Open FAR Notes (Sir Brad's Lecture) Final 4

FAR NOTES
CASH & CASH EQUIVALENT

Coins & Currencies
Cash on Hand Petty Cash Fund (PCF)
Types Undeposited Collections
Cash in Bank Money Order (remittances through Western Union, etc.)
1. Savings Deposit → ATM
Interest-bearing
2. Demand Deposit → Passbook + Checks
→ checking/current
Check Deposit
ABC ₱1,000 Supplier
Encash
3. Checks received from customer

- Personal check → most common Check (BDO) Deposit
Customer ABC
₱1,000 Encash
- Certified check → verification, “certified”, accepted (secured check)
- Cashier’s/Manager’s Check
Customer → BDO → ABC
- Traveler’s Check → prepaid

→ w/ any denomination (used for traveling)
4. Bank Drafts → used for large purchases

Mr. X Request BDO
Bank ₱10M
Draft
Seller
Short-term Debt Instruments (earns interest)

Cash Equivalents Highly Liquid investments acquired 3 months or less before
Readily convertible into cash maturity
T-bills
1. Treasury Bills PH Gov’t Investors
BTr – 90 days or less Cash
Projects
Interest
2. Treasury Notes → 1 to 10 years

Acquired 3 months or less before maturity
3. Treasury Bonds → 10 years or more
4. Time Deposit → ↑ interest; 30, 60, 90 days T-b TN
5. Money Market Placement Mr. X Mutual Funds Others T-B
- Mutual funds, UITF, indirect investments UITF
Interest Interest
6. Commercial Paper → used by large corporations

Cash
₱900
Mr. X SM SM
CP Prime
₱1000
Not legally restricted → CCE

Compensating Balance
ST → other CA
Legally restricted → Loan
LT → other NCA
Bank Overdraft
- Classified as CL
- not offset against current accounts w/ positive balance
- EXC: same bank
Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

BANK RECONCILIATION
Purpose: to reconcile book & bank balances
Example:
JEs: ABC Co. Book (Ledger/Journals) Bank
1/1 Sale AR xx ⎯
Sale xx
1/5 Collection Cash on Hand xx ⎯

AR xx
1/6 Deposit Cash in Bank xx Cash xx

Cash on Hand xx Deposit Liability xx
1/10 Purchase Purchases xx ⎯

AP xx
1/15 Payment AP xx Deposit Liability xx

Cash in Bank xx Cash xx
1/31 End of Month Bal. xx xx
→ Book & Bank balances may not be equal due to timing differences
Book → DR ↑; CR↓
Bank → DR ↓; CR ↑
Bank Book
Unadjusted Balance xx Unadjusted Balance xx

Deposit in transit xx Credit memo* + xx
Outstanding checks (xx) Debit memo** (-) (xx)
Errors (bank) +/(-) xx(xx) Errors (book) +/(-) xx(xx)
Adjusted balance xx Adjusted balance xx
*Credit Memo **Debit Memo

- collections by the bank; - NSF checks (DAIF)
- interest income - bank service charges
- proceeds from loan - auto debits
- matured time deposits - loan payments
Deposit in Transit → deposits made but not yet credited
Cash in Bank xx
AR xx
Outstanding Checks → checks issued but not yet encashed
AP xx
Cash in Bank xx
Petty Cash Fund

→ under the custody of PC cashier/custodian 12/1 Establishment PCF 8,000
→ for small or minor expenses CIB 8,000
PCF 12/1 – 12/15 Disbursement no entry

Est 8,000
↑ 2,000 2,000 Exp 12/10 Replenishment Expenses 7,000
7,000 CIB 7,000
Coins & Currencies 12/17 Increase PCF 2,000
CIB 2,000
12/31 Adjustment Expenses 3,000

PCF 3,000

TRADE AND OTHER RECEIVABLES
AR
Trade NR – promissory notes
- ordinary course of business LR – banks
Types - always CA
Non-trade
- not related to OCB
- other receivables
1. Advances
- Employee, officers, shareholders, suppliers
2. Supplier’s Debit Balance Customer’s Credit Balance

- There is overpayment (debit balance of AP)
- Not included in AR - Presented as CL
- Not included in AP
3. Subscription Receivable
- If collectible w/n 1 year → CA (other receivable)
> 1 year → contra-equity account
4. Accrued Income
- Income earned but not yet collected/received
- Interest receivable, dividends receivable, rent receivable
5. Claims Receivable
- Insurance, Tax Refund
Measurement: 1/1 12/31
Initial → Face Value @ Face Value (SP) @ NRV (recoverable amount)

Subsequent → NRV
AR
- Allowances (ADA, ASR, ASD)
NRV
Illustration:
5%
Seller ₱10,000 Buyer Disc. Period
Terms: 5/10, n/30 0 10 30
Credit Period
Gross Net
1. Sale AR 10,000 AR 9,500

Sales 10,000 Sales 9,500
2. w/n Disc Period Cash 9,500 Cash 9,500

(10 days) SD 500 AR 9,500
AR 10,000
3. Beyond Disc Period Cash 10,000 Cash 10,000

AR 10,000 AR 9,500
SD Lost 500
The net realizable value shall be computed after deducting an allowance for the following:
• Sales returns – value of merchandise expected to be returned by customers as a result in error of deliveries and
defects.
• Sales discounts – value of price savings to customers expected to pay within the discount period and take advantage
of the cash discount.
• Freight charges – amount of freight charges collected by the shipper from the buyer even though the shipment was
under FOB destination terms. This amount shall not be remitted by the buyer hence deducted from
the receivable.
• Doubtful accounts – allowance for expected uncollectibility that is an inherent risk from selling on credit.

Accounting for Bad Debts
Allowance (PFRS/GAAP) Direct Write-off (Taxation)
1. 12/31 DA BDE 2,000 no entry

ADA 2,000
2. 1/31 W-off ADA 1,000 BDE 1,000

(definitely uncollectible) AR 1,000 AR 1,000
3. 2/28 Recovery AR 1,000 AR 1,000

ADA 1,000 BDE 1,000
Cash 1,000 Cash 1,000

AR 1,000 AR 1,000
Estimation of Doubtful Accounts
Sales : 1M
AR : 500K
ADA
% of Sales (2%)
→ Income Statement 10K
→ 20k → BDE for the period 20K → BDE
12/31 BDE 20k 30k

ADA 20k
% of AR (10%) Balance Sheet

Aging of AR → 50k, end balance or required ADA (as of)
BDE 40k
ADA 40k ADA
10K
40K → BDE
50k
The computation for the doubtful accounts expense which is an adjusting entry and the allowance for doubtful accounts
will be as follows:
Beginning balance X
Write off (X)
Recovery X
Balance before adjustment X
Doubtful accounts expense X
Ending balance X
Special Treatments
✓ Advances to Subsidiaries and Affiliates – usually classified as long-term investments.

✓ Customers with Credit Balances – usually classified as current liabilities. Otherwise, non-current liabilities.
✓ Receivables from Officers, Directors, and Employees – usually classified as current assets. Otherwise, non-
current assets.
✓ Subscriptions Receivables – presented as part of the stockholders’ equity. Otherwise, part of current assets.
✓ Receivables Hypothecated against Borrowings (Pledged or Assigned) – still included as part of the current
assets with the corresponding disclosure in the notes to financial statements.
✓ Receivables Discounted with Recourse – excluded.
✓ Receivables Sold without Recourse – excluded.
✓ Unearned Finance Charges and Interests – deducted from the related receivables.

NOTES AND LOAN RECEIVABLE, IMPAIRMENT
NOTE RECEIVABLE
- More secure because of the promissory note
Illustration:
₱ 100k, goods
Seller Buyer
PN Ø
Initial (FV + TC)
Measurement: 1/1/25 12/31/25 12/31/26

- PFRS 9
ST (≤ 1 year)
FV = Face Value LT (> 1 year)
Principal FV = PV
Principal : ₱100,000
Term : 2 years 1/1/25 12/31/25 12/31/26
Coupon rate :10% (stated, nominal)
Effective rate :10% (market, discount (in PV)) Interest 10k 10k
Principal 100k
10k 110k
Interest-bearing → PV = Face Value
Initial
(LT) Noninterest-bearing
→ unreasonably low interest 10,000 110,000
PV = + = 100,000
→ PV = Discounted Value (1+10%)1 (1+10%)2
.909 .826
1/1/25 12/31/25 12/31/26
PVF 9,090 + 90,860 = 100,000
Interest Ø Ø Step 1: 1.1
Principal 100k Step 2: 
Step 3: = (no. of years)
Step 4: M+
100,000 Ordinary annuity
PV = MR
(1+10%)2
Unearned → earned = amortization
= 82,600
JE:
Interest-Bearing: NR 100K
Sales 100K
B/S
Noninterest-bearing: NR 100K
Sales 82,600 NR 100,000
Unearned Int. Inc. 17,400 UII (17,400)
CA 82,600
Subsequent:
→ Amortized cost
→ Using Effective Interest Method
→ Amortization Table
Meaning of amortized cost

The “amortized cost” is the amount at which the note receivable is measured initially:
✓ Minus principal repayment
✓ Plus or minus cumulative amortization of any difference between the initial carrying amount and the principal
maturity amount
✓ Minus reduction for impairment or uncollectibility
For long-term noninterest-bearing notes receivable, the amortized cost is the present value plus amortization of the
discount, or the face value minus the unamortized unearned interest income.

LOANS RECEIVABLE
- is an AR in the books of Financial Institutions (banks)
- always interest-bearing
₱5M Housing Loan

1/1/25 BPI Mr. X (borrower)
PN Int. + Principal
Measurement:
1/1/25 12/31/25 12/31/26
FV + TC AC
Received
→ deducted from loan proceeds in advance
Origination cost/fee (TC)
→ minus in LR
→ credit evaluation
→ appraisal Direct → charge higher int rate (+ in LR)
Incurred → not yet deducted
→ all charged to the borrower Indirect → expensed outright (no effect in LR)
Impairment
Credit Risk → possibility of non-payment

Impairment Loss = CA (loan) – PV of CF (original ER)
Expected Credit Loss (ECL) Model → PFRS 9

Credit Risk Scenario ECL
Stage 1 no significant ↑ paid on time 12 months
Stage 2 significant ↑ but 1 month past due lifetime
no objective evidence
of impairment Remaining life of the loan
Stage 3 significant ↑ in CR bankrupt lifetime
but w/ objective
evidence of impairment
Measurement of impairment
• The amount of impairment loss can be measured as the difference between the carrying amount and the present
value of estimated future cash flows discounted at the original effective rate.
• The computation corresponding entry shall be as follows:
PV of expected cash flows X
Less: Face value X
Accrued interest X X
Loan impairment loss X
Loan impairment loss xx

Interest receivable xx
Allowance for loan impairment xx
• The interest receivable shall be written off if interest income already recognized shall not be realized meanwhile the
allowance shall be deducted from the current balance of the notes receivable.

RECEIVABLE FINANCING
- Generate cash from receivable
Types:
1. Pledging of AR
2. Assignment of AR
3. Factoring of AR
4. Discounting of AR
PLEDGING
- use of receivables as collateral for a loan
- accounts receivables not affected by the pledging
- The accounts receivable is accounted for normally and are not reclassified.
Goods
ABC Customer Effects to FS:
(pledgor) ₱100k - no JE for the pledge
- disclosure (notes)
Cash 50k AR 100k
ex. ₱ 100k AR has been pledged
NP 50k Sales 100k
to a ₱50k LP w/ MB
₱50k Pledged → security/collateral

loan AR
MB
(pledgee)
ASSIGNMENT
- More formal place (loan documents + PN) Effects to FS:

- reclassification entry
Goods - required disclosure:
ABC Customer
(assignor) ₱100k (A) AR-assigned 100k
AR 100k (L) Note Payable (80k)
Cash 80k
Sales 100k (E) Equity in assigned AR 20K
NP 80k
₱80k Assigns
AR AR-assigned 100k → still part of trade receivable
loan AR 100k
MB
(assignee)
Notification → customer pays directly to bank → sends collection report to entity

Types
Non-notification → customer still pays to the entity

FACTORING Goods
ABC Customer
- Selling of AR ₱100k
- There is transfer of ownership
AR 100k
- Factor company (finance company) assumes the ₱70k Sales 100k
risk of collection and generally handles the cash
billing and collection function Cash 70k
Loss 30k
AR 100k
MB
(Factor)
w/o recourse
→ no more liability
→ absolute transfer of ownership
Types Casual Factoring
→ factor assumes risk of non-collection
→ if silent Regular means of financing
(continuous agreement)
w/ recourse
→ there is liability
Casual factoring
- a sale of the receivables at a discount

- similar to any type of sale of an asset in order to generate cash quickly
- sale is always made below the carrying amount or the net realizable value of the accounts receivable and therefore
a loss shall be recognized as follows:
Face value of AR X
Less: Service fee or commissions X
Selling price X
Less: Accounts receivable X
Allowances X (X)
Loss on factoring X
Factoring as a continuing agreement
- involves the sale of accounts receivable to a financing entity on a long-term basis

- buyer is committed to buy the receivables before the actual goods are sold to the customers on credit
- the collection and credit responsibilities are surrendered to the buyer as soon as goods are delivered to the
customers.
- The following items shall be deducted from the face value of the receivables:
Face value of AR X
Less: Service fee or commissions X
Given back to the entity after
Interest charges X
all AR is collected
Factor’s holdback X (X)
Proceeds from factoring X

DISCOUNTING
- Encashment before maturity
Goods (1/1)
ABC Customer
₱100k
PN (3/1)
w/o recourse
NR 100k Types
2/1 Sales 100k w/ recourse Conditional Sale → contingent liability (disclosed)
₱80k
Secured Borrowing → recognize liability
Cash 70k
Loss 30k
NR 100k
MB
- Discounting of notes receivable that is with recourse and on a notification basis shall involve the following
computation:
Face value or principal X

Interest on maturity X
Maturity value X
Less: Discount (MV x DR x remaining term) (X)
Proceeds from discounting X
- The discount rate shall be determined by the bank buying the note, however if there is no discount rate
provided, the same rate on the note shall be used as the discount rate.
- The remaining term is also known as the “discount period”.
- The total receivable shall also be computed on the date of the discounting which is the face value plus the accrued
interest from the date of the note. This amount shall then be compared with the proceeds of the discounting and a
“loss” shall be recognized for the difference.
Journal Entries Related to the Discounting of Notes Receivable Under Conditional Sale:
Cash xx
Loss on discounting xx
Notes receivable discounted xx
Interest income or interest receivable xx
Journal Entries Related to the Discounting of Notes Receivable Under Secured Borrowing:
Cash xx
Interest Expense xx
Notes receivable discounted xx
Interest income or interest receivable xx
The note receivable discounted account is credited rather than writing off the notes receivable account because of the
contingent liability feature of the discounting transaction. However, this account shall be a contra-asset account and
deducted from the total notes receivable to be presented in the statement of financial position.

