ACTIVITY SET 2F

SEMESTER 2
A.Y. 2019-2020
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

General Instruction: Identify each PAS, and define or elaborate concisely and shortly
each term or phase under each particular standard by filling up the blanks and missing
portions.

CASH AND RECEIVABLES

CASH EQUIVALENTS – short term highly liquid investment assets that are reaily
convertible into a known cash amount or sufficient close to their maturity date.
BANK overdrafts, as a rule, if material should be reported as a current liability
Exception:
1.
2.

SYSTEMS in maintaining petty cash fund:

1. Imprest petty cash system – which is characterized by daily deposit of all cash
receipts intact to the bank and making disbursement through issuance of checks.
2. Fluctuating petty cash system – is handing petty cash fund wherein expenditure,
voucher/receipts is debited directly with petty cash fund as credit.
BANK RECONCILIATION explains the difference between the book (company) balance
of cash and cash balance reported on the bank statement.
RELATED items:
1. Related to book balance
a) Deposit credited by the bank but not yet recorded by the entity (proceeds
of loans, loans collected in behalf of the entity)
b) Deduction by the bank not yet recorded by the entity (bank changes,
payment to a loan where the bank is authorized to deduct payment from
the balance of the entity, customers’ NSF checks)
 2. Related to bank balance
a) Outstanding checks
b) Deposits in transit

CHARACTERISTICS of loans and receivables:

1. Interest
2. Security
3. Risk involvement
IN CALCULATING the CA of a loan receivable, the lender adds to the principal the
current balance of all loans owned to it by borrowers cost incurred by the lender.
NOTE: Indirect loan origination cost incurred by the lender shall be expensed outright;
Loan origination fees charge to the borrower shall be deducted and classified as
unearned interest income.
IF THERE IS EVIDENCE that an impairment loos on loan receivable has bee incurred,
the amount of the loss is equal to the excess of the carrying amount of the loan
receivable over the present value of the cash flows relate to the loan.
TRADE RECEIVABLES are classified as current asset because they are collected
within the entity’s normal operating cycle.
NONTRADE RECEIVABLES are classified as current assets only if they are typically an
expectation that they will be paid within one year.
Offsetting is not allowed on receivables.
Estimation of Doubtful accounts based on CREDIT SALES focuses on the income
statement and the relationship of uncollectible accounts to sales rather that statement of
financial position.
AGING OF RECEIVABLES and PERCENTAGE OF ACCOUNTS RECEIVABLE
METHOD are methods of estimating doubtful accounts that emphasizes percentage of
sale and percentage of receivables rather that income statement.
Allowance method of estimating uncollectible accounts is in consistency with
RECEIVABLE FINANCING – method of generating cash from accounts receivable
1. Assignment – is a more formal borrowing arrangement in which specific receivables
are identified and used as security for a loan. The borrower (assignor) pledge the
specifically described receivables to a lender (assignee) and signs a promissory note. In
most cases, customer are not notified of the assignment and they make payment
directly to the assignor (non-notification basis) and the assignor remits the collection to
the assignee.
2. Factoring – is the transfer of receivable without resource, and is, therefore, an
outright sale of receivables. If the factor retain a portion of the purchase price to cover
probable sales discounts, returns, and allowance (called factor’s holdback) such amount
is changed to a receivable from factor amount.
3. Pledging – refers to the use of receivable as collateral for a loan. The only entry
required in the books would record the loan obtained from the finance company or bank
by debiting cash ( and discount on notes payable or interest expense if discounted) and
crediting notes payable for the amount of the loan.
4. Discounting – an entity is endorsing a promissory note to a bank or a financing
company, the latter advancing maturity value of the note less a charge called discount.
Because the endorsing company still has a continuing involvement on the discounted
note, the transaction does not qualify for derecognition of receivable.

PAS 2 – Inventories

INVENTORIES – are assets held for sale in the ordinary course of business in the
process of production for such sale or in the form of materials or supplies to be
consumed in the production process or in the rendering of services.
COST OF INVENTORY – cost of purchase, costs of conversion and other costs
incurred in bringing the inventory to their present location and condition.
COST OF PURCHASE – comprises the purchase price, import duties and irrecoverable
taxes, freight, handling and other costs directly attributable to the acquisition of finished
goods, materials and services
COST OF CONVERSION – includes cost directly related to the units of production such
as direct labor. It also includes a systematic allocation of fixed and variable production
overhead that is incurred in converting materials into finished goods.
FOB Shipping point – FAS ( Free Alongside), CIF (Cost, Insurance and Freight), ex-ship
Method of Measuring Inventories:
1) Gross Method – beginning inventory + purchase – revenue × (1- gross profit %) =
ending inventory
2) Net Method -
PURCHASE commitments - is a firm commitment to acquire goods or services from a
supplier. In order to lock in a particular price, and sometimes also to lock in the
production capacity of a supplier, which can be used as a defensive tool to keep
competitors from using the production capacity.
INVENTORIES shall be measured at the lower of cost and net realizable value
INVENTORIES are usually written down to net realizable value item by item; the
amount of any write down of any inventory shall be classified as component of an
expense in the period the write down or loss occurs.
RETAIL METHOD – used for convenience for measuring inventories of large number of
rapidly changing items with similar margins for which it is impracticable to use other
costing method. When using the retail method, the standard requires the use of average
cost retail
BROKER-TRADERS – those who buy or sell commodities for other or on their own
account. Their commodities are measure at fair value less cost to sell

