Accounting Final

PROPERTY, PLANT AND EQUIPMENT (PPE)
- Tangible asset with physical substance

- Used in production
- Used over a period of one year
Measurement
Initial Cost - Cash/ Cash Equivalent
- Cash + FV of Asset Given
Subsequent
a. Cost model = Cost - (Accumulated Depreciation) (Impairment)
b. Revaluation Model = Revalued Amount (Accumulated
Depreciation) (Impairment)
Cost
a. Purchase Price
b. Cost Directly Attributable
c. Initial Dismantling Cost (if the company will be the one to pay)
Acquisition
a. Cash Payment
b. On Account subject to Discount
- Discount, whether taken or not are deducted
c. Installment Basis
-Cash Price Equivalent
if cash price equivalent is not available,
Noninterest Bearing Note down payment + present value
d. Issuance of shares
1. FV of asset received
2. FV of shared given
3. Par value of shares given
e. Bonds
1. FV of bonds
2. FV of asset given
3. Face of Bonds
f. Exchange: Considerations
- Commercial Substance
- Fair Value
- Cash Payment
Commercial Substance recognize gain or loss
Noncommercial Substance measured at carrying amount
g. Donation
Shareholder donated capital shared premium additional
trade in capital
Non-shareholder depends on the agreement
income if there is a condition, deferred
Asset is recorder at Fair Value
h. Construction
direct materials - used to construct
direct labor ones who construct
indirect cost and incremental (overhead)
Intervening Operations Expense
Derecognition
Accumulated Depreciation
Asset
xx
xx
at cost or depreciated amount
Fully Depreciated depends on the management - disclose

Property Held for Sale
Current Asset derecognize
Property held for sale
Accumulated depreciation
Asset(Cost)
xx
xx
xx
Abandoned dont derecognize

Illustration
Glitter Company acquired the following plant assets during the current
year:
Equipment- Acquired at an invoice price of P600,000, subject to a 5%

cash discount which was not taken.
Land- acquired by making down payment of P400,000 and issuing note
payable for P1,800,000. A payment of P600,000 is to be made at the end of
each year for three years. The applicable rate of interest is 8%. The present
value of ordinary annuity of 1 at 8% for three periods is 2.58. shipping
charge for the equipment of P200,000 and installation cost of P350,000 were
incurred.
Machinery- acquired and paid in full by issuing P600,000 of 10% bonds
payable and 40,000 shares with par value of P10. The share was selling at
P19 and the bonds were trading at P102.
Inventory- acquired by paying P400,000 and trading an old inventory
with a carrying amount of P2,000,000 and a fair value of P2,100,000. The
new inventory has a fair value of 2,500,000.
Required:
1. Determine
2. Determine
3. Determine
4. Determine
exchange?
the
the
the
the
cost of the equipment?

capitalizable cost of the land?
initial cost of the Machinery?
initial measurement of the new inventory received in
Computation:
1. Invoice Price
Less: Discount (600,000 x 5%)
Cost of Equipment
600,000
(30,000)
570,000
2. Down payment
FV of future payments (600,000 x 2.58)
Shipping charges
Installation cost
Cost of Land
400,000
1,548,000
200,000
350,000
2,498,000
3. Fair value of the bonds payable (600,000 x 1.02)

Fair value of shares
(40,000 x 19)
Cost of Machinery
612,000
760,000
1,372,000
4. Fair value of asset given

Cash payment
Cost of new inventory
2,100,00
400,000
2,500,00
GOVERNMENT GRANT
-
assistance from the government in the form of transfer of resources

to an entity by the government in the form of transfer of resourced
to an entity in return for part or future compliance with certain
conditions relating to the operating activities of the entity. (PAS
20, paragraph 3)
Sometimes called subsidy, subvention or premium
Shall be provided by the government
Classification
a. Grant related to asset
b. Grant related to income
Accounting for Government Grant
Grant is taken to income over one or more periods in which the related
cost is incurred
- Grant in recognition of specific expense shall be recognized as income
over the period of the related expense
- Grant related to depreciable asset requiring fulfillment of certain
conditions shall be recognized as income over the periods and in
proportion to the depreciation of the related asset.
- Grant related to nondepreciable asset requiring fulfillment of certain
conditions shall be recognized as income over the periods which bear
the cost of meeting the conditions.
- A government grant that becomes receivable as compensation for
expenses or loses already incurred or for the purpose of giving
immediate financial support to the entity with no further related costs
shall be recognized as income of the period in which it becomes
receivable.
Two Approaches in Recording Government Grant
a. Deferred Income Approach
b. Deduction from Asset Approach
Repayment on Government Grant
-
Repayment of a grant related to income shall be applied first to

unamortized deferred income and any excess shall be recognized
immediately as expense
4
Repayment to grant related to an asset shall be recorded by increasing

the carrying amount of the asset
Illustration
On January 1, Easy Company received a grant of P 1, 500, 000 from the
government to subsidize tuition fees for a period of 5 years. On January 1,
2017, the entity violated certain conditions attached to the grant, and
therefore had to repay fully such grant to the government.
Required:
1. Determine the grant income for 2015?
2. Determine the amount to be recognizes as loss resulting from the
repayment of the grant in 2017?
Computation:
1. Grant income for 2015 (1,500,000/5 years)
300, 000
2. Total grant received

1,500,000
Income recognized in 2015 and 2016 (1,500,000/5 x 2)
(600,000)
Deferred Grant Income- December 31, 2016
900,000
BORROWING COST
-
interest and other costs that an entity incurs in connection with

borrowing funds (PAS 23, paragraph 25)
Accounting for Borrowing Cost (PAS 23)

1. If it is directly attributable to the acquisition, construction or production
of a qualifying asset, the borrowing cost is required to be capitalized as
cost of the asset.
2. All other borrowing cost shall be expensed when incurred
Specific Borrowing
actual borrowing cost less any investment income
A portion is used for working capital, treated as a general borrowing
General Borrowing
equal to the average expenditures of the asset multiplied by a

capitalization rate
Capitalization rate (total annual borrowing cost/total general

borrowing)
Commencement of Capitalization
a) When the entity incurs expenditures for the asset
b) When the entity incurs borrowing cost
c) When the entity undertakes activities that are necessary to prepare the
asset for the intended use or sale
Suspension of Capitalization
Capitalization shall be suspended during extended periods in which
active development is interrupted.
Cessation of Capitalization
6
when substantially all the activities necessary to prepare the qualifying

asset for its intended use or sale are complete
when the physical construction of asset is complete even though

routine administrative work might still continue.
Illustration
Innuendo Company has the following loans outstanding for the entire
year 2016.
Specific construction loan
General loan
1,000,000
20,000,000
10%
12%
The entity began self-construction of a building on January 1, 2016 and

the building was completed on December 31, 2015. The following
expenditures were made during the current year:
January 1
July 1
November 1
Total
1,000,000
2,000,000
3,000,000
6,000,000
Required: Determine the cost of the new building

Computation:
Date
January 1
July 1
November 1
Total
Expenditures
Fraction
1,000,000
12/12
2,000,000
6/12
3,000,000
2/12
Average
1,000,000
1,000,000
500,000
2,500,000
Average expenditures
Applicable to Specific loan
Applicable to General loan
2,500,000
(1,000,000)
1,500,000
Actual Expenditures
Capitalizable interest
Specific (1,000,00 x 10%)
General (1,500,000 x 12%)
Total cost of new building
6,000,000
100,000
180,000
280,000
6, 280,000
LAND AND BUILDING

Capitalized Cost of Land
a. Purchase price
b. Legal fees and other expenditures for establishing clean title
c. Broker commission
d. Escrow fees
e. Fees for registration and transfer of title
f. Cost of relocation or reconstruction of property belonging to others in
order to acquire possession
g. Mortgages, encumbrances and interest on such mortgages assumed by
the buyer
h. Unpaid taxes up to date of acquisition assumed by the buyer
i. Cost of survey
j. Payments to tenants to induce them to vacate the land in order to
prepare the land for the intended use but not to make room for the co
nstruction of new building
k. Cost of permanent improvements such as cost of clearing, cost of
grading, leveling and landfill
l. Cost of option to buy the acquired land
Land is not acquired option expensed
Land Improvements
Additions to cost not subject to depreciation charged to land account
If depreciable charged to land improvements account
Cost of Building Acquired by Purchase

a. Purchase price
b. Legal fees incurred in connection with the purchase
c. Unpaid taxes up to date of purchase
d. Interest, liens and other encumbrances assumed by the buyer
e. Payments to tenants to vacate the building
f. Any renovating or remodeling cost incurred to put the building
purchased in condition suitable for intended use
Cost of Building When Constructed
a. Materials used, labor employed and overhead directly attributable to
construction
b. Building permit or license
c. Architect fee
d. Superintendent fee
e. Cost of excavation
f. Cost of temporary building used as construction office and tools or
material used
g. Expenditures incurred during the construction period
h. Expenditures for service equipment and fixtures made a permanent
part of structure
i. Cost of temporary safety fence around construction site and cost of
subsequent removal thereof
Construction of safety fence after completion of building land
improvement
j. Safety inspection fee

Sidewalks, Pavements and Parking Lots
a. Part of the blueprint charged to building account
b. Incurred not in connection with the construction of building land
improvements
Damages when No Insurance is taken
Premium charged to building account
No insurance is taken and damages are paid expense/loss on
damages
PIC Interpretations
1. Land and old building purchased as single cost
a. Building is usable, cost is allocated to land and building
b. Building is not usable, allocated to land only
2. Old building is demolished immediately to make room for
construction of new building
a. Carrying amount of usable old building recognized as loss if
new building is PPE or investment property
b. Carrying amount of usable old building capitalized if new
building is inventory
c. Demolition cost minus salvage value capitalized cost of the
building whether new building is PPE, investment property or
inventory
d. Net demolition cost capitalized cost of land if the old building
is demolished to prepare the land for its intended use and not
to make room for construction
3. Building is acquired and used in prior period but demolished in
the current period to make room for construction of new
building
a. Carrying amount of old building recognized as loss whether
new building is PPE, inventory or investment property
b. Net demolition cost capitalized whether new building is PPE,
inventory or investment property
10
c. Old building is subject to contract lease payments to tenant to

vacate old building charged to building account
Illustration
Purchase price of land and an old apartment building
(fair value of building 200,000)
Legal fees, including fee for title search
Payment of land mortgage and related interest
due at a time of sale
Payment of delinquent property taxes
Cost of razing the apartment building
Grading and drainage on land site
Architect fee on new building
Payment to building contractor
Interest cost on specific borrowing during construction
Payment of medical bills of employees accidentally
injured while inspecting building construction
Cost of paving driveway and parking lot
Cost of trees, shrubs and other landscaping
Cost of installing light parking lot
Premium for insurance on building during construction
Cost of open house party to celebrate opening of building
2,000,000
10,000
50,000
20,000
30,000
15,000
200,000
8,000,000
300,000
10,000
40,000
55,000
5,000
25,000
60,000
Required:
1. Determine the cost of land
2. Determine the cost of new building
3. Determine the cost of land improvement
Computation:
1. Cost of Land excluding fair value of old building
Legal fees
Grading and drainage on land site
Payment of mortgage
Payment of taxes
Cost of razing the apartment building
Cost of Land
2. Payment of delinquent property taxes assumed
Architect fee on new building
Interest cost on specific borrowing during construction
Premium for insurance on building during construction
11
1,800,00
10,000
15,000
50,000
20,000
30,000
1,925,000
8,000,000
200,000
300,000
25,000
Cost of Building
8,525,000
3. Cost of paving driveway and parking lot

Cost of trees, shrubs and other landscaping
Cost of installing lights in parking lot
Cost of Land Improvement
MACHINERY
40,000
55,000
5,000
100,000
Capitalized Cost
a.
b.
c.
d.
e.
f.
g.
h.
i.
Purchase price
Freight, handling, storage and other cost related to the acquisition
Insurance while in transit
Installation cost, including site preparation and assembling
Cost of testing and trial run, and other cost necessary in preparing the
machinery for use
Initial estimate of dismantling and removing the machinery and
restoring the site on which it is located, for which the entity has a
present obligation
Fee paid to consultants for advice on the acquisition of the machinery
Cost of safety rail surrounding the machine
Cost of water device to keep machine cool
VAT not capitalized charged to input tax to be offset against output

tax (VAT registered)
Subsequent Cost
-
Will increase the future service potential capitalized

Will merely maintain the existing level expensed
Additions capitalized
Improvements and Betterments capitalized
Repairs
Extraordinary repairs capitalized
Ordinary repairs expensed
Rearrangement Cost capitalized
Major Replacement
Separate identification is practicable, debited to asset account
12
Cost of part eliminated and related accumulated depreciation are

removed and the carrying amount is treated as loss.
Separate identification is not practicable, replacement cost
discounted
Illustration
Reverend Company acquired a machine at the beginning of current
year:
Cash paid for machine, including VAT of P96,000
Cost of transporting machine
Labor cost of installation by expert filter
Labor cost of testing machine
Insurance cost for the current year
Cost of training for personnel who will use the machine
Cost of safety rails and platform surrounding machine
Cost of adjustment to machine to make it operate more
efficiently
Estimated dismantling cost to be incurred as required
by contract
896,000
30,000
50,000
40,000
15,000
25,000
60,000
80,000
75,000
65,000
Required: Determine capitalizable cost of the machine?