INVENTORY
- PAS 2 → assets held for sale in the ordinary course of business
Merchandising → complete inventory (assumption in FAR)

Classification (retail/trading)
Manufacturing → assemble
(RM, WIP, FG)
Control
Inclusions: if with legal title
Ownership
1. Goods owned & on-hand
2. Goods in transit GR:
Freight → paid by owner of the goods
FOB SP FOB Destination
Buyer ✔ ✖ FOB SP – Buyer
FOB D – Seller
Seller ✖ ✔
3. Consigned Goods
Consignor → owner of inventory
Consignment
Consignee
Presentation
o Current Asset – for those unsold or remaining goods or items.

o Cost of Sales – for those sold goods or items.
o Operating Expenses – for those used office and store supplies.
Inventory Systems:
Periodic:
1. Periodic
- Applicable to high volume, small peso transactions BI xx
- Ex. Department Store, SM, Hardware Purchases xx
Purch. R&A (xx)
- EI → physical count at year end
TGAS xx
EI (xx)
2. Perpetual
COGS xx
- Low volume, large peso transactions
- Ex. Toyota
Inventory
- Stock cards → running balance of
COGS Perpetual:
Inventory COGS
*Whether periodic/perpetual, both requires physical count* Beg Sold
→ Periodic → EI Purch. Purch. Ret. Sales Ret.
→ Perpetual → accuracy of records Sales Ret. Sold
End. Bal
End. Bal
X = shortage
Inventory
per count
Ex: 10k, 2/10, n/30 Gross Net
Purchase Purchase 10,000 Purchase 9,800

AP 10,000 AP 9,800
w/n Disc Period AP 10,000 AP 9,800

Cash 9,800 Cash 9,800
PD 200
Beyond Disc Period AP 10,000 AP 9,800

Cash 10,000 PD Lost 200
Cash 10,000

Formula
EI → B/S
Objective: to determine cost of inventory
COGS → I/S
PAS 2:
1. Specific Identification → used in low volume transactions
2. First-In, First-out (FIFO)

- Used in high volume transactions
- in period of inflation or rising prices, result to the highest net income
- in a period of deflation or declining prices, result to the lowest income.
3. Weighted Average (WAVE)

- Used in high volume transactions
Example: FIFO Combinations

Dec. 1 Periodic
FIFO same
5 Perpetual
10 COGS
15 (old prices) Periodic
WAVE
20 Perpetual (moving average)
25
EI (new prices)
30
Avg. Cost per unit
WAVE
1. Periodic
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
- Formula = x units on-hand
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
2. Perpetual
- popularly known as the moving average method
- a new weighted average unit cost must be computed after every purchase and purchase return
MEASUREMENT
1/1 12/31
Initial Subsequent → @ LCNRV (Lower of Cost and Net Realizable Value)

Merchandising → Purchase Price Selling Price – Cost to Sell
@ Cost
Manufacturing → DM, DL, OH → Applied Ideally → item-by-item
+ Group
Other cost necessary → intended location & condition

Ex. Freight-in, taxes, import duties
PURCHASE (FIRM) COMMITMENT
→ Agreement between the buyer & seller to purchase goods in the future at an agreed fixed price.
→ Entered into to minimize risk of price increases
→ Usually used by oil companies
12/1 12/31 1/31

10k units Mark to Market
₱10 /unit ₱12 ✔
Market Price
₱ 8 ✖ (loss)

ESTIMATION
Instances:
12/1 12/31
1. Interim Reporting
2. Inventories are destroyed Q1 Q2 Q3 Q4 Physical Count → EI
3. To test reasonableness of Physical Count
How to estimate Inventory?
Gross Profit Method:
- Based on the assumption that the rate of gross profit remains approximately the same from period to period and
therefore the ratio of cost of goods sold to net sales is relatively constant from period to period.
- Sales allowance and sales discount are ignored, that is, not deducted from sales.
→ reason is that while these items decrease the amount of sales, they do not affect the physical volume
of goods sold.
Sales 100k 100%

- COGS (60k) 60% cost ratio
Based on Sales → 100k x (1 – 40%) = 60k COGS (if silent)
GP 40k 40% GPR
Based on Cost → 100k  1.4 = 71,429
BI 20,000
Purch 180,000 Based on Sales Based on Cost
GAFS 200,000
Sales 100% Sales 140%
EI (140,000)
COGS (60%) COGS (100%)
COGS 60,000 → (100k x 60%) GP 40% GP 40%
Retail Inventory Method
- used for retail business for measuring inventory or large number of rapidly changing items with similar margin for
which it is impracticable to use other costing method.
- Goal: to compute the cost ratio
- EI → expressed in SP
- Formula
Goods available for sale at retail xx

Less: Net sales xx
Ending inventory at selling price xx
Multiply by cost ratio xx
Ending inventory at cost xx
𝐺𝑜𝑜𝑑𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒 𝑎𝑡 𝑐𝑜𝑠𝑡

Cost Ratio =
𝐺𝑜𝑜𝑑𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒 𝑎𝑡 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
Approaches:
To obtain the appropriate inventory value under the retail inventory method, three approaches are followed, namely:
✓ Conservative or conventional or lower of cost and net realizable value approach

o Includes: Net Mark UP (NMU)
o Excludes: Net Mark Down (NMD)
✓ Average cost approach
o Includes both NMU & NMD
o Take into consideration inventory that has been marked down to below the original selling price
✓ FIFO approach
o Similar to average cost approach
o However, a “current” cost ratio is determined every year considering the net purchases during the year
and excluding the beginning inventory.
o Based on the assumption that markup and markdown apply to goods purchased during the year and not
to beginning inventory.

INVESTMENTS
→ Governed by PFRS 9: Financial Instruments & PAS 32: Financial Instruments Presentation
Any contract
Financial Instruments Financial Asset of one entity
Financial Liability or Equity of another entity
Examples:
₱100,000
1. Bank Deposit ABC BDO
CIB Cash
₱100,000 ₱100,000
COH DL
₱100,000
2. Acquisition of Shares ABC PLDT
→ dividends (investor) Shares (issuer)
Investment in PLDT shares Cash

₱100,000 ₱100,000
Cash Ordinary Shares
₱100,000
3. Acquisition of Bonds ABC Meralco
Bonds
→ interest (investor) (issuer)
Investment in Meralco Bonds Cash

₱100,000 ₱100,000
Cash Bonds Payable
Cash
Financial Assets Equity Instrument of another entity
Contractual right to receive cash
Business Model (BM) Test → how the company manages its investments
Cash Flow Characteristics (CFC) Test

→ nature of CF
→ Solely payments of Principal and Interest (SPPI)
Meralco (Corporate Bonds); Government (Treasury)

→ 5 years
Debt Securities
→ Interest & Principal
ABC To be sold to another entity
₱1M Cash
Equity Securities → buy low, sell high
Classification of Financial Assets

BM Test CFC Test Debt Equity Initial Subsequent
1. Amortized Cost (AC) hold to collect SPPI ✔ ✖ FV + TC AC → EI Method
Debt
2. FVOCI hold to collect SPPI ✔ ✔ FV + TC @ FV
Equity
→ mandatory & sell
→ w/ recycling ∆s in FV (MTM) → OCI
Sale: UGL → P/L SCI (∆s in FV)
UG/L
BS (SHE → OCI)
→ cumulative/
end bal
Debt
3. FVPL (not defined) (not defined) ✔ ✔ FV @ FV
Equity
(TC = expensed)
Held for Active stock trading ∆s in FV → P/L (I/S)
Trading Short-term profits UG/L

Exceptions:
1. Equity Instrument (not for trading) → FVOCI (by election)

→ w/o recycling
→ Sale: UG/L → RE
2. If FA qualifies (AC, FVOCI) → FVPL (FV option) → to avoid accounting mismatch
Example:
ABC:
1. Bank Loan: LP → Interest Expense (P/L) ✔

2. FVOCI → UG/L (OCI)
FVPL → UG/L (P/L) ✔
Conditions for Reclassification of Financial Assets
→ Under PFRS 9, reclassification of financial assets is required if, and only if, the objective of the entity’s business model
for manages those financial assets changes.
DEBT SECURITIES: Bonds

AC FVOCI FVPL
₱100,000 Debt ✔ ✔ ✔
ABC Meralco MTM ✖ ✔ ✔
- investor Bond Int. - issuer
Amortize ✔ ✔ ✖
- bondholder
Investment in Bonds 100k Cash 100k

Cash 100k BP 100k
Cash 10k Int Exp 10k

Int Inc 10k Cash 10k
→ terms of the bond are outlined in the bond indenture
Discount/Market Rate Coupon/Stated Rate PV

Effective = Nominal Face Amount
Effective > Nominal Discount
PV @ maturity = Face amount
Effective < Nominal Premium
EQUITY SECURITIES: Shares
₱100,000
ABC PLDT Projects
Shares
- investor - issuer ↑ NI
- shareholder
dividends
Investment in PLDT shares 100k Cash 100k

Cash 100k OS 100k
→ ownership (10%) 10,000 shares

→ terms are in stock certificate 1,000 (ABC share)
Ownership Type Standards Classification Measurement
< 20% Regular PFRS 9 FVPL / FVOCI FV

20% - 50% Significant PAS 28 Investment in Associate Equity Method
Influence
> 50% Control PFRS 3 & 10 Investment in Subsidiary Consolidation

Income Dividends
✔ 1. Cash Dividends Dividend-on → Purchase price includes dividends

(# of shares x dividends per share) Ex-Dividend → excludes dividends
Dividend-on Ex-Dividend
declaration record payment
→ Approval of → registration
BOD
✔ 2. Property Dividends (PPE, Inventory)
✖ 3. Liquidating Dividends → return of capital
✖ 4. Stock Dividends Cost 11k 11k ⎯

→ ↑ # of shares (10%)  # of shares 1k 1.1k ↑
Cost/share ₱11 ₱10 ↓
Memo Entry
Stock Split Up = 2 x 1,000 = 2,000 Up Down
(2 for 1) Down = 2 1,000 = 500 Cost 11k 11k 11k
 # of shares 1k 2k 500
Cost/share ₱11 ₱5.5 ₱22
Stock Rights
₱100k
→ Evidence of a pre-emptive right of the shareholders ABC PLDT
shares
→ Right to subscribe to new shares
1,000 (10% → 5%) 10k
→ To prevent shares from being diluted ₱10/share → outsiders
1,000 10k
→ Stock warrants ₱8/share → subscription price
2,000 (10%) 20k
Inv in Shares Shares ₱95k
₱100k
Cash SR ₱5k
Accounted separately → SR ₱5k
w/ FV Inv in Shares
Not accounted separately → no journal entry
Accounting
w/o FV → estimate FV using Theoretical/Parity Value Method

Right-On Ex-Right
PP includes PP excludes
the FV of SR the SR
MV of the Share Right−On − Subscription Price

Right-On =
# of rights to purchase 1 share +1
MV of the Share Ex−Right − Subscription Price

Ex-Right =
# of rights to purchase 1 share

Other Issues:
1. Reclassification
→ Whenever there is change in business model
→ Only applies to debt securities
→ Not allowed for equity securities & irrevocable (FVOCI by election, FV Option)
TO
FROM Amortized Cost FVOCI FVPL
AC ⎯ FVOCI
@ FV
FVPL
@ FV
AC AC
FV vs CA FV vs CA
→ UG/L (OCI) → P/L
→ old EIR → not subject to amortization
FVOCI AC ⎯ FVPL
@ FV
@ FV
FVOCI FVOCI
UGL (OCI) → remove UG/L (OCI) → P/L

→ as if AC from day 1
→ old EIR
FVPL AC FVOCI ⎯
@ FV @ FV
FVPL FVPL
→ new EIR → new EIR
2. Compound Financial Instrument
₱100k
ABC PLDT
Bonds + SR
(liab) (equity)
1. Bonds @ FV 90,000 Inv in Bonds 90,000

Compound FI (liability) SR 10,000
(₱100,000) Cash 100,000
2. SR → residual 10,000
(equity)
3. FV Measurement
→ PFRS 13 → how to measure FV
• FV is the price that would be received to sell an asset (exit price)
• Principal Market (PSE)
1,000 PLDT share PSE

Stock Price: ₱100
PFRS 13 → FV Hierarchy
Level 1: Quoted Prices → most reliable
Level 2: Observable Inputs

Discounted Cash Flow Techniques
Level 3: Unobservable Inputs
→ least reliable

Impairment of Financial Assets
• PFRS 9 requires entities to estimate and account for expected credit losses for all relevant financial assets
(mostly debt securities, receivables including lease receivables, contract assets under PFRS15, loans), starting
from when they first acquire a financial instrument.
• When measuring expected credit losses, entities will be required to use all relevant information that is available to
them (without undue cost or effort).
• PFRS 9 offers two approaches:

1. General model for measuring a loss allowance:
This model recognizes loss allowance depending on the stage in which the financial asset is. There are
three (3) stages:
▪ Stage 1 – Performing assets: Loss allowance is recognized in the amount of 12-month expected
credit loss.
▪ Stage 2 – Financial assets with significantly increased credit risk: Loss allowance is recognized in
the amount of lifetime expected credit loss.
▪ Stage 3 – Credit-impaired financial assets: Loss allowance is recognized in the amount of lifetime
expected credit loss and interest revenue is recognized based on amortized cost.
2. Simplified model:
An entity does not need to determine the stage of a financial asset, because a loss allowance is
recognized always at a lifetime expected credit loss.
Embedded derivatives
• An embedded derivative is simply a component of a hybrid instrument that also includes a non-derivative host
contract.
Accounting of embedded derivatives depends on what the host contract is:
o If host = financial asset within the scope of PFRS 9, then the whole hybrid contract shall be measured as
one and not separated.
o If host = financial liability within the scope of PFRS 9 OR a contract outside the scope of PFRS 9, then
an entity should separate when the conditions are met.
● Separation means that an entity accounts for embedded derivative separately in line with PFRS 9 and the host
contract in line with other appropriate standard.
● If an entity is not able to do this, then the whole contract must be accounted for as a financial instrument at fair
value through profit or loss.
Hedge Accounting
• Hedge accounting is designating one or more hedging instruments so that their change in fair value is an offset
to the change in fair value or cash flows of a hedged item.
• Hedge accounting is NOT mandatory.
• If an entity wants to apply hedge accounting, three (3) criteria must be met:
1. There are only eligible hedging instruments and eligible hedged items in the relationship.
2. An entity has the hedge documentation at the inception of the hedge, in which an entity designates and
describe the hedging.
3. Hedge effectiveness criteria are met.
• PFRS 9 sets the rules for three (3) types of hedges:
1. Cash flow hedge

2. Fair value hedge
3. Hedge of the net investment in the foreign operation

INVESTMENT IN ASSOCIATE
Recall Equity Securities
Ownership Type Standards Classification Measurement
< 20% Regular PFRS 9 FVPL / FVOCI FV

20% - 50% Significant PAS 28 Investment in Associate Equity Method
Influence
> 50% Control PFRS 3 & 10 Investment in Subsidiary Consolidation
ABC PLDT
20k shares Issued 100k shares
- investor/
(20%) @ ₱100/shares (₱10M)
shareholder
- investee (associate)
Presumption: Significant Influence → power to participate in major decisions

→ Board Member
Equity Method → mirror the changes/movements in the equity of the associate IIA
JEs: ABC Purchase Price
Share in NI Dividends
1. IIA 2M PLDT B/S (12/31)
Share in OCI Share in NL
Cash 2M
Assets
CA
2. IIA 400k Liabilities
Sh in NI (2M x 20%) 400k Equity:
OS 10M ①
3. Cash 100k NI 2M ②
RE
IIA (500k x 20%) 100k Dividends 500k ③
OCI UG 200k
300k ④
4. IIA 60k Rev. Surplus 100k
Sh in OCI (300k x 20%) 60k
Net Assets
Asset – Liabilities
Equity
Purchase Price reflects the FVNA of the associate Scenarios:

FVNA  BVNA → issue
PP > FVNA Goodwill (not presented separately)
BV → FV
PP = FVNA ⎯
Other Accounting Issues: PP < FVNA Gain on purchase
1. Intercompany Transactions → must be eliminated
Inventory
Sales ↑ PLDT ABC
COS ↑ AR IIA
GP ↑ Sales Share in NI
OPEX COGS
NI ↑ Inventory
2. Investment in Associate achieved in stages

< 20% 20% - 50%
PFRS 9 PAS 28
(FVPL, FVOCI) (Equity method)
3. Loss of Significant Influence

20% - 50% < 20%
PAS 28 PFRS 9
4. Potential Voting Rights

→ Occur whenever there is SR
→ Assumed to have been exercised
→ % ownership

The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
a. Representation on the board of directors or equivalent governing body of the investee.

b. Participation in the policymaking process.
c. Material transactions between the investor and the investee.
d. Interchange of managerial personnel.
e. Provision of essential technical information.
Accounting for Associates
In its consolidated financial statements, an investor should use the equity method of accounting for investments in
associates, unless:
a. An investment in an associate that is acquired and held exclusively with a view to its disposal within 12 months
from acquisition should be accounted for as held for trading under PFRS 9 (FVPL).
b. A parent that is exempted from preparing consolidated financial statements by PAS 27 may prepare separate
financial statements as its primary financial statements.
c. An investor need not use the equity method if all of the following four conditions are met:
1. The investor is itself a wholly owned subsidiary or is a partially owned subsidiary of another entity and its
other owners.
2. The investor's debt or equity instruments are not traded in a public market.
3. The investor did not file, nor is it in the process of filing, its financial statements with a securities commission
or other regulatory organization for the purpose of issuing any class of instruments in a public market.
4. The ultimate or any intermediate parent of the investor produces consolidated financial statements available
for public use that comply with PFRS.
An associate with outstanding preference shares
a. The investor computes its share of profits or losses after adjusting for the dividends on such shares, whether or not
the dividends have been declared on cumulative preference shares.
b. However, if the preference shares are noncumulative, adjustments for dividends are made only if there is a
declaration.
Implicit goodwill and fair value adjustments
On acquisition of the investment any difference between the cost of the investment and the investor’s share of the net fair
value of the associate’s identifiable assets, liabilities and contingent liabilities is accounted for in accordance with PFRS 3
Business Combinations. Therefore:
a) Goodwill relating to an associate is included in the carrying amount of the investment. However, amortization of
that goodwill is not permitted and is therefore not included in the determination of the investor’s share of the
associate’s profits or losses.
b) Any excess of the investor’s share of the net fair value of the associate’s identifiable assets, liabilities and contingent
liabilities over the cost of the investment
✓ Is included as income in the determination of the investor’s share of the associate’s profit or loss in the
period in which the investment is acquired.
Date of associate's financial statements
✓ The investor should use the financial statements of the associate as of the same date as the financial statements
of the investor unless it is impracticable to do so.
Losses in excess of investment
✓ The investor’s share in the associate’s losses cannot exceed the “interest in the associate” and shall discontinue
the application of the equity method if this is the case.
✓ After the investor's interest is reduced to zero, additional losses are recognized by a provision (liability) only to the
extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate.
o If the associate subsequently reports profits, the investor resumes recognizing its share of those profits only
after its share of the profits equals the share of losses not recognized.

