PAS 23 - BORROWING COSTS Financial statement presentation
“Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the
cost of that asset. Other borrowing costs are recognized as an
expense.” (PAS 23.1)
Borrowing costs are interest and other costs incurred by an
entity in connection with the borrowing of funds. Borrowing
costs may include:
1. interest expense on financial liabilities or lease
liabilities computed using the effective interest method
2. Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs
Qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended 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.
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
1. 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
2.Qualifying assets financed through General borrowing
Total interest expense on general borrowings ₱ xx
Divide by: Total general borrowings xx
Capitalization rate %
Average expenditure on the asset ₱ xx
Multiply by: Capitalization rate %
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.
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.
PAS 19 - EMPLOYEE BENEFITS
Employee benefits are “all forms of consideration given by an
entity in exchange for service rendered by employees.” (PAS 19.8)
Four categories of employee benefits under PAS 19
1. Short-term employee benefits. Short-term employee
benefits are employee benefits (other than termination
benefits) that are due to be settled within 12 months
after the end of the period in which the employees
render the related service.
2. Post-employment benefits
3. Other long-term employee benefits
4. Termination benefits.
When an employee has rendered service to an entity during an
accounting period, the entity shall recognize the undiscounted
amount of short-term employee benefits expected to be paid in
exchange for that service:
1. as a liability (accrued expense), after deducting any
amount already paid.
2. as an asset (prepaid expense) if the amount paid is in
excess of the undiscounted amount of the benefits
incurred; provided, the prepayment will lead to a
reduction in future payments or a cash refund; and
3. as an expense, unless the employee benefit forms part
of the cost of an asset, e.g., as part of the cost of
inventories or property, plant and equipment.
Short-term compensated absences
Accumulating compensated absences are those that are carried
forward and can be used in future periods if the current period’s
entitlement is not used in full. Accumulating compensated
absences may either be
1. Vesting – wherein employees are entitled to a cash
payment for unused entitlement on leaving the entity ;
or
2. Non-vesting - wherein employees are not entitled to a
cash payment for unused entitlement on leaving the
entity
Non-accumulating compensated absences are those that are not
carried forward. No liability or expense is recognized until the
absences occur, because employee service does not increase the
amount of the benefit.
Post-employment benefits are employee benefits (other than
termination benefits) that are payable after the completion of
employment. Post-employment benefit plans are classified as
either:
1. Defined contribution plans
2. Defined benefit plans
Defined contribution plan vs Defined benefit plan
Other relevant terms b. rates of employee turnover, disability and early
retirement
c. the proportion of plan members with dependents who
will be eligible for benefits
d. claim rates under medical plans
Financial assumptions, dealing with items such as:
a. the discount rate
b. future salary and benefit levels
c. future medical costs, if any, including cost of
Accounting for defined contribution plan
administering claims and payments
The accounting for defined contribution plans is straightforward
d. the expected rate of return on plan assets
because the reporting entity’s obligation for each period is
Actuarial assumption – Discount rate
determined by the amounts to be contributed for that period.
The rate used to discount post-employment benefit obligations
Consequently, no actuarial assumptions are required to
shall be determined by reference to market yields at the end of
measure the obligation or the expense and there is no possibility
the reporting period on high quality corporate bonds.
of any actuarial gain or loss.
In countries where there is no deep market in such bonds, the
market yields at the end of the reporting period on government
Accounting for Defined benefit plan
bonds shall be used.
The accounting for defined benefit plans is complex because
Other long-term employee benefits are employee benefits (other
actuarial assumptions are required to measure the obligation
than post-employment benefits and termination benefits) that
and the expense and there is a possibility of actuarial gains and
are due to be settled beyond 12 months after the end of the
losses.
period in which the employees render the related service.
Obligations are measured on a discounted basis.