Computation:
Cash paid for machine (896,000-96,000)
Cost of transporting machine
Labor cost of installation by expert filter
Labor cost of testing machine
Cost of safety rails and platform surrounding machine
Cost of adjustment to machine to make it operate more
efficiently
Estimated dismantling cost to be incurred as required
by contract
Total cost of machine
13
800,000
30,000
50,000
40,000
60,000
80,000
75,000
65,000
1,200,000
DEPRECIATION
-
Systematic allocation of the depreciable amount of the PPE
Depreciation Period
When Asset is available for use
Depreciation will cease when asset is derecognized
Depreciation will discontinue when the asset is classified as held for
sale
Two Kinds
1. Physical Depreciation
- wear and tear and deterioration over a period
2. Functional or Economic Depreciation
a) Inadequacy
b) Supersession
c) Obsolescence
Three Factors of Depreciation
a. Depreciable Amount
b. Residual Value
c. Useful life
Factors in Determining Useful Life
a) Expected usage of asset
b) Expected physical wear and tear
c) Technical obsolescence
Methods of Depreciation
1. Equal Uniform Charge Method
a. Straight Line Method
Annual Depreciation =
Cost Residual Value

LifeYears
14
b. Composite Method
Composite Life =
Composite Rate =
Total Depreciable Amount

Total Annual Depreciation
Total Annual D epreciation
Total Cost
c. Group Method
- all assets are similar in nature and in estimated useful life are grouped
and treated as a single unit
2. Variable Charge Method
a. Service Hours Method
Total Depreciable Amount

Estimated Usefullife(Service hours)
Depreciation Rate per Hour =
Annual Depreciation = actual hours worked x rate per hour

b.
Output or Production Method

Total De preciable Amount
Estimated Usefullife(Units of Output )
Depreciation Rate per Unit =
Annual Depreciation = yearly output x rate per unit

3. Decreasing charge/ Accelerated/Diminishing Balance Method
a. Sum of Years Digit
Sum of Years Digit =
Life(
Sum of Half Years Digit =
Life+1
)
2
Life x 2[
b. Declining Balance Method
15
( Life x 2 )+ 1
]
2
Rate =
1useful life Residual Value Cost
residual value is ignored in getting depreciable amount

c. Double Declining Balance Method
Rate = 100%/Useful Life x 2
residual value is ignored in getting depreciable amount
3. Other Methods
a. Inventory Method
the difference between the balance of the asset account and the value
at the end of the year is recognized as depreciation for the year
b. Retirement Method
-
no depreciation recorded until the asset is retired
depreciation is equal to the original cost of the asset retired minus

salvage proceeds
Replacement Method
- no depreciation is recorded until the asset is retired and replaced
- depreciation is equal to the replacement cost of the asset retired less
salvage proceeds
Illustration 1
Amicable company purchased a machine at a cost of P635,000 on
January 1, 2016. It was estimated that the machine would have a residual
value of P35,000. The estimated useful life is 5 years, 60 000 service hours
and 150,000 production units.
Actual Operations
2016
2017
2018
2019
2020
Service hours
14,000
13,000
10,000
11,000
12,000
60,000
Required:
16
Unit produced
34,000
32,000
25,000
29,000
30,000
150,000
1. Determine the depreciation expense and carrying amount using Straight

line method for 2016
2. Determine the depreciation expense and carrying amount using Working
hours method for 2017
3. Determine the depreciation expense and carrying amount using
Production method for 2018
4. Determine the depreciation expense and carrying amount using Sum of
years digit method for 2019
5. Determine the depreciation expense and carrying amount using Double
declining balance method for 2020
Computation:
1.
Date Particular
Depreciation
Accum. Dep
Carrying Amount
Acquisition cost
635,000
2016
120,000
120,000
515,000
2017
120,000
240,000
395,000
2018
120,000
360,000
275,000
2019
120,000
480,000
155,000
2020
120,000
600,000
35,000
600,000
Depreciation = (635,000-35,0000)/5
= 120,000
2.
Date
Particular
Depreciation
Accum. Dep
Carrying
Amount
Acquisition cost
635,000
2016 14,000 x 10
140,000
140,000
495,000
2017 13,000 x 10
130,000
270,000
365,000
2018 10,000 x 10
100,000
370,000
265,000
2019
11,000 x 10
110,000
480,000
155,000
2020 12,000 x 10
120,000
600,000
35,000
Depreciation rate per hour = (635,000-35,000)/60,000 = 10
3.
Date
Particular
Depreciation
Accum. Dep
Carrying
Amount
Acquisition cost
635,000
2016 34,000 x 4
136,000
136,000
499,000
2017 32,000 x 4
128,000
264,000
351,000
2018 25,000 x 4
100,000
364,000
271,000
17
2019
2020
29,000 x 4
116,000
480,000
155,000
30,000 x 4
120,000
600,000
35,000
Depreciation rate per hour = (635,000-35,000)/150,00 = 4
4.
Date
Particular
Depreciation
Accum. Dep
Carrying
Amount
Acquisition cost
635,000
2016 600,000 x 5/15
200,000
200,000
495,000
2017 600,000 x 4/15
160,000
360,000
365,000
2018 600,000 x 3/15
120,000
480,000
265,000
2019
600,000 x 2/15
80,000
560,000
155,000
2020 600,000 x 1/15
40,000
600,000
35,000
SYD= 1 + 2 +3 + 4 + 5 = 15
5.
Date
Particular
Depreciation
Accum. Dep
Carrying
Amount
Acquisition cost
635,000
2016 635,000 x 40%
254,000
254,000
381,000
2017 381,000 x 40%
152,400
406,400
228,600
2018 228,600 x 40%
91,440
497,840
137,160
2019
137,160 x 40%
54,684
552,704
82,296
2020 82,476 35,000
47, 296
600,000
35,000
Fixed rate = 100%/5 = 20% x 2 = 40%
Illustration 2
Real company used a hand tool in the manufactureing activities. On
January 1, 2016, there are 800 of such tools on hand at cos of P200 each.
Acquisition and retirement during 2015 and 2016 are:
Acquisition and cost
Retirement and
Estimated value
Retirement proceeds
of tools at year end
2016 400 @ P300
300 @ P50
200,000
2017 900 @ P400
700 @ P70
350,000
Retirement may be assumed to be on first-in, first-out basis.
Required:
1. Determine the depreciation using inventory method for 2016
2. Determine the cost of tools retired
3. Determine the depreciation using replacement method for 2016
Computation:
18
1. Tools account- January 1, 2016 (800 x P200)

Acquisition at cost (400 x P300)
Sales proceeds
(300 x P50)
Tools account- December 31, 2016
Less: Inventory of tools at year end
Depreciation
160,000
120,000
(15,000)
265,000
200,000
65,000
2. January 1, 2016
(500 x P200)
100,000
2016
(200 X P300)
60,000
Cost of tools retired
3. Depreciation
160,000
(300 x 50)
15,000
Illustration 3
Silent Company provides the following schedule of machinery:
Estimated
Useful life
Total cost
Residual Value
in years
Machine A
550,000
50,000
20
Machine B
200,000
20,000
15
Machine C
40,000
5
Required:
1. Determine the annual depreciation for the current year
2. Determine the composite life of the assets
Computation:
1.
Cost
Machine A 550,000
Machine B 200,000
Machine C 40,000
Salvage
50,000
20,000
0
Depreciable
cost
500,000
180,000
40,000
720,000
2. Composite life (720,000/45,000)
Life
20
15
5
Annual
depreciation
25,000
12,000
8,000
45,000
16 years
19
DEPLETION
the removal, extraction or exhaustion of a natural resource or wasting

asset
systematic allocation of the depletable amount of a wasting asset over
the periods the natural resource is extracted or produced
Depletable Amount = Cost Residual Value
Depletion rate per unit =
Units Estimated
Depletable Amount
be exctracted
Annual Depletion = depletion rate per unit x units extracted during the
year
Exploration and Evaluation Expenses
may qualify as exploration and evaluation asset
shall be measured initially at cost
subsequent, cost or revaluation model
classified as either tangible or intangible asset
Accounting for Extractive Industry
Cost of wasting asset:
a. Acquisition Cost price paid
b. Exploration Cost
c. Development Cost
20
d. Estimated Restoration Cost

Two Methods of Accounting for Exploration Cost
1. Successful Effort Method
- cost directly related to discovery capitalized
- exploration cost related to dry well expensed
2. Full Cost Method
- all exploration costs are capitalized
Estimated Restoration Cost
Estimated cost of restoring the property to the original condition is
capitalized only when the entity incurs obligation when the asset is
acquired. (PAS 16, paragraph 16)
Depreciation of Tangible Equipment Used
- Life of equipment shorter straight line method
- Life of wasting asset shorter output method
Maximum Dividend Formula (Wasting Asset Corporation)
Retained Earnings
Add: Accumulated Depreciation
Total
Less: Capital liquidated in prior years
xx
Unrealized depletion in ending inventory xx
Maximum Dividend
xx
xx
xx
xx
xx
Illustration
Resource Company was engaged in the rock and gravel business. The
following transactions relate to the acquisition and development of an
extensive gravel pit:
2016
Cost of acquisition and development
960,000
Estimated output
2,400,000 tons
Production
1,000,000 tons
2017
Additional development cost
490,000
Production
600,000 tons
2018
Additional development cost
500,000
New estimate or remaining output
2,500,000 tons
Production
700,000 tons
Heavy equipment was acquired at the cost of 3,600,000. The
equipment had useful life of 10 years but is capable of exhausting the
resource in six to eight years.
Required:
1. Determine the depreciation for the year 2016
2. Determine the depletion for the year 2017
21
3. Determine the depletion for the year 2018

Computation:
1. Depreciation per unit
(3,600,000/2,400,000)
Depreciation (1,000,000 x 1.50)
1.50
1,500,000
2. Depletion rate (960,000/2,400,000)

Depletion for 2016 (1,000,000 x .40)
.40
400,000
Total cost (960,000 + 490,000)

1,450,000
Less: Accumulated Depletion
400,000
Depletable amount
1,050,000
Divide by estimated remaining output (2,400,000-1,000,000)
1,400,000
Depletion rate
.75
Depletion (600,000 x .75)
450,000
3. Total cost
1,450,000
Add: Additional development cost
500,000
Total
Less: Accumulated Depletion (400,000 + 450,0000)
850,000
Depletable amount
Divide by new estimated remaining output
2,500,000
New depletion rate
Depletion
(700,000 x .44)
308,000
1,950,000
1,100,000
.44
REVALUATION
Frequency depends upon the changes in the fair value of PPE.

If the fair value of revalues asset differ materially from the carrying
amount, revaluation is necessary.
Basis of Revaluation of PPE
a. Fair Value
b. Depreciated replacement cost if FV is not available
Revalued Amount FV or depreciated replacement cost of PPE
Fair Value price that would be receive to sell an asset or paid to
transfer liability
Depreciated Replacement Cost = replacement cost (current
purchase price) of PPE - corresponding accumulated depreciation
22
Carrying Amount = historical cost accumulated depreciation

Revaluation Surplus = FV/depreciated replacement cost carrying
amount of PPE
Appreciation/ Revaluation Increase = revalued amount historical
cost
Two Approaches in Recording Revaluation:
a. Proportional Approach
- accumulated depreciation at the date of revaluation is restated
proportionately with the change in gross carrying amount of the
asset
b. Elimination Approach
- accumulated depreciation is eliminated against gross carrying
amount of the asset
- net amount is restated to the revalued amount of the asset
Revaluation Surplus
- increase as a result of the revaluation component of OCI
- allocated or realized over the remaining life of the asset
- transferred to retained earnings when realized
Carrying amount s decreased as a result of revaluation, decrease-expense
Revaluation decrease shall be charge to any revaluation surplus to the
extent of a previous revaluation and balance is expensed
Revaluation increase shall be recognized as income to the extent that it
reverses or revaluation decrease of the same asset previously recognized
as expense
Illustration
On January 1, 2016, Plausible Company perorted the following account
balances relating to property, plant and equipment:
Land
Building
Machinery
2,000,000
15,000,000
3,750,000
3,000,000
1,500,000
Assets have been carried at cost since their acquisition. All assets were
acquired on January 1, 2005. The straight line method is used.
On January 1, 2015, the entity decided to revalue the property, plant
and equipment. On such date, competent appraisers submitted the
following.
Replacement Cost
Land
5,000,000
23
Building
Machinery
25,000,000
5,000,000
Required:
1. Determine the revaluation surplus on January 1, 2016
2. Determine the depreciation for the current year
3. Determine the revaluation surplus on December 31, 2015
Computation:
1. Percentage of Accumulated Depreciation
Building
(3,750,000/15,000,000)
Machinery (1,500,000/3,000,000)
Useful life
Building (10 years expired/25%)
Machinery (10 years expired/50%)
Sound
Revaluation
Value
Land
5,000,000
Building (25,000,000 x 75%)
18,750,000
Machinery (5,000,000 x 50%)
2,500,000
25%
50%
40 years
20 years
Carrying
Amount
2,000,000
11,250,000
1,500,000
Surplus
3,000,000
7,500,000
1,000,000
11,500,000
2. Depreciation- Building
625,000
Depreciation- Machinery
Total
(18,750,000/30 years)
(2,500,000/10 years)
250,000
875,000
3.
Revaluation Surplus January 1, 2016
11,500,000
Piecemeal realization in 2016
Building (7,500,000/30)
(250,000)
Machinery (1,000,000/10)
(100,000)
Revaluation surplus- December 31, 2016
11,150,000
IMPAIRMENT OF ASSET
-
a fall in the market value of an asset so that the recoverable amount is

now less than the carrying amount
Accounting issues to be considered

a. Indication of possible impairment
24
b. Measurement of the recoverable amount

c. Recognition of impairment loss
Measurement of recoverable amount
The recoverable amount of the asset is the fair value less cost of
disposal or value in use, whichever is higher
Value in use
- measured as the present value or discounted value of future net cash
inflows expected to be derived from an asset
Recognition of impairment loss
If recoverable amount is less than the carrying amount, an impairment
loss has incurred
Impairment loss should be recognized immediately by reducing the
assets carrying amount to its recoverable amount
The impairment loss is recognized in P/L and presented separately in
income statement
Impairment of revalues asset
Impairment of revalued asset is recognized directly against any
revaluation surplus related to the asset and any excess is recognized in
P/L.
Cash Generating Unit(CGU)
- smallest identifiable group of assets that generate cash inflows from
continuing use that are largely independent of the cash inflows from
other assets or group of assets
Impairment loss of cash generating unit
Impairment lost should be allocated to the assets of the unit in the
following order (PAS 36, paragraph 104) :
a. First, to the goodwill allocated to the cash generating unit
b. Then, to all other noncash assets of the cash generating unit
prorate based on carrying amount
Carrying amount of an asset shall not be reduced below the highest
fair value less cost to sell, value in use and zero. (PAS 3, paragraph
105)
Determination of impairment
Cash generating unit to which goodwill has been allocated shall be tested
for impairment at least annually by comparing the carrying amount of the
unit, including the goodwill, with the recoverable amount. (PAS 36,
paragraph 90)
25
a. Recoverable amount > carrying amount of the unit, the unit and the
goodwill allocated to that unit not impaired
b. Carrying amount < recoverable amount recognize impairment
loss
Carrying amount of CGU
Carrying amount of a CGU includes the carrying amount of only those
assets that can be attributed directly or allocated on a reasonable and
consistent basis to the CGU and shall generate the future cash inflows
used in determining the value in use of the cash generating unit. (PAS
36, paragraph 76)
Carrying amount of CGU does not include the carrying amount of any
recognized liability, unless the recoverable amount of CGU cannot be
determined without consideration of the liability. (PAS 36, paragraph
76)
Corporate Assets
- are assets other than goodwill that contribute to the future cash flows
of both the CGU under review and other cash generating asset
- group or divisional assets
- assets that do not generate cash inflows independently from other
assets
- recoverable amount cannot be determined unless the entity has
decided to dispose the asset
If there is an indication that a corporate asset is impaired, the recoverable
amount of the CGU to which the corporate asset belongs is determined
and compared with the carrying amount of the CGU.
Reversal of an Impairment
Recoverable amount of asset previously impaired turns out to be
higher than the assets carrying amount, the carrying amount shall be
increased to new recoverable amount
The increased carrying amount of an asset due to reversal of
impairment loss shall not exceed the carrying amount that would have
been determined had no impairment loss been recognized for the asset
in prior years. (PAS 36, paragraph 117)
Reversal of impairment loss recognized immediately in P/L
An impairment loss recognized for goodwill shall not be reversed in a
subsequent period. (PAS 36, paragraph 124)
Illustration
26
On January 1, 2016, Elite Company purchased equipment with a cost of

P11,000,000, useful life of 10 years and no residual value. The entity used
straight line depreciation. At every year end, the entity determined that
impairment indicators are present. There is no change in the useful life or
residual value. The following information is available for impairment testing
at each year end.
December 31, 2016
31, 2017
Fair Value less cost of
disposal
Value in use
8,200,000
8,100,000
December
8,400,000
8,550,000
Required:
1. Determine the impairment loss for 2016
2. Determine the gain on reversal of impairment for 2017
3. Determine the depreciation for 2018
Computation:
1. Cost of Equipment
Less: Annual depreciation (11,000,000/10)
Carrying Amount
Less: Value in Use
Impairment Loss
11,000,000
1,100,000
9,900,000
8,550,000
1,350,000
2. Carrying amount- Dec. 31, 2016

