BA 114.

2 FIRST MODULE 1ST EXAM (23-01-2011)

INVESTMENT PROPERTY PAS 40

>property(land or building or part of a building or both) held by an (1) owner or by the lessee under a finance lease to earn rentals or for (2) (3) capital appreciation or both * equipment or movable property cant qualify as investment property >generates cash flows that are largely independent of the other assets of the entity
*Finance lease> transfers substantially all the risks and rewards incident to ownership lease transfers ownership of asset to lessee by the end of lease term lessee has option to purchase asset at price lower than FV at date option is exercisable, at the inception of lease, it is reasonably certain option will be exercised lease term is for the major part of the economic life of asset at lease inception, PV of minimum lease payments amounts to at least substantially all of the FV of leased asset lease assets are of specialized nature

Initial measurement >IP shall be measured initially at cost + transaction costs purchased IP >purchase price + attributable expenses self-constructed IP >cost at date of completion payment for IP is deferred >cost is cash price equivalent >cash price equivalent total payments = interest expense acquired in exchange w/ >measured at FV commercial substance FV of asset received or given >CV of asset given up cant be reliably measured Excluded from the cost of IP: (a) start up costs unless necessary to bring IP to intended use; (b) operating losses; (b) abnormal amts of wasted matls, labor or other resources Subsequent measurement *accounting policy chosen must be applied to all assets classified as IP by the entity (1) FAIR VALUE MODEL > IP is carried at fair value >changes in FV from year to year are recognized in P&L >no depreciation is recorded Fair value > price at w/c the property could be exchanged bet. knowledgeable & willing parties in an arms length transaction >determined w/o deduction of possible transaction costs >reflect mkt conditions at the end of reporting pd >best evidence: current price in an active market for similar property in the same location & condition & subject to similar lease & other contract >no active market: (a) adjusted current price in active mkt for prop. of diff. nature, condition, location; (b) adjusted recent price of similar prop. in less active mkt; (c) discount CF projection based on reliable estimate of future CF o FV > CV Investment property Gain fr change in FV o FV < CV Loss fr change in FV Investment property

Investment property is not held for: (a) use in the production/supply of goods/services or for administrative purposes (b) sale in the ordinary course of business OWNER-OCCUPIED PROPERTY > property held by an owner or by the lessee under a finance lease for use in the production/supply of goods/services or for administrative purposes >Fixed asset or Property, Plant & Equipment >generates cash flows that are attributable not merely to the property but also to other assets used in the production/supply process Examples (a) land held for LT capital appreciation (b) land held for currently undetermined use (c) building owned or held under finance lease and leased out under an operating lease (d) vacant building held to be leased out under an operating lease (e) property that is being constructed or developed for future use as investment property Property interest held by lessee: May be classified & accounted for as investment property if: (a) property meets defn of investment property (b) operating lease is accounted for as finance lease (c) lessee uses FV model in measuring property interest >all investment property is to be accounted for on a FV basis *property held under a lease is classified as investment property >initial cost = lower of FV and PV of minimum lease payments Partly investment & partly owner-occupied portions could be sold or leased >account separately as IP & out separately OOP portions could not be sold >IP if only insignificant portion is separately held for mftg/admin purposes ancillary services provided by >treated as IP entity to property occupants but insignificant component of arrangement services provided are a >treated as OOP significant component of arrangement
*ancillary services > providing necessary support to the primary activities or operations of an organization

xx xx

xx xx

*If FV cant be determined reliably on a continuing basis, entity shall measure IP using the cost method until disposal of IP & residual value of IP shall be assumed zero. (2) COST MODEL >asset is carried at cost less acc. depn & acc. impairment losses >fluctuations in FV not recognized Depreciation Acc. depn xx xx