INVESTMENT PROPERTY
→ PAS 40
Earning rentals (apartment → tenants)

Land or Building
Capital Appreciation (vacant lot)
Production/Supply of goods & services (operations)

Property, Plant and Equipment (owner-occupied property)
Admin purposes (office)
→ land, building, machinery, equipment
Example: Land & Building → PPE (related)

Scenario 1: Produce & Sell accounting books → printing; head office
ABC Company Condo → tenants → Investment Property

Apartment → tenants → PPE (related)
Scenario 2: Property Developer
Condo → for sale → Inventory
Measurement:
Initial Subsequent
Cost
@ Cost Cost Model → - Acc. Dep’n
→ incurred DM, DL, OH - Acc. Imp.
→ necessary to complete the IP CA/CV/BV
FV Model (not subject to depreciation)
→ MTM
→ changes in FV → P/L
Operating → no transfer of ownership → IP

Lease
Finance → w/ transfer of ownership → derecognized
Other Issues:
1. Partly IP & Partly PPE

Leased out (1 & 2) → IP
4
Office Yes
3 Sold Office (3 & 4) → PPE
2 separately?
1
Commercial
No → Significant
Example: 50 units 1 unit (office) → IP
1 unit rent → PPE
2. Ancillary services to occupants

- Security, maintenance
Ancillary Services Significant (Hotel) → PPE

Insignificant (Condo) → IP
3. Transfer between IP, PPE, Inventory

- Change in use
Cost Model → PPE @ CA

IP
Transfer PPE (FV) xx
1. IP → PPE/Inventory IP (CA) xx
P/L xx
IP (FV) xx
FV Model 2. Inventory → IP
Inventory (CA) xx
P/L xx
3. PPE → IP IP (FV) xx
Loss (P/L) xx
PPE (CA) xx
Revaluation Surplus xx
xx
Examples of investment property:
✓ Land held for long-term capital appreciation.

✓ Land held for undecided future use.
✓ Building leased out under an operating lease.
✓ Vacant building held to be leased out under an operating lease.
✓ Property under construction as investment property.
The following are not investment property and, therefore, are outside the scope of PAS 40:
 Property held for use in the production or supply of goods or services or for administrative purposes (Property,
plant and equipment).
 Property held for sale in the ordinary course of business or in the process of construction of development for such
sale (Inventories).
 Property being constructed or developed on behalf of third parties (Construction Contracts).
 Owner-occupied property (Property, Plant and Equipment).
 Property leased to another entity under a finance lease.
Intracompany rentals - Property rented to a parent, subsidiary, or fellow subsidiary.
✓ Not investment property in consolidated financial statements that include both the lessor and the lessee, because
the property is owner-occupied from the perspective of the group.
✓ However, such property could qualify as investment property in the separate financial statements of the lessor.
Recognition
Investment property should be recognized as an asset;
✓ When it is probable that the future economic benefits that are associated with the property will flow to the
enterprise.
✓ The cost of the property can be reliably measured.
Fair value model
✓ Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss
for the period in which it arises.
✓ Where a property has previously been measured at fair value, it should continue to be measured at fair value until
disposal, even if comparable market transactions become less frequent or market prices become less readily
available.
Cost Model
✓ After initial recognition, investment property is accounted for in accordance with the cost model.
Accounting for Transfers

From To Treatment
Investment property carried Owner-occupied Fair value at the change of use is the 'cost' of the
at fair value property or property.
inventories
Owner-occupied property Investment property Difference in carrying amount and fair value as
carried revaluation under PAS 16.
at fair value
Inventories Investment property at Difference in carrying amount and fair value is
fair recognized in profit or loss.
value
Investment property under Completed investment Difference between the fair value at the date of
construction property that will be transfer and the previous carrying amount should
carried at fair value be recognized in net profit or loss.
Investment property under Owner-occupied No change in the carrying amount of the property
the cost model property or transferred.
inventories

OTHER LONG-TERM INVESTMENT
1. Cash Surrender Value (CSV)
- Amount the insurance company pays upon pre-termination (refund < 100% premium)
- Financial Asset
Life insurance policy

ABC Philam Life
Premiums
- CEO
₱50k / year
- life insurance
5 years
proceeds JE:
CEO (immediate family) Insurance Exp 50k

Beneficiary Cash 50k
ABC (Company)
Insurance Exp 50k

Cash 50k
0 1 2 3 4 5
✔
2. Sinking Fund
- Cash set aside for repayment of long-term liability
- Bonds payable
Example:
X
ABC Bondholder
Y
₱10M Investor
Z
5 years
Int. + Principal
Interest
Administered by the entity (ABC) ABC X, Y, Z
Accounting Principal
Administered by the trustee (bank)
ABC
Statement ₱10M
of fund BSF
balance
Interest + Principal
Trustee
(BDO) Debt → interest
Invest
Equity → dividends

PROPERTY, PLANT & EQUIPMENT
→ PAS 16
Tangible assets Production/Supply of goods & services

PPE Used in business Rental (hotel)
LT in nature Admin
Non-current asset → more than 1 year
Examples: Measurement:
Purchase Price
1. Land • Initial → at cost Yes → Capitalize
2. Building Directly Attributable Cost → cost necessary No → Expense
3. Machinery for its intended use
Req. to capitalized cost
4. Equipment 1. Probable future economic benefit
5. Land Improvement 2. Can be measured reliably
6. Leasehold Improvement
7. Furniture and Fixtures Cost Model
• Subsequent → option
Revaluation Model
Modes of Acquisition:
DM, DL, OH
1. Self-constructed +
all directly attributable cost
Lump-sum Acquisition of land & building

Land
Usable → Purchase Price is allocated
1. If the building is Building
Not usable → 100% Land
1. CA of old building → Loss

2. Demolition Cost
2. Capitalized to new building (net of proceeds from SV)
Nonrefundable → Capitalized
Taxes
Refundable → not capitalized
Cash basis → cash payment

2. Acquisition On account → deduct discount whether taken or not
Cash Price Equivalent
Installment
PV of Installment
+ → if paid
1. FV of asset given up  Cash
- → if received
w/ commercial substance 2. FV of asset received
(difference in CF) 3. CV of asset given up
3. Exchange
CV of asset given up  Cash

w/o commercial substance
No G/L on exchange
1. FV of asset received
4. Trade-in
2. FV of installment issued
- Involves significant cash
- Car dealers
5. Issuance of Shares 1. FV of asset received

6. Issuance of Bonds 2. FV of instrument issued
7. Donation Unrelated party → income

- At FV Related party → donated capital (SP, APIC)

Directly attributable costs
Examples of directly costs that qualify for recognition include:
✓ Costs of employee benefits arising directly from the construction of acquisition of the item of property, plant and
equipment.
✓ Cost of site preparation.
✓ Initial delivery and handling cost.
✓ Installation and assembly cost
✓ Professional fees.
✓ Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items
produced while bringing the asset to that location and condition, such as samples produced when testing
equipment.
Cost of Land
a. Purchase price of the land plus transaction cost.

b. Unpaid mortgages and taxes in arrears assumed by the buyer.
c. Special assessment.
d. Cost to relocate present occupants from existing operating lease contracts and informal settlers.
e. Option money or the reservation fee for land that is finally acquired. This should not be confused with earnest
money that is a down payment and part of the purchase price.
f. Cost of permanent improvements to the land that is determined to be non-depreciable. This once again should be
clearly distinguished from concrete and metal structures that are naturally temporary and subject to wear and tear
with the potential for replacement. Such items shall still be capitalized as “land improvement”.
Systematic allocation
Depreciation Depreciable amount (Cost – RV)
→ matching principle Expected usage
Useful Life
PPE → revenue Physical wear & tear
(dep’n exp) Obsolescence
Methods:
Formula Base
𝐶𝑜𝑠𝑡−𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
1. Straight line – constant/uniform Depreciable Amount
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
𝑈𝐿+1
2. Sum of the years digit (SYD) UL x Depreciable Amount
2
- accelerated / decreasing
3. Declining Balance
2
a. Double (200%) x CA Carrying Amount
𝑈𝐿
1.5
b. 150% x CA Carrying Amount
𝑈𝐿
4. Units of production (usage)

a. Output 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐴𝑚𝑜𝑢𝑛𝑡
Depreciable Amount
b. Input 𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑠
5. Others
a. Composite – group
b. Retirement – no depreciation until the asset is retired
c. Replacement – no depreciation until the asset is retired & replaced Large number of similar item
d. Inventory – physical count
6. Leasehold Improvement
a. Useful Life of Lease Term, whichever is SHORTER
Accounting Changes
→ Changes in method, useful life, and/or residual value

→ Change in estimate
→ Prospective : does not affect prior period.

REVALUATION AND IMPAIRMENT Example:
1/1/25 ₱500 Calculator

REVALUATION 1/1/27 ₱300 → FV
Initial Subsequent Buy 2027 Model
Cost Replacement Cost ₱600 (brand new)
At cost Cost Model Accumulated Dep’n (200)
- Acc. Dep’n
- Acc. Imp. DRC ₱400
CA/CV/BV
FV
Revaluation Model
Depreciated Replacement Cost (DRC)
- revalued amount
 FV model
FVPL
Revalued Amount vs Carrying Amount

→ revaluation surplus (OCI)
→ FVOCI
Revaluation Surplus → RE (useful life)

Option (piecemeal realization)
Disposal / Sale
Proportional
Approaches
Elimination
✓ When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the
revaluation is treated in one of the following ways:
a. Restated proportionately with the change in the gross carrying amount of the asset so that the carrying
amount of the asset after revaluation equals its revalued amount. This method is often used when an asset is
revalued by means of applying an index to its depreciated replacement cost.
b. Eliminated against the gross carrying amount of the asset and the net amount restated to the revalued
amount of the asset.
✓ If an item is revalued, the entire class of assets to which that asset belongs should be revalued. This is to avoid
a mixture of costs and revalued amounts within a class of property, plant and equipment. The following are examples
of separate classes:
a. Land e. Aircraft
b. Land and buildings f. Motor Vehicles
c. Machinery g. Furniture & Fixtures
d. Ships h. Office Equipment
✓ If a revaluation results in an increase in value, it should be credited to equity under the heading "revaluation
surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognized as
impairment loss, in which case it should be recognized as income.
✓ The revaluation surplus shall be transferred to retained earnings in one of the following ways:
If sold If NOT Sold

Asset is Depreciable The balance of revaluation surplus Revaluation surplus divided by remaining life
Asset is non-Depreciable The balance of revaluation surplus NONE
✓ If an asset’s carrying amount is decreased as a result of a revaluation (meaning impaired), the decrease shall be
recognized in profit or loss. However, the decrease shall be debited directly to equity under the heading of
revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.

IMPAIRMENT
Initial Subsequent Cost

Indicators of Impairment:
- Acc. Dep’n
At cost Cost Model - Acc. Imp. 1. Physically Damaged
CA/CV/BV 2. Obsolescence
3. Not well maintained
Revaluation Model
→ ↓ in the value of asset
PPE
PAS 36 IP Rule:
Intangible Assets An asset must not be carried
→ excludes: above its Recoverable Amount
Inventory (PAS 2) &
Financial Asset (PFRS 9)
Impairment Loss = Carrying Amount – Recoverable Amount
Higher FVLCOD (sell now) → Selling Price – Cost to Sell (commission)

(FVLCTS)
Value In Use → PV of Inflows

- PV of Outflows
(continue to use)
PV of Net CF
SCENARIO #1 SCENARIO #2
“Internal and external indicators” of impairment Annual impairment testing
1. Items of property plant and equipment. 1. Intangible assets with indefinite lives.
2. Intangible assets with definite useful lives. 2. Intangible assets not available for use.
3. Cash generated units that are tested for 3. Cash generating units with allocated goodwill.
impairment due to the unavailability of
estimating the recoverable amount of an
asset that is impaired included in the CGU.
Recognition of an Impairment Loss
• An impairment loss should be recognized whenever recoverable amount is below carrying amount.
• The impairment loss is an expense in the income statement unless it relates to a revalued asset where the value
changes are recognized directly in equity.
• Adjust depreciation or amortization charges for future periods.
Reversal of an Impairment Loss

• Internal and external indicators of reversal are identified.
External sources Internal sources
● Significant increase in market value. ● Changes in way asset is used or
● Changes in technological, market, economic or expected to be used.
legal environment. ● Evidence from internal reporting indicates
● Changes in interest rates. that economic performance of the asset
● Market interest rates have decreased. will be better than expected.
• Individual asset – the difference of the increased recoverable amount is recognized in profit and loss unless
asset carried at revalued amount.
• CGUs – allocated to assets of CGUs on a pro-rata basis.
• Goodwill – impairment of goodwill is never reversed.
• Limitation – the revised carrying amount after reversal should not exceed the carrying amount of the individual
asset and assets within the cash generating unit if impairment loss was not recognized.

CASH GENERATING UNIT (CGU)
→ Smallest identifiable group of assets

→ Generate cash flows
→ Independent from other asset (product line)
Fortuner
Innova
Toyota
Altis
Vios
Examples
Department Store
Supermarket
SM
Cinema
Food Court
Rules:
1. Goodwill (100%)
Impairment Loss
2. Other Noncash Assets (NCA)
(prorate based on CA)
Rule:
The carrying amount of the NCA after the allocation should not be below the recoverable amount.