Less: Annual depreciation (8,550,000/9)
Carrying amount- Dec. 31, 2017
Less: Fair Value less cost of disposal
Gain on reversal of Impairment
8,550,000
950,000
7,600,000
8,400,000
800,000
3. Fair Value less cost of disposal

Divide: Remaining useful life
Depreciation
8,400,000
8
1,050,000
27
INTANGIBLE ASSET
- is an identifiable nonmonetary asset without physical substance (PAS
38, paragraph 8)
- must be controlled by the entity as result of past event from which
future economic benefits are expected to flow to the entity (PAS 38,
paragraph 8)
Recognition of Intangible Asset
1. It is probable that future economic benefits that are attributable to the
asset will flow to the entity.
2. The cost of the intangible asset can be measured reliably.
Three Essential Criteria
1. Identifiability
- It is separable
- It arises from contractual or other legal rights
2. Control
- the power of the entity to obtain the future economic benefits flowing
from the intangible asset and restrict the access of others to those
benefits
3. Future Economic Benefits
- benefits resulting from the use of the asset by the entity
Cost
1. Purchase price, import duties and nonrefundable purchase taxes and
any directly attributable cost of preparing the asset for its intended use
2. If payment is deferred beyond normal credit terms, the cost is the cash
price equivalent
The difference between the cash price and the total payments is
recognized as interest expense over the credit terms
Acquisition as Part of Business Combination

a. The cost of the intangible asset is based on the fair value on the date
of acquisition
b. If there is an active market, the quoted price of an identical asset
provides the most reliable evidence of fair value.
c. If no active market, the fair value of the intangible asset is equal to any
available quoted price for identical or similar asset.
28
d. The fair value can also be based on unobservable input developed by

the entity.
Acquisition by Government Grant
The intangible asset acquired by government grant can be measured at
either:
a. Fair Value
b. Nominal or zero, plus any expenditure that is directly attributable to
preparing the asset for its intended use
Internally Generated Intangible Asset
Cost comprises all directly attributable costs necessary to create,
produce and prepare the asset to be capable of operating it in the
manner intended by the management.
Internally generated intangible generated brands, mastheads,
publishing titles, customer lists and items similar to substance shall not
recognized as intangible assets. (PAS 38, paragraph 63)
Subsequent Expenditure
- recognized as expense
May be capitalized or added to the cost if the recognition criteria for an

intangible asset are met
Identifiable Intangible Asset

If the intangible asset is acquired through purchase, there is a transfer
of legal right that would make the asset identifiable.
If the asset could be rented or sold separately, the intangible asset is
considered identifiable.
Unidentifiable Intangible Asset
- cannot be sold, transferred, licensed, rented or exchanged separately
- inherent in continuing business and can only be identified with the
entity as a whole.
Measurement After Recognition
1. Cost Method
2. Revaluation Method
Amortization
Intangible assets with limited or finite life should be amortized over
useful life (PAS 38, paragraph 97)
29
Intangible assets with indefinite useful life are not amortized but are
tested for impairment at least annually and whenever there is an
indication the intangible asset is impaired (PAS 38, paragraph 107 and
108)
Amortization Period
- depreciable amount should be amortized over useful life
- shall begin when the asset is available for use
Method of Amortization
- shall reflect the pattern which the economic benefits from the asset is
consumed
- if such pattern cannot be determined, straight line method is used
Residual Value
- shall be presumed zero except:
a. When a third party is committed to buy the asset
b. When there is an active market for the intangible asset
Derecognition
a. On disposal
b. When no future economic benefits are expected from its use and
disposal
Gains and losses from the derecognition shall be determined as the
difference between the net disposal proceeds and the carrying amount of
the asset
Derecognition gains are treated as other income
Impairment
An impairment loss on an intangible asset is recognized if the
recoverable amount is less than the carrying amount. (PAS 36)
The recoverable amount of the intangible asset is the higher between
the fair value less cost of disposal and value in use
30
SPECIFIC INTANGIBLE ASSETS

Patent, Trademark and Goodwill
PATENT
- right granted by the govt to an inventor enabling him to control the
manufacture, sale or other use of invention for a specified period of
time
- legal life is 20 years from the date of filing the application (R.A. No.
8293, Intellectual Property Code of the Philippines, January 1,
1998)
- cant be renewed but the life can be extended by a new patent
- classified as technology-based intangible asset(US GAAP)
Acquired by purchase, cost include purchase price and directly
attributable expenditure necessary in preparing the asset for intended use
Internally developed, cost includes licensing and other related legal fees
Related research and development cost expensed when incurred
Legal fees and other cost of successful prosecuting or defending a patent
- expensed when incurred
Amortization and Impairment
Cost should be amortized
a. Original cost should be amortized over the legal life or useful life,
whichever is shorter.
b. Competitive patent acquired to protect original patent should be
amortized over the remaining life of the original patent.
c. If related patent is acquired in order to extend the life of the old
patent, the cost and any unamortized cost of the old patent shall be
amortized over extended life.
TRADEMARK
- a symbol, sign, slogan or name used to mark a product to distinguish it
from other products
- is a market-related intangible asset (US GAAP)
- Acquired by purchase, cost includes the purchase price plus cost
directly attributable to the acquisition
31
Internally developed, cost includes expenditures required to

establish trademark and other expenses incurred in securing the
trademark
Successfully prosecuted/defended, litigation cost outright
expense

- Finite life, amortized at the end of each reporting period and tested for
impairment whenever there is an indication of impairment at the end
of reporting period
- Indefinite life, not amortized but tested for impairment at least
annually and whenever there is an indication of impairment
Legal life of trademark 10 years and may be renewed for periods of 10
years each (R.A. 8293, Intellectual Property Code of the
Philippines)
GOODWILL
- is created by good relationship between entities and customers
- changes from day to day
Kinds of Goodwill
1. Developed Goodwill
- Internally generated
- Shall not be recognized as an asset (PAS 38, paragraph 48)
- Cost of developing, maintaining and restoring goodwill
expensed when incurred
2. Purchased Goodwill
- One that paid for
- Arises when a business is acquired
- Recognized as an asset
Residual Approach
- goodwill is measured by comparing the purchase price for the entity
with the net tangible asset and identifiable assets (total excess
including goodwill liability assumed)
- purchase price net tangible and identifiable assets = goodwill
Impairment
Not amortized (PAS 38, paragraph 107) but tested for impairment at
least annually and whenever there is an indication that it may be
impaired
If there is an indication that goodwill may be impaired, recoverable
amount is determined for the cash generating unit which goodwill
belongs
Negative Goodwill
- Purchase price/ consideration transferred < net amount of identifiable
assets acquired and liabilities assumed, difference = negative goodwill
32
Negative goodwill is recognized in P/L as gain on bargain

purchase (PFRS 3, paragraph 34)
Goodwill Measured in a Business Combination

Consideration transferred
Amount of noncontrolling interest in the acquire
Fair value of previously held interest in the acquire
TOTAL
Net amount of identifiable assets acquired and liabilities
Assumed at fair value
GOODWILL
xx
xx
xx
xx
(xx)
xx
Illustration
On January 1, 2016, Downtown Company acquired the following
intangible assets:
A trademark for P2,000,000. The trademark has a remaining legal life of 8
years. The trademark will be renewed in the future without problem
A patent for P6,000,000. The patent has economic life for just 5 years.
And also Downtown Company purchased Sky Company for P6,000,000 which
reported assets of P5,000,000 and liabilities of P2,000,000. The carrying
amount of the assets approximate fair value, except for land which has fair
value that is P300,000 greater than carrying amount.
On December 31, the intangible assets are tested for impairment. The
trademark is now expected to generate cash flows of just P120,000 per year.
The cash flows expected to be generated by the patent amount to
P1,000,000 annually for each of the next 4 years. The appropriate discount
rate for all intangible assets is 8%. The present value of an ordinary annuity
of 1 at 8% for 4 periods is 3.31.
Required:
1. Determine the amortization for 2016
2. Determine the amount of goodwill to be recognized by Downtown
Company
3. Determine the total impairment loss to be recognized for the current year
Computation:
1. Cost of Patent
Divide:
Amortization of Patent
Amortization of Trademark- has indefinite useful life
33
6,000,000
8
1,200,000
0
2. Acquisition Cost
Less: Net Assets
Assets
Excess Fair Value of Land
Liabilities
Goodwill
6,000,000
5,000,000
300,000
(2,000,000) 3,300,000
2,700,000
3. Trademark
Value in use (120,000/8%)
Impairment Loss of trademark
Add: Impairment loss of Patent
Patent
Less: Amortization
(6,000,000/8)
Carrying amount- December 31, 2016
Value in Use (1,000,000 x 3.31)
Total Impairment Loss
2,000,000
1,500,000
500,000
6,000,000
1,200,000
4,800,000
(3,310,000) 1,490,000
1,990,000
SPECIFIC INTANGIBLE ASSETS

Copyright, franchise, leasehold, license, customer list
COPYRIGHT
- exclusive right granted by the government to the author, composer
or artist, enabling the grantee to publish, sell or otherwise benefit
from the library, musical or artistic work
- is considered an artistic- related intangible asset(US GAAP)
- cost assigned to copyright consists of all expenses incurred in the
production of the work including those required to establish or
obtain the right
- when purchased, cost includes cash paid and directly attributable
cost necessary for the intended use
- cost of copyright should be amortized over the useful life
- it is usually advisable to write off the cost of the copyright against
the revenue of the first printing
- copyright should be tested for impairment whenever there is an
indication of impairment at the end of reporting period
The term of protection of copyright is during the lifetime of the author and
for 50 years after death (Intellectual Property Code of the Philippines).
FRANCHISE
- one party called the franchisor grants certain rights to another party
called franchisee
34
contract-based intangible asset (US GAAP)
Franchise agreement:
a. Between the government and a private entity or individual
- the latter is permitted to use public property in performing its
services
b. Between private entities or individuals
- the franchisee acquires to use trademark, patent and process of the
franchisor
Cost of franchise
-
includes lump sum payment (initial franchise fee) for the franchise
and all legal fees and expenses incurred in connection with the
franchise acquisition
periodic payment to the franchisor based on the franchisees

revenue outright expense

- Definite period, cost shall be amortized over useful life or definite
period whichever is shorter
- Finite life, should be tested for impairment whenever there is an
indication of impairment at the end of reporting period
Granted indefinite or perpetually, cost shall not be amortized
but tested for impairment at least annually and whenever there is
an indication of impairment
LEASEHOLD
-
right acquired by the lessee by virtue of a property contract of lease

to use the specific property to owned by the lessor for a definite
period of time in consideration for a certain sum of money
Cost of leasehold, shall be amortized over the life of the lease

Cost is not substantial, outright expense
Leasehold improvements
- property, plant and equipment
- depreciated over the life of the lease or life of the improvements,
whichever is shorter
- residual value is ignored
35
CUSTOMER LIST
- customer database
- internally generated customer list shall not be recognized as an
intangible asset (PAS 38, paragraph 63)
- acquired customer list can be recorded as an intangible asset and
amortized over the useful life
- should be tested for impairment whenever there is an indication of
impairment at the end of the reporting period
Organization Cost
- costs incurred in forming or organizing a corporation
Start up costs expensed when incurred (PAS 38, paragraph 69)
Organization cost expensed when incurred
Share issuance cost debited to share premium
Share premium is not sufficient, excess should be debited to share
issuance cost contra equity or a deduction from share premium first and
retained earnings second
SERVICE CONCESSION
- Arrangement between a private sector entity and a public entity
whereby the private sector entity shall provide services in order that
the public could access to major infrastructure.
Two parties in a service concession:

1. Concession operator a private entity
2. Grantor a public sector entity which the party grants the service
concession
At the end of arrangement, the residual interest of any infrastructure
asset is controlled by the grantor.
Infrastructure is not part of property, plant and equipment.(IFRIC12)
The concession operator shall recognize fair value of the consideration as
either financial asset or intangible asset.
Financial asset shall be recognized by concession operator when operator
has a guaranteed contractual right to receive a specified amount of cash
over the life of the arrangement. (IFRIC 12, paragraph 16)
Amount due from the grantor is accounted for in accordance with IFRS 9
as any of the following (IFRIC 12, paragraph 24):
a. Financial asset at amortized cost
b. Financial asset at fair value through P/L
An intangible asset shall be recognized by concession operator when
(IFRIC 12, paragraph 17):
- operator has received a right or license to charge users for the
public service
36
revenue receivable is not agreed upon in advance but is dependent on the

use of the asset by the public.
Illustration 1
Sanity Company acquired a copyright to a best seller novel for 285,000
on January 1, 2016. The copyright has a remaining legal life of 20 years.
Sale of the novel is estimated as follows:
2016
50,000 copies
2017
30,000 copies
2018
10,000 copies
2019
5,000 copies
Required:
1. Determine the amortization for 2018
2. Determine the carrying amount of the copyright on December 31, 2018
Computation:
1.
2016
2017
2018
2019
50,000
30,000
10,000
5,000
95,000
copies
copies
copies
copies
copies
Amortization rate (285,000/95,000)
Amortization for the year 2018 (10,000 x 3)

2. Cost of Copyright
Less: Accumulated Amortization
2016
(50,000 x 3)
2017
(30,000 x 3)
2018
(10,000 x 3)
Carrying Amount- Dec. 31, 2018
30,000
285,000
150,000
90,000
30,000
270,000
15,000
Illustration 2
On January 1, 2016, Seashore Company signed an agreement to
operate as a franchisee for an initial franchise fee of P6,000,000. On the
same date, the entity paid P2,000,000, and agreed to pay the balance in four
37
equal annual payments of P1,000,000 at every year end. The down payment
is not refundable and no future services are required of the franchisor. The
entity can borrow at 14% for a loan of this type. Present value and future
value factors are as follows:
Present Value of 1 at 14% for 4 periods
Future amount of 1 at 14% for 4 periods
Present Value of an ordinary annuity of
at 14% for 4 periods
0.59
1.69
2.91
Required:
Determine the initial measurement of the franchise
Computation:
Present Value (1,000,000 x 2.91)
Down payment
Cost of franchise
2,910,000
2,000,000
4,910,000
Illustration 3
On January 1, 2014, Averse Company signed a 12-year lease for
warehouse space. The entity has an option to renew the lease for an
additional 8 year period on or before January, 1 2017. During January 1,
2016, the entity made substantial improvement to the warehouse. The cost
of the improvement was P540,000 with an estimated useful life of 15 years.
On December 31, 2015, the entity intended to exercise the renewal option.
The entity has taken a full year depreciation on this leasehold improvement
for 2016.
Required:
Determine the carrying amount of the leasehold improvement on
December 31, 2016
Computation:
Original lease term
Add: Extension
Total Life
Less: Years expired (2014 and 2015)
Remaining life
12
8
20
2
18
Life of leasehold improvement- shorter
38
15
Leasehold improvement
Less: Depreciation (540,000/15)
Carrying amount- December 31, 2015
540,000
36,000
504,000
LIABILITIES
-
are present obligations of an entity arising from past transactions

or events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits
Initial Measurement
Fair Value Transaction cost directly attributable
- not fair value through P/L (PFRS 9, paragraph 5.1.1)
Fair Value, Transaction cost expensed
- fair value through P/L
Subsequent Measurement
a) Amortized cost, using effective interest method
b) Fair value through P/L
Amortized Cost
- amount at which the financial liability is measured at initial recognition
minus principal payment, plus or minus the cumulative amortization
using the effective interest method of any difference between the
initial amount and the maturity amount
Fair Value Option
Financial liability is measured at fair value at every year-end and any
change in fair value is recognized in profit or loss
Fair value attributable to credit risk, recognized in OCI
39
No amortization
Current Liabilities
Classified as current when (PAS 1, paragraph 69):
a. Entity expects to settle the liability within the entitys operating cycle
b. The entity holds the liability primarily for the purpose of trading
c. The liability is due to be settled within twelve months after the
reporting period
d. The entity does not have an unconditional right to defer settlement of
the liability for at least twelve months after the reporting period
initially measured at present value
subsequently measured at amortized cost
in practice, not discounted and reported at face value
Noncurrent Liabilities
initially measured at present value
subsequently measured at amortized cost
interest bearing, initially at subsequently measured at face amount
Covenants
- are restrictions on the borrower as to undertaking further borrowings,
paying dividends, maintaining specified level of working capital and so
forth
Breach of Covenants
- liability becomes payable on demand
- liability is classified as current even if the lender agreed, after the
reporting period and before the statements are authorized for issue,
not to demand payment as a consequence of the breach (PAS 1,
paragraph 74)
- liability is classified as noncurrent if the lender has agreed on or before
the end of the reporting period to provide a grace period ending at
least twelve months after that date
Presentation of Current Liabilities
Statement of Financial Position shall include the following line items for
current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of a long-term debt
e. Current tax liability
An entity shall present additional line items on the face of the
Statement of Financial Position when such presentation is relevant to
40
an understanding of the entitys financial position. (PAS 1, paragraph