Transfers of IP > made when & only when there is a change of use (a) Commencement of owner occupation > IP to OOP (b) Commencement of devt w/ view to sale > IP to inventory (c) End of owner occupation > OOP to IP (d) Commencement of an operating lease to another entity > OOP to IP Measurement of transfers IP (cost model) to OOP/inventory OOP/inventory to IP (cost model) IP (FV model) to OOP/inventory OOP to IP (FV model)

>made at CV

Property leased to an affiliate Perspective Individual entity owning it Group as a whole; for consolidated F/S

Classification IP OOP

Recognition of investment property IP is recognized as an asset when & only when: (a) probable future economic benefits (b) cost of IP can be reliably measured

Inventory to IP (FV model) IP under construction is completed (FV model)

>FV becomes deemed cost for subsequent acctg >difference bet. FV & CV accounted for as revaluation or PPE >remeasurement to FV included in P&L >difference bet. FV & CV included in P&L

Derecognition of IP (a) on disposal (b) permanently withdrawn from use (c) no future economic benefits expected Disposal of IP >Gain/loss from disposal of IP = difference bet. net disposal proceeds & CV of asset; recognized in P&L rd >Compensation from 3 parties for IP impaired, lost or given up recognized in P&L when receivable

steady/declining growth rate per year unless increasing rate can be justified Estimates of future CF include: (a) cash inflows from continuing use of asset; (b) cash outflows incurred to generate cash inflows; (c) net cash flows received or paid on the disposal of asset Recognition of impairment loss >impairment loss is recognized immediately by reducing the assets carrying amount to its recoverable amount >impairment is adjusted through accumulated depreciation >depreciation charge for the asset shall be adjusted in future periods to allocate the assets revised carrying amount, less RV on a systematic basis over its remaining life Impairment loss Accumulated depreciation xx xx

IMPAIRMENT OF ASSETS PAS 36

IMPAIRMENT > fall in the mkt value of an asset so that its recoverable amount is less than its carrying amount in the statement of financial position CARRYING AMOUNT > amt at w/c an asset is recognized in the B/S after deducting acc. depn & acc. impairment loss *There is an established principle that assets shall not be carried at above their recoverable amount. >assets in the B/S can have lower values when CV < RV Indication of impairment >an entity shall assess at each reporting date whether there is any indication that an asset may be impaired >expected stream of economic benefits is less then projection Test for impairment General rule: Test for impairment is not done at every B/S date. >intangible assets w/ an indefinite useful life or intangible asset not yet available for use shall be tested annually External sources: (a) decrease/decline in the mkt value of asset passage of time, normal use, new competitor; (b) change in technological, market, legal, or economic environment of business in w/c asset is employed customer taste; (c) increase in interest rate/market rate of return on investment; (d) CV of net assets > market capitalization Internal sources: (a) obsolescence/physical damage; (b) change in the manner/extent asset is used w/ adverse effect on entity; (c) evidence economic performance of asset will be worse than expected Measurement of recoverable amount >the recoverable amount of an asset is its fair value less cost to sell or value in use, whichever is higher o FAIR VALUE LESS COST TO SELL > amt obtainable fr the sale of an asset in arms length transaction bet. knowledgeable parties, less cost to sell; net selling price >recovery from sale there is a binding sale sales price, adjusted for agreement incremental costs there is no binding sale market price (current bid agreement but asset is price) lest cost to sell; sales traded in an active market price of recent transaction in similar assets there is no binding sale best estimate of agreement and asset is not knowledgeable & willing traded in an active market parties in an arms length transaction Costs to sell > incremental costs directly attributable to the sale of an asset/CGUs (legal costs, stamp duty & other transaction taxes, removal cost, incremental costs); dont include finance costs & income tax expense Active market > (a) items are homogeneous; (b) willing buyers & sellers at any time; (c) prices available to public o VALUE IN USE > present value or discounted value of future pretax net CF (inflows outflows) expected to be derived from an asset >continuous use of asset >possibility of overoptimistic estimates of cash flows >PAS 36 requirements: (a) based on reasonable & supportable assumptions; (b) based on most recent budgets on fin. forecasts (5yrs); (c) CF beyond 5yrs should be estimated using

