PAS 2 Objective of IAS 2

INVENTORIES ● The objective of IAS 2 is to prescribe the

accounting treatment for inventories.
Overview ● It provides guidance for determining the cost of
● IAS 2 Inventories contains the requirements on inventories and for subsequently recognising an
how to account for most types of inventory. expense, including any write-down to net
● The standard requires inventories to be measured realisable value.
at the lower of cost and net realisable value ● It also provides guidance on the cost formulas
(NRV) and outlines acceptable methods of that are used to assign costs to inventories.
determining cost, including specific identification
(in some cases), first-in first-out (FIFO) and Scope
weighted average cost. ● Inventories include assets held for sale in the
● A revised version of IAS 2 was issued in ordinary course of business (finished goods),
December 2003 and applies to annual periods assets in the production process for sale in the
beginning on or after 1 January 2005. ordinary course of business (work in process), and
materials and supplies that are consumed in
History of IAS 2 production (raw materials). [IAS 2.6]
● However, IAS 2 excludes certain inventories from
Date Development Comments its scope: [IAS 2.2]
● work in process arising under construction
contracts (see IAS 11 Construction Contracts)
September 1974 Exposure Draft E2 ● financial instruments (see IAS 39 Financial
Valuation and Instruments: Recognition and Measurement)
Presentation of
Inventories in the ● biological assets related to agricultural activity
Context of the and agricultural produce at the point of harvest
Historical Cost
System published (see IAS 41 Agriculture).
● Also, while the following are within the scope of
the standard, IAS 2 does not apply to the
October 1975 IAS 2 Valuation and
measurement of inventories held by: [IAS 2.3]
Presentation of ○ producers of agricultural and forest
Inventories in the
Context of the
products, agricultural produce after
Historical Cost harvest, and minerals and mineral
System issued
products, to the extent that they are
measured at net realisable value (above
or below cost) in accordance with
August 1991 Exposure Draft E38 well-established practices in those
Inventories
published industries. When such inventories are
measured at net realisable value, changes
in that value are recognised in profit or
December 1993 IAS 9 (1993) Operative for annual loss in the period of the change
Inventories issued financial statements ○ commodity brokers and dealers who
covering periods
beginning on or
measure their inventories at fair value less
after 1 January 1995 costs to sell.
When such inventories are measured at fair value
less costs to sell, changes in fair value less costs
18 December 2003 IAS 2 Inventories Effective for annual to sell are recognised in profit or loss in the
issued periods beginning period of the change.
on or after 1
January 2005
Fundamental principle of IAS 2
Inventories are required to be stated at the lower of cost
and net realisable value (NRV). [IAS 2.9]
Measurement of inventories
● Cost should include all: [IAS 2.10]
○ costs of purchase (including taxes,
transport, and handling) net of trade
discounts received
○ costs of conversion (including fixed and
variable manufacturing overheads) and
○ other costs incurred in bringing the
inventories to their present location and
condition
● IAS 23 Borrowing Costs identifies some limited
circumstances where borrowing costs (interest)
can be included in cost of inventories that meet
the definition of a qualifying asset. [IAS 2.17 and
IAS 23.4]
Inventory Cost
Inventory cost should not include: [IAS 2.16 and 2.18]
● abnormal waste
● storage costs
● administrative overheads unrelated to production