55)
Estimated Liability
- are obligations which exist at the end of reporting period although their
amount is not definite
- are either current or noncurrent in nature
- is considered as provision which is both probable and measurable (PAS
37)
PREMIUM AND WARRANTY LIABILITY

Premiums are articles of value given to customers as a result of past sales
or sales promotion activities.
Accounting procedures for the acquisition of premiums and
recognition of the premium liability:
1. When the premiums are purchased:
Premiums
xx
Cash
xx
2. When the premiums are distributed to customers:
Premium expense
xx
Premiums
xx
3. At the end of the year, if premiums still outstanding:
Premium expense
xx
Estimated premium liability
xx
Illustration
Hope Company included one coupon in each package sold. A premium
is offered to customers who send in 10 coupons.
2016
2017
Number of packages sold
500,000
800,000
Number of premiums purchased @ P40 each30,000
60,000
Number of premiums distributed
20,000
50,000
41
Premiums to be distributed next period
5,000
3,000
Premium expense for 2016

Premiums distributed in 2016
20,000
Premiums to be distributed in 2017
5,000
Total premiums in 2016
25,000
Multiply by the premium purchase price
40
1,000,000
Premium Liability on Dec. 31, 2016
Estimated liability (5,000 x 40)
200,000

Premiums distributed in 2017
50,000
Premiums to be distributed in 2018
3,000
Total
53,000
Premiums from 2016 sales distributed
(5,000)
Premiums applicable for 2017
48,000
Multiply by the premium purchase price
40
1,920,000
Premium Liability on Dec. 31, 2017
Estimated liability (3,000 x 40)
120,000
Customer loyalty program IFRS 15
-is a marketing scheme whereby an entity grants award credits to
customers and the entity can redeem the award credits in exchange for free
or discounted goods or services.
*The award credits granted to customers is often described as
points.
Measurement
The fair value of the consideration received with respect to the initial
sale shall be allocated between the award credits and the sale based on
stand-alone selling price.
*Stand-alone selling price is the price at which an entity would sell a
promised goods or service separately to a customer.
Recognition
The consideration allocated to the award credits is initially recognized
as deferred revenue and subsequently recognized as revenue when
redeemed.
Illustration
A companys sale during 2016 amounted to P 7,200,000 the customer
earned 10,000 points but expects only 80%, the selling price of each point is
at P100. P4,000 of these points are redeemed during the year.
42
Product Sales
Points (8,000 x 100)
Total
7,200,000
800,000
8,000,000
6,480,000
720,000
7,200,000
Redemption of 4,000 is computed as follows:

(4,000/8,000 x 720,000)
360,000
Warranty a written statement that promises the good condition of a
product and the maker is responsible for repairing and replacing the product
in a certain period of time after its purchase.
Accrual approach the soundest theoretical support because it matches
cost with revenue.
Estimated warranty cost:
Warranty expense
xx
Estimated warranty liability
xx
Actual warranty costsubsequently incurred and paid:
xx
Cash
xx
Difference between estimate and actual cost a change in estimate and
treated currently/prospectively
Actual cost > estimate:
Warranty expense
xx
xx
Actual cost < estimate:
xx
Warranty expense
xx
The warranty cost expected to be incurred within one year current.
The balance noncurrent.
Expense as incurred approach is justified on the basis of expediency.
Sale of warranty
The warranty sometimes sold separately.
The seller may offer an extended warranty but with additional cost.
The amount received from the sale of extended warranty is recognized:
Initially deferred revenue
Subsequentlyamortized using straight line over the life of the
warranty contract.
Illustration
During 2016, N Company introduced a new product carrying a two-year
warranty against defects. The estimated warranty cost related to peso sales
are 4% within 12 months following sale and 6% in the second 12 months
following sale. The entity reported sales of P5,000,000 for 2016 and
43
P6,000,000 for 2017. The actual expenditures incurred amounted to

P150,000 for 2016 and P550,000 for 2017.
Warranty Expense 2016:
Warranty expense for 2016
(10% x 5,000,000)
Estimated Warranty Liability 2016:
Warranty expense
Warranty expenditure in 2016
Warranty liability 2016
Warranty expense 2017:
Warranty expense 2017
(10% x 6,000,000)
Estimated Warranty Liability 2017:
Warranty expense
Total 950,000
Warranty Expenditures
500,000
500,000
(150,000)
350,000
600,000
600,000
350,000
(550,000)
400,000
ACCRUED LIABILITIES AND DEFERRED REVENUE

Payroll taxes
a. Income tax payable by the employee
b. Employee contribution to the SSS
c. Employee contribution for Philhealth
d. Employee contribution to the Pag-ibig Fund
Gift certificates payable
1. Gift certificates are sold:
Cash
xx
xx
2. Gift certificates are redeemed:
xx
Sales
xx
The gift certificates may be forfeited as other income when not
presented for redemption for a long period of time.
Illustration
44
The entity has the following information regarding gift certificate and
sales redemptions:
Unearned revenue on January 1, 2016 750,000
2016 sales
2,500,000
2016 redemption of prior year sales
250,000
2016 redemptions of current year sales1,750,000
Amount to be reported as unearned revenue
Unredeemed January 1, 2016
750,000
Sales of gift certificates 2016
2,500,000
Total
3,250,000
Redemption of prior year sales
(250,000)
Redemption of current year Sales (1,750,000)
Unearned Revenue Dec. 31, 2016
1,250,000
Refundable deposits consist of cash or property received from customers
which are refundable after certain conditions.
*Containers deposit account current liability
Bonus computation
main purpose is to motivate officers and employees.
1. Bonus as a certain percent of income before bonus and before tax
Bonus = Income before bonus and before tax multiply by bonus
rate
2. Bonus as a certain percent of income after bonus but before tax
Bonus = Bonus rate (Income before bonus and before tax minus
bonus)
3. Bonus as a certain percent of income after bonus and after tax
bonus minus tax)
Tax = Tax rate (Income before bonus and before tax minus
bonus)
4. Bonus as a certain percent of income after tax but before bonus
tax)
Tax = Tax rate (Income before bonus and before tax minus
bonus)
Illustration
Income before bonus and before tax
Bonus rate
Tax rate
1. Bonus = Income before bonus and before tax
Income Before bonus before tax
4,400,000
Multiply by
10%
Bonus
440,000
45
4,400,000
10%
30%
2. Bonus = Income after bonus and before tax

B =
.10(4,400,000-B)
B = 440,000-.10B
B+.10B = 440,000
1.10B = 440,000
B = 40,000/1.10
B =
400,000
3. Bonus = Income after bonus and after tax
B =.10(4,400,000-B-T)
T =.30(4,400,000-B)
B =.10[4,400,000-B-.30(4,400,000-B)]
B =.10(4,400,000-B-1,320,000+.30B)
B =440,000-.10B-132,000+.03B
B=.10B-.03B =440,000-132,000
1.07B =308,000
B =308,000/1.07
B =287,850
T =.30(4,400,000-287,850)
T =1,233,645
4. Bonus = Income before bonus and after tax
B =.10(4,400,000-T)
T =.30(4,400,000-B)
B =.10[4,400,000-.30(4,400,000-B)
B =.10(4,400,000-1,320,000+.30B)
B =440,000-132,000+.03B
B-.03B =440,000-132,000
.97B =308,000
B =308,000/.97
B =317,526
Deferred revenue income already received but not yet earned.
Current liabilityif realizable within one year.
Noncurrent liabilityrealizable more than one year.
PROVISION AND CONTINGENT LIABILITY
Provision a liability of uncertain timing or amount.

A provision shall be recognized when
1. An entity has a present obligation as a result of a past event.
2. It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation.
3. The amount of the obligation can be measured reliably.
Legal obligation arising from a contract, legislation, or other operation of
law.
Constructive obligation is derived from an entitys action that the entity
will accept certain responsibilities because of past practice, published policy
or current statement.
46
-the entity has created a valid expectation in other parties that it

will discharge those responsibilities.
Obligating event creates a legal or constructive obligation because the
entity has no other realistic alternative but to settle the obligation.
An outflow of resources embodying economic benefits is regarded as
probable when the probability that the event will occur is greater than
the probability that the event will not occur.
Measurement of provision
The amount recognized as a provision should be the best estimate of
the expenditure.
Where there is a continuous range of possible outcomes, and each
point in that range is as likely as any other, the midpoint of the range
is used.
When the provision involves a large population of items, the estimate
of the amount reflects the weighting of all possible outcomes by their
associated probabilities.
When the provision arises from a single obligation, the estimate of the
amount is the individual most likely outcome adjusted for the effect of
other possible outcomes.
Other measurement considerations
1. Risks and uncertainties
Risk variability of outcome.
Uncertainty does not justify the creation of excessive provision or a
deliberate overstatement of liabilities.
2. Present value of obligation where the effect of the time value of
money is material.
3. Future events that affect the amount required to settle an obligation
shall be reflected in the amount of a provision where there is a sufficient
evidence that they will occur.
4. Expected disposal of assets
Gains from expected disposal of assets shall not be taken into account
in measuring a provision.
5. Reimbursements shall be treated as a separate asset and not netted
against the estimated liability for the provision.
6. Changes in provision
Provisions shall be reviewed at every end of the reporting period and
adjusted to reflect the current best estimate.
7. Use of provision
A provision shall be used only for expenditures for which the provision
was originally recognized.
8. Future operating losses
A provision for operating losses is not recognized because a past event
creating a present obligation has not occurred.
47
9. Onerous contract is a contract in which the unavoidable costs of

meeting the obligation under the contract exceed the economic benefits to
be received under the contract.
Decommissioning liability is an obligation to dismantle, remove and
restore an item of property, plant and equipment as required by law or
contract.
Change in decommissioning liability
Under IFRIC 1
1. A decrease in the liability is deducted from the cost of the asset. If
decrease exceeds carrying amount, the excess is recognized in profit
or loss.
2. An increase in liability is added to the cost of the asset. The entity shall
consider whether this is an indication that the carrying amount of the
asset may not be fully recoverable.
If there is an indication, the asset should be tested for impairment.
Restructuring a program that is planned and controlled by the
management that materially changes either the scope of a business of an
entity or the manner in which that business is conducted.
Events that qualify as restructuring include:
a. Sale or termination of business
b. Closure of business location in a region or relocation of business from
one location to another
c. Change in management structure such as elimination of a layer of
management
d. Fundamental reorganization of an entity that has a material and significant
impact on its operations.
A provision for restructuring is required when
a. The entity has a detailed plan for the restructuring.
b. The entity has raised valid expectation in the minds of those affected that
the entity will carry out the restructuring by announcing its main features to
those affected by it.
Amount of restructuring provision
A restructuring provision shall include only direct expenditures arising
from the restructuring.
Contingent liability is either a possible obligation arising from past
events and depending on future events not wholly within entitys control, or
a present obligation not recognized because either the entity cannot
measure the obligation or settlement is not probable.
Treatment of contingent liability
A contingent liability shall be disclosed only.
Disclosures:
a. Brief description of the nature of the contingent liability.
b. An estimate of its financial effects.
48
c. An indication of the uncertainties that exist.

d. Possibility of any reimbursement.
If a contingent liability is remote, no disclosure is necessary.
Contingent asset is a possible asset arising from past events and that will
be confirmed only by future events not wholly within entitys control.
A contingent asset is only disclosed when it is probable.
Disclosures:
a. A brief description of the contingent asset and an estimate of its financial
effects.
If a contingent asset is only possible or remote, no disclosure is
required.
BONDS PAYABLE
-
formal unconditional promise, made under seal, to pay specified sum

of money at a determinable future date, and to make periodic interest
payments at a stated rate until the principal sum is paid
contract of debt whereby one party called the borrower or issuer
borrow funds from another party called the investor or bondholder
Types of Bonds
1. Term bonds are bonds with single maturity date
49
2. Serial bonds are bonds with series of maturity date or bonds that
mature by installments
3. Mortgage bonds are bonds secured by mortgage of real properties
4. Collateral trust bonds are bonds secured b investments in stocks and
bonds
5. Debenture bonds are bonds without collateral security
6. Registered bonds require the registration of the name of the
bondholder on the books of the corporation
7. Coupon or bearer bonds The name of the bondholder is not
registered. Accordingly, interest is paid periodically to the bearer of the
bond or the person submitting a detachable interest coupon
8. Convertible bonds are bonds that can be exchanged for equity
shares of the issuing entity
9. Callable bonds are bonds that can be called for payment before the
date of maturity
10.
Guaranteed bonds are bonds issued whereby another party
promises to make payment if the borrower fails to do so
11.
Junk bonds are high risk and high yield bonds issued by entities
that are heavily indebted or otherwise in weak financial position
12.
Commodity-backed bonds are bonds which are redeemable in
terms of commodities such as oil or precious metal
Initial Measurement
Bonds payable not designated at fair value through profit or loss shall
be measured initially at fair value minus transaction costs that are
directly attributable to issue of the bonds payable. (PFRS 9,
paragraph 5.1.1)
Bond issue cost shall be deducted to the fair value or issue price of the
bonds payable in measuring initially.
If bonds are designated and accounted for at fair value through P/L,
transaction cost expensed
Subsequent Measurement
After initial recognition, bonds payable shall be measured either (PFRS 9,
paragraph 5.3.1):
c) Amortized cost, using effective interest method
d) Fair value through P/L
Accounting for Issuance of Bonds
a. Memorandum Approach
- No entry is made upon the authorization of the entity to issue
bonds. Authorized bonds payable account is not maintained.
b. Journal Entry Approach
- A journal entry is made to record the authorized bonds payable.
Amortized Cost
50
Difference between the face amount and present value is either

discount or premium
Discount presented as deduction from bonds payable
Premium addition to bonds payable
Bond Issue Cost
Bond issue cost shall be lumped to discount and netted to premium.
(effective interest method)
Bond issue cost is expensed. (Fair value through P/L)
Retirement of Bonds
Amortize first then compute for the carrying amount.
Treasury Bonds
- Entitys own bonds originally issued and required but not canceled
-
When acquired, treasury bonds account s debited at face value and

any related unamortized premium or discount or issue cost canceled
Difference b/n the acquisition cost and the carrying amount of the
treasury bonds is treated a gain or loss on acquisition of treasury
bonds
Accrued interest paid charged to interest expense
Reported in the Statement of Financial Position as a deduction from

bonds payable
Bond Refunding
- the floating of new bonds payable the proceeds from which are used in
paying the original bonds payable
-
premature retirement of the old bonds payable through the issuance of

new bonds payable
Refunding Charges
Bond refunding is an extinguishment of financial liability. (PFRS 9,
paragraph 3.3.1)
The difference between the carrying amount of financial liability
extinguished and the consideration paid shall be included in profit in
loss (PFRS 9, paragraph 3.3.3)
Amortization of Bond Discount or Premium
a. Straight Line Method
- Divide the amount of premium or discount by the life of the bonds
b. Bond Outstanding Method
- Applicable to serial bonds
- Fractions are developed from the bond outstanding
51
c. Effective Interest Method/ Interest Method/ Scientific Method