WASTING ASSETS & DEPLETION
- Mining companies
- Mineral / natural resources
- Gold, silver, copper, coal, etc.
Physically consumable
Wasting Asset
Irreplaceable
Cost
Cost of Wasting Asset (WA)
1. Acquisition Cost
→ Price paid
→ cost of the land
→ all directly attributable cost
2. Exploration & Evaluation Cost → PFRS 6

→ cost needed to find or locate natural resources
→ assessment of technical feasibility
Rights to explore (DENR, LGU)

Examples Buy studies from experts
Sampling & Trenching (testing)
Before legal rights After legal rights w/ technical feasibility &

are obtained are obtained commercial viability
PFRS 6 not yet PFRS 6 applied PFRS 6 not applicable
applicable (development cost)
Company Capitalized ✔
Policy Expensed
3. Development Cost
→ Natural resources are proven to exist
→ Site preparation
→ Cost incurred for the actual production or extraction of the minerals and other resources.
→ Naturally incurred multiple number of times during the period of production and will usually cause the
recomputation of the rate.
Tangible Equipment Cost → heavy equipment (trucks, drilling machine, crushing equipment, excavation
tools, bunker)
Intangible Development Cost → drilling cost, cost of construction

→ Ex. tunnels, wells, shafts
4. Restoration Cost
→ Asset retirement obligation (ARO)
→ Required by law (DENR, LGU)
→ To bring back land to original condition
SUBSEQUENT MEASUREMENT
After recognition, an entity applies either the
1. Cost model or
2. Revaluation model to the exploration and evaluation assets.
The journal entry assuming there is increase in value of wasting asset is:
Wasting asset XX
Revaluation surplus XX

DEPLETION
→ Removal or extraction of natural resources

→ Systematic allocation of the depletable amount of a wasting asset
→ Units of production method (output method)
𝐶𝑜𝑠𝑡−𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
Depletion = x Actual Output
𝑇𝑜𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑜𝑢𝑡𝑝𝑢𝑡
→ Compliant w/ matching principle
Inventory (Depreciation Expense) → COGS
Change in the units estimated to be extracted and additional development costs:

When there is a charge in the units estimated to be extracted or when the company incurs additional costs, these are
regarded as change in accounting estimate to be handled currently and prospectively. The company needs to
compute for the new depletion rate per unit using this formula:
Remaining Depletion Cost

New Depletion Rate/Unit =
Remaining revised estimate of the productive output
Depletion = Depletion rate per unit x units of extracted during the year
Depreciation of mining equipment
→ Depreciation of mining equipment shall be systematically allocated over the asset's useful life.
→ The useful life of the asset depends on whether that asset is immovable or movable.
→ If the equipment is immovable, depreciation is based on the life of the equipment or life of the wasting asset
whichever is shorter
→ If the equipment is movable; the depreciation is based on the life of the equipment.
Declaration of Dividends
GR: Maximum Dividends = Unrestricted RE
Shareholder’s Equity:
Common Stock 500k 1.2M 1M RE
Retained Earnings 1M 200K C/S
1. Creditors
Legal Capital
2. Shareholders
→ Trust fund doctrine
EXC: Wasting Assets of Mining Companies

→ wasting assets doctrine
Max Dividends = Unrestricted RE + Accumulated Depreciation (Sold)
Liquidating Dividends
Under the trust fund doctrine, the capital stock of a corporation is conceived as a trust fund for the protection creditors.
Consequently, such capital cannot be returned to stockholders during the lifetime of the corporation. However, the
corporation can pay dividends to stockholders but limited only to the balance of retained earnings.
Exception to the trust fund doctrine:

Wasting asset doctrine - under this doctrine the wasting asset corporation or a company engaged in the extraction
of a natural resource, can legally return capital to stockholders during the lifetime of the corporation.
Accordingly, a wasting asset corporation can pay dividend not only to the extent of retained earnings but also to the
extent of accumulated depletion.
Formula:
Accumulated profits – unappropriated XX

Add: Accumulated depletion XX
Total XX
Less: Capital liquidated in prior years (XX)
Depletion in ending inventory (depletion per unit x units in the Ending Inventory) (XX)
Maximum dividend XX

GOVERNMENT GRANT
→ PAS 20
→ Assistance from the Government
Acquire
₱10M Government Grant related to asset
PH Government ABC Co. (Construction) Construct
Subsidy Government Grant related to income → calamity losses
Condition:
Construct an (residual definition)
orphanage
Accounting for Government Grant
Initial: Liability → Income

- matching principle (income vs Expense)
Recognitions:
→ Reasonable assurance that the actual condition will be complied with.

→ Grants will be received.
Presentation
Liability (Deferred Income GG) → NCL

Option
Deduction from asset (offset)
Journal Entries
As Deferred Income: As Deduction from Assets:
Machinery xx Machinery xx
Cash xx Cash xx
Cash xx Cash xx
DIGG xx Machinery xx
Dep’n Exp. xx Dep’n Exp. xx

Acc. Dep’n xx Acc. Dep’n xx
DIGG xx
Income from GG xx

BORROWING COST
→ PAS 23
→ Self-constructed PPE
→ interest and other costs that an entity incurs in connection with borrowing of funds.
Loan Office
BPI ABC
₱20M, 10% Building
→ Borrowing Cost = Int Exp Qualifying Asset
→ Capitalize (DAC) → takes substantial time to complete
0 ₱10M 1 ₱10M 2 Loan ₱20M

Specific Borrowing Used (10M)
Loan ₱20M Equity → Dividends
Int Exp ₱2M Excess ₱10M
Int 10% Debt → Interest
Types of Borrowing Income (500k) x 5%
₱1.5M 500k
General Borrowing
→ working capital purposes Formula:
(purchases, rent, salaries) Average expenditure x Capitalization rate
B/S
Liability
NP 5M 3M excess
LP 7M (incidental)
Rule:
The capitalizable borrowing cost must not exceed actual interest expense
Jan 1 March 1 Dec 31
Loan Expense
Construct
Start: End
Interest
when incurred Overlapped → substantially complete
Expenditures
→ ready for use
Qualifying asset
• A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for the intended use
or sale.
• The following may be qualifying asset:

o Manufacturing plants
o Power generation facilities
o Intangible assets
o Investment properties
• Assets that are ready for their intended use or sale when acquired are not qualifying asset.
Asset financed by specific borrowing
• The amount eligible for capitalization on that asset shall be determined as the actual borrowing cost incurred
during the period less any investment income from the temporary investment of those borrowings.
Asset financed by general borrowing
• The amount of capitalizable borrowing cost is equal to the average carrying amount of the asset during the
period multiplied by a capitalization rate or average interest rate.
• However, the capitalizable borrowing cost shall not exceed the actual interest incurred.
• The capitalization rate or average interest rate is equal to the total annual borrowing cost divided by the total
general borrowings outstanding during the period.
• Investment income from general borrowing is not deducted for capitalizable borrowing cost.

Specific borrowing for asset used for general purpose
• The borrowing shall be treated as a general borrowing in determining capitalizable borrowing cost.
Commencement of capitalization
• The capitalization of borrowing costs as part of the cost of a qualifying asset shall commence when the
following three conditions are present:
✓ When the entity incurs expenditures for the asset.
✓ When the entity incurs borrowing costs.
✓ When the entity undertakes activities that are necessary to prepare the asset for the intended use or
sale.
Suspension of capitalization
• Capitalization of borrowing costs shall be suspended during extended periods in which active development is
interrupted.
• However, capitalization of borrowing costs is not normally suspended during a period when substantial
technical and administrative work is being carried out.
Cessation of capitalization
• Capitalization of borrowing costs shall cease when substantially all the activities necessary to prepare the
qualifying asset for the intended use or sale is complete.

BIOLOGICAL ASSETS
Living animals (chicken, cows, pigs, fish, horses, sheep, etc.)

Biological Assets (BA)
Living Plants
Consumable (vegetables – onion, garlic, cabbage, tomatoes)
PAS 41 Opposite: Bearer Plants/Trees (coconut, mango, avocado, papaya)

→ intended to bear fruits
→ classified as PPE
Agricultural Produce (AP) → not yet processed

→ harvested products (eggs, coconut fruits)
Examples:
1. Cows Milk Cheese

Classification BA AP Inventory
Measurement FVLCTS FVLCTS LCNRV (PAS2)
(point of harvest)
2. Avocado Trees Avocado Fruits Avocado Shake

Classification PPE (PAS 16) AP Inventory
Measurement Cost FVLCTS LCNRV (PAS2)
(point of harvest)
Measurement:
FVLCTS FVLCTS
Commissions paid to brokers
CTS Levies by regulatory agencies
Transfer taxes & duties
Changes in FVLCTS → P/L
FVLCTS Age
Disclosure:
Price Change End vs Beg Original
Total Change in FVLCTS
Physical Change End vs End Current vs Original
→ physical growth
Key Definitions:
o Agricultural activity is the management by an entity of the biological transformation of biological assets for sale,
into agricultural produce, or into additional biological assets.
o Agricultural produce is the harvested product of the entity’s biological assets.
o A biological asset is a living animal or plant.
o Biological transformation comprises the processes of growth, degeneration, production, and procreation that
cause qualitative or quantitative changes in a biological asset.
o A group of biological assets is an aggregation of similar living animals or plants.
o Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.
o Bearer plant is a living plant that:

✓Is used in the production process of agricultural produce.
✓Is expected to bear produce for more than one period.
✓Has a remote likelihood of being sold (except as part of incidental scrap sales)

INTANGIBLE ASSETS
→ PAS 38
Identifiable → legal rights (IPO)

Definition Non-monetary → not easily convertible to cash
w/o physical substance
Measurement
Initial Subsequent
Cost
Cost Cost Model - Acc. Dep’n → RV = Ø
- Acc. Imp.
PP + DAC CA/CV/BV
Revaluation Model
Examples:
1. Patent
→ Gives an inventor the right to prevent other people from using or selling an invention.
→ Ex: Pfizer Covid Vaccine
→ Incur research & development cost
Research Phase Development Phase Production Phase
- Discovery of new - Application of research - Commercial products

knowledge - Technical / - Distribution
- Studies related to Technological - Inventory (PAS 2)
vaccine feasibility
- Lab research - Prototypes / models
- Clinical testing - Mass testing
- EXPENSED - FDA approval
(100%) - Legal cost & registration
- CAN BE CAPITALIZED
Useful Life
Amortization SHORTER
Legal Life (20 years)
2. Trademark
→ Symbol, sign, logo, name that is legally registered representing a company or product
→ Brand name, tradename
→ Not subject to amortization
→ Legal life → 10 years (automatic renewal)
→ Indefinite life (impairment testing)
3. Copyright
→ Exclusive right given to authors, artists, composers, etc.
→ Books, songs, videos
1. Patter of benefit
→ Subject to amortization 2. SL method
4. Franchise
→ Right to operate a business or sell products
Right/license
Franchisor Franchisee
IFF + Periodic FF (% of sales)
(IA) (Exp)
→ Subject to amortization
5. Goodwill
→ PFRS 3 GW = Purchase Price – FVNA
→ Only arises in Business Combination - unidentifiable
→ Excess payment

6. Others
a. Computer Software – technological feasibility
Own use → Intangible Assets

Classification Sale to others → Inventory
Integral part of a machine → PPE
b. Website
Own use → Intangible Assets
Classification Advertising / promotion → OPEX
For Sale → Inventory
c. Customer List → database of customer

Purchased → Intangible Assets
Classification
Internally Generated → Expensed
Impairment Rules (PAS 36)
Indicators
w/ w/o
Definite ✔ ✖
(patent, copyright, franchise)
Useful Life
Indefinite ✔ ✔
(goodwill, trademark)
Recognition and Initial Measurement

An enterprise to recognize an intangible asset, whether purchased or self-created at cost if, and only if:
• It is probable that the future economic benefits that are attributable to the asset will flow to the enterprise.
• The cost of the asset can be measured reliably.
Initial Measurement and Subsequent Expenditures

• Intangible assets are initially measured at cost.
• Subsequent expenditure on an intangible asset after its purchase or completion should be recognized as an
expense when it is incurred.
Internally Generated Intangible Assets

• To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the
generation of the asset into:
o Research phase.
o Development phase.
• If an entity cannot distinguish the research phase from the development phase of an internal project to create an
intangible asset, the entity treats the expenditure on that project as if it were incurred in the research phase only.

CURRENT LIABILITY (PAS 1)
A=L+E
Legal → contracts / law
Present obligation
Constructive → expected
Liability Transfer an economic resource→ pay cash, deliver goods, render services
Past event → incurred
→ probable & measurable
Presentation
B/S
w/n operating cycle
Current → due to be settled
w/n 12 months
Noncured → residual
Balance Sheet Classifications
Current liabilities – are based on the following criteria:

✓ it is expected to be settled in the entity’s normal operating cycle;
✓ it is held primarily for the purpose of being traded;
✓ it is due to be settled within 12 months after balance sheet date;
✓ the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after balance
sheet date.
Examples:
CL NCL
NP (ST) Rent payable
1. Trade & Other Payable Accrued Expense Interest payable 1. Notes payable
Unearned Revenue Salaries payable 2. Bonds payable
Ordinary
3. Leases
course of
4. Income taxes
business
5. Pension
2. Estimated Liabilities (premiums & warranties)
3. Provisions & Contingencies
Refinancing → replacement of old loan with a new loan
Ex. LP (MB) 10M 7/1/30 12/31/30 3/31/31 7/1/31

Issued 7/1/26
Maturity 7/1/31 + 5 = 7/1/36 ② BS Date ① Date of Maturity
③ FS Date ③ Issuance date
Reporting
GR: CL ① → CL
EXC: Refinancing ② → NCL (adjusting event)
③ → Discretion to Refinance → NCL
(credit line)
Treatment of Currently Maturing Long-term Debt that is Refinanced on a Long-term Basis –
• Current – if the original term was for a period longer than 12 months and an agreement to refinance or to reschedule
payment on a long- term basis is completed after balance sheet date and before the financial statements are
authorized for issue.
• Noncurrent – if the refinancing is completed on or before balance sheet date and the refinancing is an adjusting
event. Also, if the entity has the discretion to refinance or roll over an obligation for at least 12 months after balance
sheet date. Note that the refinancing or rolling over must be at the discretion of the entity; otherwise, such obligation
is classified as current liability.

Payable on Demand: breach of contract
GR: CL
① → CL
EXC: Grace Period
② → NCL
Obligations
Estimated Liability Amounts are not definite
Payees cannot be identified
1. Premiums
Used for promotions
Product (Coffee) → Sales Stand Alone
Customer Loyalty program → Ex. SB Selling Price
points/credits/awards Points (Planner) → Unearned Revenue
2. Warranties → free repairs, free replacement of parts
Provisions
- Existing liabilities w/ uncertain timing or amount

- Are equal to estimated liabilities or loss contingencies that are accrued because they are both probable and
measurable.
Court case
Ex. ABC XYZ
Rules:
Exp/Loss xx
Probable → > 50% likely to happen → provision Liab xx
Possible → 50% or less → contingent liability → disclosure
Remote → 10% or less → no JE, no disclosure
Measurement:
1. Best Estimate (management)

2. Expected Value
3. Midpoint Different possible outcomes
Contingencies
Possible Obligation
Contingent Liability
(ABC) Present Obligation Not probable; or
Not measurable
POV
Probable → disclosure
Contingent Asset Possible No JE
(XYZ) Remote No disclosure
→ conservative
Contingent Liabilities
o Definitions:
✓ Possible obligations from past events that will be confirmed only by the occurrence or non- occurrence of
one or more uncertain future events not wholly within the control of the enterprise; or
✓ Present obligations from past events but are not recognized because they are not probable that an outflow
of resources will be required to settle the obligation, or the obligation cannot be measured reliably.
o Recognition – should not be recognized but should be disclosed, unless the possibilities of an outflow of
resources are remote.
Contingent Assets
o Definition – possible assets from past events whose existence will be confirmed only by the occurrence or
non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
o Recognition – should not be recognized but disclosed where inflows of economic benefits are probable.
o The disclosure includes a brief description of the contingent asset and an estimate of its financial effects. If
contingent assets are only possible or remote, no disclosures are required.