● selling costs
● foreign exchange differences arising directly on
the recent acquisition of inventories invoiced in a
foreign currency
● interest cost when inventories are purchased with
deferred settlement terms.
Inventory
● The standard cost and retail methods may be
used for the measurement of cost, provided that
the results approximate actual cost. [IAS 2.21-22]
● For inventory items that are not interchangeable,
specific costs are attributed to the specific
individual items of inventory. [IAS 2.23]
● For items that are interchangeable, IAS 2 allows
the FIFO or weighted average cost formulas. [IAS
2.25] The LIFO formula, which had been allowed
prior to the 2003 revision of IAS 2, is no longer
allowed.
● The same cost formula should be used for all
inventories with similar characteristics as to their
nature and use to the entity. For groups of
inventories that have different characteristics,
different cost formulas may be justified. [IAS
2.25]
Write-down to net realisable value
● NRV is the estimated selling price in the ordinary
course of business, less the estimated cost of
completion and the estimated costs necessary to
make the sale. [IAS 2.6]
● Any write-down to NRV should be recognised as
an expense in the period in which the write-down
occurs.
● Any reversal should be recognised in the income
statement in the period in which the reversal
occurs. [IAS 2.34]
Expense recognition
● IAS 18 Revenue addresses revenue recognition
for the sale of goods.
● When inventories are sold and revenue is
recognised,
○ the carrying amount of those inventories
is recognised as an expense (often called
cost-of-goods-sold).
● Any write-down to NRV and any inventory losses
are also recognised as an expense when they
occur. [IAS 2.34]
Required disclosures: [IAS 2.36]
● accounting policy for inventories
● carrying amount, generally classified as
merchandise, supplies, materials, work in
progress, and finished goods.
○ The classifications depend on what is
appropriate for the entity
● carrying amount of any inventories carried at fair
value less costs to sell
● amount of any write-down of inventories
recognised as an expense in the period
● amount of any reversal of a write-down to NRV
and the circumstances that led to such reversal
● carrying amount of inventories pledged as
security for liabilities
● cost of inventories recognised as expense (cost of
goods sold).
Nature of Expense
● IAS 2 acknowledges that some enterprises
classify income statement expenses by nature
(materials, labour, and so on) rather than by
function (cost of goods sold, selling expense, and
so on).
● Accordingly, as an alternative to disclosing cost
of goods sold expense, IAS 2 allows an entity to
disclose operating costs recognised during the
period by nature of the cost (raw materials and
consumables, labour costs, other operating costs)
and the amount of the net change in inventories
for the period). [IAS 2.39]
 ● This is consistent with IAS 1 Presentation of FIFO Periodic
Financial Statements, which allows presentation
of expenses by function or nature.
Units Available for Sale = 68 + 140 + 40 + 78 = 326
First-In, First-Out (FIFO)
● It is one of the methods commonly used to
estimate the value of inventory on hand at the Units Sold = 94 + 116 + 62 = 272
end of an accounting period and the cost of
goods sold during the period.
● This method assumes that inventory purchased or
Units in Ending Inventory = 326 − 272 = 54
manufactured first is sold first and newer
inventory remains unsold.
● Thus cost of older inventory is assigned to cost of
goods sold and that of newer inventory is
assigned to ending inventory.
● The actual flow of inventory may not exactly Cost of Goods Sold Units Unit Cost Total