Straight line method and bonds outstanding method are acceptable if
the periodic interest expense is not materially different from the
amount obtained by using the effective interest method
Illustration
On June 30, 2016, H Company issued at 99, five thousand of 9%, P1,000 face
value of bonds. The bonds were issued through an underwriter to whom the
entity paid bond issue cost of P425,000. Carrying amount of bond liability is
computed as follows:
Issue price (5,000,000 x 99%)
4,950,000
Bonds payable
5,000,000
Discount on bonds payable
( 50,000)
Bond issue cost
( 425,000)
Carrying amount of bonds payable
4,525,000
PFRS 9, paragraph 5.1.1, provides that transaction costs shall be
included in the initial measurement of a financial liability not
at fair value through profit or loss. Bond issue cost is deducted
from bonds payable.
EFFECTIVE INTEREST METHOD
-also known as scientific method or interest method

Nominal rate coupon or stated rate
Effective rate yield or market rate
Higher effective interest Discount
Lower effective interestPremium
Interest paid = Face amount times the nominal rate
Interest expense = Carrying amount times the effective interest rate
Discount amortization = Interest expense minus interest paid
52
Premium amortization = Interest paid minus interest expense

Market price or issue price of bond payable = present value of the
principal bond liability plus the present value of future interest payments
using the effective or market rate of interest.
Present value of the principal bond liability = face amount of the bond
times the present value of 1 factor at the effective rate.
Present value of the future interest payments = periodic nominal
interest times the present value of an ordinary annuity of 1 factor at
the effective rate.
Effective interest method bond issue cost
Bond issue cost will increase discount on bonds payable and will
decrease premium on bonds payable.
Bond issue cost must be lumped with the discount on bonds
payable and netted against the premium on bonds payable.
Illustration
On January 1, 2016, M Company issued 5-year bonds with face value of
P5,000,000 at 110. The bond issue cost was P80,000. The stated interest
rate on bonds is 8% payable annually every December 31. The bonds are
issued to yield at 6% annually.
Carrying amount of bonds payable is computed as follows:
Issue Price
5,500,000
Bonds Payable
Premium on bonds payable
Bond issue cost
Carrying Amount January 1, 2016
5,000,000
500,000
( 80,000)
5,420,000
Interest expense paid (6% x 5,420,000)

Interest paid (8% x 5,000,000)
Amortization of premium on bonds payable
325,200
400,000
74,800
Bonds Payable
5,000,000
Premium on bonds payable (420,000-74,800)
345,200
Carrying Amount Dec. 31,2016
5,345,200
Under effective interest method, bond issue cost must be netted
against the premium and lumped to discount on bonds payable.
COMPOUND FINANCIAL INSTRUMENT

-
A financial instrument that contains both a liability and an equity

element from the perspective of the issuer. (PAS 32, paragraph 28)
Financial Instrument
- Any contract that gives rise to both a financial asset of one entity and
a financial liability or equity instrument of another entity. (PAS 32,
paragraph 11)
53
Financial Liability A contractual obligation to:

a. deliver cash or other financial asset to another entity
b. exchange financial instruments with another entity under condition
that are potentially unfavorable
Equity Instrument
- any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities
Accounting for Compound Financial Instrument
If the financial instrument contains both liability and equity component,
PAS 32 mandates that such components shall be accounted for
separately
Consideration received shall be allocated between the liability and
equity component
Consideration received fair value of liability = equity component
Bonds Payable Issued with Share Warrants
Share warrants attached to a bond may be detachable or
nondetachable.
Detachable warrants can be traded separately from the bond and
nondetachable warrants cannot be traded separately.
The issuer of bonds payable shall classify the liability and equity
components separately.
PAS 32 does not differentiate whether the equity component is
detachable or nondetachable.
Whether detachable or nondetachable, the warrants have a value and
shall be accounted for separately.
Convertible Bonds
- are those which give the holders the right to convert their
bondholdings into share capital or other securities of the issuing entity
within a specified period of time
- when issued at a premium or discount, amortization period is up to the
maturity date instead of the conversion date
Accounting issues arises in two situations:
a. When the convertible bonds are originally issued
b. When the convertible bonds are converted
Original Issuance
Issuance of convertible bonds shall be accounted for as partly
liability and partly equity
Issuance price of the convertible bonds shall be allocated between
the bonus payable and the conversion privilege
Allocation of Issue Price
54
The bonds are assigned an amount equal to the market value of the
bonds without the conversion privilege
Residual amount or remainder of the issue price shall be allocated to
the conversion privilege or equity component
Conversion of Bonds
Carrying amount of the bonds is the measure of the share capital
issued.
There is no gain or loss on conversion at maturity. (Application
Guidance 32 of PAS 32)
Any cost incurred on connection with the bond conversion shall be
deducted from share premium or debited to share issue cost
Carrying amount of the bonds is equal to the face amount plus accrued
interest, if not paid, plus unamortized premium or minus unamortized
discount and bond issue cost.
Accounting Procedures
a. The amortization of discount and issue cost or premium up to the date
of conversion shall be recorded.
b. The face amount of the bonds converted shall be canceled together
with the related unamortized premium or discount or issue cost.
If only a portion of the bond is converted unamortized premium or discount
or issue cost balance shall be canceled proportionately
c. Normally, conversion is at an interest date. When at other dates, the
accrued interest up to the date of conversion is ordinarily paid.
If the interest is not paid, it is added to the face amount of the bonds
converted to get the carrying amount of the bonds for conversion purposes.
Accrued interest is charged to interest expense.
Share Premium
Share premium from the conversion privilege that was recognized at
the original issuance of the convertible bonds payable shall form part
of equity.
If bonds are later converted, the share premium for conversion
privilege should be canceled because this would effectively form part
of the total consideration paid for the shares ultimately issued as a
result of the bond conversion.
Illustration
On Dec. 31, 2016, M Company issued P5,000,000 face value, 5-year
bonds at 109. Each P1,000 bond was issued with 50 detachable share
warrants, each of which entitled the bondholder to purchase one ordinary
55
share of P5 par value at P25. Immediately after issuance, the market value of
each warrant was P5.
Stated interest of bond is 11%, Market rate of interest for similar bonds
without warrants is 12% PV of 1 at 12% for 5 periods is 0.57 and the present
value of an ordinary annuity of 1 at 12% for 5 periods is 3.60.
Carrying amount of Bond Payable on Dec. 31, 2016:
PV of principal (5,000,000 x .57)
PV of annual interest (550,000 x 3.60)
Total
Amount recorded as discount:
Bonds Payable
Present value of bonds
Discount on bonds
5,000,000
(4,830,000)
170,000
Equity component arising from the issuance of bonds:

Issue price of bonds w/ warrants
PV of bonds
Amount allocated to warrants
5,450,000
(4,830,000)
620,000
2,850,000
1,980,000
4,830,000
If the market value without warrant is unknown, the amount allocated

to bonds is equal to the present value of principal bond liability plus
the present value of future interest payments using the market rate if
interest for similar bonds without warrants
NOTE PAYABLE
56
unconditional written promise engaging to pay on demand or at a

fixed or determinable future time a sum certain in money to order or
to bearer.
Initial measurement of note payable
An entity shall measure initially a note payable not designated at fair
value through profit or loss at fair value minus transaction cost
Subsequent measurement
After initial recognition, an entity shall measure a note payable at
either amortized cost or fair value through profit or loss
Amortized cost of note payable
If present value > face amount Discount
If present value < face amount Premium
Interest bearing note issued for property recorded at purchase price
Noninterest bearing note issued for propertyrecorded at cash price
In the absence of cash price, the present value of the note assumed
to be the cash price.
The difference between cash price and face amount represents the
imputed interest.
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.
Any transaction cost is recognized as outright expense.
Illustration
On July 1, 2016, J Company borrowed P1,000,000 on a 10% five year note
payable.
On December 31, 2016, the fair value of the note is determined to be
P975,000 based on market and interest factors.
The entity has elected the fair value option for reporting the financial liability.
Amount of Interest expense for 2016:
Interest expense for 2016
(1,000,000 x 10% x 6/12)
50,000
Carrying Amount of note on Dec 31, 2016
Carrying amount is equal to fair value
975,000
Gain or Loss to be recognized in 2016 as a result of fair value option
Note Payable July 1, 2016
1,000,000
Fair value Dec. 31, 2016
975,000
Decrease in fair value gain
25,000
If the fair value option is elected for reporting a financial liability, the
liability is reported at fair value at every year end with resulting
changes in fair value included in profit or loss.
However, if the change in fair value is attributable to credit risk of the
financial liability, the gain or loss is recognized in other comprehensive
income.
57
Under the fair value option, any discount or premium on the note
payable is not recognized. Therefore, any discount or premium does
not affect the interest expense
DEBT RESTRUCTURE
Debt restructuring
is a situation where the creditor, for economic or legal reasons related
to the debtors financial difficulties, grants to the debtor concession
that would not otherwise be granted in a normal business relationship
Types of debt restructuring
1. Asset swap transfer by the debtor to the creditor of any asset in full
payment of an obligation.
PFRS 9, paragraph 3.3.1asset swap is treated as a derecognition of
a financial liability or extinguishment of an obligation.
Paragraph 3.3.3the difference between the carrying amount of the
financial liability and the consideration given shall be recognized in
profit or loss.
Illustration
H Company is indebted to Apex Company under a P5,000,000, 12%
three-year note dated December 31, 2014. Because of Hs financial
difficulties developing in 2016, H owed accrued interest of P600,000 on the
note on December 31, 2016. Under a debt restructuring on December 31,
2016, Apex agreed to settle the note and accrued interest for a tract of land
having a fair value of P4,500,000. Hs carrying amount of the land is
P3,600,000.
Gain on extinguishment:
Note payable
Accrued interest payable
Total liability
Carrying amount of land
Gain on Extinguishment - PFRS
5,000,000
600,000
5,600,000
(3,600,000)
2,000,000
PFRS 9, paragraph 3.3.3, provides that the difference between the

carrying amount of a financial liability extinguished and the
consideration paid, including any non-cash asset transferred or liability
assumed shall be recognized in profit and loss.
USA GAAPasset swap is recorded as if two transactions have taken
place, the sale of the asset and the extinguishment of the liability.
Gains and losses are recognized.
The difference between the fair value of the asset and the carrying
amount gain or loss on exchange
58
The difference between the carrying amount of the liability and the fair
value of the asset given gain or loss from restructuring
Illustration
The following information pertains to the transfer of real estate
pursuant to a debt restructuring by Knob Company to M Company in full
liquidation of Knobs liability to M:
Carrying amount of liability liquidated
1,500,000
Carrying amount of real estate transferred
1,000,000
Fair value of real estate transferred
900,000
Loss on exchange:
Fair value of real estate
Carrying Amount of real estate
Loss on exchange
Gain on Debt restructuring:
Carrying amount of liability
Fair value of real estate
Gain on debt restructuring
900,000
(1,000,000)
(100,000)
1,500,000
(900,000)
600,000
Dacionenpago accounting arises when a mortgaged property is

offered by the debtor in full settlement of the debt.
2. Equity swap is the issuance of share capital by the debtor to the
creditor in full or partial payment of an obligation.
The equity instruments issued to extinguish a financial liability shall be
measured at the following amounts in the order of priority:
a. Fair value of equity instruments issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished
The difference between the carrying amount of the financial liability and
the initial measurement of the equity instruments issued shall be
recognized in profit or loss.
The gain or loss on extinguishment shall be reported as separate line item
in the income statement.
If the carrying amount of the liability is used, there is no gain or loss on
extinguishment.
Illustration
At the year-end, S Company showed the following data with respect to
the matured obligation:
Notes payable
5,000,000
500,000
The company is threatened with a law suit if it could not pay a
maturing debt. Accordingly, the company entered into an agreement with
59
the creditor for issuance of share capital in full settlement of the note
payable. The agreement provided for the issue of 35,000 shares with the par
value of P100. The share is currently quoted at P130. The fair value of the
note payable at the date of restructuring is P4,700,000.
Gain from extinguishment of debt:
Note payable
Total liability
Fair value of shares (35,000 x 130)
Gain on extinguishment
5,000,000
500,000
5,500,000
(4,500,000)
950,000
Gain from extinguishment if the shares do not have fair value:

Total liability
5,500,000
Fair value of note payable
(4,700,000)
800,000
Share premium from extinguishment if both the shares and the note payable
do not have fair value:
Total liability
5,500,000
Par value of share (35,000 x 100)
(3,500,000)
2,000,000
In the absence of the fair value of shares and fair value of liability, the
carrying amount of the liability is the basis of measurement.
The excess of the carrying amount of liability over the par value is
recognized as share premium and not gain on extinguishment.
3. Modification of terms
Interest concession involve reduction of interest rate, forgiveness
of unpaid interest or a moratorium on interest payment.
Maturity value concession involve an extension of the maturity
date or a reduction of the amount to be paid at maturity.
PFRS 9, paragraph 3.3.2 a substantial modification of terms of an
existing financial liability shall be accounted for as an extinguishment
of the old financial liability and the recognition of a new financial
liability.
Application Guidance B3.3.6 of PFRS 9 if the gain or loss on extinguishment
is at least 10% or 10% or more of the old liability substantial modification
of terms
The difference between the carrying amount of the old liability and the
present value of new or restructured liability gain or loss on
extinguishment of debt.
60
USA GAAP
The difference between carrying amount of the old liability and the
absolute amount of the new restructured liability gain or loss on debt
restructuring
Illustration
Due to extreme financial difficulties, A company had negotiated a
restructuring of a 10% P5,000,000 note payable due on December 31, 2016.
The unpaid interest on such date is P500,000. The creditor had agreed to
reduce the fair value at P4,000,000, forgive the unpaid interest, reduce the
interest to 8% and extend the due date for three years from December 31,
2016. The PV of 1 at 10 % for three periods is 0.75 and the PV of an ordinary
annuity of 1 at 10% for three periods is 2.49.
Gain on extinguishment of debt in 2016:
PV of principal (4,000,000 x .75)
3,000,000
PV of annual interest payments (320,000 x 2.49) 796,800
Present value of new liability
3,796,800
Note payable old
Total Liability
Present value of new liability
Gain on extinguishment of debt
Journal Entry:
Note payable old
Discount on notes payable
Note payable new
5,000,000
500,000
5,500,000
(3,796,800)
1,703,200
5,000,000
500,000
203,200
4,000,000
1,703,200
61
OPERATING LEASE
also called rental approach
PAS 17, paragraph 4, a lease is an agreement whereby the lessor

conveys to the lessee in return for a payment or series of payments
the right to use an asset for an agreed period of time.
lessor owner of the property
lessee is the one granted the right to use the property owned by the
lessor.
Operating lease Lessee

