefits to one or more employees, e.g. retirement benefits (pensions or lump sum
payments), life insurance and medical care.
 
The accounting treatment for a post-employment benefit plan depends on the economic substance of
the plan and results in the plan being classified as either a defined contribution plan or a defined
benefit plan:
 
    Defined contribution plans. Under a defined contribution plan, the entity pays fixed contributions
into a fund but has no legal or constructive obligation to make further payments if the fund does not
have sufficient assets to pay all of the employees' entitlements to post-employment benefits. The
entity's obligation is therefore effectively limited to the amount it agrees to contribute to the fund and
effectively place actuarial and investment risk on the employee Defined benefit plans These are post-
employment benefit plans other than a defined contribution plans. These plans create an obligation
on the entity to provide agreed benefits to current and past employees and effectively places actuarial
and investment risk on the entity.
 
Defined contribution plans
 
For defined contribution plans, the amount recognized in the period is the contribution payable in
exchange for service rendered by employees during the period. [PAS 19(2011).51]
 
Contributions to a defined contribution plan which are not expected to be wholly settled within 12
months after the end of the annual reporting period in which the employee renders the related service
are discounted to their present value. [PAS 19.52]
Defined benefit plans
 
Basic requirements
 
An entity is required to recognize the net defined benefit liability or asset in its statement of financial
position. [PAS 19(2011).63] However, the measurement of a net defined benefit asset is the lower of
any surplus in the fund and the 'asset ceiling' (i.e. the present value of any economic benefits
available in the form of refunds from the plan or reductions in future contributions to the plan). [PAS
19(2011).64]
 
Measurement
 
The measurement of a net defined benefit liability or assets requires the application of an actuarial
valuation method, the attribution of benefits to periods of service, and the use of actuarial
assumptions. [PAS 19(2011).66] The fair value of any plan assets is deducted from the present value
of the defined benefit obligation in determining the net deficit or surplus. [PAS 19(2011).113]
 
The determination of the net defined benefit liability (or asset) is carried out with sufficient regularity
such that the amounts recognized in the financial statements do not differ materially from those that
would be determined at end of the reporting period. [PAS 19(2011).58]
 
The present value of an entity's defined benefit obligations and related service costs is determined
using the 'projected unit credit method', which sees each period of service as giving rise to an
additional unit of benefit entitlement and measures each unit separately in building up the final
obligation. [PAS 19(2011).67-68] This requires an entity to attribute benefit to the current period (to
determine current service cost) and the current and prior periods (to determine the present value of
defined benefit obligations). Benefit is attributed to periods of service using the plan's benefit formula,
unless an employee's service in later years will lead to a materially higher of benefit than in earlier
years, in which case a straight-line basis is used [PAS 19(2011).70]
 
Actuarial assumptions used in measurement
 
The overall actuarial assumptions used must be unbPASed and mutually compatible, and represent
the best estimate of the variables determining the ultimate post-employment benefit cost. [PAS
19(2011).75-76]:
 
    Financial assumptions must be based on market expectations at the end of the reporting period
[PAS 19(2011).80] Mortality assumptions are determined by reference to the best estimate of the
mortality of plan members during and after employment [PAS 19(2011).81] The discount rate used is
determined by reference to market yields at the end of the reporting period on high quality corporate
bonds, or where there is no deep market in such bonds, by reference to market yields on government
bonds. Currencies and terms of bond yields used must be consistent with the currency and estimated
term of the obligation being discounted [PAS 19(2011).83] Assumptions about expected salaries and
benefits reflect the terms of the plan, future salary increases, any limits on the employer's share of
cost, contributions from employees or third parties*, and estimated future changes in state benefits
that impact benefits payable [PAS 19(2011).87] Medical cost assumptions incorporate future changes
resulting from inflation and specific changes in medical costs [PAS 19(2011).96] Updated actuarial
assumptions must be used to determine the current service cost and net interest for the remainder of
the annual reporting period after a plan amendment, curtailment or settlement when an entity
remeasures its net defined benefit liability (asset) [PAS 19(2011).122A]*
 
* Added by Plan Amendment, Curtailment or Settlement (Amendments to PAS 19) in February 2018.
The amendments are effective for annual periods beginning on or after 1 January 2019.
 