NOTE PAYABLE AND DEBT RESTRUCTING (PFRS 9)
Inventory ₱100k
ABC XYZ
PN
Inventory NR
100k 100k
NP Sales
Measurement: PFRS 9: Financial Instrument FA (receivables, inventory)

FL
Initial: FV – TC
Subsequent: AC → amortization table

Initial Subsequent
ST (≤ 1 year) LT (> 1 year)

FV = Face FV = PV
Interest-bearing = Face
Noninterest-bearing = Discounted value
FV Option:
→ irrevocable
TC → Expensed
Effects No Amortization FVPL
∆s to FV → P/L
Note issued solely for cash

→ When a note is issued solely for cash the present value is equal to the cash proceeds.
Fair value option of measuring note payable

• At initial recognition, a note payable may be irrevocably designated as at fair value through profit or loss
(FVPL).
• The gain or loss on financial liability designated at fair value through profit or loss shall be accounted for as
follows:
o The change in fair value attributable to the credit risk is recognized in other comprehensive income.
▪ Credit risk is the risk that the issuer of the liability would cause a financial loss to the other
party by failing to discharge the obligation.
▪ Credit risk does not include market risk, such as interest risk, currency risk and price risk.
o The remaining amount of the change in fair value is recognized in profit or loss.
• Under the fair value option, any transaction cost is recognized as outright expense.
• There is no amortization of discount and premium on note payable.
DEBT RESTRUCTURING
→ is a situation where the creditor, for economic and legal reasons related to the debtor’s financial difficulties, grants
to the debtor concession that would not otherwise be granted in a normal business relationship.
1M
ABC XYZ
(borrower) Principal + Int. (lender/creditor)
1. Asset Swap
- NCA (AR, Inventory, Investment, PPE)
Land (mortgage, collateral security)
- CV of Liability vs CV of Asset
- Transfer by the debtor to the creditor of any asset in full payment of an obligation.
- Treated as a derecognition of a financial liability or extinguishment of an obligation.

2. Equity Swap
- Issuance of shares
- Creditor → Shareholder
- Transaction whereby a debtor and creditor may renegotiate the terms of a financial liability with the result
that the liability is fully or partially extinguished by the debtor issuing equity instruments to the creditor.
- Hierarchy
1. FV of shares
2. FV of Liability
3. CV of Liability
3. Modification of Terms
- Forgiveness of accrued interest
- Decrease in interest rate (10% → 8%)
- Reduction in Principal (1M → 800k)
- Extension of Maturity (3 → 5)
- The difference between the carrying amount of the old liability and the present value of new or
restructured liability shall be accounted for as a gain or loss on extinguishment of debt.
G/L
CV (old) w/ substantial modification → GL ≥ 10% of CA (old) ✔

vs
w/o substantial modification → G/L < 10% of CA (old) ✖
PV (new)
discounted using
old effective rate
4. Dacion en pago accounting

- Arises when a mortgaged property is offered by the debtor in full settlement of the debt.
- Accounted for as an asset swap form of debt restructuring.
- Requires of gain or loss based on the balance of the obligation including accrued interest and other
charges.
- If the balance of the obligation including accrued interest and other charges is more than the carrying
amount of the property mortgaged, there is a gain on extinguishment of debt.
- Otherwise, if the balance of the obligation is less than the carrying amount of property mortgaged, there is
a loss on extinguishment.

BONDS PAYABLE
- Form of financing; Bond indenture
Bondholder X
Globe Telecom
(investor) Y
(issuer)
Z
100M 100M
P+i NI
Inv. In Debt Securities Cash

100M 100M
Cash BP
Cash Int. Exp.

10M 10M
Int. Inc. Cash
Classifications of Financial Liabilities (PFRS 9)
✓ Financial liabilities at fair value through profit or loss (FL@FVTPL)

1. Held for trading
2. Designated at fair value through profit or loss
✓ Financial liabilities at amortized cost (FL@AC)
Measurement: PFRS 9
Initial : FV – TC
+ Discount
: Bond Issuance Cost
- Premium
Subsequent: AC
Market, Discount, Yield Coupon, Stated PV/Price/FV
Effective = Nominal Face

Issuance of BP Effective > Nominal Discount
Effective < Nominal Premium
Compound Financial Instrument Liability

Separate
Equity
Assets - Liabilities = Equity
(FI – L (FV)) = E (residual)
1. Convertible Bonds
- Bondholder has the right to convert bonds → shares
Liability → BP
Components
Equity → conversion privilege (SP or APIC)
2. Bonds w/ Share Warrants

- Bondholder has a right to buy share at a fixed price
Bonds + Share
Int. Inc + Div. Inc.
BP is not derecognized
Required cash payment

Accounting for Changes in Fair Value
o Changes in fair value of liabilities held for trading at fair value through profit or loss – may be recognized
as either unrealized gain or loss and be presented in profit or loss.
o Changes in fair value on liabilities designated as at fair value through profit or loss – may be recognized as
either unrealized gain or loss and be presented as follows:
1. Changes in fair value not attributable to change in credit risk present the unrealized gain or loss in the
profit or loss.
2. Changes in fair value attributable to change in credit risk.
▪ If it would create or enlarge accounting mismatch in profit or loss, it will be presented in profit or
loss.
▪ If it would not create or enlarge accounting mismatch in profit or loss, it will be presented in other
comprehensive income (OCI).
▪ Remaining amount of change in fair value, present the unrealized gain or loss in the profit or loss.
Presentation
o Financial Statement Presentation of Financial Liabilities through Profit or Loss – shall be presented in
the current liability section of the statement of financial position.
o Financial Statement Presentation of Financial Liabilities through Amortized Cost – the net carrying
value is to be reported as part of liabilities section in the statement of financial position. The net carrying value
is provided as follows:
Net Carrying Value

1. Bonds issued at face amount Face amount xx
2. Bonds issued at a discount Face amount xx

Less: Discount (xx)
Net Carrying Value xx
3. Bonds issued at a premium Face amount xx

Add: Premium xx
Net Carrying Value xx

LEASES
- PFRS 16
ABC (Lessee) Library XYZ (Lessor)

- 3-storey building Classroom
(1,000 sqm) Classroom
Right to use
10 years
₱100/sqm/month
Contract of Lease
Rental Rate
Contract Escalation Clause
Lease Term (LT)
Security Deposit
Lease
Conveys the right to use
Period of time
Consideration
Measurement: (Lessee)
GR: All leases shall be classified as Finance Lease
ROUA → Cost
Initial Subsequent - Acc Dep
LL → AC - Acc Imp
1/1 12/31 CA
1/1 Right of use asset (ROUA) – PPE

Lease Liability (LL) – NCL
ST (≤ 12 months)
Exception: Operating lease SL Method
Low Value
LEASE LIABILITY (LL)
- PV of minimum lease payments (MLP)

- Lessee → Lessor
- Excludes executory cost (taxes, security, maintenance); Lessee → 3rd party
1. Fixed Rentals
2. Variable Rentals
3. Purchase Option
- Lessee has the right to buy the lease asset
- Reasonably certain
- Leased asset will go to the lessee
Either, or
4. Guaranteed Residual Value (GRV) → can’t be both
- Assured RV at the end of LT
- Leased asset will revert back to the lessor
5. Penalties (pre-terminated)
PFRS 16 (Hierarchy of Discounting)
1. Implicit Interest Rate → required / target return of lessor

2. Incremental Borrowing Rate
- Similar asset
- Bank interest rate

RIGHT-OF-USE ASSET (ROUA) ROUA > LL POV of Lessee:
- PPE (@ Cost → PP + DAC) Unguaranteed Residual Value (URV) is

ALWAYS IGNORED
(not included in ROUA or Depreciation)

1. PV of MLP
2. Lease Bonus – Lease Incentives
(lessee → lessor) (lessor → lessee)
→ more favorable → reimbursement
3. Initial Direct Cost (IDC) → DAC

→ Broker’s fee, agent’s fee, commission, finder’s fee
→ Restoration Cost
Remove
→ Leasehold improvements
Restore
→ Must be written
Depreciation: SL Method
LT UL
1. No transfer of ownership ✔ ⎯
2. w/ transfer ⎯ ✔
3. Purchase Option ⎯ ✔
4. GRV ✔ ⎯
LESSOR:
Transfer of Risks & Rewards
Operating Lease ✖ → SL method

Classifications → Equal rental income
Finance Lease ✔
1. Transfer of ownership to the lessee
2. Bargain purchase option (BPO) → significantly lower
3. Lease term is a major part of economic life
LT ≥ 75% UL
4. PV of MLP amounts to substantially all of the FV of a lease asset (LA)

PV of MLP ≥ 90% FV
5. Leased asset is of specialized nature

→ Major modifications
DIRECT FINANCING (DF)
- Applies to companies engaged in leasing/financing

- Heavy equipment
JEs:
Truck Truck
Seller BDO Customer Lessee: ROUA 4M
4M Rentals LL 4M
1M/year (5M)
- int income (implicit int rate) Lessor: Lease Receivable (gross) 5M
Equipment 4M
UII 1M
B/S
Gross Investment → MLP (rental + PO + GRV) + URV
- Net Investment → Cost of Equipment + IDC LR 5M
UII (1M)
Unearned Int. Inc. (UII)
4M

1/1/25 1/1/26 1/1/27 1/1/28 1/1/29 1/1/30
(4M) 1M 1M 1M 1M 1M
Gross Investment
Net Inv.
(PV of MLP)
SALE-TYPE (ST)
- Manufacturer & seller

- Ordinary course of business → Sales & COGS
JEs:
ABC Customer
Rentals Lessor: LR (gross)
Sales PV of MLP
- Manufactures UII FV of CA
- Sells trucks → revenue recognition
- w/ mark up (GP) COGS → conservative
- int. inc. & markup Inventory
Date of lease contract

Inception Date Earlier
Date of commitment
(signing)
Commencement Date → 1st day of lease contract

→ PV of MLP
Lease Bonus → recognized over lease term
SALE & LEASEBACK (PFRS 16 → LESSEE)
Sells building
ABC XYZ (buyer-lessor)
- need cash & bldgs. 20M
(seller-lessee)
Leases building
₱1M/year
Advantages:
Seller-Lessee Buyer-Lessor
- Source of financing - Stable income

- Tax advantages - Tax advantages
(rent exp, int exp, dep’n exp)
- Avoids executory cost
Scenarios:
1. SP = FV
ROUA → in proportion to the rights retained
LL → PV of MLP
2. SP > FV
→ Excess → additional financing
3. SP < FV
→ Difference → prepayments of rentals
Right to control the use of an asset
A contract conveys the right to control the use of an asset if throughout the period of use, the customer has the right to:
✓ Obtain substantially all of the economic benefits from the use of the identified asset.
▪ The customer can obtain substantially all the economic benefits from the use of the asset by having exclusive
use of the asset throughout the period of use.
▪ A customer can obtain economic benefits directly or indirectly in many ways, such as using, holding or
subleasing the asset.
✓ Direct use of the identified asset.

▪ A customer has the right to direct use of the asset when the customer has the right to direct how and for what
purpose the asset is used throughout the period of use.
Initial measurement of right of use asset

• A right of use asset is defined as an asset that represents the right of a lessee to use an underlying asset
over the lease term in a finance lease.
• The lessee shall measure the right of use asset at cost at commencement date.
• The cost of right of use asset comprises:
✓ The amount of initial measurement of the lease liability or the present value of lease payments.
✓ Lease payments made to lessor at or before commencement date, such as lease bonus, less any lease
incentives received.
✓ Initial direct costs incurred by the lessee.
✓ Estimate cost of dismantling, removing and restoring the underlying asset for which the lessee has a present
obligation.
Subsequent measurement of right of use asset

• A lessee shall measure the right of use asset applying the cost model.
• To apply the cost model, the lessee shall measure the right of use asset at cost less any accumulated
depreciation and impairment loss.
• Moreover, the carrying amount of the right of use asset is adjusted for any remeasurement of the lease liability.
Depreciation of right of use asset

• The lessee shall apply normal depreciation policy for right of use asset.
• The lessee shall depreciate the right of use asset over the useful life of the underlying asset under the following
conditions:
✓ The lease transfers ownership of the underlying asset to the lessee at the end of lease term.
✓ The lessee is reasonably certain to exercise a purchase option.

INCOME TAX
→ PAS 12
Interperiod → TD ITE-C
Audited FS (BS, IS, SCF, SCE) Intraperiod → Total ITE Deferred
Corporation
ITR Benefit
I/S (PFRS) ITR (Tax Code)
Revenues Taxable Revenues (GI)
Accrual Cash basis
- Expenses - Deductible Expense (AD)
Inc. before Tax (AI, FI, Pretax) Taxable Income
- Income Tax x Tax rate (25% RCIT)
Net Income Income Tax
I/S ITR
Differences
Non-Taxable Income (NTI) ✔ ✖ (NEVER)
1. Permanent Difference (PD)
Non-Deductible Expense (NDE) ✔ ✖ (NEVER)
a.
Income subject to Final Taxes (interest income, unlisted shares)
NTI
Exempt Income → dividends
b.
Nondeductible expenses → penalties
c.
NDE
Subject to limit → contributions
d.
Timing Difference
2. Temporary Difference (TD)
I/S ITR
2025 2026 2025 2026
PFRS – Sale ✔ ✖ ✖ ✔ → Taxable TD (DTL)

3. Installment Sale
Tax Code – Collect AR Cash
Sales AR
a. Bad Debt Expense PFRS – Est ✔ ✖ ✖ ✔ → Deductible TD (DTA)

Tax Code – w-off BDE ADA
ADA AR
DTA DTL
I/S Approach → ∆ BB BB
Approaches ∆ ∆
B/S Approach → ending balance
→ ITE, DTA, DTL
EB EB
Summary:
AI > TI → DTL negative adjustment
AI < TI → DTA positive adjustment
I/S Approach B/S Approach

2025 2026
CA
Accounting Income (AI) 1M 2M
- Tax Base (TB) → CA of A & L using tax code
 Permanent Differences:
Difference
Interest Income (50k) ⎯ x Tax Rate
Penalties 70k ⎯ DTA / DTL
AI subject to Tax 1.02M 2M
 Temporary Differences: Summary:
Installment Sale (100k) 100k
BDE 60k (60k) Assets : CA > TB → DTL
Taxable Income 980k 2.04M : CA < TB → DTA
x 25% x 25% Liab. : CA > TB → DTA
Income Tax Payable 245k 510k : CA < TB → DTL

An entity has to make the following adjustments to convert accounting profit into taxable profit:
✓ Add back the expenses recognized but nondeductible for tax purposes.
✓ Add income not recognized but included under tax regulations.
✓ Deduct expenses not recognized but deductible for tax purposes.
✓ Deduct income recognized but not taxable under tax regulations.
Deductible temporary differences

a. Bad debts
b. Estimated expenses
c. Impairment loss/ unrealized loss
d. Research cost
e. Excess of financial over tax dep’n.
f. Cash received in advance
Taxable temporary differences

a. Prepayments
b. Development costs
c. Excess of tax over financial dep’n.
d. Sales on account or installment
e. Cost recovery method for tax and percentage of completion for financial
f. Unrealized gains
Taxable income → based on applicable tax laws – appearing on income tax returns
Examples of nontaxable or tax-exempt revenues are:

✓ Gain from settlement life insurance of officers and employees and interest income on government securities
(municipal bonds, treasury bills) and deposits.
Examples of non-deductible expenses are:

✓ Fines and penalties for violation of law, charitable contributions in excess of tax limitation, and premiums on life
insurance for officers and employees when the company is the beneficiary.
Deferred income tax

• Deferred income tax is the income tax payable (recoverable) in future periods in respect of the temporary
differences, unused tax losses and unused tax credits.
• Deferred tax liabilities result from taxable temporary differences and deferred tax assets result from
deductible temporary differences, unused tax losses and unused tax credits.
Temporary differences
● Temporary differences are differences between the carrying amount of an asset or liability in the statement of
financial position and its tax base.
● When the carrying amount of an asset or a liability is greater than its tax base, then there is a taxable temporary
difference and it gives rise to deferred tax liability.
● When the carrying amount of an asset or a liability is lower than its tax base, then there is a deductible temporary
difference and it gives rise to deferred tax asset.
Offsetting
● Offsetting the current income tax

o An entity can offset current income tax assets and liabilities if two conditions are fulfilled:
▪ An entity has a legally enforceable right to set off the recognized amounts.
▪ An entity intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
● Offsetting the deferred income tax

o An entity can offset deferred income tax assets and liabilities if two conditions are fulfilled:
▪ An entity has a legally enforceable right to set off the current income tax assets against current
income tax liabilities.
▪ The deferred tax assets and the deferred tax liabilities relate to income taxed levied by the same
taxation authority on either:
✓ The same taxable entity.
✓ Different taxable entities which intend to settle current tax liabilities and assets on a net basis or
realize the assets and settle the liabilities simultaneously, in each future period in which significant
amounts of deferred tax liabilities or assets are expected to be settled or recovered.