match the first-in, first-out pattern.

Use the following information to calculate the value of Sales From Mar 1 68 $15.00 $1,020
inventory on hand on Mar 31 and cost of goods sold Inventory
during March in FIFO periodic inventory system and
under FIFO perpetual inventory system
Sales From Mar 5 Purchase 140 $15.50 $2,170
Mar 1 Beginning Inventory 68 units @ $15.00
per unit

Sales From Mar 11 40 $16.00 $640

Purchase
5 Purchase 140 units @ $15.50
per unit

Sales From Mar 16 24 $16.50 $396

Purchase
9 Sale 94 units @ $19.00
per unit

272 $4,226

11 Purchase 40 units @ $16.00

per unit
Ending Inventory Units Unit Cost Total

16 Purchase 78 units @ $16.50

Inventory From Mar 16 54 $16.50 $891
per unit
Purchase

FIFO Perpetual
20 Sale 116 units @ $19.50
per unit
Dat Purchases Sales Balance
e

29 Sale 62 units @ $21.00

per unit
 Unit Unit Tot Unit Unit Tot Unit Unit Tot 2 $16. $32 78 $16. $1,2
s Cos al s Cos al s Cos al 00 50 87
t t t

29 38 $16. $60 54 $16. $89

Mar 68 $15. $1,0 00 8 50 1
1 00 20

24 $16. $39
5 140 $15. $2,1 68 $15. $1,0 50 6
50 70 00 20

Average costing method in periodic inventory system

140 $15. $2,1 ● When average costing method is used in a
50 70
periodic inventory system, the cost of goods sold
and the cost of ending inventory is computed
using weighted average unit cost.
9 68 $15. $1,0 114 $15. $1,7 ● Weighted average unit cost is computed using
00 20 50 67
the following formula:
Weighted average unit cost = Total cost of units
available for sale / Number of units available for sale
26 $15. $40
50 3 The Meta company is a trading company that purchases
and sells a single product – product X. The company has
the following record of sales and purchases of product X
11 40 $16. $64 114 $15. $1,7 for the month of June 2013.
00 0 50 67 June 01: Balance on hand at the beginning of the
month; 200 units @ $10.15.
June 05: Purchased 800 units @ $10.25.
40 $16. $64 June 07: Sold 400 units.
00 0 June 12: Purchases: 600 units @ $10.40.
June 14: Sales: 500 units
June 20: Purchases: 400 units @ $10.50
16 78 $16. $1,2 114 $15. $1,7 June 25: Purchases: 800 units @ $10.70
50 87 50 67 June 26: Sales: 1,400 units
June 28: Sales: 200 units
June 30: Purchases: 600 units @ $10.85
40 $16. $64
00 0 Required: Compute inventory cost at June 30, 2013 using
average cost method assuming the Meta company uses
periodic inventory system.
78 $16. $1,2
50 87 Weighted average unit cost = $35,740 / 3,400 units
= $10.51176 per unit
Units in ending inventory = Total units available for sale –
20 114 $15. $1,7 38 $16. $60 Total units sold during the period
50 67 00 8 = 3,400 units – (400 units + 500 units + 1,400 units + 200
units)
= 3,400 units – 2,500 units
= 900 units
Cost of goods sold: 2,500 units × $10.51176 = $26,279.40
Cost of ending inventory: 900 units × $10.51176 =
$9,460.60
PAS 16
Property, Plant and Equipment
Characteristics of PPE
a. Tangible assets – items of PPE have physical
substance
b. Used in normal operations – items of PPE are
used in the production or supply of goods or
services, for rental, or for administrative
purposes
c. Long-term in nature – items of PPE are expected
to be used from more than a year
Examples of items of PPE
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety
reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by
equipment
h. Furniture and fixture
i. Bearer plants
Recognition
The cost of an item of property, plant and equipment
shall be recognized as an asset only if:
a. it is probable that future economic benefits
associated with the item will flow to the entity;
and
b. the cost of the item can be measured reliably.
Initial measurement
An item of PPE is initially measured at its cost.
Elements of Cost
1. Purchase price, including non-refundable
purchase taxes, after deducting trade discounts
and rebates.
2. Costs directly attributable to bringing the asset to
the location and condition necessary for it to be
capable of operating in the manner intended by
the management.
3. Present value of decommissioning and
restoration costs to the extent that they are
recognized as obligation
Examples of directly attributable costs
● Costs of employee benefits arising directly from
the construction or acquisition of PPE;
● Costs of site preparation;
● Initial delivery and handling costs (e.g., freight
costs);
● Installation and assembly costs;
● Testing costs, net of disposal proceeds of samples
generated during testing; and
● Professional fees.
Cessation of capitalizing costs to PPE
Recognition of costs in the carrying amount of an item of
PPE ceases when the item is in the location and condition
necessary for it to be capable of operating in the manner
intended by management.
Measurement of Cost
The cost of an item of PPE is the cash price equivalent at
the recognition date. If payment is deferred beyond
normal credit terms, the difference between the cash
price equivalent and the total payment is recognized as
interest over the period of credit unless such interest is
capitalized in accordance with PAS 23 Borrowing Costs.
Acquisition through exchange
If the exchange has commercial substance, the asset
received from the exchange is measured using the
following order of priority:
a. Fair value of asset Given up
b. Fair value of asset Received
c. Carrying amount of asset Given up
If the exchange lacks commercial substance, the asset
received from the exchange is measured at (c) above.
Subsequent measurement
Subsequent to initial recognition, an entity shall choose
either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy to an
entire class of PPE.
Cost Model
After recognition, an item of PPE is measured at its cost
less any accumulated depreciation and any
accumulated impairment losses.