The periodic rental is recognized as a rent expense
A lease bonus paid by the lessee to the lessor in addition to the
periodic rental is treated as prepaid rent expense by the lessee to be
amortized over the lease term
Leasehold improvement depreciated over the life of the
improvement or lease term, whichever is shorter
The residual value is ignored
Any security deposit refundable upon the lease expiration is
accounted for as an asset by the lessee
Operating lease Lessor
The periodic rental is recognized as rent income
The lease property remains as an asset of the lessor and consequently,
the lessor bears all ownership or executor costs.
Initial direct costs incurred by the lessor in an operating lease shall
be added to the carrying amount of the leased asset and recognized as
an expense over the lease term on the same basis as the lease
income.
Security deposit refundable upon the lease expiration shall be
accounted for as liability by the lessor
62
Lease bonus received by the lessor from the lessee is recognized as

unearned rent income to be amortized over the lease term.
Unequal rental payments
The operating lease requires unequal cash payments, the total cash
payments for the lease term shall be amortized uniformly on the
straight line basis as rent expense or rent income.
Disclosures for operating lease Lessee
1. The total of future minimum lease payments under noncancelable
operating leases for each of the following periods:
a. Not later than one year
b. Later than one year and not later than 5 years
c. Later than 5 years
2. The total of future minimum lease payments expected to be received
under noncancelable subleases at the end of the reporting period.
3. Lease and sublease payments recognized as expense in the period,
with separate amounts for minimum lease payments, contingent rents
and sublease payments.
4. A general description of the lessees significant leasing arrangements.
Disclosures for operating leases Lessor
1. Future minimum lease payments under noncancelable operating leases
in the aggregate and for each of the following periods:
a. Not later than one year
b. Later than one year and not later than 5 years
c. Later than 5 years
2. Contingent rents recognized as income in the period.
A general description of the lessors leasing arrangement
63
FINANCE LEASE LESSEE
Finance lease lease purchase

Equivalent of capital lease (US GAAP)
Finance lease is a lease that transfers substantially all risk and
rewards incident to ownership of an asset. Transfer of ownership
may not eventually be transferred. (PAS 17, Paragraph 4)
Situations lead to a lease being classified as finance lease (PAS 17,
paragraph 10):
a. It transfers ownership to the lessee at the end of the lease term.
b. It has lease bargain purchase option
c. Lease term is for the major part of the economic life of the asset
USA GAAP - Major Part 75% and above
d. Present value of minimum lease payment amounts to
substantially all of the fair value of the leased asset at the
inception of lease
USA GAAP Substantially all 90% and above
Other criteria (PAS 17, paragraph 10 &11):
a. The leased is of such specialized nature that only the lessee can
use it without major modification
b. If the lessee can cancel the lease, the lessors losses associated
with the cancelation are borne by the lessee
c. Gains or losses from the fluctuation in the fair value of the
residual value accrue to the lessee
d. The lessee has the liability to continue the lease for a secondary
period at a rent that substantially lower than market value
Cancelable lease deemed as non-cancelable
Cancelable lease deemed as non-cancelable and thus classify as
finance lease when (PAS 17, paragraph 4):
a. Can be canceled upon occurrence of a remote contingency
b. Can be canceled only with the permission of the lessor
64
c. The lessee, upon cancelation, enters a new lease for the same or
equivalent asset with the same lessor
d. Can be canceled only upon payment of additional amount or
penalty of such magnitude that the lessee shall be discouraged
from cancelling the lease
Inception and Commencement
Inception
- date when a lease is classified as operating or finance leased
- date when the amounts to be recognized at the commencement of the lease
are determined for finance lease
Commencement
- date from which the lessee is entitled to exercise the right to use the leased
asset
- date of initial recognition of asset, liability, income or expense

Land and Building Lease
a. an entity normally considers separate
b. land lease w/ several decades or longer may be classified as finance
lease
c. IASB states that when a lease contains land and building, entity should
determine the classification of the land lease and building lease
according to the criteria of classification
d. minimum lease payments are allocated between the land and building
elements in proportion to the relative fair value of the leasehold
interests in the land and building elements at the inception
if lease payments cant be allocated reliably, entire lease
finance lease, unless it is clear that both are operating lease
e. separate measurement of the land and building elements is not
required when the lessees interest in both land and building is
classified as investment property
Cost of the Asset and Lease Liability
- shall be equal to the fair value of the leased property in the inception
of the lease or the present value of the minimum lease payments,
whichever is lower
Minimum Lease Payment
a. Rental payments required during the lease term
b. Any payments under a bargain purchase option
c. Any guaranteed residual value if there is no bargain purchase
option
Contingent rent and executory cost
Contingent rent and executory cost is not included in the computation
of the minimum lease payments
Executory cost expensed outright
Initial Indirect Cost
65
included as part of the amount recognized as an asset under finance

lease
Implicit and Incremental Rate
Implicit
- discount rate that causes aggregate present value of the minimum
lease payments and the unguaranteed residual value to the fair value
or the lease asset and initial direct cost of the lessor
Lessees incremental borrowing rate
- rate of the interest that the lessee will have to pay on a similar lease
- rate that the lease would incur by borrowing funds to purchase the
asset over a similar term and similar security
Depreciation of the leased asset
The lessee will obtain ownership by the end of the term useful life of the
asset
The lessee will not obtain ownership by the end of the term useful life of
the asset or lease term, whichever is shorter
Cost of asset purchased under a finance lease
To
To
To
To
Carrying amount of leased asset

Cash payment
xx
xx
Total consideration
Lease liability balance
xx
(xx)
Cost of asset actually purchased

xx
record the finance lease at the commencement:
Asset
xx
Lease liability
xx
record annual payment:
Interest expense
xx
Lease Liability
xx
Cash
record depreciation:
Depreciation
xx
xx
record the return of asset:
xx
Equipment
xx
xx
Illustration
On January1, 2016, D Company entered into a10 year lease agreement
with W Company for industrial equipment. Annual Lease payment of
P1,000,000 are payable at the end of the each year.
The entity knows that the lessor expects a 10% return on the lease
which is the implicit rate in the lease.
The equipment is expected to have a useful life of 10 years.
66
In addition, a third party guaranteed a pay W a residual value of

P500,000 at the end of the lease.
Present value of an ordinary annuity of 1 at 10% for 10 periods is 6.14
and the present value of 1 at 10 % for 10 periods is .39.
Principal Lease Liability:
Lease liability Jan 1, 2016 (1,000,000 x 6.14)
6,140,000
First payment on Dec 31, 2016
1,000,000
Interest expense for 2016 (614,000 x 10%)
614,000 ( 386,000 )
Lease Liability December 31,2016
5,754,000
Minimum lease payment shall include the guaranteed residual value if

guaranteed by the lessee. If the guaranteed residual value is guaranteed
by a third party it is excluded in computing the lease liability.
DIRECT FINANCING LEASE LESSOR

Accounting Considerations
1. Gross invested in the lease
- gross investment in the lease is equal to the gross rentals for the
entire lease term plus the absolute amount of the residual value,
whether guaranteed or unguaranteed. Actually, this is the amount
debited to lease receivable.
Gross rentals + Residual value
2. Net investment in the lease
- net investment in the lease is equal to the cost of the asset plus any
initial direct cost incurred by the lessor.
Cost of asset + Initial direct cost
3. Unearned interest income
- total financial revenue of the lessor which is the difference between
the gross investment and the net investment in the lease.
Gross investment Net investment
4. Initial direct cost
- is added to the cost of the asset to get the net investment in the
lease.
- effectively spread the initial direct cost over the lease term and
reduce the amount of interest income.
- the interest rate implicit in the lease is recomputed so as to include
the initial direct cost in the measurement of the lease receivable.
Annual Rent Payment
Cost of machinery
xx
PV of residual value
(xx)
Net investment to be recovered from rental
xx
67
Divide by PV of annuity of 1 for _ periods

Annual Rent
x
xx
If the machinery will not revert to the lessor at the end of the lease
term, the residual value (guaranteed or unguaranteed) is
completely ignored in the computation of the annual rental and the
unearned interest income
Journal Entries
To record direct financing lease:
Lease receivable
xx
Asset
xx
Unearned interest income
xx
To record collection of annual rental:

Cash
xx
Leasehold receivable
xx
To record the interest income:
xx
Interest income
xx
To record return of asset to lessor:
Asset
xx
Lease receivable
xx
To record return of asset to lessor (FV of asset < Residual value,
guaranteed):
Cash
xx
Asset
xx
Lease Receivable
xx
To record return of asset to lessor (FV of asset < Residual value,
unguaranteed):
Loss on finance lease
xx
Asset
xx
Lease Receivable
xx
Illustration
At the beginning of the current year, L Company leased a machine to E
Company. The machine had an original cost of P6,000,000. The lease term
was five years and the implicit interest rate on the lease was 15%. The lease
is properly classified as a direct financing lease. The annual lease payments
of P1,730,541 are made each December 31. The machine reverts to lessor at
the end of the lease term, at which time the residual value of the machine
68
will be P400,000. The residual value is unguaranteed. PV of 1 at 15%, 5

periods is .4972 and PV of an ordinary annuity of 1 at 15%, 5 periods is
3.3522.
Lessors net lease receivable:
PV of lease receivable (1,730,000 x 3.3522)
5,801,120
Unguaranteed residual value (400,000 x .4972)
198,880
Lease Receivable equal to the cost of asset 6,000,000
Gross investment:
Gross lease payments (1,730,000 x 5)
8,652,705
Unguaranteed residual value
400,000
Gross investment
9,052,705
Unearned interest income:
Gross investment
9,052,705
Net investment cost of asset
(6,000,000)
3,052,705
Interest income:
(15% x 6,000,000)
900,000
SALES TYPE LEASE LESSOR
Sales type lease uses the lease as a means of facilitating the sale of
product.
The sales type lease recognizes a manufacturer or dealer profit. The
direct financing lease does not.
Accounting Considerations
1. Gross investment
- equal to the gross rentals for the entire lease term plus the absolute
amount of the residual value, whether guaranteed or unguaranteed.
Gross rentals + Residual value
2. Net investment in the lease
- equal to the present value of the gross rentals plus the present
value of the residual value, whether guaranteed or unguaranteed.
PV of gross rentals + PV of Residual Value
3. Unearned interest income
- total financial revenue of the lessor which is the difference between
the gross investment and net investment in the lease.
Gross investment Net investment
4. Sales
- the amount is equal to the net investment in the lease or fair value
of the asset, whichever is lower.
5. Cost of goods sold or cost of sales
69
equal to the cost of the asset sold plus the initial direct cost incurred
by the lessor.
Cost of equipment + Initial direct cost
6. Gross profit
- the unusual formula of sales minus cost of sales.
Sales Cost of Goods Sold
7. Initial direct cost
- amount is expensed immediately in a sales type lease as
component of cost of goods sold.
If the machinery will not revert to the lessor at the end of the lease
term, the residual value (guaranteed or unguaranteed) is
completely ignored in the computation of unearned interest income
and gross profit
Sales (guaranteed and unguaranteed residual value)
A. Guaranteed
PV of residual value is added to sales
B. Unguaranteed
PV of residual value is deducted to the cost of machinery to get COGS
Actual sale of the leased asset by the lessor to the lessee
When a lessor actually sells an asset that it has been leasing under a
finance lease, the difference between the sale price and the carrying
amount of the lease receivable is recognized in profit or loss.
Carrying amount of the lease receivable
Carrying Amount = Lease receivable Unearned interest
income
Journal Entries
To record sale:
Lease receivable
xx
Sales
xx
xx
To record the cost of goods sold, perpetual:
Cost of goods sold
xx
Inventory
xx
To record the collection of annual rental:
Cash
xx
Lease receivable
xx
To record interest income:
xx
Interest income
xx
70
To record return of asset to lessor:

Inventory
xx
Lease receivable
xx
To record return of asset to lessor (FV of asset < Residual

value, guaranteed):
Cash
xx
Inventory
xx
Lease receivable
xx
To record return of asset to lessor (FV of asset < Residual
value, unguaranteed):
Loss on finance lease
xx
Inventory
Lease receivable
xx
Illustration
V Company is a dealer in machinery. On January 1, 2016, a machinery
is leased to another entity with the following provisions:
Annual rental payable at the end of each year
3,000,000
Lease term and useful life of machinery
5 years
Cost of machinery
8,000,000
Residual value unguaranteed
1,000,000
Implicit interest rate
12%
PV of an ordinary annuity of 1 for 5 periods at 12%
3.60
PV of 1 for 5 periods at 12%
0.57
At the end of the lease term on December 31, 2020, the machinery will
revert to V Company. V incurred initial direct cost of P300,000 in finalizing
the lease agreement.
Unearned interest income:
Gross rentals (3,000,000 x 5)
Gross investment
Present value or Net Investment:
Rentals (3,000,000 x 3.60)
10,800,000
Residual value (1,000,000 x .57)
570,000
Unearned Interest Income January 1, 2016
Gross Profit:
Sales
Cost of goods sold:
Cost of machinery
Initial direct cost
10,800,000
8,000,000
(570,000) (7,430,000)
3,070,000
71
15,000,000
1,000,000
16,000,000
11,370,000
4,630,000
If the residual value is unguaranteed, the sales and cost of goods sold
should exclude the present value of the residual value. The initial direct
cost incurred by the lessor is expensed immediately as component of
cost of goods sold.
SALE AND LEASEBACK
an arrangement whereby one party sells a property to another party

and then immediately leases the property back from its new owner.
seller seller-lessee
purchaser purchaser-lessor
There is no physical transfer of asset
Two separate and distinct transactions.
1. There is a sale of property
2. There is a lease agreement for the same property in which the seller
is the lessee and the buyer is the lessor.
The lease rent and the sale price are usually interdependent as they are
negotiated as a package.
Leaseback as an operating lease

1. If the lease rental and the sale price are established at fair value, in
effect there is a normal sale transaction and therefore any gain or loss
is recognized immediately.
The transaction is established at fair value when the sale price
is equal to the fair value.
2. Sale price is below fair value gain or loss shall be recognized
immediately.
If loss is compensated by future lease rental at below market
value, the loss is deferred and amortized in proportion to the
lease payments over the period for which the asset is
expected to be used.
3. Sale price is above fair value, the excess over the fair value is deferred
and amortized over the period for which the asset is expected to be
used.
The excess of sale price over the fair value deferred gain
The excess of fair value over the carrying amount outright gain.
4. Paragraph 63, if the fair value at the time of sale and leaseback is
less than carrying amount of the asset, the difference is recognized as
loss immediately.
Illustration
Selling Price > Fair Value > Carrying Amount
On December 31, 2016, M Company sold equipment with useful life of 10
years and simultaneously leaseback the equipment for 2 years.
Sales price
7,500,000
72
Fair value
Carrying amount
Gain for 2016:
Fair value
Carrying amount
Outright gain
6,000,000
5,000,000
6,000,000
(5,000,000)
1,000,000
1. Selling Price < Fair Value < Carrying Amount

