INTERMEDIATE ACCOUNTING

CASH AND CASH EQUIVALENTS

Cash - is measured at face value.

To qualify as cash presented as a current asset, cash items must be generally unrestricted.

Cash items include:

• Cash on hand (cash currently on hand, undeposited collections, customers and managers' checks, bank drafts and
money orders)

• Cash in bank without restrictions on withdrawals

• Working funds (petty cash fund, change fund, dividend fund, payroll fund) Cash equivalents

• Short-term highly liquid investments that are readily convertible into cash.

• Apply the THREE-MONTH rule for cash equivalents where the duration is from the date of purchase up to the date of
maturity.

• Three months’ time deposits and commercial papers

• BSP treasury bills purchased three months before maturity

Temporary investments of cash:

- If excess cash is invested to earn interest income, the actual cash invested shall be classified as follows:
• With a term of three months or less is cash equivalents
• More than three months but less than a year is short-term investments as current assets but not as cash
• More than one year is long-term investments as noncurrent assets, most certainly not
as cash.

Compensating balances:

• No legal restrictions to withdraw is cash

• With legal restrictions on withdrawal is cash held as compensating balance (for short-term) or long-term
investment, depending if the related loan made is short-term or
long-term.

Postdated checks – (payer/drawer) issued check and made company entry, but the payee did not yet withdraw; check that is
written w/ future date on it, and can't be cashed until that date; shall be reverted back to cash as at the end of the reporting
period.

Cash short or over:

- Cash overages (Cash count > recorded cash)

o Cash overages are initially credited to CSO account and debited to cash.
o These overages are then debited to the CSO account where the amount of the overage is credited
to the "reason" for the overage.
- Cash shortage (Cash count < recorded cash)
o Cash shortages are initially debited to CSO account and credited to cash.
o These shortages are then credited to the CSO account where the amount of the shortage is
debited to the "reason" for the shortage.

Internal control on cash (imprest system)

• Cash receipts > deposited altogether

• Cash payments > made through checks

Petty cash fund - payments for small amount where check payments are seen impracticable.

• Imprest fund system - has fixed balance, and the fund is replenished w/ exact amount of disbursements (only
recorded when the fund is replenished); often used for incidental expenses, like flowers for departing employee

Advantages: cash control, ease of use, reduced risk of fraud

 o can be vulnerable to mistakes in recording disbursements

Replenished - to restore cash in petty cash amount shown in petty cash general ledger account

• Fluctuating fund system - allows the fund balance to fluctuate based on expenses incurred; disbursements (recorded
immediately, and replenishment may not equal disbursements); allows for more flexibility
BANK RECONCILIATION STATEMENT

Cash-in-bank

• Cash receipts > deposited altogether

• Cash payments > made through checks

Sources of details about cash-in-bank

- Cash-in-bank ledger account of the entity

- Bank statement issued by the bank

Bank statement: increase in entity's cash: credit

decrease in entity's cash debit

Ledger : increase in cash : debit

decrease in cash credit

Bank reconciliation statement - prepared by entity to reconcile the cash-in-bank account balance in entity's books versus balance
as reported by the bank in bank statement.

A. Bank balance reconciling items:

Deposits in transit (+)

o Cash that has been received by an entity and was recorded in the cash-in-bank account balance as a deposit.
However, this deposit that has been sent to the bank is not yet processed and posted by the bank, thus not
reflecting in the bank statement.

Outstanding checks (-)

o Checks that the company has issued and was recorded as a credit entry in the entity's cash- in-bank account.
However, these checks were not yet presented for payment and has not yet cleared from the bank account from
which it is drawn.

Bank errors (+ or -)

o Erroneous debits and credits by the bank in the entity's account.

B. Ledger balance reconciling items:

Credit memos (+)

o Items credited by the bank to the bank account of the entity not yet recorded by the firm in their books. These
include notes receivable collected by the bank in behalf of the entity and interest earned in putting their cash in
the bank.

Debit memos (-)

o Items charged against the company's bank account not yet recorded in the company's ledger. These includes NSF
(not sufficient funds) check which are checks deposited but were returned by the bank because the source
account has insufficient balance. It also includes bank service charges.