Depreciation
● Depreciation is the systematic allocation of the
depreciable amount of an asset over its
estimated useful life.
● When computing for depreciation, each part of
an item of PPE with a cost that is significant in
relation to the total cost of the item shall be
depreciated separately.
● Depreciation begins when the asset is available
for use, i.e., when it is in the location and
condition necessary for it to be capable of
operating in the manner intended by
management.
● Depreciation ceases when the asset is
derecognized or when it is classified as “held for
sale” under PFRS 5, whichever comes earlier.
Selection of depreciation method
● There are various methods of depreciation. The
entity shall select the method that most closely
reflects the expected pattern of consumption
of the future economic benefits embodied in
the asset.
● However, a depreciation method that is based on
revenue that is generated by an activity that
includes the use of an asset is not appropriate.
The Straight-line method of Depreciation
Straight line method – depreciation is recognized evenly
over the life of the asset by dividing the depreciable
amount by the estimated useful life.
Depreciation = (Historical cost – Residual value) ÷
Estimated useful life
Changes in depreciation method, useful life, and
residual value
● A change in depreciation method, useful life, or
residual value is a change in accounting estimate
accounted for prospectively.
● Prospective accounting means the change
affects only the current period and/or future
periods. The change does not affect past periods.
Revaluation Model
After recognition as an asset, an item of PPE whose fair
value can be measured reliably shall be carried at a
revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment
losses.
Revaluation surplus
Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx
*The fair value is determined using an appropriate
valuation technique, taking into account the principles
set forth under PFRS 13.
Frequency of revaluation
For items with significant and volatile changes in fair
value, annual revaluation is necessary. For items with
insignificant changes in fair value, revaluation may be
made every 3 or 5 years.
Revaluation applied to all assets in a class
● If an item of PPE is revalued, the entire class of
PPE to which that asset belongs shall be revalued.
● The items within a class of PPE are revalued
simultaneously to avoid selective revaluation of
assets and the reporting of amounts in the
financial statements that are a mixture of costs
and values as at different dates.
Subsequent accounting for revaluation surplus
Revaluation is initially recognized in other
comprehensive income unless the revaluation represents
impairment loss or reversal of impairment loss, in which
case it is recognized in profit or loss.
Subsequently, the revaluation surplus is accounted for as
follows:
1. If the revalued asset is non-depreciable, the
revaluation surplus accumulated in equity is
transferred directly to retained earnings when
the asset is derecognized.
2. If the revalued asset is depreciable, a portion of
the revaluation surplus may be transferred
periodically to retained earnings as the asset is
being used.
Derecognition
The carrying amount of an item or PPE shall be
derecognized:
a. on disposal; or
b. when no future economic benefits are expected
from its use or disposal
 PAS 40 e. Property that is being constructed or developed for
Investment Property future use as investment property.

