Professional Documents
Culture Documents
Ias 37 Provision and Contingencies-2
Ias 37 Provision and Contingencies-2
I. PROVISION
- A liabilityi of uncertain timing or uncertain amount.
-It can be distinguished from other liabilities such as trade payables and accruals because there
is uncertainty about the timing or amount of the future expenditure required in the settlement.
B. Measurement of provision
The amount recognized should be the best estimate of the expenditure required to settle the present
obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the
obligation at the balance sheet date or to transfer it to a third party. This means:
- Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit)
are measured at the most likely amount.
- Provisions for large populations of events (warranties, customer refunds) are measured at a
probability-weighted expected value.
- Both measurements are at discounted present value using a pre-tax discount rate that reflects
the current market assessments of the time value of money and the risks specific to the liability.
- Financial obligations that might or might not - possible asset that arises from past events
arise in the future, dependent on the - inflow is probable
outcome of a particular event. Ex: when you are suing somebody else and expect
- Shall not be recognized winning the court case with some compensation
- Shall be disclosed only from other party, in such a case result of court
Ex: a company warranty and a lawsuit against proceedings is out of your control and this possible
the company. Both represent possible losses to compensation would represent contingent asset.
the company, yet both depend on some
uncertain future event.
Occurence
Estimate
The amount of provision is largely not certain. A reasonable estimate can be made for the amount
of payment.
- It is one of the most liquid asset and the most prone to lose due to theft or mishandling
- Must be unrestricted and available for use
- Cash is money, used as currency and exchange
- There are two types of Cash:
Cash on hand – simply put, it is Cash that you have on hand and not deposited in a bank
Cash in Bank – it is cash that was deposited in the bank and can be withdrawn
- Cash funds are cash that will be used for a specified reason.
Cash fund for current asset = ex. Petty, payroll, travel, interest, dividend & tax fund
Cash fund for NCA = ex. Sinking, preference share, contingent fund (any long term
investment)
Cash Equivalents are money making instruments/short investments that are near its maturity date (3
months). It must be liquid and there would be no significant change (increase/decrease) to its value.
The
petty cash fund is utilized for everyday expenses, composed of bills & coins to pay for small expenses that does
not require checks.
Accounting procedures for Petty Cash
Bank Reconciliation
*Debit memos (-) are items recorded in the books but not yet shown in the depositor’s bank records
ex. Non-sufficient funds (NSF checks) – checks that aren’t accepted because of lack of funds
Defective checks – checks with errors (no signature, mutilated countersigned)
Bank Service charge (BSC) – bank charges for interest, collection and penalty
* Outstanding checks (-) are checks that have already been recorded by the depositor but not yet reflected
in their bank statement.
Error – Can be seen in both Book and Bank, can either be added or deducted depending if it is overstated
or understated in the book// bank statement
Proof of Cash
Proof of Cash is a two date bank reconciliation which is used to find and fix the ending balance of the book
and bank statement. It balances the book and bank statement’s beginning, receipts, disbursements and
ending balance of the period.
RECEIVABLES
Represents any legitimate claim from other companies (money, goods, service)
(in accounting) claims that are expected to be settled in cash
From sales, performance of service, from money lent, etc.
Evidenced by promissory note or time draft
Trade Receivables: arising from normal course of business
Non-trade Receivables: arising from other sources (e.g. accrued interest, advances to employees)
In the Financial Statement: classified as current asset since expected to be collected within normal
operating cycle; otherwise: non-current
Initial Recognition: initially recognized at the transaction price; only recognized when entity comes into
contract
Discounts
Trade discounts: for converting catalog price to actual charge
Cash discounts: for prompt payment; 1/5 , n/60 means 1% discount if paid within 15 days, payable
within 60 days
Interest Bearing Note
For payment of interest for the time between date issued up to due date
On issuance: present value is face value
Subsequent present value is face value plus accrued interest based on interest rate
Initially recognized when an entity becomes payee to the writer of the note
Recognized at transaction price or fair value of the non-cash asset given up or fair value of note
received (discounted cash flow of future collections, based on implicit interest)
Must not be due yet, otherwise it is reclassified as accounts payable and subsequently put into bad
debts expense (dishonored note)
Illustration:
July 1: A issues a 60 – day, P500,000 10% note to B on merchandise acquired.
August 31: B collects due from A.