Book errors (+ or -)

o Erroneous debits and credits of cash in the entity's ledger.

TRADE AND OTHER RECEIVABLES

Receivables - claims that entity expects to be settled by customers/other parties through receipt of cash; amount collectible from
sale of goods/services on account, or as evidenced by a note of promise to pay; receivables arising from other income such as
interest, commissions, and rentals (accrued revenue; loans and advances to company officers and employees, and all other claims.

Measurement at initial recognition - Original Transaction Price

Subsequent measurement - Net realizable value

Cash Discounts

A. Gross method B. Net method

Uncollectible accounts - Accounts receivable, at times, becomes uncollectible due to various reasons

Methods:

1. Direct write-off method 2. Allowance method

Notes Receivable – receivable that, supported by notes of promise to pay (promissory note)

2 Kinds:

1. Interest-bearing: carries a stated rate of interest

2. Noninterest-bearing: interest forms part of the face amount

Loans Receivable - amount owed from a debtor to a creditor; creditors are usually banks/other financial institutions; a financial
asset from loan transaction granted by entity to a borrower

Initial measurement - Fair value + transaction costs

Subsequent measurement - Amortized cost

Receivable Financing - the way entities obtain cash to finance their operations should their cash balances deemed to be lacking.
Receivable financing can take on the following forms:

1. Pledge - receivable serve as collateral for a loan arrangement.

2. Assignment - transfer of rights in an account receivable in consideration for a loan.
3. Factoring - sale of accounts receivable.
4. Notes receivable discounting - obtaining cash before maturity date of the loan through discounting the note to a financing
company.
INVENTORIES 1

According to IAS 2, paragraph 6, inventories are assets:

a. held for sale in the ordinary course of business;

b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process or in the rendering of services.

When can the company say the inventory is theirs?

OWNERSHIP > When the company has the title, regardless of the location of the inventory

1. Items currently on hand (warehouse, store selling area)

2. Items purchased FOB shipping point currently in transit
3. Items sold FOB destination currently in transit
4. Items out on consignment to other entities
5. Items currently in the hands of sales agents that are unsold

FOB Shipping Point

- Title is passed to the buyer at the point of shipment.

- The buyer is responsible for the delivery charges.

FOB Destination

- Title is passed to the buyer upon receipt of goods.

- The seller is responsible for the delivery charges.

Consignment - marketing technique whereby a company (called the consignor) requests another entity to allow them to sell their
goods, serving as agent (called the consignee).

Goods out on consignment - company's inventory

Goods held on consignment - inventory of original owner

The consignor pays commissions to the consignee.

Systems of inventory recording:

A. Periodic Inventory System - facilitates the physical counting of inventories at the end of an accounting period, whereby
the updated balances of inventories is based on this physical count.
o Applicable for low-value inventories
B. Perpetual Inventory System - facilitates recording of inventory movement in every purchase and sale through the use of
stock cards. Inventory records are updated in every transaction.
o Applicable for high-value inventories

Cost of inventories

Inventories shall be recorded at:

1. Cost of purchase (purchase price, duties, irrecoverable taxes, freight and handling)
2. Cost of conversion (for manufacturing, direct labor and overhead)
3. Cost related to bringing the inventory items to their present location and condition

LCNRV According to IAS 2, paragraph 9.

- Inventories shall be measured at the lower of cost and net realizable value.

Inventory cost allocation and flow

1. Specific identification method (par. 23)

2. First-in, first out (FIFO, par. 25)
3. Weighted average - periodic (par. 25)
4. Moving average - perpetual (par. 27)
o Last-in, first-out (LIFO) Not permitted under IAS 2.

Methods of inventory estimation:

1. Gross profit method 2. Retail inventory method
INVENTORIES 2 (COST FLOW METHODS)

Specific Identification Method

- According to IAS 2, paragraph 23, the cost of inventories of items that are not ordinarily interchangeable and goods or
services produced and segregated for specific projects shall be assigned by using specific identification of their
individual costs.
First-in, First-out (FIFO)

- According to IAS 2, paragraph 25, the cost of inventories (other than those dealt with in paragraph 23), shall be assigned
by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all
inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost
formulas may be justified.
Weighted Average Method

- Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of
similar items at the beginning of a period and the cost of similar items purchased or produced during the period.
Moving Average Method

- According to IAS 2, paragraph 27, under the weighted average cost formula, the cost of each item is determined from
the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or
produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is
received, depending upon the circumstances of the entity.