On January 1, 2016, J Company sold a machine and immediately leased it
back:
Sales Price
5,000,000
Fair value
6,500,000
Carrying Amount
7,000,000
Remaining life
15 years
Lease term
5 years
Amount of loss for 2016:
Fair value
6,500,000
Carrying Amount
(7,000,000)
Impairment Loss
(1,000,000)
Sales Price
Fair value
Deferred Loss
5,000,000
(6,500,000)
(1,500,000)
Impairment loss
Amortization of deferred loss
(1,500,000/5 years)
Loss to be recognized
500,000
300,000
800,000
2. Selling Price < Fair Value > Carrying Amount

On January 1, 2016, P Company sold a machine and immediately leased it
back at an annual rental that was determined to be sufficiently lower than
market rent:
Sales price
4,000,000
Fair value
5,300,000
Carrying amount of machine
5,000,000
Remaining life
10 years
Lease term
2 years
Total Amount of loss:
Sales price
Deferred Loss
Amortization of deferred loss
(1,000,000/2 years)
73
4,000,000
(5,000,000)
(1,000,000)
500,000
3. Selling Price < Fair Value < Carrying Amount

On January 1, 2016, P Company sold a machine and immediately leased it
back at an annual rental that was determined to be sufficiently lower than
market rent:
Sales price
5,000,000
Fair value
6,500,000
7,000,000
Remaining life
15 years
Lease term
5 years
Total Amount of loss recognized:
Fair value
Impairment Loss
Sales price
Fair value
Deferred Loss
6,500,000
(7,000,000)
(1,500,000)
5,000,000
(6,500,000)
(1,500,000)
Impairment Loss
Amortization of impairment loss
Total amount of loss
500,000
300,000
800,000
4. Selling Price = Fair Value > Carrying Amount

On December 31, 2016 B Company sold a machine with 12 year useful life to
another entity and simultaneously leased it back for one year:
Sales price
360,000
Carrying amount
330,000
PV of rentals
34,100
Revenue from sale:
Sales price
360,000
Carrying Amount
(330,000)
Gain on sale and leaseback
30,000
If the leaseback is an operating lease and the transaction is
established at fair value, gain or loss is recognized immediately.
Leaseback as a finance lease
Any gain on sale and leaseback is deferred and amortized over the
lease term.
Any loss on sale and leaseback is recognized immediately.
EXAMPLE:
74
On January 1, 2016, B Company sold equipment to an

unaffiliated entity for P5,700,000. The equipment had a carrying
amount of P4,500,000 and a remaining life of 5 years. On the same
date, the entity had leaseback the equipment at P1,350,000 per year
payable in advance for 5 periods. The lessors implicit rate in the lease
is 10% and used double declining balance of amortization.
Unearned income for sales and leaseback:
Sale price
5,700,000
Carrying amount of equipment
(4,500,000)
Unearned interest income Jan. 1, 2016
1,200,000
Realized in 2016 (1,200,000 x 40%)
(480,000)
Unearned interest income Dec. 31, 2016
720,000
Straight line rate
(100%/5)
20%
Double declining rate (20% x 2)
75
POSTEMPLOYMENT BENEFITS
Employee Benefits
-are all forms of consideration given by an entity in exchange for
services rendered by employees or for the termination of employment
PAS 19 Revised or 19R prescribes
disclosure for employee benefits.
-
the
accounting
and
Postemployment benefits
employee benefits, other than termination benefits and other short-term
employee benefits, which are payable after completion of employment
Postemployment benefits include:
a. Retirement benefits, such as pensions and lump sum payments on
retirement
b. Postemployment life insurance
c. Postemployment medical care
Some employment benefit plans are informal as evidenced only by the
entitys practice to pay postemployment benefits.
The plans may also be established by law whereby entities are required
to contribute to national benefit plans.
Postemployment benefit plans are classified as either defined
contribution plans or defined benefit plans, depending on the economic
substance of the plan as derived from its principal terms and condition.
Contributory and noncontributory
Contributory
-the employer and employee make contributions to the retirement
benefit plan but they do not necessarily contribute equal amounts. Both the
employer and the employee share in the retirement benefit cost
Noncontributory plan
-the employer makes only contributions to the retirement benefit plan
-the employer shoulders all the retirement benefit cost.
Funded and Unfunded
Funding
-the transfer of assets to an entity, called the retirement fund, which is
separate from the reporting entity for the purpose of meeting obligations
arising from a retirement benefit plan.
Funded plan
-the entity sets aside funds for future retirement benefits by making
payments to a funding agency, such as a trustee, bank or insurance
company.
76
Unfunded plan
-entity retains the obligation for the payment of retirement benefits
without the establishment of a separate fund
Defined contribution plan
-plan under which an entity pays fixed contributions into a separate
entity known as the fund
-entity makes a specific or definite amount of contribution to a
separate fund without specifying the retirement benefit to be received by the
employee
The contribution is definite but the benefit is indefinite.
If the plan provides exceptional investment performance, the employee will
share in the gain in the form of larger retirement benefit.
If the plan does poorly, the employee will share in the loss by receiving
smaller retirement benefit.
In effect, the employee bears the investment risk in a defined
contribution plan.
Once the defined contribution is paid, the employer has no more
obligations under the plan.
Defined benefit plan
PAS 19R defines a defined benefit plan as a postemployment plan
other than a defined contribution plan
An employee is guaranteed specific or definite amount of benefit which
is usually related to his salary and years of service.
The benefit is definite but the contribution is indefinite
The entity must make contributions such that the contributions plus
earnings would be sufficiently large to cover future retirement benefits.
Thus, the entity assumes the investment risk in a defined benefit plan.
Plan is exceptionally good
-entity may take a contribution holiday, meaning stop paying the
contribution for a while
Plan is poor
-the entity must make additional contributions for any expected
shortfall in order to satisfy the promised future benefits
Postemployment benefit plans under the law
a. Social Security System
-a defined contribution plan because the entitys obligation is limited to
specified contributions to the plan as a percentage of a salary
b. R.A. 7641
-a defined benefit plan because the entitys obligation is to provide
specific level of benefit for every year of service
77
Insured benefits
An entity may pay insurance premiums to fund a postemployment

benefit plan. Such postemployment benefit plan shall be treated as defined
contribution plan.
Such a plan shall be accounted for as a defined benefit plan, if the entity
has a legal or constructive obligation:
a. To pay the employee benefits directly when they fall due.
b. To pay further amounts if the insurer does not pay all future employee
benefits relating to employee service in the current and future periods.
Insurance policy is in the name of a specified plan participant or a group of
participants and the entity does not have any legal or constructive
obligation to cover any loss on the policy, the entity has no obligation to
pay benefits and the insurer has sole responsibility for paying the benefits.
Consequently, the entity no longer has an asset or a liability.
Therefore, the entity shall treat such insurance payments as contribution
to a defined contribution plan.
Accounting for defined contribution plan
-is straight forward because the obligation of the entity is determined
by the amount contributed for each period.
-the obligations are measured on an undiscounted basis, except
when they are not expected to be settled wholly within twelve months after
the end of the period.
Accounting procedures
a. The contribution shall be recognized as expense in the period it is payable.
b. Any unpaid contribution at the end of the period shall be recognized as
accrued expense.
c. Any excess contribution shall be recognized as prepaid expense but only
to the extent that the prepayment will lead to a reduction in future payments
or cash refund.
Accounting for defined benefit plan
-is complex because actuarial assumptions are required to measure the
obligation and the expense and there is a possibility of actuarial gains and
losses.
Moreover, the obligation is measured on a discounted basis.
Defined benefit plans may be unfunded, fully funded or partly funded by
the contributions of the entity.
Under a defined benefit plan, the expense recognized is not necessarily
the amount contribution for the period.
78
Components of defined benefit cost

An entity shall recognize the following components of defined benefit cost
(PAS 19R, paragraph 120):
Service cost which comprises:
a. Current service cost
b. Past service cost
c. Any gain or loss on settlement
Net interest which comprises:
a. Interest expense on defined benefit liability
b. Interest income on plan assets
Remeasurements which comprise:
a. Actuarial gain and loss
b. Actual return on plan assets less interest income on plan assets
c. Any change in the effect of asset ceiling minus interest on the effect of
asset ceiling
The service cost and the 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 to
retained earnings (PAS 19R, paragraph 122)
The defined benefit cost partly profit or loss representing service cost and
net interest, and partly other comprehensive income representing the
remeasurements.
PAS 19R encourages but does not require an entity to involve a
qualified actuary in the measurement of a defined benefit obligation.
Current service cost
Current service cost is the increase in the present value of the defined
benefit obligation resulting from employee service in the current period.
Current service cost is the cost is the cost to an entity under a defined
benefit plan for service rendered by employees in the current year.
This component of the benefit expense understandably increases expense
and defined benefit obligation.
Net interest
Net interest on defined benefit liability or asset is the change in the
defined benefit obligation and plan assets as a result of the passage of
time.
79
The net interest can be viewed as comprising two elements, namely:

Interest expense
= defined benefit obligation, beginning x discount rate
Interest income
= fair value of the plan assets, beginning x discount rate
Net interest expense/Net interest/net interest income
-Interest expense on the defined benefit obligation less Interest income
on the plan assets
Past service cost
-is the change in the present value of defined benefit obligation for
employee service in prior periods resulting from a plan amendment or
curtailment.
Plan amendment
-includes introduction of defined benefit plan or changes to an
existing defined benefit plan.
Plan curtailment
-a significant reduction by the entity in the number of employees
covered by the defined benefit plan
Recognition of past service cost
An entity shall recognize past service cost as an expense at the earlier of
the following dates (PAS 19R, paragraph 103):
a. When the plan amendment or curtailment occurs.
b. When the entity recognizes related restructuring costs or termination
benefits.
This means that all past service costs, whether vested or unvested, shall
be recognized as an expanse immediately.
An entity can no longer defer recognition of unvested past service
costs over the remaining future vested period.
Vested benefits are employee benefits that are not conditional on future
employment.
Plan assets
-comprise assets held by a long-term benefit fund and qualifying
insurance policies.
a. The conditions for assets held by long-term benefit fund are:
b. The assets are held by an entity, the fund itself, that is legally separate
from the reporting entity.
80
c. The assets are available to pay only employee benefits

d. The assets are not available to the reporting entitys own creditors even in
bankruptcy.
e. The assets cannot be returned to the reporting entity if the remaining
assets of the fund are sufficient to meet all employee benefit obligations or
the assets are returned to the reporting entity to reimburse it for employee
benefits already paid.
Measurement of plan assets
Plan assets
-measured at fair value.
-exclude unpaid contributions due from the reporting entity to the
fund,
-exclude any nontransferable financial instrument issued by the entity
and held by the fund
-are reduced any liabilities of the fund that do not relate to employee
benefits, for example, trade and other payables and liabilities resulting from
derivative financial instruments
Return on plan assets
Components of return on plan assets include the following:
a. Interest, dividend and other income derived from the plan assets.
b. Realized and unrealized gains and losses on the plan assets
Shall be deducted in computing the return on plan assets:
a. Any costs of managing the plan assets or costs of managing investments
b. Any tax payable by the plan itself or any tax on investment income.
Recognition of return on plan assets
The return on plan assets is fully recognized as a remeasurement and
accounted for as component of other comprehensive income
The term remeasurement is a new accounting jargon introduced in PAS
19R
The amount of remeasurement is equal to the actual return on plan assets
minus the interest income on the fair value of the plan assets at the
beginning of the reporting period
Such remeasurement included in other comprehensive income without
any subsequent recycling or reclassification to profit of loss
Remember that the usual components of the fair value of plan assets are:
a. Contribution to the fund
b. Interest income on plan assets
c. Remeasurement gain or loss on plan assets
d. Benefits paid upon retirement
e. Settlement price of plan settlement before retirement
81
Actuarial gains and losses

Actuarial gains and losses are changes in the present value of the
defined benefit obligation resulting from experience adjustments and
the effect of changes in actuarial assumptions.
Experience adjustments are adjustments from the differences between
the previous actuarial assumptions and what has actually occurred.
Experience adjustments arise because actual events inevitably differ from
actuarial assumptions.
Determination of actuarial gain and loss

a. If the actual benefit obligation is higher than the estimated amount, there
is an actuarial loss.
b. This means that the projected benefit obligation has increased and the
increase is recognized as an actuarial loss.
c. If the actual benefit obligation is lower than the estimated amount, there is
an actuarial gain.
d. This means that the projected benefit obligation has decreased and the
decrease is recognized as an actuarial gain.
Recognition of actuarial gain and loss
PAS 19R, paragraph 120, introduces a new accounting jargon
remeasurements.
Remeasurements include actuarial gains and losses on defined benefit
obligation.
Paragraph 120 provides that all remeasurements, including actuarial
gains and losses, shall be recognized immediately in other comprehensive
income.
The remeasurements are not subsequently recycled or reclassified to
profit or loss.
Paragraph 122 provides that an entity may transfer remeasurements
recognized in other comprehensive income within equity or reclassified to
retained earnings.
Actuarial gains and losses are permanently excluded from profit or loss.
Basic accounting considerations
The benefit plan shall be viewed as a subentity separate and distinct from
the primary entity, which is the employer entity.
The subentity maintains information that does not appear in the financial
statements of the primary entity.
Such information is kept only by means of memorandum records and
therefore not reflected in the general ledger accounts of the primary
entity.
82
The information contained in the memorandum records of the subentity

contains the following:
a. Fair value of plan assets (FVPA)
b. Projected benefit obligation (PBO)
The fair value of the plan assets is the source of fund set aside in
meeting future benefit payments.
The projected benefit obligation or the defined benefit obligation is the
present value of expected future payments required to settle the
obligation arising from employee service in the current and prior periods.
The relationship between the FVPA and the PBO can be express as follows:
Fair value of plan assets
xx
Less: Projected benefit obligation
xx
Prepaid/accrued benefit cost (P/ABC)

xx
The FVPA is analogous to an off-statement of financial position asset with
a debit balance and the PBO is analogous to an off-statement of financial
position liability with a credit balance.
The prepaid/accrued benefit cost is the item that appears on the
financial statement of the employer entity.
If the FVPA is more than the PBO the plan is overfunded and therefore
there is a prepaid benefit cost, a noncurrent asset.
If the FVPA is less than the PBO the plan is underfunded and therefore
there is an accrued benefit cost, a noncurrent liability.
Prepaid/accrued benefit cost

