ACCTG 441 GOVERNMENT ACCOUNTING & NPOs

Chapter 07-16

CHAPTER 7 - INVENTORIES

Inventories are assets:

a. Held for sale or distribution in the ordinary course of operations (Finished goods);
b. In the process of production for sale or distribution (Work in process); or
c. In the form of materials or supplies to be consumed in the production process or distributed in the
rendering of services (Raw materials and supplies).

More specifically, the inventories of a government entity consists of the following:

a) Inventory Held for Sale (eg., medicines for sale in government pharmacies)
b) Inventory Held for Distribution (e.g., rice and other welfare goods held for distribution)
c) Inventory Held for Manufacturing (e.g., raw materials, work-in-process)
d) Inventory Held for Consumption (e.g., office supplies inventory)
e) Semi-Expendable Property - consists of machinery, equipment, furniture and fixtures and similar items
that are not capitalized as PPE because their costs are below the ₽15,000 capitalization threshold for
PPE.

Measurement:
Initial At Cost
Subsequent Goods held for sale: Lower of Cost and Net Realizable Value
Goods held for distribution: Lower of Cost and Current Replacement Cost

Cost comprises the following:

a. Purchase cost, excluding trade discounts, rebates, and ole similar deductions in purchase price.
b. Direct costs incurred in bringing the asset to its intended location and condition (e.g, freight costs,
conversion costs - such as costs of labor and production overhead for manufactured items).
Cost excludes the following:
a) Abnormal amounts of wasted materials, labor, and production overhead;
b) Selling costs; and
c) Administrative overheads
Exceptions:
a. Inventories received from non-exchange transactions (e.g, donations) are initially measured at
acquisition-date fair value.
b. b. Agricultural produce are initially measured at fair value less costs to sell at the point of harvest.
For these items, their initial measurements are deemed their costs for purposes of subsequent measurement
at the lower o cost or NRV/Current replacement cost.

Net Realizable Value (NRV) is estimated selling price less estimated costs of completion and estimated
selling/disposal costs.

Current replacement cost is the cost the entity would incur to acquire the asset on the reporting date.
Cost Formulas
a) Specific identification
b) Weighted average cost

Government entities shall use the perpetual inventory system.

Receipt and Disposition of Inventories

Receipt
1. End users prepare the Purchase Request (PR) form to request for the purchase of items not available
on stock. The PR is the basis in preparing the Purchase Order.

'End users' refer to the individuals who will actually be using the items. For example, the end users of
office supplies are those who are working in the office; the end users for cleaning materials are the
janitors.

As an internal control, only the appropriate end users are allowed to make purchase requests for the
items they need. It would be inappropriate for an office clerk to make a purchase request for
cleaning materials.

2. The authorized official prepares the Purchase Order (PO). The PO is a document issued to the supplier
when making a purchase. It indicates the specifications, quantities and agreed prices of the items being
purchased.

Recall that a canvass from at least 3 suppliers is required for purchases amounting to P1,000 and
above.

3. When the purchased items are delivered, the Property/Supply Division signs the "received" portion of
the Delivery Receipt (DR) and prepares the Inspection and Acceptance Report (IAR). The lAR will be
used by the Property Inspector in inspecting and accepting the delivered items. The Property/Supply
Division forwards the DR, IAR and PO to the Property Inspector.

4. The Property Inspector inspects the conformance of the delivered items with the specifications in both
the PO and DR and indicates the result of the inspection (i.e., acceptance or rejection) in the IAR.
Rejected deliveries will be returned to the supplier.

The Property Inspector forwards the copies of DR, IAR and PO to both the Property/ Supply Division and
Accounting Division for recording.

5. The Property/Supply Division, through the Stock Card Keeper, records the accepted deliveries in the
Stock Card (SC). The SC shows the quantities of all receipts and issuances of inventory, as well as the
available balance at any given point of time.

6. The Accounting Division records the accepted deliveries in the books of accounts and in the Supplies
Ledger Card (SLC). The SLC shows both the quantities and monetary amounts of all receipts and
issuances of inventory, as well as the available balance at any given point of time.

As an internal control, the SC (maintained by the Property/Supply Division) and SLC (maintained by the
Accounting Division) are periodically reconciled.

7. The Property/Supply Division prepares the Disbursement Voucher (DV) then forwarding, together with
supporting documents, to the Accounting Division for processing of payment.
Disposition

8. End users prepare the Requisition and Issue Slip (RIS) to request for the issuance of items available on
stock. The Head of the requesting individual shall approve the RIS. The approved RIS is then forwarded
to the Property/Supply Division.

9. The Property/Supply Division prepares the Report of Supplies and Materials Issued (RSMI). The RSMI
will be used by the Stock Card Keeper in updating the SC and the Accounting Division in journalizing the
items issued.

10. The Accounting Division records the items issued in the books of accounts and updates the SLC.

11. The following are other documents used in the disposition of inventories:
a) Waste Materials Report - prepared by the Property or Supply Custodian to report wasted
materials, such as destroyed spare parts and other spoilages.
b) Report on the Physical Count of Inventories - used in reporting the results of physical counts. It
shows the balance of inventory, as well as any shortages or overages.
c) Report of Accountability for Accountable Forms - used to report the movement and status of
accountable forms in the possession of an officer.
d) Inventory Custodian Slip - prepared when issuing ten expendable property.

Summary:
 The inventories of government entities include the following
 Inventory Held for Sale,
 Inventory Held for Distribution
 Inventory Held for Manufacturing
 Inventory Held for Consumption
 Semi-Expendable Property

 Goods held for sale are subsequently measured at the Lower of Cost and NRV while goods held for
distribution are subsequently measured at the Lower of Cost and Current replacement cost.

 The FIFO cost formula and the Periodic inventory system are not used by government entities.

Chapter 8: Agriculture

Agriculture means farming or the process of producing crops and raising livestock.

Agricultural Activity - is the management by an entity of the biological transformation and harvest of
biological assets for sale, including exchange or non-exchange transactions, or for conversion into
agricultural produce, or into additional biological assets.

Examples of agricultural activities include:

 raising livestock,
 forestry,
 annual or perennial cropping,
 cultivating orchards and plantations,
 floriculture, and
 aquaculture (including fish farming).
The following are the common features of agricultural activities:
a. Capability to change - living animals and plants are capable of biological transformation;

b. Management of change - management facilitates biological transformation by enhancing, or at least

stabilizing, conditions necessary for the process to take place. Such management distinguishes
agricultural activity from other activities. For example, harvesting from unmanaged sources (such as
ocean fishing and deforestation) is not agricultural activity; and

c. Measurement of change - the change in quality or quantity brought about by biological

transformation or hares measured and monitored as a routine management function

Biological Transformation - comprises the following processes her cause qualitative or quantitative
changes in a biological asset:
1. Asset changes through:
a) Growth - is an increase in quantity or improvement in quality of an animal or plant.
b) Procreation - is the creation of additional living animals or plants.
c) Degeneration - is a decrease in the quantity or deterioration in quality of an animal or plant. II.
2. Production of agricultural produce.