PERIODIC - Weighted average

PERPETUAL - Moving average

INVENTORIES 3 (Lower of Cost and Net Realizable Value/LCNRV)

How to measure inventory?

- According to IAS 2, paragraph 9, inventories shall be measured at the lower of cost and net realizable value.

LCNRV

- Accountants shall apply the principle of conservatism (accountant shall lean towards the less favorable outcome for the
entity) in the measurement of inventories. An asset shall not be measured and reported at an amount higher than what
is likely to be realized from sale or use.

What is NRV for inventories?

- Net realizable value is the difference between the estimated selling price for all inventories and the cost of storing or
preparing the goods for sale. For example, a retailer purchases large pieces of expensive furniture as inventory, and the
company has to build a display case and hire a contractor to carefully move the furniture to the buyer's home. These
extra costs are subtracted from the selling price to compute the NRV (Investopedia).

Inventory writedown:

Cost < NRV measure inventory at cost

Cost > NRV measure inventory at NRV with recognition of the decrease in inventory value

- Inventories shall be measured at LCNRV applied by individual item.

INVENTORIES 4 (INVENTORY ESTIMATION)

Inventory estimation - immediate info about inventory is sometimes needed where an immediate physical count is deemed to be
impossible due to some circumstances.

To estimate inventory value, the entity can either use:

1. gross profit method; or 2. retail inventory method

Uses of inventory value estimates:

- Interim Financial Statements

- Inventory reasonableness
- Catastrophe and other extraordinary circumstances

Gross profit method - allows expressing and using a gross profit percentage based on either cost of goods sold or net sales to
estimate inventory value.

• Gross profit rate based on sales

• Gross profit rate based on cost
Retail inventory method - inventory estimation method that applies retail (sales price) information to determine its relationship
with costs (cost ratio) and ultimately, the estimated ending inventory. The retail inventory method is applicable for industries that
has numerous product offers and variety of goods that monitoring of costs would be burdensome like groceries and department
stores.

Methods of retail inventory estimation:

1. Conservative method - considers all effects of price markups but does not consider price markdowns.
2. Average method - considers both price markups and price markdowns
3. FIFO method - cost-to-retail ratio is only based on current period purchases which excludes beginning inventory based on
the claim that markups and markdowns are applied only to purchases during the period and not on beginning invento
PROPERTY, PLANT, AND EQUIPMENT 1

Property, Plant, and Equipment

- According to IAS 16, paragraph 6, property, plant and equipment are tangible items that: a. are held for use in the
production or supply of goods or services, for rental to others, or for administrative purposes; and b. are expected to be
used during more than one period.

Examples of PPE: Land, Buildings, Machineries, Office Furniture, Automobile, Office Equipment

Initial recognition

- According to IAS 16, paragraph 7, the cost of an item of property, plant and equipment shall be recognized as an asset if,
and only if: a. it is probable that future economic benefits associated with the item will flow to the entity; and b. the cost
of the item can be measured reliably.

Spare parts and other equipment

- According to IAS 16, paragraph 8, items such as spare parts, stand-by equipment and servicing equipment are recognized
in accordance with IAS 16 when they meet the definition of property, plant and equipment.

Unit of measure for recognition

- According to IAS 16, paragraph 9, IAS 16 does not prescribe the unit of measure for recognition, ie what constitutes an
item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to an entity's
specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies,
and to apply the criteria to the aggregate value.

Measurement at recognition (par.15 & 16)

- An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.

The cost of an item of property, plant and equipment comprises:

a. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and
rebates.
b. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating
in the manner intended by management.
c. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the
obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during
a particular period for purposes other than to produce inventories during that period.