Impairment of revalued asset >an impairment loss on a revalued asset is recognized directly against any revaluation surplus and any excess is recognized in profit or loss 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 >basic rule: recoverable amt of an asset shall be determined for the asset individually >otherwise: determine the recoverable amount of CGU to w/c asset belongs >departments or product lines w/c are significantly unprofitable & cash drains >entity level aggregation: no impairment recognized department/product line level aggregation: loss-producing assets would be written down to recoverable amount When an impairment loss is recognized for a CGU, this loss shall be allocated to the assets of the unit in the following order: (a) First, to the goodwill, if any. (b) Then, to all other noncash assets of the unit prorata based on their carrying amount. >the carrying amt of an asset shall not be reduced below the highest of FV less cost to sell, value in use & zero >the amount of impairment loss that would otherwise have been allocated to the asset shall be allocated prorate to the other assets of the CGU CGU w/ goodwill >Goodwill does not generate CF independently from other assets/group of assets, & therefore, the recoverable amt of goodwill cant be determined Carrying amount of CGU >includes the carrying amt of only those assets w/c can be attributed directly or allocated on a reasonable & consistent basis to the CGU & can generate future cash inflows used in determining the value in use of the CGU >does not include the carrying amount of any recognized liability unless necessary in determining recoverable amt >avoid double counting Corporate assets > assets other than goodwill that contribute to the future CF of both the CGU under review & other CGUs Reversal of an impairment loss >there has been a change in the estimate used to determine the assets recoverable amt since the last impairment loss was recognized >increased carrying amount of an asset due to a reversal of an 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 >recognized immediately as income >impairment loss for goodwill shall not be reversed

With estimated liability for dismantling & removal cost (assumed by the buyer) FV less cost to sell = estimated selling price + est. liab. for dismantling & removal cost (assumed by buyer) disposal cost CA = carrying amt. est. liab for dismantling & removal cost (assumed by buyer) > no longer sellers responsibility Value in use = value in use est. liab. for dismantling & removal cost (assumed by buyer)

>ownership interest in an entity ordinary shares, preference share, other share capital; doesnt include redeemable preference share, treasury shares, convertible debt Debt security > represents a creditor relationship w/ an entity >usually has a maturity date & value <see APPENDIX A> Fair value > amt. for w/c an asset could be exchanged or a liability settled, bet. knowledgeable & willing parties in an arms length transaction Quoted price o Asset held or existing asset > current bid price or price w/c a willing a buyer wants to pay o Asset to be acquired > asking price or price w/c a willing seller wants to receive o Bid & asking price unavailable > price of most recent transaction Reclassification >entity shall reclassify financial assets only when it changes its business model for managing financial assets >apply prospectively Reclassification date > 1st day of reporting pd following the change in business model w/c results in an entity reclassifying FA >changes in entitys business model expected to be infrequent >will not result to a change in business model: (a) change in intention; (b) temporary disappearance of particular mkt for FA; (c) transfer of FA bet. parts of entity w/ diff. business models o From FV to amortized cost > FV at reclassification date becomes new carrying amount of FA @ amortized cost; diff. bet. new CA & face value amortized through P&L over remaining life of FA using effect interest method o From amortized cost to FV > FV is determined at reclassification date; diff. bet. previous CA & FV recognized in P&L