Other long-term employee benefits are accounted for using the
Step #1: Determine the deficit or surplus
procedures applicable for a defined benefit plan. However, all of
(Deficit) Surplus = FVPA – PV of DBO
the components of the net benefit cost are recognized in profit or
Step #2: Determine the Net defined benefit liability (asset)
loss.
- If there is a deficit, the deficit is the Net defined benefit
liability.
Termination benefits are employee benefits provided in
- If there is a surplus, the Net defined benefit asset is the
exchange for the termination of an employee’s employment as a
lower of the surplus and the asset ceiling.
result of either:
The asset ceiling is the present value of any economic benefits
1.an entity’s decision to terminate an employee’s employment
available in the form of refunds from the plan or reductions in
before the normal retirement date; or
future contributions to the plan.
2.an employee’s decision to accept an entity’s offer of benefits in
Set #3: Determine the defined benefit cost
exchange for the termination of employment.
Measurement
Termination benefits are initially and subsequently recognized in
accordance with the nature of the employee benefit.
a. If the termination benefits are payable within 12
months, the entity shall account for the termination
benefits similarly with short-term employee benefits.
b. If the termination benefits are payable beyond 12
months, the entity shall account for the termination
benefits similarly with other long-term benefits.
c. If the termination benefits are, in substance,
enhancement to post-employment benefits, the entity
shall account for the benefits as post-employment
1. Current service cost - is the increase in the present value of a benefits.
defined benefit obligation resulting from employee service in the
current period. PAS 12 - INCOME TAXES
2. Past service cost - is the change in the present value of the Accounting profit vs. Taxable profit
defined benefit obligation resulting from a plan amendment or
curtailment.
3. Gain or loss on settlement – the difference between the
present value of the defined benefit obligation and the settlement
price.
4. Interest cost on the defined benefit obligation – is the
increase during a period in the present value of a defined benefit
obligation which arises because the benefits are one period closer
to settlement.
The varying treatments of economic activities between the PFRSs
5. Actuarial gains and losses – are changes in the present value
and tax laws result to permanent and temporary differences.
of the defined benefit obligation resulting from experience
Permanent differences
adjustments and the effects of changes in actuarial assumptions.
Permanent differences are those that do not have future tax
Actuarial assumptions
consequences.
Actuarial assumptions are an entity’s best estimates of the
Examples:
variables that will determine the ultimate cost of providing
a. Interest income on government bonds and treasury bills
post-employment benefits.
b. Interest income on bank deposits
Demographic assumptions about the future characteristics of
c. Dividend income
employees who are eligible for benefits. Demographic
d. Fines, surcharges, and penalties arising from violation
assumptions deal with matters such as:
of law
a. mortality, both during and after employment
 e. Life insurance premium on employees where the entity
is the irrevocable beneficiary
Temporary differences
Temporary differences are those that have future tax
consequences. Temporary differences are either:
a. Taxable temporary differences – arise, for example, when
financial income is greater than taxable income or the
carrying amount of an asset is greater than its tax base.
b. Deductible temporary differences arise in case of the
opposites of the foregoing.
Taxable temporary differences result to deferred tax liabilities
while deductible temporary differences result to deferred tax
assets.
Deferred Taxes
● If the increase in deferred tax liability exceeds the
increase in deferred tax asset, the difference is deferred
tax expense. If it is the opposite, the difference is
deferred tax income or benefit.
● A deferred tax asset is recognized only to the extent that
it is realizable.
● Deferred taxes are measured using enacted or
substantially enacted tax rates that are applicable to the
periods of their expected reversals.
•Deferred tax assets and liabilities are not discounted.
•Deferred tax asset and liabilities are presented as non-current.
PAS 38 - INTANGIBLE ASSETS
An intangible asset is an identifiable non-monetary asset
without physical substance.
Goodwill acquired in a business combination is outside the scope
of PAS 38 because it is unidentifiable. Goodwill is accounted for
under PFRS 3 Business Combinations and PAS 36 Impairment of
Assets.
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 combination is
its fair value at the acquisition date.