What are directly attributable costs? (par. 17)

Examples of directly attributable costs are:

a. costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and
equipment;
b. costs of site preparation;
c. initial delivery and handling costs;
d. installation and assembly costs;
e. costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items
produced while bringing the asset to that location and condition (such as samples produced when testing
equipment); and
f. professional fees.

What are not PPE costs? (par. 19)

Examples of costs that are not costs of an item of property, plant and equipment are:

a. costs of opening a new facility;

b. costs of introducing a new product or service (including costs of advertising and promotional activities);
c. costs of conducting business in a new location or with a new class of customer (including costs of staff training); and
d. administration and other general overhead costs.

Types of PPE acquisition:

 1. Purchase
2. Self-construction
3. Deferred payment contracts
4. Exchange

Depreciation - process of allocating cost of PPE as expense in a systematic manner in relation to the periods that are expected the
entity is able to benefit from usage of asset.

Depreciation methods:

1. Straight-line method
2. Units-of-production
3. Sum of the years' digit
4. Declining and double declining balance
5. Group and Composite depreciation for multiple PPE items.
PROPERTY, PLANT, AND EQUIPMENT 2 (Modes of Acquisition and Borrowing Cost)

Types of PPE acquisition:

1. Purchase - acquiring PPE items by purchase is by far one of most common methods of asset acquisition; cash price equivalent
of the PPE (is cost of the item at recognition date); includes cash paid plus any other directly attributable costs like freight
and installation.
Asset account XXX
Cash XXX
2. Self-construction - entities may opt to construct their own PPE (e.g. office building) for administrative and other purposes;
total construction costs (materials used, labor costs incurred, overhead) will be the basis for the asset cost.

3. Deferred payment contracts - when entities opt not to directly involve direct cash outlay in acquisition of PPE, entity may
enter into a deferred payment contract using, for example, notes payable.

4. Exchange - entity may opt to exchange nonmonetary assets, e.g. old equipment for a new equipment or one asset for another
asset; exchanges of assets might have commercial substance or no commercial substance; considered to have commercial
substance if future cash flow (timing and amount of cash flows) change as result of exchange transaction; if 2 parties to
exchange experience changes in economic position, the transaction has commercial substance.
➢ If the exchange has commercial substance:
• Gains and losses should be recognized.
➢ If the exchange has no commercial substance, and no cash is received:
• Defer gains and recognize losses.
➢ If the exchange has no commercial substance, and cash is received:
• Recognize partial gain and recognize full loss.
IAS 23 Borrowing Costs

- Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part
of the cost of that asset. Other borrowing costs are recognized as an expense. A qualifying asset is an asset that necessarily
takes a substantial period of time to get ready for its intended use or sale. Manufacturing plant Power generation facility
Intangible assets Investment property

Specific borrowing

- To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall
determine the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the temporary investment of those borrowings (par. 12).
General borrowing

- Sometimes, funds are borrowed generally (and not specifically for the asset construction). The amount of capitalizable
borrowing cost is equal to the average carrying amount of the asset during the period multiplied by a capitalization rate
or average interest rate. The capitalizable borrowing cost, however, shall not exceed the actual interest incurred.

-
PROPERTY, PLANT, AND EQUIPMENT 2 (Depreciation and Depletion)

Depreciation - systematic allocation of asset's depreciable amount over its useful life. Part of manufacturing overhead when PPE
is used in relation to the production of goods. Part of operating expense when PPE is used for administrative purposes.

When do we depreciate?

- Depreciation starts when the asset is available for use and stops when an asset is derecognized. If an asset is classified as
held for sale, depreciation shall be stopped.

Items to consider in depreciation:

1. Useful life - period of time over which the asset is expected to be used by the entity; the number of hours it is expected
to work/number of units it is able to produce.
2. Residual value - amount expected to be recovered by entity after asset's useful life.
3. Depreciable amount - amount that is being subject to depreciation, w/c is represented by difference between the asset
cost and residual value.

Depreciation methods:

1. Straight-line method, composite and group method

2. Depreciation based on service hours of the asset

3. Depreciation based on output

4. Sum-of-the-years' digit method

5. Declining balance method

6. Double declining balance method

Composite and group method - when companies have numerous assets, it will be difficult for them to calculate asset depreciation
one-by-one; entities can apply either the composite method or group method.

