ADVANCED FINANCIAL ACCOUNTING AND REPORTING TOPIC 1.1 PARTNERSHIP FORMATION Dofinition of a Partnership A partnership is "a contract whereby two or more persons bind themselves to contribute money, property, or Industry to a common fund, with the intention of dividing the profits among themselves.” ‘Two or more persons may also form a partnership forthe exercise of a profession. (GPP) Article 1767, Civil Code of the Philippines. LEGAL: Anicle 1767 to 1867, Civil Code of the Philippines PROFESSIONAL: All PFRS including the conceptual framework, as applicable, Characteristics of a Partnership (SECMUL!) 41. Separate legal personality Ease of formation Co-ownership of contributed assets ‘Mutual Agency, Mutual participation in the profits Unlimited iabilty Limited fe Income tax PARTNERSHIP FORMATION Primary formation issues include: + Valuation of contribution pontribution PFRS Internal (External) 2. Revalignment of contribution with partnership agreement [> Money ~ 7 Property v v industry x us "Opportunity Cost x 7 Liability ‘+ Assumed by the partnership v ¥ + Assumed by the partner x xPARTNERSHIP BOOKS TO BE USED Tndividuals with no existing business New Books Existing business and another existing Business or individual | New Books With no existing business Existing Books (Adjust the books fist to align with the agreement, then close the books) Capital Contribution vs. Capital Credit Capital contributions epresent the net assets invested by a partner whereas capital credit represents the agreed capital for a partner. An ‘accounting issue will arise when the two do not equal. Such diference is accounted for by either: 1. Bonus method — a transfer of capital from one partner to another 2. Goodwill method an increase in the partner's contributed capital as a result of recording an unidentfiable However, goodwill method Is not allowed under PFRS, 3. Revaluation method — an increase in the partner's contributed capital as a result ofan adjustment to an identifiable 4. Additional investment ~ an increase in 2 partner's contributed capital as a result of addtional investment 5. Withdrawal — a decrease in a partner's contributed capital because of withdrawal It the partner's agreed capita is known, the partners will contribute an amount that wil be the same as their agreed capital. This method is known as net investment method.Valuation of Contribution 4. Assets ~ contributed by the - partners to the partnership should be valued in the following order of priority ‘a. Agtood values (Art. 1787 Civil Code) When the capita ora part thereof which a partner is bound to contribute consists of goods, ther appraisal must be made in the ‘manner prescribed in the contract of parinership, and in the abserice of stipulation, it shall be made by experts chosen by the ‘partners, and according to current prices, the subsequent changes thereof being for the account of the partnership. (Article 1787, Civ Code) Fair values (An. 1787 Civil Code & PFRS 2) 2. Liabilities - liablties attached to assets contributed by the partners are recognized only in the parinarship books to the extent that they are assumed by the partnership. When assumed by the partnership, contributed libilties operate to decrease the contributed capital of ‘the contributing partner; otherwise, the labiltes remain to be personal liablites of the cortributing partner. Labilties assumed by the partnership is valued in the folowing order of pronty: ‘3, Agreed values (Art. 1787 Civil Code) Fair value or Present value (Art 1787 Civil Code & PFRS 2), Ro-alignment of contribution with partnership agrooment PERS: “ v as Tec< TAC. wkPARTNERSHIP BOOKS TO BE USED Tndividuals with no existing business New Books Existing business and another existing Business or individual | New Books With no existing business Existing Books (Adjust the books fist to align with the agreement, then close the books) Capital Contribution vs. Capital Credit Capital contributions epresent the net assets invested by a partner whereas capital credit represents the agreed capital for a partner. An ‘accounting issue will arise when the two do not equal. Such diference is accounted for by either: 1. Bonus method — a transfer of capital from one partner to another 2. Goodwill method an increase in the partner's contributed capital as a result of recording an unidentfiable However, goodwill method Is not allowed under PFRS, 3. Revaluation method — an increase in the partner's contributed capital as a result ofan adjustment to an identifiable 4. Additional investment ~ an increase in 2 partner's contributed capital as a result of addtional investment 5. Withdrawal — a decrease in a partner's contributed capital because of withdrawal It the partner's agreed capita is known, the partners will contribute an amount that wil be the same as their agreed capital. This method is known as net investment method.ADVANCED FINANCIAL ACCOUNTING AND REPORTING ‘TOPIC 1.2 PARTNERSHIP OPERATION PARTNERSHIP OPERATION Primary accounting issues include: ‘a. Profit or oss allocation . Periodic adlustment ot capita ater operation Profit Division: Profit sharing agreement b._ Original capital Loss Division: Loss sharing agreement. b. How protitis divided Asbitrary Allocation: “The partners may provide forthe following methods of profit or loss distribution: 1. Salary ~ compensation for SERVICES: provided for regardless of the existence of profit because the provision of services by a partner is independent from earning a profit, Time proportioned ¥ Theories > Proprietary Theory