Acquisition by way of government grant
Intangible assets acquired by way of government grant may be
recorded at either:
1. fair value
2. alternatively, at nominal amount or zero, plus direct
costs incurred in preparing the asset for its intended
use
Exchange 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 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 the research phase are expensed
immediately.
2. Costs incurred in the 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:
I. Trouble-shooting during commercial production
Ii. Periodic or routine design changes to existing products
Iii .Modification of design for a specific customer
Iv. Design, construction and operation of plant that is feasible for
commercial production
V. Engineering follow through in an early phase of commercial
production
Vi. 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 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.
PAS 36 - IMPAIRMENT OF ASSETS
Core Principle
If the carrying amount of an asset is greater than
its recoverable amount, the asset is impaired. The excess is
impairment loss.
Computation of Impairment loss
Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx
•Recoverable amount is the amount to be recovered through
use or sale of an asset. It is the higher of an asset’s:
a. Fair value less costs of disposal, and
b. Value in use
Value in use is the present value of the future cash flows
expected to be derived from an asset or cash-generating unit.
Identifying an asset that may be impaired
● An entity shall assess at the end of each reporting
period whether there is any indication that an asset
may be impaired. If any such indication exists, the
entity shall estimate the recoverable amount of the
asset.
● If there is no indication that an asset may be
impaired, an entity is not required to estimate the
recoverable amount of the asset.
Indications of impairment
I. External sources of information
a. Significant decline in the asset’s value more than
what is expected as a result of passage of time of
normal use.
b. Significant changes in technological, market,
economic or legal environment in which the entity
operates or in the market to which an asset is
dedicated.
c. Increase in market interest rates or other market
rates of return on investments which are likely to
affect discount rates used in calculating asset’s value
in use and decrease asset’s recoverable amount
materially.
d. Carrying amount of the net assets is more than its
market capitalization.
II. Internal sources of information
a. Evidence of obsolescence or physical damage
b. Significant change with adverse effect to the entity has
taken place or will take place, which will affect
expected use of asset, e.g., discontinuance, disposal,
restructuring plans.
c. Evidence is available from internal reporting that
indicates that the economic performance of an asset
is, or will be, worse than expected.
Required testing for impairment
● The following assets are required to be tested for
impairment at least annually, whether or not there are
indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
Measuring recoverable amount
● Recoverable amount is the higher of the asset’s fair
value less costs of disposal and value in use.
● However, if there is no reason to believe that an
asset’s value in use materially exceeds its fair value
less costs of disposal, the asset’s fair value less costs of
disposal may be used as its recoverable amount. This
will often be the case for an asset that is held for
disposal.
Value in use
● Value in use is the present value of the future cash
flows expected to be derived from an asset or
cash-generating unit.
- Any residual value of the asset and disposal costs
should be included in estimating future cash inflows
and outflows.
- Cash flow projections shall cover a maximum period
of 5 years.
- Projections beyond 5 years are extrapolated.
- The discount rate to be used shall be a pre-tax rate
When making estimates of future cash flows for purposes of
computing value in use:
Exclude cash flows arising Include cash flows arising
from: from:
1. Future 1. Revenues to be
restructurings not derived from the
yet committed continuing use of
2. Improving or the asset
enhancing the 2. Day-to-day costs of
asset’s using the asset
performance 3. Any residual value
3. Income taxes of the asset and
4. Financing activities disposal costs
Recognizing and measuring an impairment loss
● Impairment loss is recognized in profit or loss, unless
the asset is carried at revalued amount, in which case
revaluation surplus is decreased first and any excess is
recognized in profit or loss. The decrease in the
revaluation surplus is recognized in other
comprehensive income.
Depreciation after impairment
● After the recognition of an impairment loss, the
depreciation (amortization) charge for the asset shall
be adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value (if
any), on a systematic basis over its remaining
useful life.