Composite method - items that are dissimilar in nature are depreciated as a single unit.

Group method - items that are similar in nature are depreciated as single unit.

Wasting assets or natural resources - assets held by an entity of economic value produced by nature such as oil and gas reserves
and mineral deposits.

Cost of wasting assets:

1. Acquisition cost - price paid for the acquisition of the property that holds the natural resource.
2. Exploration cost - amount expended to locate a natural resource before the extraction of mineral resources.
3. Development cost - cost incurred to extract natural resources.
4. Restoration cost - cost to be incurred to restore the property to its original condition
PROPERTY, PLANT, AND EQUIPMENT 2 (Subsequent measurement of PPE)

Subsequent measurement of PPE

- entity can choose from two models in measuring PPE after initial recognition:
1. Cost Model Revaluation Model - if entity chooses the cost model of subsequent PPE measurement, the PPE shall be
presented at cost less accumulated depreciation and accumulated impairment losses.
2. Revaluation model – if entity chooses revaluation model of subsequent PPE measurement, PPE shall be presented at
its revalued amount.
Revalued amount - fair value of asset at date of revaluation, less subsequent accumulated depreciation and
subsequent accumulated impairment losses.

Asset impairment - entity should not carry their asset at more than its recoverable amount. If the asset's carrying amount is greater
than its recoverable amount, the difference should be recognized as impairment loss. An assessment by an entity is required if
there is an indication of asset impairment (may come from external or internal sources)

External sources of asset impairment

- The external information that should be considered which may indicate impairment include:
o Decline in asset value: more so than normal wear and tear
o Changes in the entity's environment; technological, market, economic or legal conditions.
o Increase in market interest rate, this will affect the asset's value in use.
o Carrying amount of net assets: If this is greater than the market capital of a company, there may be impairment.
- Internal sources of asset impairment:
o Evidence of obsolescence or physical damage
o Changes to the asset's use, including
o Asset becoming idle
o Plan to discontinue or restructure the operation to which the asset belongs
o Plan to dispose of the asset before previously expected date
o Reassessing the useful life as finite rather than infinite
o Poor performance

Recoverable amount - asset's recoverable amount is the higher amount between the asset's:

1. Fair value less cost of disposal

Cost of disposal are costs incurred by an entity to ready the asset for eventual sale. This includes legal costs, stamp duties,
and other transaction taxes.
2. Value in use
Value in use is the calculated present value of estimated future cash flows associated in an asset.

Change in accounting estimate

- When there is a significant change in the pattern of the future economic benefits from the asset, an entity may opt to
change the asset's useful life or depreciation method, whatever is deemed fit.
- Both changes shall be applied by the entity prospectively*.
- *current and future periods
INTANGIBLE ASSETS

Intangible assets - identifiable, non-monetary asset w/out physical substance. An asset is a resource that is controlled by the entity
as a result of past events and from which future economic benefits are expected.

Critical Attributes of an intangible asset are:

1. Identifiability
o An intangible asset is identifiable when it: is separable (capable of being separated and sold, transferred,
licensed, rented, or exchanged, either individually or together with a related contract) or arises from contractual
or other legal rights, regardless of whether those rights are transferable or separable from the entity or from
other rights and obligations.
2. control (power to obtain benefits from the asset)
3. future economic benefits (such as revenues or reduced future costs)

Examples of intangible assets:

- patented technology, computer software, databases and trade secrets

- trademarks, trade dress, newspaper mastheads, internet domains
- video and audiovisual material (e.g. motion pictures, television programmes)
- customer lists
- mortgage servicing rights
- licensing, royalty and standstill agreements
- import quotas
- franchise agreements
- customer and supplier relationships (including customer lists)
- marketing rights

Modes of acquisition:

- by separate purchase
- as part of a business combination
- by a government grant
- by exchange of assets
- by self-creation (internal generation)

Recognition criteria IAS 38 requires an entity to recognize an intangible asset, whether purchased or self-created (at cost) if, and
only if:

• it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and
• the cost of the asset can be measured reliably.
- If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38
requires the expenditure on this item to be recognized as an expense when it is incurred.