EMPLOYEE BENEFITS
- Revised PAS 19
Services
Mr. X Toyota
- CFO Sal. + Employee Benefits
Types:
Pension
1. Post-employment benefits → retirement benefits Lump-sum
Sick Leave
2. Short-term benefits Vacation Leave
3. Other long-term benefits → sabbatical leave

4. Termination benefits → separation pay
POST-EMPLOYMENT BENEFITS
Fixed Contribution
1. Defined Contribution Plan
Employee bears the risk
- SSS, GSIS
- Stock/Bonds
Fixed
₱10k / month Pension (variable)
Toyota Fund Mr. X
(trust, retirement, pension)
Contribution = Expense
Fixed Benefits
2. Defined Benefit Plan
Employer bears the risk
- RA 7641
₱50k/month
Variable Fixed amount
Toyota Fund Mr. X
PROJECTED BENEFIT OBLIGATION (PBO): Projected Unit Credit Method → actuary
50 years old 60 years old 75 years old

1/1/25 1/1/35 600k/year 1/1/50
PV of 1
PBO PV of OA
Actuarial – life expectancy, work period

Assumptions
Financial – discount rate, salary increase
FV of Plan Assets (FVPA) → PBO
DEFINED BENEFIT COST
Components:
Current Service Cost → ↑ PBO for every year of service
1. Service Cost Past Service Cost → ↑ PBO from plan introduction, amendment, curtailment (↓ PBO)
Gain or Loss on Settlement
FVPA PBO
Interest Expense on PBO
Interest Income on FVPA BB BB
2. Net Interest
Interest Expense on effect on Asset Ceiling * Contri. Benefit Benefit CSC
Return paid paid PSC
FVPA (MTM) Int. Exp
EB
3. Remeasurement PBO EB
Effect on Asset Ceiling *
*Asset Ceiling Memo Entry Only
- Limit of prepaid benefit cost
Refunds Only the FVPA > PBO → Prepaid Benefit Cost (NCA)
- PV of economic benefits difference
Reduction in future contri. FVPA < PBO → Accrued Benefit Cost (NCL)
Ex. is recorded
Monthly ₱100k
Actual ₱150k Excess 50k
Four Categories of Employee Benefits:
o Short-term employee benefits – fall due within 12 months after the end of the period in which the employees
render the related service.
o Post-employment benefits – are payable after the completion of employment. They are classified as either
defined contribution plans or defined benefit plans. They may be funded or unfunded.
o Other long-term employee benefits – fall due wholly within 12 months after the end of the period in which the
employees render the related service.
o Termination benefits – are payable as a result of either an entity’s decision to terminate an employee’s
employment before the normal retirement date, or an employee’s decision to accept voluntary redundancy in
exchange for those benefits.
→ The service cost and net interest are included in profit or loss as component of employee benefit expense.
→ All of the remeasurements are fully recognized through other comprehensive income and are not recycled or
reclassified subsequently to profit or loss.
→ Remeasurements may be transferred within equity or reclassified the remeasurements.
Treatment of Effect of Asset Ceiling
• PAS 19R provides that the surplus in a defined benefit plan must not exceed the asset ceiling determined by
using the discount rate in the measurement of the defined benefit obligation.
• Interest on the effect of asset ceiling is part of the total change in the effect of asset ceiling. This amount is
determined by multiplying the effect of the asset ceiling at the beginning period by the discount rate. The interest
on the effect of asset ceiling is included in profit or loss as component of employee benefit expense.
• The difference between the total change in the effect of the asset ceiling and the interest on the effect of the asset
ceiling is considered the remeasurement and to be recognized through other comprehensive income.

SHAREHOLDER’S EQUITY
Articles of Incorporation
- Revised Corporation Code
By-laws
₱1M ₱10M
ABC JFC
(10k shares) - issued 100k NI
(Investor/SH)
stock share @ 10% ABC
certificate ₱100/share 90% Other
(₱10M)
JE:
Dividends Cash 10M
Inv in JFC Share (issuer) SC 10M
Cash 1M
Cash
100k
Div Inc.
1. Creditors
Voting Dividends Liquidation 2. Preference
3. Ordinary
Ordinary ✔ ② Excess NI 2nd
Shareholders
Preference ✖ ① Fixed amount 1st
Par Value
- Fixed amount (AOI)
Shares
- Cannot be issued below par
No par value → stated value (min. ₱5/share)
a. Authorized → maximum # to be issued

b. Subscribed → promise to buy share
c. Issued → fully paid (stock certificate)
d. Treasury → reacquired (buy back)
e. Outstanding → issued – treasury
→ entitled to dividends
PRESENTATION: B/S → SHE
1. Share Capital Issued

✓ Preference Share Capital + Subscribed
✔ @ par ✓ Ordinary Share Capital - Treasury
✓ Subscribed Share Capital Outstanding Shares
(Subscription Receivable) → dividends
Share Premium (APIC)
✓ Share Dividends Payable
✓ Retained Earnings
Dividends
Legal Appropriation → TS
- Unappropriated (unrestricted) ✔ business expansion
Reasons Contractual → Bonds
- Appropriated (restricted) ✖ Voluntary Appropriation working capital
contingencies
4. Other Comprehensive Income (OCI)
- Unrealized Gain/Loss (FVOCI)
- Revaluation Surplus (PPE)
- Remeasurement G/L (Employee Benefits)
- G/L on Forex Translation
AFAR
- G/L on Cash Flow Hedge
- Treasury Shares Excessive Cash JFC (owner)

- Contra-Equity (deduction) Reasons Reacquire ₱20
- Reacquired shares (buy back) Undervalued Shares
Reissue ₱30
- Accounting: Cost Method
Reissuance of TS: Retirement of Shares:
Cash xx Ordinary Share Capital xx
Share Premium – TS xx Share Premium – OS xx
hierarchy
Retained Earnings xx Share Premium – TS xx hierarchy
Treasury Shares xx Retained Earnings xx
Treasury Shares xx
Contributed Capital (CC): SC + SSC + SP
w/ par value → LC = Total par (issued + subscribed)

Legal Capital (LC) no par value → LC = CC
→ portion that cannot be declared
Retained Earnings
BB
Dividends NI
(distributed  Prior period errors
earnings)  ∆ in accounting policy
EB
DIVIDENDS:
1. Cash Dividends Retained Earnings

- Most common Cash Div. Payable → CL
- Per share basis
Cash Div. Payable
Cash
2. Property Dividends (IFRIC 17)
FVPL
Current Asset Inventory
Noncash
Assets
FVOCI
NCA AC
PPE
JEs:
Declaration
Retained Earnings
@ FV → MTM year-end
Property Dividend (CL)
payment
NCAHDTO CA Lower
Reclassify FVLCTD
PPE
→ PFRS 5
→ Non-current asset held for distribution to owners
3. Share Dividends RE
Small (< 20% of OS) @ FV
Large (> 20% of OS) @ par
4. Liquidating Dividends
- Creditors
P/S
- Shareholders
O/S

OTHER ISSUES:
Cash
ABC JFC
Shares
(OS, PS)
→ w/ additional features
1. Convertible Shares RIGHT

- Shareholder has the option to convert PS → OS (fixed) Shareholder (ABC)
2. Callable Preference Share

- Shareholder has the right to redeem/call/retire the PS Issuer (JFC)
- Cash payment
3. Redeemable Preference Share

- The shareholder has the option to require the issuer to Shareholder (ABC)
redeem the PS
- Mandatorily redeemable PS → Liability → interest expense
4. Preference Share w/ Share Warrants
- Compound Financial Instrument BP @ FV (Liab)

SW Residual (equity)
Preferred Share
- Separate - equity
@ FV
Share Warrant (SP)
- equity
SHARE WARRANTS
These are certificates that entitle the holder thereof to acquire shares at a certain price within a specified period. Share
warrants may be issued for the following reasons:
1. As additional compensation (e.g., share options)

2. To make the securities more attractive (e.g., warrants or bonds payable)
3. As a right of pre-emption to existing shareholders of the corporation
Non-Detachable Warrants
• Stock warrants that cannot be traded separately from the security with which they were originally issued.
Detachable Warrants
• Stock warrants that can be traded separately from the security with which they were originally issued.
• Right Issue / Stock Right / Right of Preemption
• It is granted to existing shareholders to enable them to acquire new shares at a specified price during a specified
period.
Pro-forma journal entries
1. To record issuance of warrants

- Memo entry
2. To record exercise of warrants

Cash xxx
Share capital xxx
Share premium (if any) xxx
3. To record expiration of warrants

- Memo entry
Detachable Share warrants
Share warrants issued with preference share
1. Fair value of share ex-warrant and fair value of warrant are known. Use the relative fair value method.
Total Fair value Fraction Allocated cost

Preference shares (No. of Pref. shares x fair AA AA/CC DD
value)
Warrants (No. of Warrants x Fair value) BB BB/CC EE
Total CC FF (Total Proceeds)
2. Only one class of security has available fair value
Total proceeds xxx
Less: Market value of securities known xxx
Securities with unknown Market value xxx
3. The fair values of the preference shares and warrants are unknown
Market value of ordinary shares xxx
Less: Option price/ Exercise price xxx
Intrinsic value of warrant xxx
Multiply: # of ordinary shares under warrants xxx
Market value of share warrants xxx
Total proceeds XX
Less: Value of share warrants XX
Value assigned to preference Share XX
Pro-forma journal entry

Cash xxx
Preference share xxx
Share premium – P/S (if any) xxx
Ordinary share warrants outstanding xxx
Note: Ordinary share warrants outstanding shall be reported as part of share premium. If the warrants are not
exercised, the ordinary share warrants outstanding account is simply transferred to the generic share premium
account.
Share warrants issued with bonds payable

Issued price including warrants xxx
Less: Issue price of bond ex-warrants xxx
Allocated to warrants xxx
RECAPITALIZATION
- happens when there are changes in capital structure of a corporation
- there will be a cancellation of old shares & issuance of new shares
∆ from par → no par

no par → par
Ways
Reduction of par value
→ no effect No. of shares
to SHE Up ↑ ↓ par
Share Split
Down ↓ ↑ par
QUASI-REORGANIZATION: Financially troubled (potential to recover)
→ fresh start; to increase RE
Criteria:
1. Large deficit (negative RE) Recapitalization → Share Premium

Ways ↑ RE
2. Approved by SHs & Creditors Revaluation → Revaluation Surplus
3. Approved by the SEC
4. Advantageous to all parties
Basic Approach:
• Assets and liabilities are revalued upwards or downwards.

• Any resulting credit balance in revaluation surplus is used to wipe out any deficit (i.e., negative balance in
retained earnings)
• If a recapitalization is made, any resulting share premium shall also be used to wipe out any deficit.
• Disclosures required by relevant regulations (SEC) are provided in the financial statements for a minimum period
of three (3) years).

SHARE-BASED COMPENSATION (PFRS)
Equity-settled – Share Options (SO) (Equity → SP)
PFRS
Cash-settled – Share Appreciation Rights (SARs) (Liability)
CEOs
SHARE OPTIONS (SO): Compensation Package CFOs
VPs
Services
Mr. X Meralco JE:
(CEO) Salaries + Bonuses + SO ↑ revenue, ↑NI, ↑ Stock Price
Sal. Exp.
- Right to buy shares at SP-SO
a specified price (₱100) ₱100 ✔
SP
₱ 90 ✖
(exercise/subscription/
option price)
1. FV Method Exercisable immediately

- FV of SO at the date of grant Vesting immediately No condition
How to Measure? 100% (year 1)
2. Intrinsic Value Method w/ condition
- IV = Stock Price – Exercise Price Not vesting immediately Service period
(receive) (pay) Allocate over service
period
SHARE APPRECIATION RIGHTS (SARs)
→ Cash is received
→ Cash = S – X (IV)
→ Liability → Sal. Exp.
Sal. Payable
1. FV Method
- FV of SARs (Dec. 31)
How to measure?
2. Intrinsic Value
Share & Cash Alternative
Liability → Cash; or
Entity
Equity → Shares
Choice
1. FV of Liability
Counterparty → CFI
2. Equity
(employees)
o Some share-based payment transactions allow the employee the choice as to whether to settle the transaction
in cash, or by issuing equity shares.
o An employee may have the right to choose between:
✓ Cash alternative – cash payment equal to the market value of a certain number of shares subject to
certain conditions.
✓ Share alternative – equity shares given to the employee.
o The accounting for this type of instrument depends on which party has the choice of settlement.
• If the entity has the choice of settlement, there is no accounting problem. The instrument is not a
compound financial instrument.
• If the employee has the right to choose the settlement, the entity is deemed to have issued a compound
financial instrument.
▪ Thus, the compound financial instrument is accounted for as partly liability which is the cash
alternative and partly equity which is the share alternative.
▪ The equity component is the residual amount: fair value of the whole compound financial
instrument minus the fair value of the liability component.

FINANCIAL STATEMENTS
- PAS 1
1. Statement of Financial Position (SFP) – as of the period (running balance)

2. Statement of Comprehensive Income (SCI)
3. Statement of Changes in Equity (SCE) 25 26 27
For the period
4. Statement of Cash Flows (SCF)
5. Notes to Financial Statements For the period
As of the period
→ accounting policies, details
Objective: to provide useful information to the users.
Investors/SH
Creditors (banks)
ABC Corp. FS Users Supplier
Employees
- reliable Government (BIR, SEC)
- IFRS/PFRS Management
STATEMENT OF FINANCIAL POSITION: Balance Sheet

Liquidity (ST) → AP
- Ability to pay ↑ A, ↓ L, ↑ E → more liquid, more solvent
Solvency (LT) → BP
Current (a)
Assets
Noncurrent (b)
Realized (asset) 12 months
Current w/n LONGER
Settled (liability) Operating cycle
Current (c)
Elements Liabilities
Noncurrent (d) Noncurrent → > 12months
Equity → SC, SP, RE, OCI, TS
(a) Cash & Cash Equivalent (c) Trade & Other Payables
Trade & Other Receivables Income Tax Payable
Financial Assets (FVPL) Current portion of LT borrowings (NP, LP)
Inventories
Prepaid Expenses (d) Bonds Payable
Notes Payable (LT)
(b) PPE Loans Payable
LT investment (FVOCI, FAAC, IP, IIA) Lease Liability
Intangible Asset Other NCL (DTL)
Other NCA (Biological Asset, DTA)
STATEMENT OF COMPREHENSIVE INCOME: Income Statement, Profit or Loss

NI
- Financial Performance (profitability) Results of operations
NL
Comprehensive Income = Net Income + Other Comprehensive Income

Reclassification
Other Comprehensive Income (OCI) Subject (P/L) Not Subject (RE)

Mandatory
1. Unrealized Gain or Loss from FVOCI By election (equity) ✔
2. Revaluation Surplus (PPE) ✔

3. Remeasurement Gain or Loss (Employee Benefits) ✔
4. Gain or Loss on Translation ✔
5. Gain or Loss on Cash Flow Hedge ✔
Single Statement SCI

Presentation Net Income
Two Statements NI OCI
+ OCI
Comprehensive Income
Format:
Sales Main line