Examples of items that are not investment property:

Investment property
a. Property intended for sale in the ordinary course of
Investment property is “property (land or a building – or
business or property acquired exclusively with a view
a part of a building – or both) held (by the owner or by to subsequent disposal in the near future or for
the lessee under finance lease) to earn rentals or for development and resale.
capital appreciation or both, rather than for: b. Property being constructed or developed on behalf of
a. use in the production or supply of goods or third parties (PFRS 15 Revenue from Contracts with
services or for administrative purposes; or Customers).
b. sale in the ordinary course of business.” c. Owner-occupied property (PAS 16) and
owner-occupied property awaiting disposal.
d. Property that is leased to another entity under a
A finance lease is a leasing arrangement in which the
finance lease.
lessee obtains ownership of the leased asset by the end
● A finance lease is a leasing arrangement in
of the lease term. (PAS 40) which the lessee obtains ownership of the
leased asset by the end of the lease term.
Investment property vs. PPE
● Property that is partly investment property and
partly owner-occupied
Investment property Owner-occupied property
If the portions could be sold separately (or leased out
separately under a finance lease), an entity accounts
for the portions separately. The portion being rented
out under operating lease is classified as investment
Held to earn rentals or for Held for use in the production or property and the portion used as owner-occupied is
capital appreciation or both. supply of goods or services or for classified as property, plant, and equipment.
administrative purposes.
● If the portions could not be sold separately, the
property is investment property only if an
insignificant portion is held for use in the production
Generates cash flows largely Generates cash flows in conjunction
or supply of goods or services or for administrative
independently of the other with the other assets held by an
assets held by an entity entity.
purposes. If the owner-occupied portion is significant,
the entire property is classified as property, plant, and
equipment.

Includes only land and May include assets other than land Ancillary services to occupants
building and building ● When ancillary services are provided to the occupants
of a property held, the property is classified as
investment property if the services are insignificant
to the arrangement, as a whole.
Accounted for under PAS 40 Accounted for under PAS 16
○ Example: When the owner of an office building
provides security and maintenance services to
the building tenants
Examples of investment property ○ If services provided are significant, the entire
a. Land held for long-term capital appreciation rather property is classified as PPE.
than for short-term sale in the ordinary course of
business. Measurement
b. Land held for a currently undetermined future use. Initial Measurement: Cost
c. A building owned by the entity (or held by the entity ● Cost depends on the mode of acquisition.
under a finance lease) and leased out under one or ● Purchase price and any directly attributable
more operating leases. costs in bringing the asset to its intended
● An operating lease is a contract that permits condition.
the use of an asset but does not convey ● It may include professional fees for legal
ownership rights of the asset. services, property transfer taxes and other
d. A building that is vacant but is held to be leased out transaction costs.
under one or more operating leases. Subsequent Measurement: Either the Cost model or Fair value
model
The following are excluded from the cost of investment Calculation of Investment Property
property and are expensed immediately:
a. Start-up costs (unless they are necessary to bring the
property to the condition necessary for it to be capable
of operating in the manner intended by management)
b. Operating losses incurred before the investment
property achieves the planned level of occupancy
c. Abnormal amounts of wasted material, labor or other
resources incurred in constructing or developing the
property

Change in accounting policy

● A change from the cost model to the fair value is
accounted for prospectively.
● A change from the fair value model to the cost model is
not permitted.

Determining fair value

● PAS 40 requires all entities to determine the fair value
of investment property whether it uses the cost model
or fair value model.
● Fair values determined are used for measurement and
disclosure purposes if the entity uses the fair value
model and for disclosure purposes only if the entity
uses the cost model.