Subsequent measurement - entity must choose either the cost model or the revaluation model for each class of intangible asset.

Cost model - after initial recognition, intangible assets should be carried at cost less accumulated amortization and
impairment losses.

Revaluation model - intangible assets may be carried at a revalued amount (based on fair value) less any subsequent
amortization and impairment losses only if fair value can be determined by reference to an active market.

Classification Intangible assets are classified as:

A. Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the
entity.

Intangible assets with indefinite useful lives

- An intangible asset with an indefinite useful life should not be amortized.

- Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to
support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment
from indefinite to finite should be accounted for as a change in an accounting estimate.
- The asset should also be assessed for impairment in accordance with IAS 36.
 B. Finite life: a limited period of benefit to the entity.

Intangible assets with finite lives

- The cost less residual value of an intangible asset with a finite useful life should be amortized on a systematic basis
over that life.

The amortization method should reflect the pattern of benefits. If the pattern cannot be determined reliably, amortize by
the straight-line method.

The amortization charge is recognized in profit or loss unless another IFRS requires that it be included in the cost of
another asset.

The amortization period should be reviewed at least annually.

- The asset should also be assessed for impairment in accordance with IAS 36.

Subsequent expenditures

- Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognized in
the carrying amount of an asset. Subsequent expenditure on brands, mastheads, publishing titles, customer lists and
similar items must always be recognized in profit or loss as incurred.

Patent

- exclusive right granted by the government to an inventor enabling him to control the manufacture, sale, or other use of
invention for a specified period of time.
- The legal life of a patent is 20 years in accordance with RA 8293 or the Intellectual Code of the Philippines.

A patent can be acquired by purchase, in which the cost comprises the purchase price, import duties, nonrefundable purchases
taxes, and directly attributable costs.

If internally developed, costs include licensing and related legal fees in securing the rights.

A patent shall be amortized over the legal life or its useful life, whichever is shorter.

If a competitive patent is acquired to protect an original patent, the cost shall be amortized over the remaining life of the old
patent.

Trademark

- symbol, sign, slogan, or name used to mark a product to distinguish it from other products.
- The cost of a trademark, when purchased, includes the purchase price and directly attributable costs.
- If internally developed, the cost of a trademark includes the expenditures required to establish it - filing fees, registry fees,
and other costs.
- The legal life of a trademark is 10 years and renewable for periods of 10 years each. With this, an entity can classify a
trademark as an intangible asset with an indefinite useful life.
- The cost of a trademark, then, is not amortized but should be tested for impairment.

Copyright

- exclusive right granted by the government to the author, composer, or artist enabling the grantee to publish, sell or
otherwise benefit from the literary, musical, or artistic work.
- The term of protection for copyright is during the life of the author and for 50 years after death.
- A copyright should be reviewed for impairment by assessing at the end of each reporting period whether there is an
indication of impairment.

Franchise

- Under the agreement of a franchise, one party called the franchisor grants certain rights to another party called the
franchisee.
- The cost of the franchise includes the lump-sum payment for the acquisition of the franchise plus directly attributable
costs necessary for the intended use, such as legal fees and expenses incurred in connection with the acquisition of the
right.
- If the franchise is granted for a definite period, the cost is amortized over its useful life or definite period, whichever is
shorter.
 - If the franchise is granted indefinitely, the cost is not amortized but tested for impairment, at least annually.

Others: Broadcasting license; Airline rights; Customer list database (acquired)

Goodwill - arises when earnings exceed normal earnings by reason of good name, capable staff and personnel, high credit standing,
reputation for fair dealings, reputation for superior products, favorable location, and a list of regular customers.

- It is the most intangible of all intangible assets.