The prepaid/accrued benefit cost account is the balancing figure.
If the account has a debit balance, it is classified as noncurrent asset
presented as prepaid benefit cost.
If the account has a credit balance, it is classified as noncurrent liability
presented as accrued benefit cost.
Settlement of plan
-a transaction that eliminates all further legal or constructive
obligations for part or all of the benefits provided under a defined benefit
plan.
A lump sum payment to plan participants in exchange for their rights to
receive specified postemployment benefits is a settlement.
PAS 19R clarified that a lump sum payment to plan participant made
under the terms of the existing defined benefit plan is not a settlement.
This is referred to as routine settlement and considered an actuarial
assumption that should be included in the measurement if the defined
benefit obligation.
Gain or loss on settlement
83
An entity shall recognize gain or loss on the settlement of e defined

benefit plan when the settlement occurs (PAS 19R, paragraph 110).
The gain or loss on settlement is the difference between the settlement
price and the present value of the defined benefit obligation on the date
of settlement.
The settlement price includes any plan assets transferred and any
payments made directly by the entity in connection with the settlement.
Any gain or loss on settlement is fully recognized and included in service
cost in the computation of employee benefit expense.
FVPA more than PBO
FV of plan assets > the projected benefit obligation, the plan is overfunded there is a prepaid benefit cost which PAS 19R calls it surplus.
The surplus in a defined benefit plan must not exceed the asset ceiling
price determined by using the discount rate in the measurement of the
defined benefit obligation (PAS 19R, paragraph 64).
Asset ceiling price
-PV of any economic benefits available in the form of refunds
from the plan or reductions on future contributions to the plan.
Any change in the effect of the asset ceiling, excluding interest on the
effect of the asset ceiling is a remeasurement to be recognized through
other comprehensive income (PAS 19R, paragraph 8).
The interest on the effect of the asset ceiling is part of the total change
in the effect of the asset ceiling (PAS 19R, paragraph 126).
The amount is determined by multiplying the effect of the asset ceiling at
the beginning of the period by the discount rate.
Total change in the effect of the asset ceiling - Interest on the
effect of the asset ceiling = remeasurement
The effect of asset ceiling is a credit in the memorandum record which is
the same category of the projected benefit obligation.
Any increase in the effect of the asset ceiling is a remeasurement loss
and any decrease is a remeasurement gain.
Illustration
Benny Fit Company provided the following information in relation to a defined
benefit plan for the current year:
January 1 December 31
Fair value of plan assets
2,600,000
3,000,000
Projected benefit obligation
2,000,000
2,100,000
84
Prepaid/accrued benefit cost surplus

Asset ceiling
300,000
600,000
200,000
900,000
Effect of asset ceiling
400,000
600,000

Contribution to the plan
Benefits paid
150,000
Discount rate
100,000
350,000
10%
Required:
1. Determine the actual return on plan assets for the current year.
2. Determine the actuarial gain due to decrease in PBO.
3. Determine the amount that should be reported as employee benefit
expense.
4. What is the net remeasurement loss for the current year?
Computation:
1. FVPA January 1
2,600,000
Contribution
Actual return (SQUEEZE)
Benefits paid
350,000
200,000
(150,000)
FVPA December 31
3,000,000
2. PBO January 1
2,000,000
Interest expense (10% x 2,000,000)
200,000
Benefits paid
Actuarial gain due to decrease in PBO (SQUEEZE)
PBO December 31
100,000
(150,000)
(50,000)
2,100,000
3. Current service cost

Interest expense (10% x 2,000,000)
200,000
85
100,000
Interest income (10% x 2,600,000)

(260,000)
Interest expense on effect of asset ceiling (10% x 400,000)
40,000
Employee benefit expense
4. Actual return
Interest income (10% x 2,600,000)
(260,000)
Remeasurement loss on plan assets
(60,000)
Actuarial gain decrease in PBO
Remeasurement loss on effect of asset ceiling
(160,000)
Net remeasurement loss
(170,000)
Change in the effect of asset ceiling (600,000 400,000)
200,000
Interest expense on effect of asset ceiling (10% x 400,000)
(40,000)
Remeasurement loss on effect of asset ceiling
160,000
RETAINED EARNINGS
Appropriation and quasi-reorganization
Appropriation of retained earnings
a. Unappropriated retained earnings
b. Appropriated retained earnings
86
80,000
200,000
50,000
Legal appropriation
-the legal capital cannot be returned to the shareholders until the
entity is dissolved and liquidated.
Contractual appropriation
-the terms of the bond issue and preference share issue may impose
restriction on the payment of dividends to insure the eventual payment of
the bonds and redemption of the preference share.
Voluntary appropriation
-the management wishes to preserve the funds for expansion purposes
or for covering possible losses or contingencies
Items affecting directly retained earnings

Net income is added because it increases retained earnings or loss is
deducted for the period.
Prior period errors are shown as adjustment to the beginning balance of
retained earnings to arrive at the corrected beginning balance.
If the net income of prior period is understated, the amount of error is
added to retained earnings. If overstated, it is deducted.
Dividends to shareholders deducted from retained earnings
Effect of change in accounting policy an adjustment to the beginning
balance of retained earnings.
If the net income of prior period is understated because of the change
in accounting policy, the effect is added to the beginning retained
earnings. If overstated, it is deducted.
Appropriation of retained earnings is deducted from the unappropriated
balance of retained earnings.
Quasi-reorganization
-is a permissive but not a mandatory procedure under which a
financially troubled entity restates its accounts and establishes a fresh
start in accounting sense.
-is the procedure of restating assets, liabilities and share capital
balances in conformity with fair value for the purpose of eliminating a deficit.
-it must be approved by the SEC.
-it may be accomplished thru
87
a. Recapitalization
b. Revaluation of property, plant and equipment
Illustration recapitalization
Adverse financial and operating circumstances warrant that Mathai Company
should undergo quasi-reorganization.
The following information may be relevant in accounting for the quasiorganization:
Inventory with a fair value of P2,000,000 is currently recorded in the
accounts at cost of P2,500,000.
Plant assets with a fair value of P7,000,000 are currently recorded at
P8,500,000 net of accumulated depreciation.
Individual shareholders contribute P4,000,000 to create additional capital
to facilitate the reorganization. No new shares are issued.
The par value of the share is reduced from P25 to P5.
The shareholders equity before the quasi-reorganization comprised the
following:
Share capital, P25 par value, 100,000 shares
authorized and outstanding
2,500,000
Share premium
1,750,000
Retained earnings (deficit)
(3,000,000)
Required:
After the quasi-reorganization, what is the balance of the share premium?
Computation:
Retained earnings
Inventory
500,000
500,000
Retained earnings
1,500,000
1,500,000
Cash
Share premium
4,000,000
4,000,000
Share capital (100,000 x P20)

Share premium
2,000,000
2,000,000
88
Share premium
Retained earnings
5,000,000
5,000,000
Share premium per book

1,750,000
Reduction of par
Cash contribution from shareholders
4,000,000
Elimination of deficit
(5,000,000)
Adjusted of deficit
2,750,000
2,000,000
Circumstances that may justify quasi-reorganization

a. A large deficit exists.
b. Approved by the shareholders and creditors.
c. The cost basis of the accounting for property, plant and equipment
becomes unrealistic.
d. A fresh start appears to be desirable or advantageous to all parties
concerned.
89
SHARE-BASED COMPENSATION
Share options
Share-based compensation plan
-is a compensation arrangement established by the entity whereby the
entitys employees shall receive shares of capital in exchange for their
services or the entity incurs liabilities to the employees in amounts based on
the price of its shares.
Philippine Financial Reporting Standard 2 sets out the measurement
principles and specific requirements for accounting of the following sharebased compensation:
Equity settled
-the entity issues equity instruments in consideration for services
rendered. (Share options)
Cash settled
-the entity incurs a liability for services received and the liability
is based on the entitys equity instruments. (Share appreciation
rights)
Share options
-conceived as additional compensation on the part of senior
officers and other key employees.
Measurement of compensation
a. Fair value method
-compensation is equal to the fair value of the share options on
the date of grant.
-mandated by Philippine Financial Reporting Standard 2
b. Intrinsic value method
-compensation is equal to the intrinsic value of the share options
-intrinsic value is the excess of the market value of the share
over the option price.
-Paragraph 24 PFRS 2 provides that the intrinsic value method
can be used only if the fair value of the share option cannot be
estimated reliably.
Recognition of compensation
90
a. If the share options have no vesting period, the entity shall

recognize the compensation as expense in full on grant date.
b. If the share options have a vesting period, the entity shall
recognize the compensation as expense over the vesting period or
service period.
Acceleration of vesting
-the entity cancels or settles a grant of share options during the
vesting period. (PFRS 2, par. 28)
a. The entity shall recognize immediately the compensation
expense over the remainder of the vesting period.
b. Any payment made to the employee on the cancelation or
settlement of the grant is a deduction from equity/
If the payment exceeds the fair value of the share option, the
excess shall be recognized as an expense.
Illustration
On January 1, 2016, Share It Company granted to a senior executive
30,000 share options, conditional upon executives remaining in the entitys
employ until December 31, 2018. The par value per share is P50. The
exercise price is P100.
However, the exercise price drops to P80 if the entitys earnings
increase by at least an average of 10% per year over the three-year period.
The entity estimated that the fair value of the share option is P30 if the
exercise price is P80.
If the exercise price is P100, the fair value of the share option is P25.
During 2016 and 2017, the earnings increased by 11% and 12%
respectively. However, during 2018, the earnings increased only by 4%.
Required:
1. Determine the compensation expense for 2016, 2017 and 2018.
2. What is the share premium upon exercise of the share options on
December 31, 2018?
Computation:
1. 2016
Fair value of share options (30,000 x 30)
900,000
Compensation expense for 2016 (900,000/3)
300,000
91
The fair value of share option is P30 because the sales increased by
11% in 2016.
2017
Cumulative compensation for 2016 and 2017
(900,000/3 x 2)
Compensation expense recognized in 2016
(300,000)
Compensation expense in 2017
300,000
900,000
600,000
The fair value of the share option is still P30 because the sales
increased by 12% in 2016 or an average of 11.5% for two years.
2018
Cumulative compensation for 2016 and 2017
(600,000)
150,000
750,000
The fair value of share option is only P25 because the sales increased
by 4% in 2018 or an average of 9% only for 3 years. [(11% + 12% + 4%) / 3]
= 9%
2.
Option price (30,000 x 100)
Fair value of share options December 31, 2018
750,000
Total consideration
3,750,000
Par value of share (30,000 x 50)
(1,500,000)
Share premium
92
3,000,000
2,250,000
SHARE-BASED COMPENSATION
Share appreciation right
Share appreciation right
-entitles an employee to receive cash which is equal to the excess of
the market value of the entitys share over a predetermined price for a
stated number of shares.
Measurement of compensation
Compensation is based on the fair value of the liability at the
reporting date and shall be remeasured at every year-end until it is finally
settled.
Fair value of liability is equal to the excess of the market value of
share over a predetermined price for a given number of shares over a
definite vesting period.
Compensation in a share appreciation right becomes known only on
exercise date.
Recognition of compensation
a. If the share appreciation right has no vesting period, the
compensation is recognized immediately on the date of grant.
b. If the share appreciation right has a vesting period, the
compensation is recognized over the service or vesting period.
Cash and share alternative
a. Cash alternative cash payment equal to the market value of a
certain number of shares subject to certain conditions.
b. Share alternative equity shares given to the employee.
If the entity has the choice of settlement, the instrument is not a
compound financial instrument.
93
If the employee has the right to choose the settlement, the entity is
deemed to have issued a compound financial instrument.
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 usually the fair value of the whole compound
financial instrument minus the fair value of the liability component. The
equity component is always the residual amount.
Illustration
On January 1, 2016, K Company established a share appreciation rights plan
for the executives.
The plan entitled them to receive cash at any time during the next four years
for the difference between the market price for the ordinary share and a preestablished price of P20 on 60,000 share appreciation rights or SARs.
On December 31, 2018, 20,000 SARs are exercised by executives.
Market price
January 1, 2016
25 per
share
December 31, 2016
28
per share
December 31, 2017
35
per share
December 31, 2018
30
per share
Required:
1. Determine the compensation expense recognized for 2016 and 2017.
2. What amount should be recognized as accrued liability for share
appreciation rights on December 31, 2018?
Computation:
1.
2016
Fair value December 31, 2016 (28 20)
94
Compensation expense for 2016 (60,000 x 8)

480,000
2017
15
Accrued compensation December 31, 2017 (60,000 x 15)
900,000
(480,000)
Compensation expense for 2017
420,000
2.
10
Accrued compensation December 31, 2018 (60,000 x 10)

600,000
Accrued compensation December 31, 2017
(900,000)
Gain on reversal of SARs
(300,000)
Accrued compensation December 31, 2018
600,000
Payment for exercise of SARs (20,000 x 10)
(200,000)
Adjusted accrued liability December 31, 2018
95
400,000

Accounting Final

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Accounting Final

Enviado por

Direitos autorais:

Formatos disponíveis

PROPERTY, PLANT AND EQUIPMENT (PPE)

- Tangible asset with physical substance

Intervening Operations Expense

at cost or depreciated amount

Fully Depreciated depends on the management - disclose

Abandoned dont derecognize

Equipment- Acquired at an invoice price of P600,000, subject to a 5%

cost of the equipment?

3. Fair value of the bonds payable (600,000 x 1.02)

4. Fair value of asset given

assistance from the government in the form of transfer of resources

Repayment of a grant related to income shall be applied first to

Repayment to grant related to an asset shall be recorded by increasing

2. Total grant received

interest and other costs that an entity incurs in connection with

Accounting for Borrowing Cost (PAS 23)

actual borrowing cost less any investment income

A portion is used for working capital, treated as a general borrowing

equal to the average expenditures of the asset multiplied by a

Capitalization rate (total annual borrowing cost/total general

when substantially all the activities necessary to prepare the qualifying

when the physical construction of asset is complete even though

The entity began self-construction of a building on January 1, 2016 and

Required: Determine the cost of the new building

LAND AND BUILDING

Additions to cost not subject to depreciation charged to land account

If depreciable charged to land improvements account

Cost of Building Acquired by Purchase

j. Safety inspection fee

c. Old building is subject to contract lease payments to tenant to

3. Cost of paving driveway and parking lot

VAT not capitalized charged to input tax to be offset against output

Will increase the future service potential capitalized

Cost of part eliminated and related accumulated depreciation are

Required: Determine capitalizable cost of the machine?

Systematic allocation of the depreciable amount of the PPE

Cost Residual Value

Total Depreciable Amount

Total Depreciable Amount

Depreciation Rate per Hour =

Annual Depreciation = actual hours worked x rate per hour

Output or Production Method

Depreciation Rate per Unit =

Annual Depreciation = yearly output x rate per unit

Sum of Half Years Digit =

b. Declining Balance Method

1useful life Residual Value Cost

residual value is ignored in getting depreciable amount

no depreciation recorded until the asset is retired

depreciation is equal to the original cost of the asset retired minus

1. Determine the depreciation expense and carrying amount using Straight

1. Tools account- January 1, 2016 (800 x P200)

2. Composite life (720,000/45,000)

the removal, extraction or exhaustion of a natural resource or wasting

Depletion rate per unit =

d. Estimated Restoration Cost

3. Determine the depletion for the year 2018

2. Depletion rate (960,000/2,400,000)

Total cost (960,000 + 490,000)

Frequency depends upon the changes in the fair value of PPE.

Carrying Amount = historical cost accumulated depreciation

a fall in the market value of an asset so that the recoverable amount is

Accounting issues to be considered

b. Measurement of the recoverable amount