- Cost of Goods Sold
Gross Profit Dividend Income
+ Other Income Interest Income
Total Income Gain on Sale
Expenses:
Selling Functional
Administrative – Office → grouped
Other Expenses – Loss on Sale Depreciation Expense (100%)
Finance Cost – Interest Expense Natural Rent Expense
Income Before Tax → specific, broken down Salaries Expense
- Income Tax Expense
Net Income
Subject to reclassification
 Other Comprehensive Income
Not subject to reclassification
Comprehensive Income
STATEMENT OF CHANGES IN EQUITY
- Movement / changes of the items in Shareholder’s Equity (SHE)
Shareholder’s Equity:
Ordinary Share Capital
1. Share Capital (SC)
Preferred Share Capital
2. Share Premium (SP)
3. Retained Earnings (RE)
4. Other Comprehensive Income (OCI)
5. Treasury Shares (TS)
Statement of RE: Optional
OCI Retained Earnings

BB BB
∆s → SCI Dividends NI
(distributed  Prior period errors
EB Retroactive
earnings)  ∆ in accounting policy
EB
STATEMENT OF CASHFLOWS (SCF)
- PAS 7 Income (earn)

SCI
Inflows + → accrual Expense (incur)
Cash
Outflows -
Income (received)
SCF
→ cash Expense (paid)
Net Income  Cash Flows
Major Sections:
1. Operating Activities Indirect: NI → CF (SCI → SCF)

- Related to operations (FVPL)
Net Income xx
Direct (encouraged) 1. Adjustment for NC items:
+ Depreciation Expenses (↓ NI) xx
Cash received from customer xx + Amortization Expense (↓ NI) xx
Cash paid to suppliers (xx) + Loss on Sale (↓ NI) xx
Cash paid from OPEX (xx) - Gain on Sale (↑ NI) (xx)
Interest Paid (xx) 2. ∆s in Working Capital (CA – CL)
Income Tax Paid (xx) - ↑ AR (xx)
CF from Operating Activities xx + ↑ AP xx
3. Interest Paid (xx)
Income Tax Paid (xx)
CF from Operating Activities xx

2. Investing Activities
LT investment (FVOCI, FAAC, IP, IIA)
- Related to purchase & sale of
PPE (Land, Building, Equipment)
3. Financial Activities Noncurrent Liabilities

- LT borrowings & issuance of shares Equity
→ Dividends, Loans, Lease payments
Balance Sheet Perspective Alternative Presentation

Operating → silent
Received
Investing
Current Operating
Asset Interest
Noncurrent Investing Operating → silent
Paid
Current Operating Financing
Liabilities Noncurrent Financing Operating → silent
Received
Investing
Equity Financing Dividends
Operating
Paid
Financing → silent

EVENTS AFTER THE REPORTING PERIOD
- PAS 10
- An event, which could be favorable or unfavorable, that occurs between the reporting period and the date
that the financial statements are authorized for issue.
Start of the year FS / BS Date Date of authorization Date of actual issuance

1/1/25 12/31/25 3/31/26 4/30/26
✖
Reporting period ✔
✖
Types:
1. Adjusting Events – adjusting entries

- Evidence or conditions existing as of the end of reporting period
- JE as of December 31
Examples:
a. Pending Lawsuit
12/31/25 2/28/26 – settlement (₱1.5M)
Loss 1M
Est. Liability 1M
Loss 500k
Est. Liability 500k
b. Mr. X: AR ₱500k
12/31/25 2/25/26 – Bankrupt
BDE 100k ADA 500k
ADA 100k AR 500k
BDE 400k
ADA 400k
c. Events that indicate that the going concern assumption in relation to the whole or part of the entity is not
appropriate.
d. Settlement after reporting date of court cases that confirm the entity had a present obligation at reporting
date.
e. Bankruptcy of a customer that occurs after reporting date that confirms a loss existed at reporting date on
trade receivables.
f. Sales of inventories after reporting date that give evidence about their net realizable value at reporting
date.
g. Determination after reporting date of cost of assets purchased or proceeds from assets sold, before
reporting date.
h. Discovery of fraud or errors that show the financial statements are incorrect.

2. Non-Adjusting Events – disclosure (Notes)
- Evidence or conditions arising after the end of reporting period
- No JE as of December 31
Examples: 2/28/26
a. Casualty Loss (fire, earthquake)
b. Gain or Loss on Sale of PPE
c. Change in FV (FVPL, FVOCI)
d. Issuance of Shares
e. Declaration of Dividends
f. Major business combinations or disposal of a subsidiary.
g. Announcing a plan to discontinue operations.
h. Announcing a major restructuring after reporting date.
i. Abnormal large changes after the reporting period in assets prices or foreign exchange rates.
j. Changes in tax rates or tax law.
k. Entering into major commitments such as guarantees.
l. Commencing major litigation arising solely out of events that occurred after the reporting period.
Accounting
• Adjust financial statements for adjusting events – events after the reporting period that provide further
evidence of conditions that existed at the end of the reporting period, including events that indicate that the
going concern assumption in relation to the whole or part of the enterprise is not appropriate.
• Do not adjust for non-adjusting events – events or conditions that arose after the reporting period.
Disclosure
• Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the
ability of users to make proper evaluations and decisions.
• The required disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a statement
that a reasonable estimate of the effect cannot be made.
• A company should update disclosures that relate to conditions that existed at the reporting period to reflect
any new information that it receives after the reporting period about those conditions.

INTERIM REPORTING
- PAS 34 Provide updates (Dec 31) Issue:
- Preparation & Presentation of FS (< 1 year) Regulatory requirements -SEC → Listed (quarterly) Costly &
- Monthly, quarterly, semi-annual Management decision making Impractical
Minimum Requirements:
1. Condensed FS – SFP, SCI, SCE, SCF
→ Less detailed
2. Selected explanatory notes
Basic Principles
1. Same accounting policies (Dec. 31)
→ Ex. Inventory → FIFO; PPE → Cost
→ Tax recognized based on weighted average annual income tax rate expected for the full year.
→ Tax rate changes during the year are adjusted in the subsequent interim period during the year.
2. Seasonal / Irregular
→ 100% in the interim period in which they occur
→ Ex. G/L on PPE, IL, Loss on inventory writedown, dividend income
→ Discrete / independent
3. Operating expenses that can be estimated and allocated

→ Allocate throughout the period
→ Ex. Depreciation Expense
→ Integral View → part of other quarters
Yes → Allocate
Can be estimated?
No → 100% recognize in the interim period they occur
Interim reports require a greater use of estimates than annual reports.
Costs incurred unevenly - anticipated or deferred only if it would be possible to defer or anticipate at yearend.

OPERATING SEGMENTS Products – Nestle (2,000+) Goal:
- PFRS 8 Own revenue & expenses (Nescafe, Milo, Nido,
Reviewed by CODM To determine
- Component of an entity Bearbrand, Kitkat) which segment
Financial info are available
(division, branch, store, product) are reportable
Location – Jollibee (1,000+)
separately
Qualitative → Management Approach (Chief Operating Decision Maker)

Criteria
Quantitative → thresholds
QUANTITATIVE:
1. Revenue Test → segment’s revenue ≥ 10% of Total Revenues (External + Internal)
Profit
2. P/L Test → segment’s P/L ≥ 10% Higher of absolute amount
Loss
3. Asset Test → segment’s assets ≥ 10% Total Asset
Overall Size Test → reportable segment’s external revenues ≥ 75% of Total external revenues
Aggregation Criteria: Similar Characteristics
1. Nature of products / services

2. Nature of process
3. Type or class of customer Majority (3/5)
4. Marketing methods (Distribution)
5. Nature of regulatory environment
Major Customer
- If single customer accounts for at least 10% of entities external revenue
Ex. ₱100M x 10% = ₱10M (SM Hypermarket)
Allocate
w/ proper & reasonable basis →✔

Common Cost
(Advertising) w/o proper & reasonable basis → ✖
• The term ‘chief operating decision maker’ identifies a function, not necessarily a manager with a specific title.
That function is to allocate resources to and assess the performance of the operating segments of an entity.
• Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately
disclosed, if management believes that information about the segment would be useful to users of the financial
statements.
Overall Size Test
• If total external revenue attributable to reportable segments identified using the 10% quantitative thresholds is
less than 75% of the total consolidated or enterprise revenue (external revenue), additional segments should
be identified as reportable segments, even if they do not meet the 10% requirement. Until at least 75% of
total consolidated or enterprise revenue is included in reportable segments.
• In other words, the quantitative thresholds will not be necessary in determining additional reportable segments in
order to meet the 75% requirement.
Entity-Wide Disclosures:
• Information about products and services.

• Information about geographical areas.
• Information about major customers - if revenues from transactions with a single external customer amount to
10 percent (10%) or more of an entity’s revenues, the entity shall disclose that fact and disclose the following:
o The total amount of revenues from each such customer
o The identity of the segment or segments reporting the revenues.

RELATED PARTY DISCLOSURES
- PAS 24
- Related if one party can influence the decisions of another party
A party is related to an entity if:
Directly, or indirectly through one or more intermediaries, the party:
✓ Controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and
fellow subsidiaries).
✓ Has an interest in the entity that gives it significant influence over the entity.
✓ Has joint control over the entity.
Examples: Y
Associate
1. Affiliates – Parents & Subsidiaries Ms. X 20%
2. Associates – Investor & Associates Customer Significant
3. Venturers in Joint Venture 30 days Influence
4. Key Management Personnel 90 days Investor
51%
- BOD, Executives (CEO, CFO) Mr. X ABC Corp. X
Control
- Compensation 50% Parent Subsidiary
5. Close family members Joint
- Spouse, children, children’s spouse Supplier Control Project
6. Post-employment benefit plans W (Son) 20% Unanimous
- BDO asset management 50% 50% Consent
Z
→ if none of the above, unrelated party
Sale / Purchase
Nature of relationship
Related Party Transactions Nature of transactions
Peso amount
AR, AP
BDE, ADA
Related Party Transactions
→ Is a transfer of resources, services, or obligations between related parties, regardless of whether a price is
charged.
→ If there have been transactions between related parties, disclose the nature of the related party relationship as
well as information about the transactions and outstanding balances necessary for an understanding of the
potential effect of the relationship on the financial statements.
Disclosures:
• Relationships between parents and subsidiaries

o Regardless of whether there have been transactions between a parent and a subsidiary, an entity must
disclose the name of its parent and, if different, the ultimate controlling party.
o If neither the entity's parent nor the ultimate controlling party produces financial statements available for
public use, the name of the next most senior parent that does so must also be disclosed.
• Management Compensation - disclose key management personnel compensation in total and for each of the
following categories:
✓ Short-term employee benefits
✓ Post-employment benefits
✓ Other long-term benefits
✓ Termination benefits
✓ Equity compensation benefits.
• Key management personnel are those persons having authority and responsibility for planning, directing, and
controlling the activities of the entity, directly or indirectly, including all directors (whether executive or otherwise).
• These disclosures would be made separately for each category of related parties and would include:
✓ The amount of the transactions.
✓ The amount of outstanding balances, including terms and conditions and guarantees.
✓ Provisions for doubtful debts related to the amount of outstanding balances.
✓ Expense recognized during the period in respect of bad

BASIC ACCOUNTING CONCEPTS
- Uniform accounting standards & practice
Background:
International
International Accounting Standards Board (IASB) (IAASC)

- independent private sector that develops and approves IFRS (IAS)
- IFRS → adopted by 167 countries
- US GAAP → FIFO, LIFO, WAVE
Local
1. Financial and Sustainability Reporting Standards Council (FSRSC → 2022) (FRSC → 2009) (ASC → 2004)
- Promulgates the PFRS in the Philippines
- RA 9298 (Philippine Accountancy Act of 2004)
2. Philippine Interpretations Committee

- Assist FSRSC in the interpretation, implementation, clarification
3. Board of Accountancy
- Supervises & regulates the accountancy practice in the Philippines
Administering & preparation of CPALE
Oversees practice in the 4 sectors
Accounting Cycle:
1. Identifying & analyzing business transactions

- Check documents
2. Journalizing
- Journals (Journal Entry); Double-entry system (DR, CR)
Date Account Title & Description Debit Credit

2023 Accounts Receivable 100,000
March 1 Sales 100,000
To record credit sales
3. Posting – Journal (original entry) → Ledger (final entry)

Ledger
Sales
March 1 100,000
April 15 200,000
August 31 300,000
October 1 400,000
December 31 1,000,000
4. Preparing the unadjusted trial balance (TB)

Before adjusting entries; to detect errors
ABC Co.
Trial Balance
December 31, 2025
Debit Credit
Cash xxx
Accounts Receivable xxx
Inventory xxx
•
•
•
Accounts Payable xxx
•
•
Common Share xxx
Preferred Share xxx
•
•
Revenue xxx
Expense xxx
Total xxx xxx

5. Preparing Adjusting Entries
Initial Recognition:
Expense (Prepayment)
Asset Expense
10/1 Prepaid Supplies Supplies Expense
120,000 120,000
Cash Cash
12/31 Supplies Expense Prepaid Supplies

30,000 90,000
Prepaid Supplies Supplies Expense
Income (Deferral)
Liability Income
4/1 Cash Cash
120,000 120,000
Unearned Rent Inc. Rent Income
12/31 Unearned Rent Income Rent Income

90,000 30,000
Rent Income Unearned Rent Income
Adjusting Entries:
Dec. 31
Accrual: Interest Expense Prepayment: Insurance Expense
Interest Payable Prepaid Insurance
Deferral: Unearned Revenue Others: Depreciation Expense

Revenue Accumulated Depreciation
6. Preparing Adjusted Trial Balance
7. Preparing Financial Statements

- SFP, SCI, SCF, SCE, Notes to FS
8. Preparing Closing Entries

- Temporary / nominal (I/S items)
- N/A: Permanent / Real (B/S items)
Sales Income Summary

COGS Retained Earnings
OPEX
Income Summary (NI)
9. Preparing Post-closing Trial Balance

- After closing entries; no more income statement items
10. Preparing Reversing Entries (optional)

- To simplify entry next year
Accruals
Prepayments (Expense Method)
Deferrals (Income Method)
9/30/25 ₱1M, 12% NP
12/31/25 Interest Expense 30k → (1M x 12% x 3/12)

Interest Payable 30k
1/1/25 Interest Payable 30k

Interest Expense 30k
w/ reversing Interest Expense 120,000
9/30/26 Cash 120,000
w/o reversing Interest Payable 30,000

Interest Expense 90,000
Cash 120,000

REVISED CONCEPTUAL FRAMEWORK
- IASB → March 2018
- Comprehensive set of concepts & guidance for financial reporting
Purpose:
1. To assists IASB (FSRSC) in developing new standards

2. To assists IASB (FSRSC) in reviewing existing standards
3. To assists preparers in accounting for transactions when no standard applies
Status: Not an accounting standard
Chapter 1: Objective of Financial Reporting
Objective: To prepare financial information that is useful to users in making decisions relating to providing resource to
the entity.
Users:
1. Primary → investor, creditors

2. Others → suppliers, employees, management, government
Decisions:
Example
1. Buying, selling or holding equity or debit instrument PLDT Shares

2. Providing or selling loans & other forms of credit BDO
3. Voting or influencing management decisions SM Malls (BOD)
Prospects for future net cash flows to the entity (SCF, SCI)
Access FS
Management stewardship on economic resources (SFP)
Chapter 2: Qualitative Characteristics of Useful Financial Information
Fundamental:
1. Relevance
- information is capable of making a difference
- predictive or confirmatory value
2. Faithful Representation (Reliability)

- information is complete, neural, free from error
Prudence (✖ ↑ Assets, Income; ✖ ↓ Liability, Expense)
Cost-benefit
Constraints
Timeliness
Enhancing:
1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
Chapter 3: Financial Statements & Reporting Entity
Financial Statements: SFP, SCI, SCF, SCE, Notes
Consolidated (Parents & Subsidiary)

Types Unconsolidated / Separate (Parent)
Combined (Home Office & Branch)
Reporting Entity
→ preparer
→ can be more than 1 entity