- Goodwill standing alone cannot be bought and sold, and is only identified with the entity as a whole

Kinds:

1. Internal goodwill shall not be recognized as an asset.

2. Purchased goodwill arises when a busines is purchased. It is recognized as an asset because it is paid for.
- Goodwill shall not be amortized because its useful life is indefinite. However, it should be tested for impairment at least
annually or whenever there is an indication of impairment.
- If the purchase price transferred in purchasing an entity is greater than the fair value of identifiable net assets, the
difference is goodwill.
- If the purchase price transferred in purchasing an entity is less than the fair value of identifiable net assets, the difference
is a gain on bargain purchase, recognized in profit or loss.
INVESTMENTS IN EQUITY AND DEBT SECURITIES

Investments - assets held by an entity for accretion of wealth through distribution, such as interest, royalties, dividends, and rentals,
for capital appreciation or other benefits to the investing entity such as those obtained through trading relationships. (International
Accounting Standards Board)

- held for diverse reasons such as:

a. For accretion of wealth or regular income through interest, dividends, royalties, and rentals;
b. For capital appreciation as in the case of investments in land and real estate held for appreciation and direct
investments in gold, diamonds, and other precious commodities;
c. For ownership control as in the case of investment in subsidiaries and associates;
d. For meeting business requirements as in the case of sinking fund, preference share redemption fund, plant
expansion fund, and other noncurrent funds; and
e. For protection as in the case of interest in life insurance contract in the form of cash surrender value.

Security – interest/share in a debt/equity of another entity that is represented in financial instrument, w/c is being dealt on capital
markets.

• Equity securities - represent ownership interest such as ordinary and preference shares; include rights such as warrants,
put options, and call options, gives the holder certain rights to acquire/dispose of any ownership interest, at an agreed or
determinable price.

• Debt securities - financial assets that represent the terms of loan between the creditor and the lender. These typically
include the maturity value, interest rate payments, and a maturity date.

Equity investments

• An entity shall recognize a financial asset or a financial liability in its statement of financial position when and only when
the entity becomes a party to the contractual provisions of the instrument.

• These financial instruments shall be initially measured at fair value (all financial instruments at fair value through profit
or loss) or at fair value plus transaction cost (all other financial instruments at amortized cost or fair value through other
comprehensive income)

Financial assets at Fair Value through Profit or Loss (FAFVPL) – investments, measured at initial recognition and every
reporting date at fair value. Transaction costs at initial recognition do not form part of the initial cost and are charged to
expense

Financial assets at Fair Value through Other Comprehensive Income (FAFVOCI) – investments, shall be recorded upon
acquisition at purchase price (presumably the fair value) plus directly attributable transaction costs

Investment in associate According to IAS 28, Investments in Associates and Joint Ventures, an associate is an entity over which the
investor has significant influence.

- If an entity holds, directly or indirectly (e.g., through subsidiaries), 20% or more of the voting power of the investee, it is
presumed that the entity has significant influence unless it can be clearly demonstrated that this is not the case.
Conversely, if the entity holds, directly or indirectly (e.g., through subsidiaries), less than 20% of the voting power of the
investee, it is presumed that the entity does not have significant influence unless such influence can be clearly
demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from
having significant influence.

Significant influence

The existence of significant influence by an entity is usually evidenced in one (1) or more of the following ways:

a. representation on the board of directors or equivalent governing body of the investee;

b. participation in policy-making processes, including participation in decisions about dividends or other distributions;
c. material transactions between the entity and its investee;
d. interchange of managerial personnel; or
e. provision of essential technical information.
- An entity with significant influence over an investee shall account for its investment in an associate using the equity
method.
Debt securities - any securities issued by company (usually publicly listed companies) and sold to investor, w/ expectation to gain
a future return. These have a maturity date and maturity value

Examples: Corporate bonds; Bangko Sentral ng Pilipinas (BSP) treasury bills; Government securities; Commercial
papers; and Preference share with mandatory redemption date or are redeemable at the option of the
holder.

- entity shall classify financial assets as subsequently measured at amortized cost, fair value through other comprehensive
income, or fair value through profit or loss.

Financial assets shall be measured at amortized cost if both conditions are met:

a. The financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual
cash flows; and
b. The contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.

Financial assets shall be measured at fair value through other comprehensive income if both conditions are met:

a. The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows
and selling financial assets; and
b. The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.