July 1:
Notes Receivable 500,000
Sales 500,000
August 31:
Cash 508,333.33
Notes Receivable 500,000
Interest Revenue 8,333.33
Non- Interest Bearing Note
Makes no provisions for interest
However, there is still interest accruing
Note is written with the imputed interest on the face value for the term of the rate
When exchanged for cash only, present value or amortized cost of note is equal to the cash proceeds
When exchanged for non-cash assets, recorded at fair value of that asset
When undeterminable, an imputed rate is used
Amortized cost = present value of principal & interested discounted by the rate; either at a premium
or discount
Subsequent Measurement
Subsequently measured at amortized cost
Given: financial instrument is held for contractual cash flows and terms of the asset gives rise to
payment of principal and interest on specified dates
Impairment
Uncollectible receivables
Recognized in profit or loss
Either through allowance method or direct right- off
When previously written off but subsequently recovered/collected:
Accounts Receivable xxx
Bad debts recovered xxx
Cash xxx
Accounts receivable xxx
IFRS 9 requires disclosure of expected credit losses from financial instruments
Receivable Financing
to accelerate cash inflows by selling receivables or using them as collateral
Secured borrowing: pledging, assignment, discounting of note with recourse
Sale of receivables: discounting without recourse, factoring
Pledging: use of receivables as collateral for a loan, general assignment
Assignment of accounts receivable: receivables are identified and used as security for a loan; specific
assignment, borrower remits collections from receivables
Discounting of notes receivable: a note’s maturity is advanced by a financing company through
endorsement of an entity, less discount (charge); sale of receivable, no total detachment from
obligations
Discounting without recourse: total sale of receivable with derecognition since the entity is relieved of
further obligations; no liability is recorded by the seller
Factoring: transfer of receivables without recourse, Factor Company assumes risk of collection; factor’s
holdback held for purchase returns and is returned when not consumed. Any excess in factor’s
holdback consumed by purchase returns = payable.
STOCKHOLDERS’ EQUITY
Equity refers to the assets of a business after paying off its liabilities, as such Stockholders’ Equity is the
residual interest found in a corporation or the stockholders’ share. It is one of the three elements of
Accounting, with the other two being Assets and Liabilities. It is a main component in the balance sheet that
makes up the Accounting Equation of Assets = Liabilities + Equity. (In the Balance Sheet, the Stockholders’
Equity is the difference between Assets and Liabilities)
Illustration 1:
May Corporation has the following information derived from its 2019 Balance Sheet:
Assets 1,570,000
Liabilities 900,000
What is the balance for Stockholders’ Equity?
Answer:
Equity = Assets – Liabilities
1,570,000 – 900,000 = P670,000
Stockholders’ Equity is used as a means to estimate how well a corporation is operating, to determine
whether or not it is within the range of bankruptcy or solvency. This takes into account its corporate capital and
income, among others. It can be found in two financial statements, namely the balance sheet and the
statement of stockholders’ equity.
The Stockholders’ Equity, in the Statement of Stockholders’ Equity, can be accounted for by its three
main components: Paid in Capital, Retained Earnings and Treasury Stock.
PAID IN CAPITAL
It is comprised of the overall contribution of the stockholders, wherein it includes Share Capital,
Subscribed Share Capital, and Share Premium of both Preferred and Ordinary stock.
Share Capital – represents the capital of the total authorized, issued and outstanding stock bought by the
stockholders.
Subscribed Share Capital – capital that is brought about by the individual subscriptions made by the
stockholders, which can be paid for in many forms (such as cash, land or property).
Share Premium – the excess of Paid in Capital added into its net amount.
RETAINED EARNINGS
It is the resulting profits or losses found within the course of business in a corporation. Profits earned is
added into the stockholder’s equity, meanwhile, losses incurred are deducted. This is the account wherein
dividends are drawn from.
Dividends serve as the distribution of profits of a company on a periodic basis. Which is dependent on
the accumulated earnings of a corporation.
TREASURY STOCK
It is the value that results from the shares reacquired by the corporation after its preceding issuance to
stockholders. They are different from that of issued and unissued stock, wherein both have voting rights,
treasury stock – as a result of its subsequent reacquisition by the corporation do not have those rights.
Treasury stock is a contra-equity account that is deducted from total paid in capital plus or minus retained
earnings in order to get the amount of stockholders’ equity.
Illustration 2:
June Corporation has the following information:
Share Capital P 1,000,000
Subscribed Share Capital 700,000
Share Premium 200,000
Retained Earnings 50,000
Treasury Stock 30,000
What is the Stockholders’ Equity balance?
Answer:
Add:
Stockholders’ Equity is a key-component used in judging the capacity of a corporation to flourish. It also
describes the corporation best, by analyzing its strengths and weaknesses periodically found within the
changes – increase and decrease in equity accounts.