Past service costs
 
Past service cost is the term used to describe the change in a defined benefit obligation for employee
service in prior periods, arising as a result of changes to plan arrangements in the current period (i.e.
plan amendments introducing or changing benefits payable, or curtailments which significantly reduce
the number of covered employees) .
 
Past service cost may be either positive (where benefits are introduced or improved) or negative
(where existing benefits are reduced). Past service cost is recognized as an expense at the earlier of
the date when a plan amendment or curtailment occurs and the date when an entity recognizes any
termination benefits, or related restructuring costs under PAS 37 Provisions, Contingent Liabilities
and Contingent Assets. [PAS 19(2011).103]
 
Gains or losses on the settlement of a defined benefit plan are recognized when the settlement
occurs. [PAS 19(2011).110]
 
Before past service costs are determined, or a gain or loss on settlement is recognized, the net
defined benefit liability or asset is required to be remeasured, however an entity is not required to
distinguish between past service costs resulting from curtailments and gains and losses on settlement
where these transactions occur together. [PAS 19(2011).99-100]
 
Recognition of defined benefit costs
 
The components of defined benefit cost is recognized as follows: [PAS 19(2011).120-130]
Component        Recognition
Service cost attributable to the current and past periods                Profit or loss
Net interest on the net defined benefit liability or asset, determined using the discount rate at the
beginning of the period   Profit or loss
Remeasurements of the net defined benefit liability or asset, comprising:
 
    actuarial gains and losses return on plan assets some changes in the effect of the asset ceiling
 
                Other comprehensive income
(Not reclassified to profit or loss in a subsequent period)
 
Other guidance
 
PAS 19 also provides guidance in relation to:
 
    when an entity should recognize a reimbursement of expenditure to settle a defined benefit
obligation [PAS 19(2011).116-119] when it is appropriate to offset an asset relating to one plan
against a liability relating to another plan [PAS 19(2011).131-132] accounting for multi-employer plans
by individual employers [PAS 19(2011).32-39] defined benefit plans sharing risks between entities
under common control [PAS 19.40-42] entities participating in state plans [PAS 19(2011).43-45]
insurance premiums paid to fund post-employment benefit plans [PAS 19(2011).46-49]
 
Disclosures about defined benefit plans
 
PAS 19(2011) sets the following disclosure objectives in relation to defined benefit plans [PAS
19(2011).135]:
 
    an explanation of the characteristics of an entity's defined benefit plans, and the associated risks
identification and explanation of the amounts arising in the financial statements from defined benefit
plans a description of how defined benefit plans may affect the amount, timing and uncertainty of the
entity's future cash flows.
 
Extensive specific disclosures in relation to meeting each the above objectives are specified, e.g. a
reconciliation from the opening balance to the closing balance of the net defined benefit liability or
asset, disaggregation of the fair value of plan assets into classes, and sensitivity analysis of each
significant actuarial assumption. [PAS 19(2011).136-147]
 
Additional disclosures are required in relation to multi-employer plans and defined benefit plans
sharing risk between entities under common control. [PAS 19(2011).148-150].
Other long-term benefits
 
PAS 19 (2011) prescribes a modified application of the post-employment benefit model described
above for other long-term employee benefits: [PAS 19(2011).153-154]
 
    the recognition and measurement of a surplus or deficit in an other long-term employee benefit
plan is consistent with the requirements outlined above service cost, net interest and
remeasurements are all recognized in profit or loss (unless recognized in the cost of an asset under
another IFRS), i.e. when compared to accounting for defined benefit plans, the effects of
remeasurements are not recognized in other comprehensive income.
 
Termination benefits
 
A termination benefit liability is recognized at the earlier of the following dates: [PAS 19.165-168]
 
    when the entity can no longer withdraw the offer of those benefits - additional guidance is provided
on when this date occurs in relation to an employee's decision to accept an offer of benefits on
termination, and as a result of an entity's decision to terminate an employee's employment when the
entity recognizes costs for a restructuring under PAS 37 Provisions, Contingent Liabilities and
Contingent Assets which involves the payment of termination benefits.
 
Termination benefits are measured in accordance with the nature of employee benefit, i.e. as an
enhancement of other post-employment benefits, or otherwise as a short-term employee benefit or
other long-term employee benefit. [PAS 19(2011).169]