Financial assets shall be measured at fair value through profit or loss if both conditions are met:

a. The financial instrument is a derivative financial asset, and

b. The company designates the financial asset at fair value through profit or loss.
INVESTMENT PROPERTY AND OTHER NONCURRENT ASSETS

Investment Property - property (land or a building or part of a building or both) held to earn rentals/for capital appreciation/both.
Examples of investment property:

- land held for long-term capital appreciation

- land held for a currently undetermined future use
- building leased out under an operating lease vacant
- building held to be leased out under an operating lease property that is being constructed or developed for future use as
investment property

Recognition Investment

- property should be recognized as an asset when it is probable that the future economic benefits that are associated with
the property will flow to the entity, and the cost of the property can be reliably measured.

Measurement subsequent to initial recognition

- IAS 40 permits entities to choose between: a fair value model, and a cost model. One method must be adopted for all of
an entity's investment property. Change is permitted only if this results in a more appropriate presentation.
- IAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model.

Fair value model Investment property

- remeasured at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Gains or losses arising from changes in the
fair value of investment property must be included in net profit or loss for the period in which it arises.
- Fair value should reflect the actual market state and circumstances as of the balance sheet date. The best evidence of fair
value is normally given by current prices on an active market for similar property in the same location and condition and
subject to similar lease and other contracts. In the absence of such information, the entity may consider current prices
for properties of a different nature or subject to different conditions, recent prices on less active markets with adjustments
to reflect changes in economic conditions, and discounted cash flow projections based on reliable estimates of future
cash flows.

Cost model

- After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16
Property, Plant and Equipment - cost less accumulated depreciation and less accumulated impairment losses.

Classification transfers

- Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more
of the following:
o commencement of owner-occupation (transfer from investment property to owner- occupied property)
o commencement of development with a view to sale (transfer from investment property to inventories)
o end of owner-occupation (transfer from owner-occupied property to investment property)
o commencement of an operating lease to another party (transfer from inventories to investment property)
o end of construction or development (transfer from property in the course of construction/development to
investment property)

Selling?

- When an entity decides to sell an investment property without development, the property is not reclassified as inventory
but is dealt with as investment property until it is derecognized.

Rules to apply on transfers

- for a transfer from investment property carried at fair value to owner- occupied property or inventories, the fair value at
the change of use is the 'cost' of the property under its new classification.
- for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be applied up to
the date of reclassification. Any difference arising between the carrying amount under IAS 16 at that date and the fair
value is dealt with as a revaluation under IAS 16
- for a transfer from inventories to investment property at fair value, any difference between the fair value at the date of
transfer and it previous carrying amount should be recognized in profit or loss
 - when an entity completes construction/development of an investment property that will be carried at fair value, any
difference between the fair value at the date of transfer and the previous carrying amount should be recognized in profit
or loss.

When an entity uses the cost model for investment property, transfers between categories do not change the carrying amount
of the property transferred, and they do not change the cost of the property for measurement or disclosure purposes.

Disposal - investment property should be derecognized on disposal or when the investment property is permanently withdrawn
from use and no future economic benefits are expected from its disposal. The gain or loss on disposal should be calculated as the
difference between the net disposal proceeds and the carrying amount of the asset and should be recognized as income or expense
in the income statement.

Other noncurrent assets

The following assets are classified as long-term assets since they are funds set aside for noncurrent purposes:

1. Sinking fund or redemption fund - It is a fund set aside for the liquidation of long-term debt, more particularly long-term
bonds payable. As a rule, this type of fund is classified as a non-current asset. However, if the bond is payable for which
the sinking fund was set aside becomes due within 12 months after the end of the reporting period, the sinking fund is
reclassified as a current asset.
2. Preference share redemption fund - It is a fund set aside by the company to ensure the eventual redemption of the
preference share.
3. Plant expansion fund - It is a fund set aside in anticipation of future acquisition of additional property because of expanded
or increased volume of operations.
4. Contingency fund - It is a fund set aside to meet obligations that may arise from contingencies like pending lawsuits or
taxes dispute.
5. Insurance fund - It is a fund set aside to meet obligations that may arise from certain risks not insured, such as fire,
typhoon, explosion, and other similar casualties.