FINANCIAL ASSET AT FAIR VALUE

INVESTMENTS > held by an entity for: (a) accretion of wealth (regular income through interest, dividends, royalties, rentals) (b) capital appreciation (investment in land/real estate, direct investments in gold, diamonds) (c) ownership control (investments in subsidiaries/associates) (d) meeting business requirements (sinking fund, P/S redemption fund, plant expansion fund, other NC fund (e) protection (interest in life insurance contract cash surrender value) >not directly identified w/ operating activities of entity; auxiliary relationship to central revenue producing activities Current investments > readily realizable & intended to be held for not more than 1 year Noncurrent investments >intended to be held for more than 1 year or not expected to be realized w/in 12 months after end of reporting period FINANCIAL INSTRUMENTS > any contract w/c gives rise to a financial asset of one entity and a financial liability/equity instrument of another entity (e.g. cash in the form of notes & coins, cash in the form of checks, cash in bank, trade accounts, notes and loans, debt securities, equity securities) >most fin. instruments involve one party having a contractual right to receive cash or another financial asset & another party having a contractual obligation to deliver cash or another financial asset Financial asset > any asset w/c is: (1) cash; (2) a contractual right to receive cash/another fin. asset from another entity; (3) a contractual right to exchange fin. instrument w/ another entity under conditions w/c are potentially favorable [such exchanges will result to gain/addl cash inflow to entity]; (4) an equity instrument of another entity (e.g. cash/currency, deposit of cash, receivables, trading securities, option to buy shares @ less than mkt price) (not fin. assets: physical & intangible assets, p-paid expenses, leased assets) Financial liability > any liability that is a contractual obligation: (1) to deliver cash/other fin. asset to another entity; (2) to exchanged fin. instruments w/ another entity under conditions w/c are potentially unfavorable (e.g. payables, option to sell shares @ less than mkt price) (not fin. liabs.: deferred rev., warranty obligations, income tax pay., constructive obligations) Equity instrument > any contract w/c evidences a residual interest in the assets of an entity after deducting all its liabilities (ordinary share capital, preference share capital, warranty or written call options) >Redeemable P/S > gives the holder the right to require issuer to redeem the instrument at a future date for a fixed/determinable amt; fin. liab. because issuer has contractual right to pay cash at some future time; dividends paid interest expense; current/noncurrent Classification of financial assets (1) Financial assets @ fair value > equity & debt securities (2) Financial assets @amortized cost > debt securities Equity security > any instrument representing ownership shares & right, warrants or options to acquire/dispose of ownership shares at a fixed or determinable price

INVESTMENT IN EQUITY SECURITIES

>acquisition of equity securities (ownership shares; rights and other share capital) for the purpose of accruing income through dividends and increase in market value, or controlling another entity *owners of equity securities known as shareholders Share > ownership interest/right of shareholder in an entity; evidenced by share certificate Acquisition of equity securities Initial recognition Equity securities acquired in an exchange Two or more equity securities acquired at a single cost or lump sum Only 1 security has known MV

FINANCIAL ASSET AT AMORTIZED COST

>business model is to collect contractual cash flows if the contractual cash flows are solely payments of principal and interest >e.g. investment in bonds & other debt instruments >classified as noncurrent assets Bond > formal unconditional promise made under seal to pay a specified sum of money at a determinable future date & to make periodic interest payments at a stated rate until principal sum is paid >contract of debt whereby the issuer borrows fund from the investor Classification of bond investments a) Trading securities > transaction costs expensed immediately b) FA @ amortized cost Acquisition of bond investments Bonds acquired on interest date Bonds acquired between interest dates

FV + trans. costs FV of asset given No FV: cost/CA of asset given Allocated to securities based on FV Amount allocated to security w/ known MV equal to its MV & the remainder to other security

Investment in unquoted equity instruments *all investments in equity instruments & contracts on those instruments must be measured at FV >measured at cost Sale of equity securities >diff. bet. consideration received and carrying amount recognized in profit and loss >entity shall determine cost of securities sold using FIFO or average cost approach Stock rights accounted for separately o Acquisition: Inv. in equity sec. xx Cash xx o Receipt of stock rights: Stock rights (MV) xx Inv. in equity sec. xx o Exercise of stock rights: Inv. in equity sec. xx Cash xx Stock rights xx o Sale of stock rights: Cash xx Stock rights xx Gain on sale of stock rights xx o Expiration of stock rights: Loss on stock rights xx Stock rights xx Theoretical or Parity Value of a stock right > assumed FV of the right derived from the MV of the share a) Share is selling right on