Fair value model

● After initial recognition, an entity that chooses the fair
value model shall measure all of its investment
property at fair value, except in cases where the
exemptions under PAS 40 applies.
PAS 23
● Changes in fair values are recognized in profit or loss. BORROWING COSTS
● Depreciable assets classified as investment property
measured under fair value model are not Core principle
depreciated. “Borrowing costs that are directly attributable to the
● If the fair value of an item of investment property acquisition, construction or production of a qualifying
cannot be determined reliably on initial recognition, asset form part of the cost of that asset. Other
such item is subsequently measured under the cost
borrowing costs are recognized as an expense.” (PAS
model.
23.1)
Cost model
After initial recognition, an entity that chooses the cost model Borrowing costs
shall measure all of its investment property at cost less any Borrowing costs are interest and other costs incurred by
accumulated depreciation and impairment losses in an entity in connection with the borrowing of funds.
accordance with PAS 16 Property, Plant, and Equipment. Borrowing costs may include:
1. interest expense on financial liabilities or lease
Transfers liabilities computed using the effective interest
Transfers to, or from, investment property shall be made when,
method
and only when, there is a change in use, evidenced by:
2. Exchange differences arising from foreign
a. Commencement of owner-occupation, for a transfer
from investment property to owner-occupied property;
currency borrowings to the extent that they are
b. Commencement of development with a view to sale, regarded as an adjustment to interest costs.
for a transfer from investment property to inventories;
c. End of owner-occupation, for a transfer from Qualifying asset
owner-occupied property to investment property; or Qualifying asset is an asset that necessarily takes a
d. Commencement of an operating lease to another substantial period of time to get ready for its intended
party, for a transfer from inventories to investment
property.
use or sale. Depending on the circumstances, any of the
following may be qualifying assets:
a. Inventories
b. Manufacturing plants
c. Power generation facilities
d. Intangible assets
e. Investment properties measured under cost
model
The following are not qualifying assets
a. Financial assets, and inventories that are
manufactured, or otherwise produced, over a
short period of time.
b. Assets that are ready for their intended use or
sale when acquired are not qualifying assets.
c. Assets that are routinely manufactured or
otherwise produced in large quantities on a
repetitive basis.
d. assets measured at fair value.
Capitalization rate %
Average expenditure on the asset ₱ xx
Multiply by: Capitalization rat %
Borrowing cost that may be
eligible for capitalization ₱ xx
The amount computed in the formula above shall be
compared with the actual borrowing costs incurred
during the period. The amount to be capitalized is the
lower amount.
Financial statement presentation
Qualifying assets are not segregated from other assets
in the financial statements. They are presented as
regular assets under their normal classification as
provided under other standards.

Commencement of capitalization
The capitalization of borrowing costs as part of the cost
of a qualifying asset commences on the date when all of
the following conditions are met:
a. The entity incurs expenditures for the asset;
b. The entity incurs borrowing costs; and
c. It undertakes activities that are necessary to
prepare the asset for its intended use or sale.

Suspension of capitalization
Capitalization of borrowing costs shall be suspended
during extended periods of suspension of active
development of a qualifying asset.

Cessation of capitalization
An entity shall cease capitalizing borrowing costs
when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale
are complete.

Determining borrowing costs eligible for

capitalization
Qualifying assets financed through specific borrowing
Interest expense on specific borrowing ₱ xx
Less: Investment income
earned on specific borrowing xx
Borrowing cost eligible for capitalization ₱xx

Determining borrowing costs eligible for

capitalization
Qualifying assets financed through General borrowing
Total interest expense on general borrowing ₱ xx
Divide by: Total general borrowings xx
 Essential criteria in the definition of intangible assets
1. Identifiability – separable or arises from
contractual rights
2. Control – power to obtain (or restrict others from
obtaining) the economic benefits from an asset.
3. Future economic benefits – may include revenue
from the sale of products or services, cost
savings, or other benefits resulting from the use
of the asset by the entity.

Recognition
An intangible asset shall be recognized if management
can demonstrate that:
1. The item meets the definition of intangible asset;
2. It is probable that the expected future economic
benefits will flow to the entity; and
3. The cost of the asset can be measured reliably.

Initial measurement
An intangible asset shall be measured initially at cost.
Measurement of cost depends on how the intangible
asset is acquired. Intangible assets may be acquired
through:
1. Separate acquisition
2. Acquisition as part of a business combination
3. Acquisition by way of a government grant
4. Exchanges of assets
5. Internal generation

Separate acquisition
The cost of a separately acquired intangible asset
comprises:
1. Its purchase price, including import duties and
non-refundable purchase taxes, after deducting
trade discounts and rebates; and
2. Any directly attributable cost of preparing the
asset for its intended use.