Biological Asset - is a living animal or plant

Agricultural Produce - is the harvested product of the entity's biological assets. "Harvest" is the
detachment of produce from a biological asset or the cessation of a biological assets

Products that are the result of

Biological Assets Agricultural Produce
processing after harvest
Trees in a plantation forest Felled trees Logs, lumber
Plants Harvested palay Rice
Harvested cane Sugar
Corn Corn Flour, Corn Starch
Cotton Thread, Clothing
Dairy cattle Milk Cheese
Sheep Wool Yarn/Carpet
Pigs Carcass Sausages, Cured hams
Bushes Leaf Tea, cured tobacco
Vines Grapes Wine
Fruit Trees Picked Fruit Processed fruit

Recognition

A biological asset or agricultural produce is recognized when it meets the asset recognition criteria,
including the reliable measurement of its fair value or cost.

Measurement

Biological assets are initially and subsequently measured at fair value less costs to sell. The gain or loss
arising from initial measurement and subsequent changes in fair value less costs to sell are recognized in
surplus or deficit. Biological assets whose fair value cannot be reliably determined on initial recognition are
initially measured at cost and subsequently measured at cost less accumulated depreciation and
accumulated impairment losses.
Agricultural produce is initially measured at fair value less costs to sell at the point of harvest. This will
be the deemed cost when subsequently measuring the agricultural produce using the measurement basis
for inventories or other basis.

The gain arising from the initial measurement is recognized in surplus or deficit.

Costs to Sell - are the incremental costs directly attributable to the disposal of an asset, excluding finance
costs and income taxes.

Determination of Fair Value

a. Fair value is determined as follows:

Quoted price in an active market less Transport costs = Fair value

Active Market - is a market in which all of the following conditions exist:

 the items traded in the market are homogeneous;
 willing buyers and sellers can normally be found a any time; and
 prices are available to the public.

 If there are more than one active markets, the entity shall use the price in the market expected to
be used.

 If there is no active market, the entity shall estimate the market price based on one of the following:
i. The most recent market transaction price, provided that there is no significant change in
economic circumstances between the date of that transaction and the reporting date;

ii. Market prices for similar assets with adjustment to reflect differences;

iii. Sector benchmarks, such as the value of an orchard expressed per export tray, bushel, or
hectare, and the value of cattle expressed per kilogram of meat; and

iv. Present value of expected net cash flows from the asset discounted at a current
market-determined rate, in circumstances where market-determined prices or values are not
available for a biological asset in its present condition. Estimates of cash flows exclude finance
costs, taxes, and costs of reestablishing biological assets after harvest e.g, the cost of replantine
trees in lanter anot Contract prices are irrelevant when determining fair value. , Transport costs
refer to all costs necessary in getting the asset to the market for the sale.

b. The determination of fair value may be facilitated by grouping b. biological assets or agricultural
produce according to significant tributes, e.g, by age or quality.

c. Cost may sometimes approximate fair value, particularly when:

i. Little biological transformation has taken place since initial cost incurrence (e.g, seedlings
planted immediately prior to reporting date); or
ii. The impact of the biological transformation on price is not expected to be material (e.g., the
initial growth in a 30-year pine tree plantation production cycle).

d. Biological assets attached to land (e.g., trees in a plantation forest) may not have a separate market but
an active market may exist for the combined assets (i.e., biological assets, raw land, and land
improvements) as a package. In such case, the fair value of the raw land and land improvements may be
deducted from the fair value of the combined assets to arrive at the fair value of the biological assets.
e. A biological asset that is previously measured at fair value less costs to sell shall be measured at fair
value less costs to sell until it is disposed.

Disclosures

The following are the peculiar disclosures related to agriculture:

a. The aggregate gain or loss on initial recognition of biological assets and agricultural produce and from
the change in fair value less costs to sell of biological assets.

b. Consumable and Bearer biological assets and biological assets held for sale and held for distribution at
no charge or for a nominal charge.

 Consumable Biological Assets - are those that are to harvested as agricultural produce or to be
sold distributed as biological assets.

Examples: livestock intended for production of meat, annual crops like mains and rice, and trees
being grown for lumber.

 Bearer Biological Assets - are those that are self-generating and are used repeatedly for more
than one year.

Examples: dairy cattle held for the production of milk, fruit trees, and trees from which firewood is
harvested while the tree remains.

c. Mature and immature biological assets

 Mature Biological Assets - are those that have attained harvestable specifications (for consumable
biological assets) or are able to sustain regular harvests (for bearer biological assets).

d. The amount of change in fair value less costs to sell due to physical changes and due to price changes.

Summary:

 Biological Asset - is a living animal or plant.

 Agricultural Produce - is the harvested product of the entity's biological assets. An agricultural
produce subjected to post-harvest processing is inventory.

 Biological assets are initially and subsequently measured at fair value less costs to sell. Gain or loss
arising from measurement are recognized in surplus or deficit.

 Agricultural produce is initially measured at fair value less costs to sell at the point of harvest.

 Fair value = Quoted price in an active market less Transport costs

 If there are more than one active markets, the entity shall use the price in the market expected to be
used.
Chapter 9: Investment Property

Investment Property - is land and/or building held for rentals or capital appreciation. It is not held for use
in the production or supply of goods or services, for administrative purposes, or sale in the ordinary course
of business.

Examples of investment property:

a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of
operations;
b. Land held for a currently undetermined future use;
c. A building owned by the entity (or held by the entity under a finance lease) and leased out under one or
more operating leases on a commercial basis;
d. A building that is vacant but is held to be leased out under one or more operating leases on a
commercial basis to external parties;
e. Property that is being constructed or developed for future use as investment property; and
f. Significant portion of a property that is held to earn rentals or for capital appreciation rather than to
provide services, and insignificant portion that is held for use in the production or supply of goods or
services or for administrative purposes.

The allowing are item not considered as investment property:

a) Biological assets related to agricultural activity;
b) Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources;
c) Property held for sale in the ordinary course of operations or in the process of construction or
development for such sale;
d) Property being constructed or developed on behalf of third parties,
e) Owner-occupied property, including:
i. Property held for future use as owner-occupied property;
ii. Property held for future development and subsequent use as owner-occupied property; ii. Property
occupied by employees; or
iii. Owner-occupied property awaiting disposal.
f) Property that is leased to another entity under a finance lease;
g) Property held to provide a social service and which also generates cash inflows;
h) Property held for strategic purposes; and,
i) Property held for use in the production or supply of goods or services or for administrative purposes.
(GAM for NGAs, Chapter 9, Sec. 4)

Initial Measurement

An investment property is initially measured at cost. The measurement of cost depends on the mode of
acquisition.