i. The partnership is owned by the parties ji, Means distributing profit li, NOT considered as expenses > Entity Theory ~ considered as EXPENSE2. Interest ~ compensation for USE OF PARTNER'S CAPITAL; provided for regardiess of the existence of profit because the use of the pariner’s capital is independent from eaming a profit Time proportioned > Intorest = Capital x Rato x Time ¥ Can be based on different capital ratio > Average: Simple vs. Weighted Average Cay tomer i secre ‘3. Bonus compensation for GOOD PERFORMANCE; provided only when the partnership has profit and if there is @ positive balance in net income alter deducting any salaries and intorest. Given ifthe: Net income and Base is POSITIVE Tees] ie i neti “ War ineame | Aver Bela Bonus bases: ‘Aer expense | B'S. BIS ‘2. Before bonus: Bonus = Bonus rate x bonus factor b. After bonus: Bonus = Bonus rate x [bonus factor! (100% + bonus rate) ‘Special Allocation 4. istribution of profit in order of priority 2. Minimum profit sharing 3. Bonus, interest or salaries aro garded as expenseStatement of Partner's Capital Beginning / Original Capital Add: Additional Investment Less: Withdrawals Less: Drawings Add: Share in Net Income Less: Share in Net Loss Ending Capital xX XX (xx) (xx) Xx (xx) xX Ending Capital Balance before ClosingADVANCED FINANCIAL ACCOUNTING AND REPORTING. ‘TOPIC 1.3 PARTNERSHIP DISSOLUTION Dissolution is tho change in the relation of the partners causod by any partner being disassociated trom the business or by change in agreements ofthe partners. This may include: (RAID) 1. Admission of a new partner 2. Retirement or withdrawal of a partner 3. Death ofa partner 4. Incorporation of the partnership Note: Please refer lo your RFBT for the discussion of other modes of dissolution. Dissolution Accounting Procedures: 1. Adjust the capital for share in profit or loss during the period up to the date of dissolution 2, Adjust the capital for any other agreement ofthe partners 3. Record the dissolution ADMISSION OF NEW PARTNERS 1. Admission by purchase - this is a personal transaction between the new and existing partner(s) Methods: a. No adjustment or book value method - assets are not adjusted regardless of the amount paid by the new partner. A personal gain (loss) is datermined but nat recorded in the partnership books, ». With adjustment or revaluation method - assets of the existing partnership are adjusted based on the amount paid by the new partner ‘A revaluation upwards (downwards) are shared by the existing partners. 2, Admission by investment ths isa transaction between the new partner and the partnership Methods: Bonus method — bonus to old or new partners) of Revaluation method - revaluation existing partnership Goodwill method — gocell to new or existing partners, This method however is not alowed under PFRS. Withdrawal - withdrawal of assets as a resul of re-alignment ‘Additional investment — additional investment as a result of re-alignment2. Admission by investment this is a transaction between the new partner and the partnership Methods: ‘a, Bonus methed — bonus to old or new partner(s) of b. Revaluation method ~ revaluation existing partnersh © Goodwill method — goodwil to new or existing partners, This method however is not allowed under PFRS. d. Withdrawal — withdrawal of assets as a resul of re-alignment 2. Additional investment — additonal investment as a result of re-alignment RETIREMENT / WITHDRAWAL ‘Soonarios: Retiring or withdrawing partner's interest is sold 10 41. One or more of the remaining pariners ‘a. No adjustment or book value method assets are not adjusted regardiess ofthe amount paid tothe retring/withdrawing partner b. With adjustment or revaluation method assets of the existing partnership ate adjusted based on the amount paid to the tetirin/watherawing partner 2 Outside party (wth the consent ofall partners) ‘a. No adjustment or book value method - assets are not adjusted regardless of the amount paid to the retiring/vithdrawing partner b. With adjustment or revaluation method assets of the existing partnership are adjusted based on the amount paid to the retiing/withdrawing partner -3. Parinership Se ecto Natinest az PERE feces pte exe ae E Gonie pannel heed indedtie) FT eeeroaaram z Peano as easneeia {7 eee : over bpscna) oa parent ee z Pate Daan Seera_-— fi Balen cation acest meray rakes 2 eahie, Gunner din of zi oye ear actin eT mor en | — eee Metin meat EEE Fatma! {cst wiapae aah fetneer —t wees | ee isn 7. hs he cpt of deczased pamela stre profs tn he peed up the ae deat E ikstiee ech acai fekeion agh oattm mtect oe Tro sjused apa clr doceased paner sabe Varefered afl cco : Interest payable to the estate is an expense on the books of the continuing partners.BEFORE ad INCORPORATION WHO? Parinor | Tadao Sherwhodar ‘WHAT? Capital ‘Share capta, Procedures: “1. Adjust the capital the partners for share in profit or loss during the peried up to the date ot incorporation 2. Adjust the capita the partners for share in revaluation (i any) as atthe date of incorporation 3. The adjusted capital shall be transferred to share capital. Excess of the aggregate capital accounts aver the par value or stated value of shares of stocks issued to the partners is treated as share premium. ASSIGNMENT OF INTEREST A partner's interest may be assigned to: 4. Partnership - rules of retirement applies 2. Other partners - reclassification of capital 3. Third party ‘a. With consent of ether partners - rules on formation apply b. Without consent of otter partners - no accounting issue