PAS 41 – Agriculture

BIOLOGICAL ASSETS – both living animals and living plants; they are to be measured
at initial recognition and at the end of each reporting period at fair value less cost of
disposal.
AGRICULTURAL ACTIVITY – is the harvested product of an entity’s biological assets.
AGRICULTURAL PRODUCE – harvested product of an entity’s biological asset and
measured at fair value less cost of disposal at the point of harvest.
Cost to sell – commissions to brokers and dealers, levies by regulatory agencies,
transfer taxes and duties
 A gain or loss arising on the initial recognition of biological asset and from a
change in fair value les cost to sell of a biological asset shall be included in the
profit or loss for the period

PAS 16 – Property, Plant And Equipment

REQUIREMENTS to classify as Financial Instrument:

1) There must be a evidence of an ownership interest in an entity.
2) There must be at least monetary contracts between parties
 3) Financial asset to an one entity.
4) Financial liability or equity to another entity.
Equity instrument – a contract that refers to a document which serves as a legally
applicable evidence of the ownership right in a firm; residual method.
A PREFERENCE SHARE can be classified as a LIABILITY under the following
conditions:
1) Mandatory redemption at the option of the holder
2) Mandatory dividend

PAS 39 – Financial Instrument Recognition And Measurement

FINANCIAL ASSET at fair value through profit or loss include

1) Financial assets that are held for “trading” – by requirement of the standards
2) Financial assets that are “designated” on initial recognition as at fair value
through profit or loss – by designation
A FINANCIAL ASSET is classified as held for trading if:
1) Acquired or held for the purpose of setting in the short term.
2) On initial recognition, it is part of a fair value with fair value changes in profit or
loss.
3) It is derivative except for a derivative that is a recent pattern of short term profit
taking are held for trading.
AVAILABLE FOR SALE FINANCIAL ASSETS are non-derivative financial assets that:
1) Are designated as available for sale – by designation.
2) Are not classified as financial assets at fair value through profit or loss, held to
maturity investments and loans and receivable – by residual definition
Characteristics of financial assets classified as HELD TO MATURITY:
1) They have no maturity dates, and so cannot be held to maturity.
2) They are quoted in an maturity or the asset’s call date that change in the market
3) The holder has demonstrated a fixed maturity, and for which an entity has both
intention and ability to hold them to maturity
TRANSACTION costs directly attributable to the acquisition of financial assets and
issue of financial liabilities include:
1) Transaction price is the fair value of the consideration given or received.
 2) The fair value of a financial instrument on initial recognition is the transaction
price.
3) The accounting treatment of transaction costs depends on the subsequent
measurement of the financial asset or financial liability.
 When an entity seller/reclassifies more than an insignificant amount of the held to
maturity investments prior to maturity, such as sales or reclassifications will
disqualify the entity from using the held to maturity classification during the
current year and in the next two years.
Characteristics of a derivative:
1) Its value changes in response to a change in price of, or index on a specified
underlying financial or non-financial item or other variable.
2) It required no, or comparatively little initial investment.
3) It is to be settled at a future date.
FORWARD contract – is an agreement between two parties to trade a specific quantity
of an asset for a pre-specified price at a specific date in the future.
FUTURE contract – is an agreement to buy or sell an agreed upon quantity of an
underlying asset, at a specified date, for a stated price.
OPTION – is a financial contract that give an investor the right, but not the obligation, to
either buy or sell an asset at a pre-determined price (known as the strike price) by a
specified date.
EMBEDDED derivative – requires that some portion of the contract’s cash flows be
modified in relation to changes in a variable, such as an interest rate, commodity price,
credit rating, or foreign exchange rate.
Embedded derivative are “bifurcated” or accounted for separately when:
a) The host contract
b) The balance sheet at fair value
c) With any changes in fair value

PAS 28 – Investment In Associates

ASSOCIATE – an entity over which the investor has significant influence.