Modes of Acquisition
1. Cash purchase - the cost of an investment property acquired through cash purchase comprises the
purchase price and any direct costs necessary in bringing the asset to its intended condition, e.g.,
professional fees for legal services and property transfer taxes.

2. Installment purchase - the cost of an investment property acquired through installment purchase is the
cash price equivalent. The difference between this amount and the total payments is recognized as
interest expense over the period of credit.

3. Non-exchange transaction - the cost of an investment property acquired through a non-exchange

transaction is the fair value has at the acquisition date.
4. Self-construction - the cost of a self-constructed investment! property includes the costs of direct
materials, labor, and construction overhead. The cost of wasted materials, labor or other resources
incurred in constructing the property are recognized as expense.

Construction costs incurred are initially recorded in the "Construction in Progress" account pending
completion of the investment property. Upon completion, the construction costs are reclassified to the
"Investment Property"

The cost of an investment property does not include the following:

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 materials, labor or other resources incurred in constructing or
developing the property.

Subsequent Measurement

Investment properties are subsequently measured under the cost model. Under this model, investment
properties are measured at cost less accumulated depreciation and accumulated impairment losses.

The fair value model, which is available to business entities, is not allowed for government entities.

Transfers To or From Investment Property

Transfers to or from investment property shall be made only when there is a change in use, as
evidenced by the following:
a. Commencement of owner-occupation, for a transfer from investment property to owner-occupied
property;
b. End of owner-occupation, for a transfer from owner-occupied property to investment property;
c. Commencement of an operating lease (on a commercial basis) to another party, for a transfer from
inventories to investment property; or
d. Commencement of development with a view to sale, for a transfer from investment property to
inventories.

A government entity accounts for transfers to or from investment property at cost. Accordingly, no gain or
loss shall arise from the transfer, except when the transferred asset is impaired, in which case, impairment
loss shall be recognized first before making the reclassification.

Derecognition

An investment property is derecognized when it is disposed or when it is permanently withdrawn from use
and no future economic benefits or service potential is expected from its disposal.

When an investment property is derecognized, the difference between the net disposal proceeds (if any) and
its carrying amount is recognized as gain or loss in surplus or deficit.
Impairment

An asset is impaired if its carrying amount exceeds its recoverable amount. The excess represents
impairment loss which shall be recognized in surplus or deficit.

- Recoverable amount is the higher of an asset's fair value less costs to sell and value in use.

- Value in use is the present value of the estimated future cash flows expected to be derived from the
continuing use of an asset and from its disposal at the end of its useful life.

At each reporting date, an entity shall assess whether there is an indication that an asset may be impaired. If
such indication exists, the entity shall estimate the following amount of the asset. An entity shall consider the
following indications of impairment:

I. External sources of information:

a) Significant decline in the asset's market value.
b) Significant changes in technological, market, economic, ou legal environment that adversely affect
the recoverable amount of an asset.
c) Increase in market interest rates that adversely affect the discount rate used in calculating an asset's
value in use, and consequently, its recoverable amount.

I. Internal sources of information

a) Obsolescence or physical damage of an asset.
b) Significant changes in the expected use of an asset that adversely affect its recoverable amount (e.g.,
the asset becomes idle, plan to discontinue or restructure the operation to which an asset belongs,
plan to dispose of the asset earlier than expected, and reassessment of an assets useful life from
indefinite to finite).
c) Cessation of the construction of an asset before it is completed.
d) Indications that the economic performance of an asset is, or will be, worse than expected (e.g, the
maintenance costs of the asset are significantly higher than expected, cash inflows from the asset
are significantly lower than expected) based on its recoverable amount.

After impairment, depreciation charges on an asset will be based on its recoverable amount.

Cash Generating Unit

If there is an indication for impairment, recoverable amount is determined for an individual asset, except
when this is not possible, in which case the recoverable amount of the cash generating unit where the
individual asset belongs is determined.

Cash Generating Unit (CGU), is the smallest identifiable group of assets held with the primary
objective of generating a commercial return that generates cash inflows from continuing use that are
largely independent of the cash inflows from other assets or groups of assets.

An impairment loss is recognized if the CGU's carrying amount exceeds its recoverable amount. The
impairment loss is allocated to the individual assets in the CGU on a pro rata basis, based on their carrying
amounts.
In allocating an impairment loss, the carrying amount of an individual asset shall not be reduced below the
highest of:
a. Its fair value less costs to sell (if determinable);
b. Its value in use (if determinable); and
c. Zero.

Reversal of Impairment

An entity shall assess whether there is any indication that an impairment loss recognized in prior periods for
an asset may no longer exist or may have decreased. If such indication exists, the entity shall estimate the
recoverable amount of that asset.

In making the assessment, the entity shall consider the exact opposites of the indications of impairment
provided earlier.

The reversal of impairment shall not result to a carrying amount in excess of the asset’s carrying amount had
no impairment loss has been recognized in prior periods.

The reversal of impairment is recognized in surplus or deficit in the period of reversal.

Compensation from third parties

Compensation from third parties for an investment property that was impaired, lost or given up shall be
recognized in surplus or deficit when the compensation becomes receivable.

Summary:
 Investment Property is land and/or building held for rentals or capital appreciation.

 Investment property is initially measured at cost and subsequently measured at cost less accumulated
depreciation and impairment losses.

 The fair value model is not allowed for government entities.

 Transfers to or from investment property shall be made only when there is a change in use.

 A government entity accounts for transfers to or from investment property at cost. Accordingly, no gain
or loss shall arise from the transfer, except when the transferred asset is impaired.

 On derecognition of an investment property, the difference between the net disposal proceeds (if any)
and the carrying amount is recognized as gain or loss in surplus or deficit.

 An asset is impaired if its carrying amount exceeds its recoverable amount.

 Recoverable amount is the higher of an asset's fair value less costs to sell and value in use.

 The reversal of impairment shall not result to a carrying amount in excess of the asset's carrying amount
had no impairment loss been recognized in prior periods.
Chapter 10: Property, Plant & Equipment

Property, Plant and Equipment are:

a. tangible assets;
b. held for use in the production or supply of goods, services or program outputs, for rental to others, or
for administrative purposes, and not intended for resale in the ordinary course of operations; and
c. expected to be used for more than one reporting period

Recognition

An item of PPE is recognized if it meets the definition of a PPE and the recognition criteria for assets, as well
as the capitalization threshold of ₽15,000.

The 15,000 capitalization threshold is the minimum cost an item should have before it is capitalized as PPE.
This threshold is applied on a per item basis, except as follows:

a) Individual items with values below the threshold but work together as a group of assets are recognized
as PPE if the total cost of the assets as a group is ₽15,000 or more (e.g, the costs of web servers, routers,
modems, and other hardware comprising communications network are capitalized as PPE under the
‘communications network’ account.

b) Bulk acquisition of small items of PPE like library books, computer peripherals, and small items of
equipment recognized as PPE if their aggregate cost is P15,000 or more.