Acquisition as part of a business combination

The cost of intangible asset acquired in a business
PAS 38
combination is its fair value at the acquisition date.
Intangible Assets

Acquisition by way of a government grant

Intangible assets
Intangible assets acquired by way of government grant
An intangible asset is an identifiable non-monetary asset
may be recorded at either:
without physical substance.
1. fair value
2. alternatively, at nominal amount or zero, plus
Goodwill acquired in a business combination is outside
direct costs incurred in preparing the asset for its
the scope of PAS 38 because it is unidentifiable.
intended use
Goodwill is accounted for under PFRS 3 Business
Combinations and PAS 36 Impairment of Assets.
Exchanges of assets
If the exchange has commercial substance, the
intangible asset is initially recognized using the following
order of priority:
a. Fair value of the asset Given up (Plus cash Paid or
minus cash received)
b. Fair value of the asset Received
c. Carrying amount of the asset Given up (Plus cash
Paid or minus cash received)
If the exchange has lacks commercial substance, the
intangible asset is initially recognized using (c) above.
An exchange transaction has a commercial substance if
the expected future cash flows from the asset received
significantly differ from those of the asset given up.
Internally generated intangible assets
The costs of self-creating an intangible asset are
classified into:
a. Research costs – include costs of searching new
knowledge and identifying and selecting possible
alternatives.
b. Development costs – include costs of designing
from selected alternative and using knowledge
gained from research.
If an entity cannot identify in which phase a cost is
incurred, the cost is regarded as incurred in research
phase.
R&D Costs
1. Costs incurred in research phase are expensed
immediately.
2. Costs incurred in development phase are
expensed immediately, unless they meet all of the
following conditions for capitalization:
(1) Technical feasibility,
(2) Intention to complete,
(3) Ability to use or sell,
(4) Probable economic benefits,
(5) Availability of adequate resources, and
(6) Measured reliably.
The following are not R&D expenses but rather regular
expenses.
a. Costs incurred during commercial production:
● Trouble-shooting during commercial production
● Periodic or routine design changes to existing
products
● Modification of design for a specific customer
● Design, construction and operation of plant that
is feasible for commercial production
● Engineering follow through in an early phase of
commercial production
● Quality control during commercial production
b. Advertising and other marketing expenses
c. Training costs
(HINT: R&D expense relates to something that is still in
the process of being invented. It does not relate to
periodic changes to an existing product . The following
terms generally indicate that a cost is not an R&D
expense: ‘commercial,’ ‘customer,’ ‘advertising’ and
‘market’.)
Items of PPE used in R&D activities
If the item of PPE can be used in various R&D activities
or other purposes, the cost of the PPE is capitalized and
depreciated. The amount of depreciation is included as
R&D expense.
If the item of PPE is can only be used on one specific
R&D project, the cost of the PPE is expensed
immediately in its entirety as R&D expense.
Items not recognized as intangible assets
The cost of internally generated brands, mastheads,
publishing titles, customer lists, goodwill and items
similar in substance are expensed when incurred.
Subsequent expenditure
Subsequent expenditures on an intangible asset are
generally recognized as expense.
Reinstatement of costs in subsequent period
Expenditure on an intangible item that was initially
recognized as an expense shall not be recognized as part
of the cost of an intangible asset at a later date.
Measurement after recognition
After initial recognition, an entity shall choose as its
accounting policy either the
a. Cost model, or
b. Revaluation model – applicable only if the intangible
asset has an active market.
Amortization
Intangible assets with finite useful life are amortized
over the shorter of the asset’s useful life and legal life.
Intangible assets with indefinite useful life are not
amortized but tested for impairment at least annually.
The default method of amortization is the straight-line
method.
 PFRS 3
BUSINESS COMBINATIONS
Definition of a Business Combination
A business combination is “a transaction or other event