SIGNIFICANT influence – is the power to participate in the financial and operating
policy decisions of the associate but not control or joint control over those policies.
EQUITY method in recording investment in associate:
1) Initially recorded at cost.
 2) Increased or decreased by the investor’s share of the loss of the investee.
3) The investor’s share of the profit or loss of the investee is recognized in the
investment income.
4) Distribution received from the investee the cash dividend amount from the
carrying amount of the investment.

 If the investor ceases to have significant influence over an associate the

investments should be accounted for in accordance with PAS 39 either as non-
marketable securities or available for sale security.

PAS 40 – Investment Property

INVESTMENT property – is defined as property land or building or part of a building or

both held by an owner or by the lessee under a finance lease to earn rentals or for
capital appreciation or both.
Investment property shall be measured at:
1) Initially – at its, cost transaction costs shall be included in the initial
measurement.
2) Subsequent – either of the following models as the accounting policy and shall
apply that policy.
WHEN the entity uses the COST model, transfer between investment property, owner
occupied property and inventory shall be accounted for at carrying amount.
A transfer from investment property CARRIED AT FAIR VALUE to owner-occupied
property shall be accounted for at fair value which becomes the deemed cost

PAS 16 – Property, Plant And Equipment

PROPERTY, PLANT AND EQUIPMENT – tangible assets held for use in production or
supply of goods or services, for rental to others, or for administrative purposes and
expected to be used during more than ore reporting period.
SOURCES of Cash Flows:
1) Operation
2) Investing
3) Financing
CARRYING AMOUNT – is the recorded cost of an asset, net of any accumulated
depreciation or accumulated impairment losses.
COST of PPE – purchase price, import duties and not refundable purchase taxes, any
cost directly attributable in bringing the asset to the location and condition for its
intended use
EXCHANGE w/ commercial substance – when it is expected that the future cash flows
of a business will change as a result of the transaction.
EXCHANGE w/o commercial substance – CA of the asset given up; no gain (loss)
recognized
DEPRECIATION – of an asset begins when it is available for use, meaning, when the
asset is in the location and condition necessary for the intended use by management.
RESIDUAL VALUE – is the estimated net amounted currently obtainable if the asset is
at the end of the useful life.
USEFUL LIFE – is either the period over which an asset is expected to be available for
use by the entity, or the number of production or similar units expected to be obtained
from the asset by the entity.
BETTERMENT – expenditure made to a fixed asset in order to extend its useful life or
increase its value.
ADDITION – expenditure made for the cost involved for adding new assets or improving
existing assets within a business.
REPLACEMENT – expenditure made to increase in the fixed asset of the entity the
accounting entry.
MAINTAINANCE – expenditure made to renewing, replacing, rehabilitating, refurbishing
or restoring assets to ensure that services continue at the same level.
INSIGNIFICANT changes in fair value – revaluation are necessary only every 3-5 years
SIGNIFICANT changes in fair value – revaluation are necessary annually
ACCUMULATED Depreciation on the date of revaluation are treated either as:
1) Proportionate Method – records the assets and liabilities of a joint venture on a
company’s balance sheet in proportion to the percentage of participation a
company maintains in the venture.
2) Elimination Method – allow the presentation of all account balance as if the
parent and its subsidiaries were a single economic enterprise.
CHANGES IN CARRYING AMOUNT due to REVALUATION:
  Increase shall be recognized in Revaluation Surplus as component of OCI and in
P/L to the extent that if reverses a revaluation decrease previously recognized
 Decrease shall be recognized in P/L after deducting any revaluation surplus
previously recognized

PAS 20 – Government Grant

GOVERNMENT GRANT – as assistance by government in the form of transfer of

resources to an entity in return for part or future companies with certain condition
relating to the operating activities of the entity.
Recognition:
 Entity will comply with the conditions attaching to them
 The grant will be received.
 Should be recognized as income over the period as the relevant expense on a
systematic and rational basis
GRANT related to assets – primary condition is that an entity qualifying for them should
purchase, construct, or otherwise acquire long-term assets; accounting treatment would
be either to income over one or more periods in which the related cost is incurred.
GOVERNMENT assistance – action by a government designed to provide an economic
benefit specific to an entity or range of entities qualifying under certain criteria.
 A government grant that becomes repayable shall be accounted for as a change
in accounting estimate
 Repayment of a grant
 Related to income shall be applied first against any unamortized deferred
income set up previously, and excess is recognized immediately in P/L
 Related to an asset:
 Recorded by increasing the carrying amount of the asset or
reducing the deferred income balance by the amount repayable
 Cumulative additional depreciation that would have been
recognized to date as an expense in the absence of the grant shall
be recognized immediately as an expense