Items below the capitalization threshold are recognized as inventories. (i.e., Semi-Expendable Property).

Initial Measurement

PPE are initially measured at cost. The initial cost comprises the following:
a. Purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates;

b. Direct costs of bringing the asset to the location and condition necessary for it to be capable of
operating in the manner intended by management; and

c. Present value of Decommissioning and Restoration costs - Decommissioning costs refer to the costs
of dismantling or uninstalling a PPE at the end of its useful life. Restoration costs refer to the cost of
restoring the site where the PPE is previously installed. The present value of these estimated costs are
capitalized as cost of the PPE, with a corresponding credit to a liability account (i.e., 'Other Provisions').

Examples of directly attributable costs:

a) Costs of employee benefits arising directly from the construction or acquisition of PPE;
b) Costs of site preparation;
c) Initial delivery and handling costs (e.g., freight costs);
d) Installation and assembly costs;
e) Testing costs, net of disposal proceeds of samples generated during testing; and
f) Professional fees.
Examples of costs that are expensed outright:
a. Costs of opening a new facility.
b. Costs of introducing a new product or service including costs of advertising and promotional activities).
c. Costs of conducting business in a new location or with a new class of customers (including costs of staff
training).
d. Administration and other general overhead costs.

Modes of Acquisition
a) Acquisition by Purchase - acquisitions of PPE through purchase are classified as Capital Outlays (CO) in
the budget registries.

 Cash discounts, whether taken or not, are excluded from the initial measurement of an item of
PPE. A cash discount not taken is recognized as "Other Losses."

 A PPE purchased under installment basis is initially measured at the cash price equivalent.
The difference between the cash price and the installment price is amortized as interest
expense over the credit term.

 Promotional items acquired in conjunction with the purchase of PPE are accounted for as
follows:
a. If the promotional item is the same as those purchased, the total acquisition cost is
allocated to all the items acquired including the promotional item.

b. If the promotional item is different from the other items acquired, the initial cost of the
promotional item is its fair value. The purchase price, net of the fair value of the
promotional item, is allocated to the other assets acquired.

b) Acquisition by Construction - acquisitions of PPE through acquisitions of PPE through construction are
also classified as Capital Outlays (CO) in the budget registries.

Construction costs incurred are initially recorded in the "Construction in Progress" account pending
the completion of the asset. Upon completion, the construction costs are reclassified to the
appropriate PPE account.
 Acquisition through Construction Contracts awarded to contractors - the cost of PPE
acquired through a construction contract is the contract price.

 Construction by Administration (Self-construction) - the cost of a self-constructed PPE

includes the costs of direct materials, labor and other construction overheads. The cost of
wasted materials, labor or other resources incurred in constructing the property are recognized
as expense.

c) Acquisition through Exchange - the measurement of the asset acquired depends on whether the
exchange transaction has commercial substance or not.

i. With Commercial Substance - an exchange has a commercial substance if the subsequent cash
flows of the entity change as a result of the exchange. The asset received is measured using the
following order of priority:
1. Fair value of asset Given up (plus any cash paid or minus any cash received);
2. Fair value of asset Received
3. Carrying amount of asset Given up (plus any cash paid or minus any cash received)
 ii. Lacks Commercial Substance - The asset received is measured at the:
1. Carrying amount of asset Given up (plus any cash paid or minus any cash received).

No gain or loss shall arise if the asset received is measured at the carrying amount of the asset given
up (plus any cash paid or minus any cash received).

d) Acquisition through Non-Exchange Transaction - The asset acquired in a non-exchange transaction

(e.g., donation, grant) is initially measured at its fair value at the acquisition date.

Those received without condition are recognized immediately as income (i.e., 'Income from Grants and
Donations in Kind').

Those with condition are initially recognized as liability (i.e., 'Other Deferred Credits) and
subsequently recognized as income when the condition is met.

e) Acquisition through Intra-agency or Inter-agency Transfers - The asset acquired from either intra or
inter-agency transfer is measured at the carrying amount of the asset received.

Intra-agency transfers are transfers within the same agency (eg., from Central Office to a Regional
Office or Operating Unit, and vice versa.

Inter-agency transfers are transfers between different agencies (e.g., from BIR to DPWH).

Subsequent Expenditures on recognized PPE

Capitalization of costs ceases when the PPE is in the location ad condition necessary for it to be capable of
operating in the mane intended by management. Therefore, costs incurred in using a redeploying a PPE are
not capitalized.

The following subsequent expenditures on PPE are recognized as expenses:

a. Costs incurred while an item capable of operating in the manner intended by management has yet to be
brought into use or is operated at less than full capacity.
b. Initial operating losses, such as those incurred while demand for the item's output builds up.
c. Costs of relocating or reorganizing part or all of the entity's operations.

As a general rule, subsequent expenditures on recognized PPE are expensed. Subsequent expenditures are
capitalized only when it is clear that they meet the recognition criteria for PPE, including the ₽15,000
capitalization threshold.

The GAM for NGAs provides the following guidelines when accounting for subsequent expenditures on
recognized PPE:

a) Repairs & Maintenance - these are classified into

1. Minor repairs costs of day-to-day servicing of an item of PPE, necessary to maintain its operating
capability. These are charged as expenses.
2. Major repairs - are considered 'betterments' and are capitalized.

If it is not clear that a cost is a major repair, it shall be treated as expense.

b) Replacement costs - the cost of replacing a part of an item of PPE is capitalized. The carrying amount
of the replaced part is derecognized and recognized as loss on derecognition.
 If the carrying amount of the replaced part cannot be determined, the cost of the replacement part is
used as an indication of what the cost of the replaced part was at the time it was acquired or
constructed.

c) Spare parts and servicing equipment - Minor spare parts are recognized as inventory and charged as
expense when consumed. Major spare parts and stand-by equipment are recognized as PPE when they
meet the recognition criteria, e.g., they are expected to be used over more than one period. Spare parts
and servicing equipment that can only be used in conjunction with an item of PPE are accounted for as
PPE.

d) Betterments - are enhancements to the future economic benefits or service potential of a PPE, such as:
a. an increase in the previously assessed physical output or service capacity;
b. a reduction in associated operating costs
c. an extension of the estimated useful life
d. an improvement in the quality of output.

Costs of betterments are capitalized (if they meet the recognition criteria for PPE) and are subsequently
depreciated as follows:
i. Over the remaining useful life, is the betterment increases the service potential of the asset
without extending its useful life
ii. Over the extended useful life, if the betterment extends the useful life of the asset. The extended
period shall not exceed the original estimate of useful life of the asset.