Purchase price is initially recognized as acquisition cost Purchase price includes accrued interest >2 assets acquired: bonds & accrued interest TS Int. rec. Cash Cash Int. rec Int. income or TS Int. inc. Cash Cash Int. inc. xx xx xx xx xx xx xx xx xx xx xx

Amortization of premium or discount >investment in bonds shall be measured at amortized cost >any premium or discount on the acquisition of LT investment in bonds must be amortized over the life of the bonds (from date of acquisition to date of maturity) o Bond discount amortization: Inv. in bonds xx Int. inc. xx o Bond premium amortization Int. inc. xx Inv. in bonds xx >amortization may be on interest dates or at the end of the reporting period Philosophy on amortization >Reason: to bring the carrying amount of the investment to face value on date of maturity *Bond premium > loss on the part of the bondholder because he paid more than what can be collected on maturity date *Bond discount > gain on the part of the bondholder because he paid less than what can be collected on maturity date *Amortization > process of allocating the bond premium as deduction from interest income and the bond discount as addition to interest income Sale of bonds prior to maturity >amortization of premium/discount, if any, should be recognized up to the date of sale >if sale is bet. interest dates, sales price normally includes accrued interest (credited to interest income) >gain or loss on sale of investment = sales price accrued interest CA of bond investment Serial bonds > those w/c have a series of maturity dates >bonds w/c are payable in installments

b) Share is selling ex-right

Stock rights not accounted for separately o Acquisition: Inv. in equity sec. xx Cash xx o Receipt of stock rights: Memo entry o Exercise of stock rights: Inv. in equity sec. xx Cash xx o Sale of stock rights: Cash xx Inv. in equity sec. xx o Expiration of stock rights: Memo entry

Effective interest method of amortization Rates of interest: 1) Nominal, coupon, or stated rate > rate of interest appearing on the face of the bonds > nominal rate X face value of bonds = periodic interest received 2) Effective, yield, or market rate > true of actual rate of interest w/c bondholder earns on the investment >effective rate X CA of bond = interest income *carrying amount of the bond investment > initial cost gradually increased/reduced by periodic amortization of discount/premium o effective rate = nominal rate > cost of bond inv. = face value o Bonds acquired at a premium > effective rate < nominal rate o Bonds acquired at a discount > effective rate > nominal rate

the lender cannot demand immediate repayment) Nonadjusting events > bet. end of reporting pd & before F/S are authorized for issue >(1) refinancing on a LT basis; (2) rectification of a breach of LT loan agreement; (3) granting of a grace pd Estimated liabilities > obligations w/c exist at the end of reporting pd although their amt is not definite >current/noncurrent >considered as a provision w/c is both probable & measurable

LIABILITIES > present obligations of an entity arising from past

transactions or events, the settlement of w/c is expected to result in an outflow from the entity of resources embodying economic benefits >essential characteristics: (1) present obligation of a particular entity > entity liable must be identified; (2) arises from past transaction or event > not recognized until incurred; (3) settlement requires an outflow of resources embodying economic benefits Measurement >initial: FV (PV of future cash outflow in settling obligation) plus transaction costs >subsequent: amortized cost >current liabilities: face amount noncurrent liabilities: (1) interest-bearing > face amount; (2) noninterest-bearing > present value Current liabilities > (1) expected to be settled w/in entitys operating cycle; (2) held primarily for trading; (3) due to be settled w/in 12 mos. after reporting pd; (4) entity does not have an unconditional right to defer settlement of liability for at least 12 mos. after reporting pd >e.g. trade payables & accruals, other current liabilities, financial liabilities held for trading Noncurrent liabilities >all liabilities not classified as current >e.g. noncurrent portion of LT debt, finance lease liability, deferred tax liability, LT obligation to entity officers, LT deferred revenue LT debt falling due w/in one year Original term > 12 months; agreement to refinance/reschedule payment on LT basis completed after reporting pd & before F/S are authorized for issue Refinancing on LT basis completed on or before end of reporting pd Entity has the discretion to refinance/roll over an obligation for at least 12 mos after reporting pd under existing loan facility Refinancing/rolling over not at entitys discretion