in which an acquirer obtains control of one or more
businesses.” (PFRS 3)
Control
An investor controls an investee when the investor is
exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to
affect those returns through its power over the investee.
Control is normally presumed to exist when the
ownership interest acquired in the voting rights of the
acquiree is more than 50% (or 51% or more).
Control may exist even if the acquirer holds less than
50% interest in the voting rights of acquiree, such as in
the following cases:
1. The acquirer has the power to appoint or remove
the majority of the board of directors of the
acquiree; or
2. The acquirer has the power to cast the majority
of votes at board meetings or equivalent bodies
within the acquiree; or
3. The acquirer has power over more than half of
the voting rights of the acquiree because of an
agreement with other investors; or
4. The acquirer has power to control the financial
and operating policies of the acquiree because of
a law or an agreement.
Accounting for business combinations
Business combinations are accounted for using the
acquisition method. This method requires the following:
1. Identifying the acquirer;
2. Determining the acquisition date; and
3. Recognizing and measuring goodwill. This
requires recognizing and measuring the following:
a. Consideration transferred
b. Non-controlling interest in the acquiree
c. Previously held equity interest in the
acquiree
d. Identifiable assets acquired and liabilities
assumed on the business combination.
Identifying the acquirer
The acquirer is the entity that obtains control of the
acquiree. The acquiree is the business that the acquirer
obtains control of in a business combination.
The acquirer is normally the entity that:
a. Transfers cash or other assets and incurs
liabilities;
b. Issues its equity interests (except in reverse
acquisitions);
c. Receives the largest portion of the voting rights;
d. Has the ability to elect or appoint or to remove a
majority ;
e. Dominates the management of the combined
entity;
f. Significantly larger of the combining entities;
g. Initiated the combination
Determining the acquisition date
The acquisition date is the date on which the acquirer
obtains control of the acquiree.
Recognizing and measuring goodwill
Consideration transferred xx
Non-controlling interest in the acquiree (NCI) xx
Previously held equity interest in the acquiree xx
Total xx
Less: Fair value of net identifiable assets acquired (xx)
Goodwill / (Gain on a bargain purchase) xx
On acquisition date, the acquirer recognizes a resulting:
a. Goodwill as an asset.
b. Gain on a bargain purchase as gain in profit or
loss.
Consideration transferred
The consideration transferred in a business combination
is measured at fair value.
Examples of potential forms of consideration include:
1. Cash,
2. Other assets,
3. A business or a subsidiary of the acquirer,
 4. Contingent consideration,
5. Ordinary or preference equity instruments,
options, warrants and member interests of
mutual entities.

Acquisition-related costs
Acquisition-related costs are costs the acquirer incurs to
effect a business combination.

Acquisition-related costs are recognized as expenses in

the periods in which they are incurred, except for the
following:
a. Costs to issue debt securities measured at
amortized cost – included in the initial
measurement of the resulting financial liability.
b. Costs to issue equity securities – are accounted
for as deduction from share premium. If share
premium is insufficient, the issue costs are
deducted from retained earnings.

Non-controlling interest (NCI)

Non-controlling interest (NCI) is the equity in a
subsidiary not attributable, directly or indirectly, to a
parent.
NCI is measured either at:
a. Fair value, or
b. The NCI’s proportionate share of the acquiree’s
identifiable net assets.

Previously held equity interest in the acquiree

Previously held equity interest in the acquiree pertains to
any interest held by the acquirer before the business
combination.

Net identifiable assets acquired

On acquisition date, the acquirer shall recognize,
separately from goodwill, the identifiable assets
acquired, the liabilities assumed and any non-controlling
interest in the acquiree.

Any unidentifiable asset of the acquiree (e.g., any

recorded goodwill by the acquiree) shall not be
recognized.
The identifiable assets acquired and the liabilities
assumed are measured at their acquisition-date fair
values.