If the betterment involves the replacement of an asset, the replacement is accounted for under b' above.
If it is not clear that a cost is a betterment, it shall be treated as expense.

e) Additions and Rearrangements

Additions are modifications which increase the physical size or function of the PPE. An addition can
be:
i. a new unit that is physically distinct from the old unit (e.g. a wing of a building); or
ii. an expansion, extension or enlargement of the old unit (e.g, a new floor to a building).

The cost of an addition that is a new unit is depreciated over its own useful life while an expansion cost
is depreciated over the shorter of its useful life and the remaining life of the PPE of which it is part.

Rearrangement is the relocation or reinstallation of an asset which proves to be less efficient in its
original location. Rearrangement costs are capitalized and depreciated over the remaining life of the
related asset. The carrying amount of the original installation cost is derecognized and charged as loss.
(GAM for NGAs, Chapter 10, Sec. 26)

An entity should be very careful when assessing it rearrangement costs qualify for capitalization as GAM
for NGAS, Chapter 10, Sec. 9 states the following: "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. Therefore, costs incurred in using or redeploying an
item are not included in the carrying amount of that item.
Subsequent Measurement

PPE are subsequently measured using the cost model. Under this model, an item of PE is measured at
its cost less any accumulated depreciation and any accumulated impairment losses.
 Depreciation - is the systematic allocation of the depreciable amount of an asset over its useful life.
 Depreciable Amount - is the cost of an asset, or other amount substituted for cost, less its residual
value.
 Residual Value - is the amount the entity would currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset were already of the age and in the condition
expected at the end of its useful life.

Depreciation is recognized as expense unless it forms part of the carrying amount of another asset (e.g.,
depreciation of a factory equipment is included in the carrying amount of inventory).

Guidelines in depreciating items of PPE:

a. The three factors considered when determining depreciation are:
1. initial cost
2. useful life
3. residual value

b. All items of PPE shall be depreciated, except land and heritage assets.

c. Depreciation begins when the asset is available for its intended use. For simplicity, if a PPE becomes
available for its intended use:
i. On or before the 15th of the month - depreciation is computed at the beginning of that month.
ii. After the 15th of the month - depreciation is computed at the beginning of the following
month.

d. Depreciation ceases when the asset is derecognized or fully depreciated. Depreciation does not
cease when the asset becomes idle or retired from active use and held for disposal.

e. The straight line method of depreciation shall be used unless another method is more appropriate.
That method is applied consistently from period to period unless there is a change in the expected
pattern of consumption of those future economic benefits or service potential.

f. The estimation of the useful life of an asset is a matter of judgment, based on the entity's
experience with similar asset. As a guideline, PPE shall be depreciated over the following life spans:

Property, Plant & Equipment Estimated Useful Life

Infrastructure Assets 20 to 50 years
Buildings & Other Structures 30 to 50 years
Machinery & Equipment 5 to 15 years
Transportation Equipment
Motor Vehicles 5 to 15 years
Military Vehicles 3 to 20 years
Trains 10 to 20 years
Aircrafts and Ground Equipment 10 to 20 years
Watercrafts 10 to 25 years
Furniture, Fixtures and Books 2 to 15 years
Leased assets, excluding land Shorter of the assets’ useful life and lease term, including
extension period if renewal is expected
Leased Assets Improvements Shorter of the assets’ useful life and lease term, including
 extension period if renewal is expected
Service Concession Assets Shorter of the asset’s useful life and term of service concession
arrangement, including extension period if renewal is expected
Land Improvements Over the useful life of the asset to which the improvement was
made of the useful life of the improvement if significantly shorter
Others 2 to 15 years

g. Residual value shall be at least 5% of cost, unless an entity determines a more appropriate
estimate, subject to the approval of COA.

h. The residual value and the useful life of an asset shall be reviewed at least at each annual
reporting date and, if expectations differ from previous estimates, the changes) shall be accounted
for as a change in an accounting estimate

i. Depreciation shall be recognized on a monthly basis.

j. Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall
be recorded & depreciated separately.

For example, each part of an aircraft (i.e. its engines, passenger seats, and other parts) shall be
depreciated separately. Each part shall also be assigned a 5% residual value based on the cost of
each part.

Impairment

A PPE is impaired if its carrying amount exceeds its recoverable service amount or recoverable amount.

Recoverable service amount - is the higher of a non cash-generating asset's fair value less costs to sell and
its value in use.

At each reporting date, an entity shall assess whether there is an indication that an asset may be impaired. If
such indication exists, the entity shall estimate the recoverable amount of the asset.

An entity shall consider the following indications of impairment:

1. External sources of information:
a) Cessation, or near cessation, of the demand for services provided by the asset.
b) Significant long-term changes with an adverse effect on the entity have taken place during the
period, or will take place in the near future, in the technological, legal, or government policy
environment in which the entity operates

2. Internal sources of information:

a) Physical damage of an asset.
b) Significant changes in the expected use of an asset that adversely affect its recoverable amount (e.g.
the asset becomes idle, plan to discontinue or restructure the operation to which an asset belongs,
plan to dispose of the asset earlier than expected, and reassessment of an asset's useful life from
indefinite to finite).
c) Cessation of the construction of an asset before it is completed.
d) Indications that the service performance of an asset is, or will be, significantly worse than expected.
Computation of Value in Use
 Value in use of a cash generating asset - the present value of the estimated future cash flows
expected to be derived from the continuing use of an asset and from its disposal at the end of its useful
life.
 Value in use of a non-cash generating asset - the present value of the asset's remaining service
potential.

Value in use can be computed using one of the following methods:

a. Depreciated Replacement Cost Approach

Under this approach, value in use is equal to the asset's replacement cost adjusted for depreciation to
reflect the asset's used condition.

Replacement cost is the cost of replacing or reproducing the asset, whichever is lower.

When determining the replacement cost of an asset, any overdesign or overcapacity of that asset is
ignored. Overdesign refers to features that are unnecessary for the goods or services the asset provides
services the asset provides.

b. Restoration Cost Approach

Under this approach, value in use is equal to the asset’s depreciated replacement cost or depreciated
reproduction cost (whichever is lower) minus estimated restoration cost.

Restoration cost is the cost of restoring the service potential of an asset to its pre-impaired level.

c. Service Units Approach

Under this approach, value in use is equal to the assets depreciated replacement cost or depreciated
reproduction cost (whichever is lower) minus a proportionate reduction to reflect the reduced number
of service units expected from the asset in its impaired state.