CURRENT LIABILITIES
Premiums > articles of value (toys, dishes, silverware, other goods, cash payments) given to customers as result of past sales or sales promotion activities Purchase of premiums Premiums inventory xx Cash xx Distribution of premiums Premium expense xx Premiums inventory xx At year-end, if premiums are Premium expense xx still outstanding Est. premium liability xx Start of next year Est. premium liability xx Premium expense xx Customer loyalty program > build brand loyalty, retain valuable customers, increase sales volume >designed to reward customers for past purchases & to provide them w/ incentives to make further purchases >award credits = points >account for award credits as a separate component of an initial sale transaction; future delivery of goods >FV of consideration received w/ respect to initial sale allocated bet. award credits & sale Subsequent recognition a) Entity supplies the award itself > initial: deferred revenue; subsequent: revenue when redeemed >amount of revenue recognized shall be based on the number of award credits that have been redeemed relative to the total number expected to be redeemed >revenue recognized made on a cumulative basis Cash xx Sales xx U/R points xx U/R points xx Sales xx b) Third party supplies the awards > revenue from the award credits is recognized at the point of initial sale i) Entity is collecting as principal > amount of revenue is equal to gross consideration allocated to award credits Cash xx Sales xx Revenue from points xx Loyalty program expense xx Cash xx ii) Entity is collecting as agent of the 3rd party > amount of revenue equal to the net amount retained on its own account Cash xx Sales xx Liability for points xx Liability for points xx Cash xx Revenue from points xx Warranty > to provide free repair service or replacement during specified period if the products are defective >at the point of sale, a liability is incurred Accrual approach >properly matches cost w/ revenue Warranty expense xx Est. warranty liability xx Actual warranty cost incurred: Est. warranty liability xx Cash xx

Current liability

Noncurrent liability

Noncurrent liability

Current liability

Covenants > attached to borrowing agreements w/c represent undertakings by the borrower >restrictions on the borrower as to undertaking further borrowings, paying dividends, maintaining specified level of working capital & so forth Certain conditions are breached Current liability > payable on demand Even if lender has agreed, after the reporting pd & before F/S are authorized for issue, not to demand payment Lender has agreed on or before Noncurrent liability end of reporting pd to provide a grace pd (pd w/in w/c entity can rectify the breach & during w/c

Payroll taxes >withheld by employer: (1) income tax payable by employee; (2) SSS contribution; (3) Philhealth contribution; (4) Pag-ibig contribution Gross payroll: Salaries expense xx Withholding tax payable xx SSS payable xx Philhealth payable xx Pag-ibig payable xx Cash xx Employers contribution: Payroll tax expense xx SSS payable xx Philhealth payable xx Pag-ibig payable xx Remittance: Payables xx Cash xx Value added taxes (VAT) > taxes on customers on sales of tangible personal property & certain services; BIR A/R xx Sales xx Output VAT xx Purchases xx Input VAT xx A/P xx Output VAT xx Input VAT xx VAT payable xx VAT payable xx Cash xx

Gift certificates payable > redeemable in merchandise GCs sold: Cash xx GCs payable xx GCs redeemed: GCs payable xx Sales xx GCs expire: GCs payable xx Forfeited GCs xx *Forfeited GCs > other income Refundable deposits > cash or property received from customers but w/c are refundable after compliance w/ certain conditions Cash xx Containers deposit xx *containers deposit > current liability Containers deposit xx Cash xx Containers deposit xx Containers xx Gain on sale of containers xx Bonus computation 1) certain % of income before bonus & before tax 2) certain % of income after bonus but before tax 3) certain % of income after bonus & after tax 4) certain % of income after tax & before bonus