Cash-generating unit (CGU)
● Cash-generating unit (CGU) is the smallest
identifiable group of assets that generates cash
inflows that are largely independent of the cash
inflows from other assets or groups of assets.
Impairment of individual assets included in a CGU
● Assets whose recoverable amount can be determined
reliably are tested for impairment individually.
● Assets whose recoverable amount cannot be
determined reliably (e.g., assets that do not generate
their own cash flows) are included in a CGU. The
CGU is the one tested for impairment.
Allocating goodwill to CGU’s
● For purposes of impairment testing, goodwill
acquired in a business combination shall be
allocated to each of the acquirer’s CGU in the year of
business combination.
Impairment loss for a CGU
•The impairment loss on a CGU shall be allocated
1. First, to any goodwill allocated to the CGU
2. Then, to the other assets of the unit pro rata on the
basis of the carrying amount of each asset in the
unit.
Reversal of Impairment loss
RECITATION
1. Define Intangible Assets under PAS 38.
Ans: An identifiable non-monetary asset without
physical substance
2. Goodwill is an intangible asset accounted for under
PFRS 3 on Business Combination and also in PAS 36
Impairment of Assets. Why is Goodwill in Business
Combination falls outside the scope of PAS 38?
Ans: Because it is unidentifiable.
3. Enumerate the Essential Criteria in the definition of
Intangible Assets. Describe each.
Ans:
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.
4. How is an Intangible Asset Recognized in the book?
Ans: Item must meet the definition of intangible asset:
1. It is probable that expected future economic
benefits will flow to the entity
2. Cost of the asset can be measured reliably.
5. How are Intangibles initially measured?
Ans: at Cost
6. What do you mean by at Cost? What are the bases of
Cost to be used to recognize the intangibles?
Ans: 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:
•Separate acquisition
•Acquisition as part of a business combination
•Acquisition by way of a government grant
•Exchanges of assets
•Internal generation
7. Explain each manner of Acquisition.
Ans: a. Separate acquisition. Cost includes what?
Purchase price and any directly attributable cost.
Purchase price (import duties, non-refundable purchase taxes,
after deducting trade discounts and rebates) and directly
attributable cost of preparing the asset for its intended use.
b. Acquisition as part of a business combination
The cost of an intangible asset acquired in a bus combination
is its FAIR VALUE at the acquisition date.
c. By way of a government grant
Maybe recorded at either:
•Fair value
•Alternatively at a nominal amount or zero, plus direct cost
incurred in preparing the asset for its intended use.
8. When do you say that the exchange transaction has
commercial substance?
Ans: If the exchange lacks commercial value (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.
9. What are the costs of self-creating an intangible
asset?
•Research costs – include costs of searching new knowledge
and identifying and selecting possible alternatives.
•Development costs – include costs of designing from
selected alternative and using knowledge gained from
research.
10. If the entity can not identify in which phase a cost is
incurred how will it be regarded?
Ans: If an entity cannot identify in which phase a cost is
incurred, the cost is regarded as incurred in the research
phase.
11. How are Research & Development Costs ( R&D)
incurred and expensed?
Ans: Research phase - expensed immediately
Development phase - expensed immediately unless they
meet
12. What conditions for Capitalization? ( all 6 conditions)
Items of Plant, Property & Equipment (PPE) used in R&D
activities.
13. if PPEcanbe used in various R&D activities, how will
the cost of said PPE and its depreciation be treated?
Ans: 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.
14. If PPE can only be used on one specific R&D project
how will its cost be treated?
Ans: If the item of PPE 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.
15. Give examples of items that might be considered as
intangible assets :
Computer Software.
Patents.
Copyright
Motion Picture Films
Customer Lists
Franchises
Fishing Rights
16. What are the two kinds of useful. Life of an intangible
asset. How are they amortized?
Ans: Finite and Indefinite
Ans: An intangible asset with a finite useful life should be
amortized over its expected useful life. An intangible asset
with an indefinite useful life should not be amortized.