The choice of the most appropriate approach to measuring value in use depends on the availability
of data and the nature of the impairment:

Indication of Impairment Method

Significant long-term changes in the technological,
legal, or government policy environment
Significant long-term change in the extent and
manner of use, including cessation or near cessation
of demand
Physical damage
Depreciated replacement cost approach or Service
units approach whichever is more appropriate
Depreciated replacement cost approach or Service
units approach whichever is more appropriate
Restoration cost approach or depreciated approach,
whichever is more appropriate

Reversal of Impairment

The principles used in recognizing reversals of impairment loss on items of PPE are the same as those used
for investment property.
Heritage Assets

Heritage assets are those which have historical, cultural and environmental significance, and are intended to
be preserved for future generations.

Examples include:
 historical buildings and monuments,
 statues,
 museum and gallery collections,
 archeological sites,
 national archives,
 ruins,
 conservation areas,
 nature reserves, and
 works of art

The characteristics of heritage assets are:

a. Their value in cultural, environmental, educational, and historical terms is unlikely to be fully reflected in
a financial value based purely on market price;
b. The law may impose restrictions on their disposal by sale;
c. They are often irreplaceable and their value may increase over time even if their physical condition
deteriorates
d. It may be difficult to estimate their useful lives, which in some cases could be several hundred years.
(GAM for NGAS, Chapter 10, Sec. 30)

Heritage assets are measured at cost. If acquired through non-exchange transaction, the cost is the fair
value at the acquisition date.

Heritage assets are not depreciated, but subject to impairment. If determinable, a heritage asset's fair value
is disclosed.

However, heritage assets that have future economic benefits or service potential other than their heritage
value are depreciated similar to the other items of PPE, e.g., a historic building being used as office.

Heritage assets not recognized in the books of accounts are recorded in the Registry of Heritage Assets.

Infrastructure Assets

Infrastructure assets include road networks (including facilities, such as traffic lights and road signage),
flood control, sewer, water and power supply systems, communications networks, railways, seaports, airports,
and the like.

Infrastructure assets have the following additional characteristics:

a) Part of a system or network;
b) Specialized in nature and do not have alternative uses;
c) Immovable; and
d) May be subject to constraints on disposal.

Infrastructure assets are accounted for similar to the other items of PPE, i.e, they are initially measured at
cost and subsequently depreciated.
However, generally, infrastructure assets have no residual value. In cases where a part of an infastructure
asset has residual value, it shall be at least 5% of the cost of that part.

Reforestation Projects

Reforestation refers to the renewal of a forest cover by planting seeds or young trees.

Reforestation projects are recorded as land improvements in the books of accounts of the Department of
Environment and Natural Resources (DENR) or other entity concerned.

The initial costs of reforestation projects include the following:

a. Survey, mapping and planning
b. Nursery operation and seedling production or procurement
c. Plantation establishment (site preparation, hauling seedlings and planting)

Initial costs are recorded in the "Construction in Progress-Land Improvements" account pending the
completion of the project, which normally takes 3 years. Upon completion and tum-over of the project, the
costs are reclassified to the "Land Improvements, Reforestation Projects" account.

Subsequent costs on reforestation projects are accounted for as follows:

a) Maintenance and protection costs incurred within the duration of the project, such as construction of
fire lines, strip brushing, replanting, pest control, and patrolling, are capitalized.
b) Maintenance and protection costs incurred after the turn-over of the project are charged as repairs and
maintenance expense
c) The cost of replacing trees are expensed where small numbe of trees are being replaced in any one
particular area.

Reforestation projects are nit depreciated but subject to impairment. Impairment loss is recognized when a
reforestation project is destroyed by a force majeure or fortuitous event beyond the control of man.

Derecognition

The carrying amount of a PPE is derecognized when it is disposed or when no future economic benefits or
service potential is expected from the asset.

On derecognition, the difference between the carrying amount of the derecognized PPE and the net disposal
proceeds, if any, is recognized as gain or loss in surplus or deficit.

Disposals of PPE shall be in accordance with the Supply and Property Management Manual and Sec. 79 of
P.D. No. 1445.

Idle, Fully Depreciated, Unserviceable and Lost PPE

 Idle PPE refers to assets that are temporarily taken out of active use or temporarily abandoned. Idle
PPE are not derecognized but continued to be depreciated because future benefits are consumed not
only through usage but also through obsolescence and wear and tear.

 A PPE is fully depreciated when its carrying amount is equal to zero or its residual value. Fully
depreciated PPE are not derecognized, meaning the historical cost and accumulated depreciation are
not removed from the books of accounts.
 Unserviceable property are those which do not have future economic benefits or service potential.
Unserviceable property is derecognized. The carrying amount is recognized as impairment loss.
Unserviceable properties are reported in the Inventory and Inspection Report of Unserviceable
Property.

 When a PPE is lost, either through theft, fire or other force majeure, the officer having custody of the PPE
shall immediately notify the COA within 30 days and shall submit an application for relief, together with
supporting evidence. If warranted by the evidence, a credit for loss shall be allowed. Failure to do the
requirements will not relieve the officer of liability. (P.D. No. 1445, Sec. 73) The carrying amount of the
lost PPE is derecognized and charged as loss, upon receipt of the Report of Lost, Stolen, Damaged, or
Destroyed Property together with the Notice of Loss by the Accountable Officer.

Pending the result of the investigation, the accountability of the officer shall be established, equal to the
depreciated replacement cost of the lost PPE. If a credit for loss is subsequently allowed to the officer,
the entry to establish the accountability is simply reversed. If not, the officer

 In case of a partial loss of PPE, the loss recognized is equal to the asset's carrying amount less the fair
value of the remaining serviceable portion.

Receipt and Disposition of PPE

The procedures in the receipt and disposition of PPE are similar to those of inventories. Only those that are
peculiar to PPE are discussed below:

a. Property Card - used by the Supply/Property Division to record all movements in items of PPE. It is
maintained for each class of PPE. This is the equivalent of the Stock Card used for inventories.

b. Property, Plant and Equipment Ledger Card - used by the Accounting Division to record all
movements in items of PPE, both in quantity and monetary amount. It also shows the estimated life,
depreciation, impairment and other information on the PPE. This is the equivalent of the Stock Ledger
Card used for inventories. As an internal control, the PC and PPELC are periodically reconciled.

c. Property Acknowledgement Receipt - used by the Supply/Property Division to record the issuance of
PPE to the end user. This is based on the approved Requisition and Issue Slip (RIS) submitted by the
requesting individual. The PAR is renewed every after 3 years or whenever there is a change in
custodianship. This is the equivalent of the Report of Supplies and Materials Issued used for inventories.

d. Report on the Physical Count of Property, Plant and Equipment - At the end of each year, the entity
shall perform a physical count of PPE and prepare this report. This report shall be submitted to the COÀ
not later than January 31 of the following year.

e. Inventory & Inspection Report for Unserviceable Property - used to account for all unserviceable
property subject to disposal. It is the basis for derecognizing the unserviceable properties the books of
accounts.

f. Report of Lost, Stolen, Damaged or Destroyed Property - used by the accountable officer to notify
the concerned officials of the lost, stolen, damaged or destroyed property. Items ‘'e’’ and 'f" above are
the equivalent of the Waste Materials Report used for inventories.

g. Property Transfer Report - used to record transfers of property from one accountable officer to
another.
Borrowing Costs

Borrowing costs - are interest and other expenses incurred by an entity in connection with the borrowing of
funds. (PPSAS5,5)

Examples:
a) Interests on notes, loans, bonds and finance lease payables,
b) Amortization of discount, premium, issue costs and ther ancillary costs relating to payables
c) Exchange differences arising from foreign currency borrowings, to the extent that they are regarded as
an adjustment to interest costs.