Chapter 4: Elements of Financial Statement – Assets, Liabilities, Equity, Income, Expense
Asset → a present economic resource controlled by the entity as a result if past event
→ an economic resource is a right that has the potential to produce economic benefits
→ Ex. PPE → Revenue
Liability → a present obligation of the entity to transfer and economic resource as a result of past events.
→ an obligation is a duty or responsibility that the entity has no practical ability to avoid.
→ Ex. Due to Contract, Customary Practice (warranty)
Equity → the residual interest in the assets of the entity after deducting all its liabilities
→ Assets – Liabilities = Equity
Income → increase in assets or decrease in liabilities, that result in an increase in equity, other than those
relating to contributions from holders of equity claims.
Expenses → decrease in asset or increase in liabilities, that result in a decrease in equity, other than those
relating to distributions to holders of equity claims.
Chapter 5: Recognition & Derecognition of Asset & Liabilities
Recognition
→ inclusion of item in the financial statements
→ first journal entry
Derecognitions – removal of assets & liabilities in the SFP

Asset – losses control of the asset
Liability – no longer has a present obligation
Chapter 6: Measurement Bases & How to use them
Examples:
1. Historical Cost → PPE, IA

2. Fair Value → Investment, Intellectual Property
3. Value in Use → Impairment Loss
4. Fulfillment Value → expected value
→ liability
5. Current Cost → replacement cost
Chapter 7: Presentation & Disclosures
→ Sufficiency of the Notes to Financial Statements

→ Income Statement (Statement of Profit or Loss)
→ Other Comprehensive Income (OCI)
→ Recycling vs. w/o recycling
Chapter 8: Capital (SHE) & Capital Maintenance (Recovery)
→ Income should be recognized after the entity’s capital has been maintained / recovered
→ Income is recognized in excess of capital maintenance
SHE
100 BB
20 NI
100 → Capital Maintenance
120 EB
20 → Income

NONCURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
- PFRS 5
NONCURRENT ASSET HELD FOR SALE
Sales transactions ✔
Held for Sale → CA can be recovered
Continued use ✖
Ex.: ABC Corp. 1/1/25 12/31/25 5/31/26

Not subject Old Factory New Factory
to depreciation Building Building Measurement:
Factory Building – HFS CA

LOWER (IL)
10M RA
Factory Building
FVLCTS
HIGHER
VIU
Individual asset (PPE, IP, IIA, IA)

Noncurrent Asset
Group of Asset (disposal group)
Criteria:
1. Available for immediate sale

2. Sale must be highly probable
a. Management is committed on selling
b. Locating a buyer
c. Sale is expected to be completed w/n 1 year (except: beyond entity’s control)
d. Price is reasonable (FV)
e. Management is unlikely to withdraw the plan to sell
3. Carrying value of the asset is to be recovered principally through a sale transaction.
Change in Classification
Rule:
1. Compute CA before reclassification adjusted for depreciation

as if no reclassification
LOWER
FVLCTS
2. Recoverable Amount HIGHER
VIU
Note: Gains for any subsequent increase in fair value less costs to sell of an asset are recognized, but not in excess of
the cumulative impairment loss that has been recognized.
Noncurrent assets exclusively acquired with a view to its subsequent disposal
• Classify the non-current asset (or disposal group) as held for sale at the acquisition date only if the one-year
requirement in is met.
• It is highly probable that the other requisites will be met within a short period following the acquisition (3 months).
Noncurrent assets to be abandoned
• An entity shall not classify as held for sale a noncurrent asset (or disposal group) that is to be abandoned. This
is because its carrying amount will be recovered principally through continuing use.

DISCONTINUED OPERATIONS
Major line of business

Component Disposed of; or
Geographical area
(Segment) Held for sale
Subsidiary
Operations and cash flows that can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity.
Measured at:
CA
LOWER
RA
Ex.: Ayala Corp. (Conglomerate)
Ayala Land 1/1/25 12/31/25 5/31/26

Globe → PLDT •
BPI
Manila Water
Presentation:
Post-tax P/L
1. Statement of Comprehensive Income Single Amount  Whole year
Post-tax G/L on (1/1 – 12/31)
Revenues measurement
- Expenses (FVLCTS)
Income before Tax
- Income Tax Expense
Income form continuing operations
Income from discontinued operations
Net Income
2. Statement of Financial Position
Separate Assets → CA
Liabilities → CL
Cash flow statement presentation
The net cash flows attributable to the operating, investing, and financing activities of a discontinued operation shall be
separately presented on the face of the statement of cash flows or disclosed in the notes.

ACCOUNTING CHANGES AND CORRECTION OF ERROR
- PAS 8
ACCOUNTING CHANGES
P&L (Dep’n Exp.)
Types:
1/1/25 1/1/26 1/1/27 1/1/28
1. Change in accounting estimate
a. Estimation of Doubtful Account BDE SL DD
5% → 2%
ADA
b. Estimation of Warranty Cost Warranty Expense

3% → 4%
Est. Warranty Liability
c. Net Realizable Value of Inventory Loss

Allowance
Depreciation Method (SL, DD, SYD)

d. PPE Useful Life (5 years → 10 years)
Residual Value (50k → 70k)
→ accounted for currently & prospectively
RE, beg
2. Change in Accounting Policy 1/1/25 1/1/26 1/1/27 1/1/28
a. Change in Inventory Method (FIFO → WAVE)
b. PPE (Cost → Revaluation) FIFO WAVE
c. IP (Cost → FV)
d. ∆ in business model (BMT, CFC)
e. ∆ in recognizing revenues for LTCC (POC → cost recovery)
→ accounted for retrospectively (retroactively)
→ Requires restatement of FS: SCI, SCF, SCE (2 years); SFP → at the beginning of the earliest comparative
period
Guide:
Beginning Inventory
+ Purchases ↑ COGS, ↓ NI → inversely related to NI
CGAS
- Ending Inventory → ↓ COGS, ↑ NI → directly related to NI
Cost of Goods Sold
Definition:
• Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.
• Accounting estimates result from uncertainties inherent in business activities that many items cannot be
measured with accuracy but can only be estimated.
Cases or circumstances to change accounting policy:
• Is required by a standard or interpretation; or

• Results provide more relevant and reliable information about an entity's financial position, financial performance,
or cash flows.
When it is difficult to distinguish the change is in accounting policy from a change in accounting estimate, the change
is treated as a change in accounting estimate.

CORRECTION OF ERRORS 2023 2024 2025 2026
- Prior period errors CY
- Retrospective
- Charged to RE beginning
Types: Dec. 31, 2025 2025 2026 RE

1. Counterbalancing Salaries Expense 50k ↑ NI ↓ NI Ø
- Auto correct after 2 years Salaries Payable 50k
- Accruals
- Deferrals 2026
- Prepayments
- Inventory (purchase / sale) Salaries Expense 50k
Cash 50k
2. Non-counterbalancing
- omission of JE Dep’n Exp
Acc Dep’n 20k ✖
- incorrect classification Repair’s Exp

Cash 50k
Errors:
• Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more
prior periods arising from a failure to use, or misuse of, reliable information that was available and could
reasonably be expected to have been obtained and taken into account in preparing those statements.
• The general principle in PAS 8 is that an entity must correct all material prior period errors retrospectively in
the first set of financial statements authorized for issue after their discovery by:
o Restating the comparative amounts for the prior period(s) presented in which the error occurred; or
o If the error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.
o However, if it is impracticable to determine the comparative information for one or more prior periods
presented, the entity must restate the opening balances of assets, liabilities, and equity for the earliest
period for which retrospective restatement is practicable.
o Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of
an error on all prior periods, the entity must restate the comparative information to correct the error
prospectively from the earliest date practicable.

BOOK VALUE PER SHARE (BVPS)
- Amount to be recovered by shareholders per share during liquidations
𝑇𝑜𝑡𝑎𝑙 𝑆𝐻𝐸
Basic Formula (one class of SC): BVPS =
# 𝑜𝑓 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠
Two Classes of SC → necessary to apportion the shareholders’ equity between the preference share and ordinary share.
amount which the preference

Liquidation Process: shareholders normally receive upon
the liquidation of the corporation.
1. Sell all noncash assets (NCA → cash)
2. Pay the creditors Liquidation Value (@ par value)
3. Return capital to the preferred shareholders +
4. Return capital to the ordinary shareholders Unpaid Dividends (dividends in arrears)
✖ ✖ ✔
Feature of Preferred Shares 2024 2025 2026
1. Cumulative → entitled to dividends in arrears ✔ ✔ ✔

2. Noncumulative → entitled only to current year dividends (silent) ✖ ✖ ✔
3. Participating → entitled to fixed rate dividends + excess
4. Nonparticipating → entitled only to fixed rate dividends (silent)
Example: 1,000 PS, ₱100 par, 12%
Nonparticipating
PS 12,000
Dividends ₱100,000
Excess 88,000 → OS
Participating
PS 12,000
Dividends ₱100,000 OS 12,000
PS 38,000
Excess 76,000 OS 38,000
For book value purposes, the following are assumed to be available for divided:
✓ Retained earnings
✓ Share premium
✓ Revaluation surplus

EARNINGS PER SHARE (EPS)
- PAS 33
- Amount of income that each share earns
- Required for publicly listed entities
- Applies to ordinary shares
Measure of an entity’s performance

Uses
Determination of over/undervalued companies (stocks)
1. Basic Earnings Per Share (BEPS)

Always current year only
Cumulative → deduct whether declared or not
Net Income−Preferred Dividends
BEPS = Noncumulative → deduct only if declared
# of outstanding shares
↳ issued + subscribed – TS
↳ significant changes → WAVE
↳ stock dividends, stock split → retroactive (↑ shares w/o consideration)
2. Diluted Earnings Per Share (DEPS)

- Applicable whenever an entity’s capital structure is complex
- Dilutive securities → decreases EPS
- Lowest possible EPS
- “as if” approach
a. Convertible Preference Share 1/1 12/31

- PS → OS
✔ 𝑁𝐼 − 𝑃𝐷 Ø
# 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠
b. Convertible Bonds No interest expense

- Bonds → OS 1/1 12/31
✔ Add back interest

𝑁𝐼 − 𝑃𝐷 expense (net of tax)
# 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠
c. Options / Warrants
- Treasury Share Method (buy back)
- Exercise / Subscription price
- Goal: to compute for shares that are issued for no consideration (free shares)
Treasury share method
• Options and warrants are included in the EPS computation through the treasury share method.
• The following procedures shall be followed in the computation of incremental ordinary shares arising from
issuance of options and warrants:
✓ The options and warrants are assumed to be exercised at the beginning of the current year or at the date
they are issued during the current year.
✓ The proceeds from the exercise of the options and warrants are assumed to be used to acquire treasury
shares at average market price.
✓ The number of incremental ordinary shares is equal to the option shares minus the assumed treasury
shares acquired.
• The incremental ordinary shares represent the issue of ordinary shares for no consideration

SMALL AND MEDIUM SIZED ENTITIES (SMEs)
- Account for 90% of all the business in the Philippines
FSRSC → PFRS for SMEs

→ approved & issued by SEC on January 1, 2010 (2017, 2019)
Total Asset 3M to 350M; or

Total Liabilities 3M to 250M Equity 100M
SMEs
And
Does not have public accountability
Beyond threshold (large)

Not SMEs Full PFRS
w/ public accountability
1. Listed companies (PSE)
FS are available to the public
2. In the process of Initial Public Offering (IPO)
3. Public Utilities → Meralco, Manila Water
4. w/ Fiduciary Capacity → holds funds on behalf of the public
→ banks, insurance, mutual funds, pension
Difference:
FULL PFRS PFRS for SMEs

Equity FVPL, FVOCI FVPL
1. Investment
Debt FVPL, FVOCI, FAAC FAAC
(PFRS 9)
2. Investment in Associate (IIA) Equity Method Equity

IL
(PAS 28) Cost UG/L
No share
FV FVPL Dividend Income
3. Investment in Joint Venture Equity Method Equity, Cost, FV

(PAS 28, PFRS 11)
Cost
4. Investment Property Option FV FV
(PAS 31)
5. Research & Development Research → Expensed R&D → 100% Expensed

Development → may be Capitalized
(PAS 38)
6. Goodwill Not Amortized Amortized (maximum of 10 years)
Finite
7. Other Intangible Assets Indefinite Always Finite (max. 10 years)
8. Borrowing Cost May be Capitalized 100% Expensed

(PAS 23)
P/L
9. Employee Benefits Actuarial G/L Choice
OCI
→ OCI (PAS 19)
10. Presentation of FS SFP, SCI, SCE, SCF Same,

(PAS 1) w/ option → Statement of Income & RE
→ replace (SCI, SCE)
Basic → w/ basic features

Financial Instrument
Other → w/ complex features

Small Entities
• Small entities are entities with total assets between P3,000,000 and P100,000,000 or total liabilities between
P3,000,000 and P100,000,000.
• Small entities shall apply the PFRS for Small Entities beginning on or after January 1, 2019.
Micro-Business Entities
• Micro-business entities are entities whose total assets or total liabilities are below the P3,000,000 floor threshold.
• Micro-business entities have the option to use any of the following bases of accounting in the preparation of
financial statements.
✓ Full PFRS
✓ PFRS for SMEs
✓ Another acceptable basis of accounting

Open FAR Notes (Sir Brad&#39;s Lecture) Final 4

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FAR NOTES

CASH & CASH EQUIVALENT

3. Checks received from customer

- Traveler’s Check → prepaid

4. Bank Drafts → used for large purchases

Short-term Debt Instruments (earns interest)

2. Treasury Notes → 1 to 10 years

6. Commercial Paper → used by large corporations

Not legally restricted → CCE

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

1/5 Collection Cash on Hand xx ⎯

1/6 Deposit Cash in Bank xx Cash xx

1/10 Purchase Purchases xx ⎯

1/15 Payment AP xx Deposit Liability xx

1/31 End of Month Bal. xx xx

Unadjusted Balance xx Unadjusted Balance xx

*Credit Memo **Debit Memo

Deposit in Transit → deposits made but not yet credited

Outstanding Checks → checks issued but not yet encashed

Petty Cash Fund

PCF 12/1 – 12/15 Disbursement no entry

12/31 Adjustment Expenses 3,000

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

2. Supplier’s Debit Balance Customer’s Credit Balance

Measurement: 1/1 12/31

Initial → Face Value @ Face Value (SP) @ NRV (recoverable amount)

1. Sale AR 10,000 AR 9,500

2. w/n Disc Period Cash 9,500 Cash 9,500

3. Beyond Disc Period Cash 10,000 Cash 10,000

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Allowance (PFRS/GAAP) Direct Write-off (Taxation)

1. 12/31 DA BDE 2,000 no entry

2. 1/31 W-off ADA 1,000 BDE 1,000

3. 2/28 Recovery AR 1,000 AR 1,000

Cash 1,000 Cash 1,000

Estimation of Doubtful Accounts

12/31 BDE 20k 30k

% of AR (10%) Balance Sheet

✓ Advances to Subsidiaries and Affiliates – usually classified as long-term investments.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Measurement: 1/1/25 12/31/25 12/31/26

Meaning of amortized cost

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

₱5M Housing Loan

1/1/25 12/31/25 12/31/26

Credit Risk → possibility of non-payment

Expected Credit Loss (ECL) Model → PFRS 9

Loan impairment loss xx

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

₱50k Pledged → security/collateral

- More formal place (loan documents + PN) Effects to FS:

Notification → customer pays directly to bank → sends collection report to entity

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

- a sale of the receivables at a discount

Factoring as a continuing agreement

- involves the sale of accounts receivable to a financing entity on a long-term basis

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

- Encashment before maturity

Face value or principal X

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Merchandising → complete inventory (assumption in FAR)

o Current Asset – for those unsold or remaining goods or items.

Ex: 10k, 2/10, n/30 Gross Net

Purchase Purchase 10,000 Purchase 9,800

Open FAR Notes (Sir Brad's Lecture) Final 4

Open FAR Notes (Sir Brad's Lecture) Final 4