Recognition of Borrowing costs

1. Benchmark Treatment - expensed in the period incurred.
2. Allowed Alternative Treatment - capitalized if the borrowing costs are directly attributable to the
acquisition of a qualifying asset.

• Qualifying asset - is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale

Commencement, Suspension and Cessation of Capitalization

The capitalization of borrowing costs as part of the cost of a qualifying asset shall (be):
a. Commence when outlays for the asset are being incurred, borrowing costs are being incurred, and
activities that are necessary to prepare the asset for its intended use or sale are in progress.
b. Suspended during extended periods in which active development is interrupted, and expensed.
c. Cease when the qualifying asset is substantially complete. If completed in parts, capitalization of
borrowing costs ceases as each part is completed; capitalization continues for the uncompleted parts.

Summary

 For government entities, the capitalization threshold for PPE is P15,000.

 PPE are initially measured at cost. Cost comprises the purchase price, including non-refundable taxes
but excluding trade and cash discounts; direct costs; and present value of decommissioning and
restoration costs.

 Promotional items:
- If the same, allocate total cost to all items acquired including the promotional item.
- If different, assign the promotional item its fair value; the remainder to the other items acquired.

 Acquisition by Construction:
- Through Construction Contract - cost is contract price.
- By Administration - cost is sum of DM, DL, & OH.

 Construction costs are initially recorded in the "Construction in Progress" account.

 Acquisition through Exchange:

- With commercial substance - GRG (plus cash paid)
- No commercial substance - CA of given up (pp)
 Acquisition through Non-Exchange Transaction - the asset received is measured at fair value at the
acquisition date.
- No condition, recognized immediately as income.
- With condition, initially recognized as liability.

 Acquisition through Intra-agency or Inter-agency Transfers - measured at the carrying amount of the
asset received

 Repairs and Maintenance - minor, expensed; major, capitalized. If not clear, treat as minor.

 Replacement costs - charge carrying amount of old part as loss; capitalize new part. If carrying amount
of old part is not determinable, use the cost of new part as basis.

 Spare parts and servicing equipment - minor, expensed; major, capitalized. Those that can only be used
in conjunction with an item of PPE are accounted for as PPE.

 Betterments are capitalized (if they meet the recognition criteria for PPE) and are subsequently
depreciated:
- over the extended useful life, if betterment extends useful
- over remaining useful life, if betterment does not extend useful life.

 Additions are modifications which increase the physical size or function of the PPE. If the addition is a
(an):
- new unit - depreciate over its own useful life
- expansion - depreciate over useful life of original asset.

 PPE are subsequently measured using the cost model. The revaluation model is not applicable to
government entities.

 The straight line method of depreciation is used unless another method is more appropriate.

 Residual value is generally 5% of cost.

 Computation of value in use (VIU):

a. Depreciated Replacement Cost Approach:
> VIU (depreciated replacement cost) = Replacement cost less Accumulated depreciation based on
the replacement cost
b. Restoration Cost Approach:
> VIU = Depreciated replacement cost minus Estimated restoration cost.
c. Service Units Approach
> VIU = Depreciated replacement cost x (100% less % of reduction in service potential

Heritage Assets Not depreciated but subject to impairment

Infrastructure Assets Generally, no residual value
Reforestation projects Land improvement, not depreciated but subject to
impairment
Idle PPE Not derecognized; continued to be depreciated
Fully depreciated Not derecognized
Unserviceable property Derecognized
Lost PPE Derecognized (if total loss)
 Borrowing costs by
- NG - expensed (Benchmark Treatment)
- NGAs - capitalized (if related to the acquisition of a qualifying asset (allowed Alternative Treatment)

Intangible Assets Summary

 Intangible Assets are identifiable non-monetary assets without physical substance.

 Essential elements:
(1) Identifiability (separable or arises from binding arrangements);
(2) Control; and
(3) Future economic benefits or service potential.

 Intangible assets are initially measured at cost. The measurement of costs depends on the mode of
acquisition, which is similar to those of PPE and investment property

 Internal generation:
1. Research cost - recognized as expense.
2. Development cost - capitalized only if all of the conditions listed in the GAM for NGAs are met.

 If it is not clear whether an expenditure is a research or a development cost, it is treated as research

cost.

 Reinstatement of costs already expensed is prohibited.

 Internally generated brands, mastheads, publishing titles, customer lists, and similar items are not
recognized as intangible assets.

 Subsequent expenditures on recognized intangible assets are generally expensed, unless they meet the
definition of an intangible asset and the asset recognition criteria.

 Subsequent measurement:
1. Indefinite life - not amortized but tested for impairment at least annually.
2. Finite life - amortized using the straight line method over a Period of 2 to 10 years. The residual
value is assumed to be zero except when the entity has the ability to sell the asset at the end of its useful
life.

Liabilities Summary

 A liability is recognized only when all of the following are

a. The item meets the definition of a liability;
b. It is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation;
c. The obligation has a cost or value (eg, fair value) that can be measured reliably.

 Financial liabilities are initially measured at fair value minus transaction costs and subsequently
measured at amortized cost, except for financial liabilities at fair value through surples or deficit which
are initially and subsequently measured at fair value.

 Provision is a liability of uncertain timing or amount.

 Contingent liability is one that meets some but not all of the liability recognition criteria. A contingent
liability is not recognized but disclosed only, if its occurrence or settlement is reasonably possible;
otherwise, it is ignored.

 Contingent asset is not recognized but disclosed only, if its occurrence or realization is probable;
otherwise it is ignored.

 A provision is measured at the entity's best estimate of the amount needed to settle the liability at the
reporting date. If the effect of time value of money is material, the provision is measured at present
value

Lease Summary

 A lease that transfers substantially all the risks and rewards incidental to ownership of an asset is a
finance lease; a lease that does not is an operating lease.

 Any of the following would lead to a finance lease classification:

1. Transfer of ownership
2. Bargain purchase option
3. The lease term is for the major part of the economic life of the asset ('75% criterion).
4. The PV of the lease payments 90% substantially all of the fair value of the leased asset ('90%
criterion').
5. The leased asset is specialized nature.

 Inception of the lease is the earlier of the date of the lease agreement and the date of commitment by
the parties to the principal provisions of the lease. Classification and measurement are done on this
date.

 Commencement of the lease term is the date from which the lessee is entitled to exercise its right to
use the leased asset, Initial recognition of any asset or liability is made on this date.

 A lessee recognizes an asset and a liability from a finance lease.

 Lease payments are discounted using the interest rate implicit in the lease, if this is determinable; if
not, the lessee's incremental borrowing rate is used.

 Initial direct costs are generally capitalized.

 The lessee depreciates the leased asset under a finance lease over the shorter of the asset's useful life
and the lease term if there is no reasonable certainty that the lessee will obtain ownership over the asset
by the end of the lease term.

 A lessor recognizes the lease payments receivable under a finance lease at an amount equal to the net
investment in the lease.

 A lessee (lessor) under an operating lease recognizes the lease payments as expense (income) on a
straight line basis over the lease term, unless another systematic basis is more representative of the
time pattern of the user's benefit.
Chapter 14 Financial Statements Summary

 The responsibility over financial statements rests with the entity's management, particularly the Head of
the Entity jointly with the Head of Finance/Accounting.

 A peculiar financial statement of a government entity is the Statement of Comparison of Budget and
Actual Amounts. This statement shows the differences between budgeted amounts and actual results
for a given reporting period.

 The statements of financial position and financial performance are presented in comparative, condensed
and detailed formats

 The statement of financial position of a government entity shows distinctions between current and
noncurrent assets and liabilities.

 The following are recognized directly in equity, rather than through surplus or deficit:
(a) correction of prior period errors;
(b) effect of changes in accounting policies; and
(c) gains or losses on remeasuring available-for-sale financial assets.

 Government entities present cash flows from operating activities using the direct method.

 Adjusting events are those that provide evidence of conditions that existed at the reporting date.
Those that are indicative of conditions that arose after the reporting date are non-adjusting events.
Adjusting events are recognized. Non-adjusting events are disclosed only, if material.

 A change in accounting policy is accounted for using the following order of priority:
(1) transitional provision;
(2) retrospective application;
(3) prospective application.

 A change in accounting estimate is accounted for by prospective application.

 The correction of a prior period error is accounted for by retrospective restatement.

Chapter 15 Miscellaneous Topics Summary

 Under a service concession arrangement a private entity ('operator') uses the service concession asset
to provide a public service on behalf of the government ('grantor') in exchange for compensation which
is
(a) payments in cash or
(b) grant of right to collect fees from users of the asset or right to access another revenue-generating
asset, or
(c) a combination of (a) and (b).

 A service concession asset is either an asset that the operator provides to the grantor or an existing
asset of the grantor that the operator undertakes to refurbish.

 A service concession asset is initially measured at fair value if it is provided by the operator to the
grantor for which the grantor obtains control of. In other cases, the service concession asset is initially
measured at cost.

 A service concession asset is subsequently accounted for as either PPE or intangible asset. If the
compensation to the operator is in the form of payments; the grantor recognizes a financial liability that
is subsequently measured at amortized cost.

 If the compensation is in the form of payments, the grantor recognizes a financial liability that is
subsequently measured at amortized cost. If the compensation is in the form of grant of right, the
grantor recognizes a liability for unearned revenue that will be recognized as revenue when earned in
accordance with the substance of the service concession agreement.

 The three (3) forms of joint ventures under the GAM for NGAs are
(1) Jointly controlled operations
(2) Jointly controlled assets
(3) Jointly controlled entities

 Under jointly controlled operations, the joint venturer recognizes its own costs, assets, and liabilities
but recognizes its own costs, assets and liabilities but recognizes its share in the sale revenue of the joint
venture.

 Under jointly controlled assets, the joint venturer recognizes its share in the joint venture's assets,
liabilities, income and expenses and include them line-by-line to its own assets, liabilities, income and
expenses.

 Under jointly controlled entities, the joint venturer recognizes its interest in the joint venture (a
separate entity) under the "Investment in Joint Venture" account, which is accounted for using the
equity method.

 A foreign currency transaction is initially measured by translating the foreign currency amount into the
functional currency using the spot exchange rate.

 At each reporting date, monetary items are translated using the closing rate; nonmonetary items
measured at historical cost are translated using historical exchange rates; and nonmonetary items
measured at fair value are translated using the exchange rate at the date when the fair value was
determined.
 Exchange differences on monetary items are recognized in surplus or deficit while exchange differences
on nonmonetary items are recognized either in equity or in surplus or deficit.

 An entity is required to present its financial statements using its functional currency. However, it can
translate its financial statements to any presentation currency whenever needed.

 When translating financial statements, assets and liabilities are translated using the closing rate at the
reporting date. Revenues and expenses are translated at the exchange rates at the dates of the
transactions. All resulting exchange differences are recognized in equity.

Chapter 16 Summary

 Although the PFRSs are designed to apply to business entities, they can also be applied to non-profit
organizations.

 Non-profit organizations carry out socially desirable needs of the community or its members without
the intention of making profit. NPOs can be classified into the following: (1) Health Care Organizations,
(2) Private, non-profit, colleges and universities, (3) Voluntary Health and Welfare Organizations, and (4)
Other non-profit organizations.

 Accounting principles under U.S. GAAP:

 Contributions are classified based on donor's restrictions as: (1) unrestricted, (2) temporarily
restricted, and (3) permanently restricted. These classifications are also applied to the net assets.
Internally-restricted funds are unrestricted.

 Unconditional promises to give contributions are recognized when the promise is received from the
donor. Conditional promises are recognized only when the performance of the attached condition
is reasonably certain.

 Cash and other non-cash assets received as contributions are recognized as assets and revenue
measured at fair value.

 Services in-kind that enhance a non-financial asset or require specialized skills are recognized as
revenue and expense. Other services are not recognized.

 Works of art and similar items received as donation are generally not recognized, unless they meet
the asset recognition criteria.

 Contributions received by an NPO acting as an agent are recognized as liabilities.

 Net assets released from restrictions are presented as a decrease in temporarily restricted net assets
and an increase in unrestricted net assets.

 NPOs shall prepare the following financial statements: (1) Statement of financial position, (2)
Statement of activities, (3) Statement of cash flows, and (4) Notes.

 Expenses are presented using the following functional classifications: (1) Program services and (2)
Supporting activities.
 For a health care organization:
a. Net patient revenue = Gross patient service revenue less contractual adjustments, employee
discounts and billed charity care.
b. Premium revenue = revenues from capitation agreements.
c. Other revenues = all other unrestricted revenues. > Restricted contributions are presented
separately from the revenues section of the statement of operations.

 For a private, non-profit, college or university: Net revenue from tuition and fees = Total
assessments less refunds and scholarship grants that are not granted as compensation for services
rendered by the grantee. All other types of scholarships are expensed.