Chapter 1

(The Accountancy Profession)

•Accounting Standard Council: Accounting is a service activity, and also provides

quantitative information especially to nancial in nature, economic entities, that is useful in
making economic decisions.

• Committee on Accounting Terminology ( American institute of certi ed public

accountants ): accounting is an Art of recording, classifying and summarizing in a signi cant
manner and in terms of money, transactions and events which is part of least of a nancial
character and interpreting the results.

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 Week 2
Topic 3: Preparation of Financial
Statements (PAS 1)
1. General purpose nancial
statements, its purpose,
structure, contents, and overall
consideration, complete set of
nancial statements
2. Statement of nancial position
3. Statement of pro t or loss and
other comprehensive Income
4. Statement of changes in equity
5 Statement of cash ows
6. Disclosure of accounting
policies

Topic 4: Statement of Cash Flows

(PAS 7)
1. De nition of Statement of Cash

J
Flows
2. Cash and Cash Equivalents
3. Operating, Investing and chapter 10
Financing Activities
4. Non-cash Investing and
Financing Activities
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April 18,2024
Pas I
Chapter 8

Financial statements: by which information accumulated and processed in nancial

accounting is periodically communicated to the users. (It is the main output of the nancial
accounting process. It shown the entity's nancial position and performance. )

General purpose nancial statements: simply referred to as nancial statements are those
intended to meet the needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs.(general purpose nancial statements are
directed to all common users and not to the speci c users.)

Components of nancial statements: Complete Set of Financial Statements

1. Statement of nancial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes In equity
5. Statement of cash ows
6. Notes, comprising a summary of signi cant accounting, accounting policies and other
explanatory notes.

Objective of nancial statements: to provide information about nancial position, nancial

performance and cash ows of an entity that is used to a wide range of users in making
economic decisions.
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 Purpose of general purpose nancial statement: provide information useful for decision-
making, and to demonstrate the accountability of the entity for the resources entrusted to it.

Frequency of reporting: shall be presented at least annually.

When an entity's end of reporting period changes and nancial statements are presented for
a period longer or shorter than one year, an entity shall disclose:
a. The period covered by the nancial statements.
b. The reason for using a longer or shorter period.
c. The Fact that amounts presented in the nancial statements are not entirely comparable.

Statement of nancial position: A formal statement showing the three elements comprising
nancial position, namely; assets liabilities, and equity.

Operating cycle: the time between the acquisition of assets

may mga assets and
And their realization in cash.
liabilities na nase-settle
Normal operating cycle of an entity is not clear and
as part of the entities normal
Has a duration of twelve months.
and presented
operating cycle .

as current even it expected

to be realized or settled beyond
12 months.
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Presentation of statement of nancial position:

A. Classi ed presentation shows distinctions between when and non current assets/lia.
B. Unclassi ed presentation (based on liquidity) shows no distinction between current is non
current items.

Current assets:
A. PAS I, paragraph 66, entity shall classify an asset as current when
a. Asset is cash or cash equivalent unless the asset is restricted to settle a liability for more
than twelve months after reporting period.
Note I:
Cash on hand
Cash in bank
Petty cash fund
And any cash equivalent
Cash equivalent are short term and highly liquid investments that are convertible into cash
and so near their maturity that they present insigni cant risk of changes in interest rate.
Ex. 3 months time deposit

B. The entity holds the asset primarily for the purpose of trading.
Ex. Trade receivable

C. The entity expects to realize the asset within 12 months after the reporting period.

D. The entity expect to realize the asset or intends to sell or consume it within the entity’s
normal operating cycle.
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Non-current assets:
Pas 1, paragraph 66, simply states that an entity shall classify all other assets, not classi ed
as current as non-current.

Non-current includes tangible, intangible and nancial assets of a long-term nature . it does
not prohibit the use of alternative descriptions as long as the meaning is clear.

Property, plant and equipment

PAS 16, paragraph 6, de nes property, plant and equipment "tangible assets which are held
by an entity for use in production or supply of goods and services, for rental to others, or for
administrative purposes, and are expected to be used during more than one period".

Most property, plant and equipment, except land, are presented at cost less accumulated
depreciation.

Long-term investments
The International Accounting Standards Committee de nes investment as "an asset held by
an entity for the accretion of wealth through capital distribution, such as interest, royalties,
dividends and rentals, for capital appreciation or for other bene ts to the investing entity such
as those obtained through trading relationships

Intangible assets
An intangible asset is simply de ned as an identi able nonmonetary asset without physical
substance.

The common examples of identi able intangible assets include patent, franchise, copyright,
lease right, trademark and computer software.

An example of an unidenti able intangible asset is goodwill.

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Other noncurrent assets

Other noncurrent assets are those assets that do not t into the de nition of the previously
mentioned noncurrent assets.

Examples of other noncurrent assets include long-term advances to of cers, directors,

shareholders and employees, or abandoned property and long-term refundable deposit.

Classi cation of liabilities

Liabilities are classi ed into two, namely current liabilities and noncurrent liabilities.

Current liabilities
PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:
a. The entity expects to settle the liability within the entity's normal 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 a right to defer settlement of the liability for at least twelve months
after the reporting period.

Noncurrent liabilities
The term "noncurrent liabilities" is also a residual de nition.
PAS 1, paragraph 69, provides that all liabilities not classi ed as current are classi ed as
noncurrent.
a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to company of cers
e. Long-term deferred revenue
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 De nition of equity
The term equity is the residual interest in the assets of the entity after deducting all of its
liabilities. Simply stated, equity means "net assets" or total assets minus liabilities.

The terms used in reporting the equity of an entity depending on the form of the business
organization are:
a. Owner's equity in a proprietorship
b. Partners' equity in a partnership
c. Stockholders' equity or shareholders' equity in a corporation

However, the term equity may simply be used for all busine entities. Under PAS 1, paragraph
7, the holders of instrumen classi ed as equity are simply known as owners.

Currently maturing long-term debt

A liability which is due to be settled within twelve months after the reporting period is
classi ed as current, even if:
a. The original term was for a period longer than twelve months.
b. An agreement to re nance or to reschedule payment on a long-term basis is completed
after the reporting period and before the nancial statements are authorized for issue.

However, if the re nancing on a long-term basis is completed on or before the end of the
reporting period, the re nancing is an adjusting event and the obligation is classi ed as non-
current liability.

Covenants
Covenants are often attached to borrowing agreements which represent undertakings by
the borrower.
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Covenants are actually restrictions on the borrower as to undertaking further borrowings,
paying dividends, maintaining speci ed level of working capital and so forth.

Under these covenants, if certain conditions relating to the borrower's nancial situation are
breached, the liability becomes payable on demand.

PAS 1. paragraph 74, provides that the liability is classi ed as current even if the lender has
agreed, after the reporting period and before the statements are authorized for issue, not to
demand payment as a consequence of the breach.

However, Paragraph 75 provides that the liability is classi ed as noncurrent if the lender has
agreed on or before the end of reporting period to provide a grace period ending at least
twelve months after the end of reporting period.

Statement of comprehensive income

COMPREHENSIVE INCOME
The change in equity during a period resulting from transactions and other events, other than
changes resulting from transactions with owners in their capacity as owners.
Includes:
A. components of pro t or loss
Pro t or loss
The total income less expenses, excluding the components of other comprehensive income.
B. components of other comprehensive income
OTHER COMMPREHENSIVE INCOME
Comprises items of income and expenses including reclassi cation adjustments that are not
recognized in pro t or loss as required or permitted by PFRS.
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Components:
A.OCI that will be reclassi ed subsequently to pro t or loss when speci c conditions are met.
1. Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income.
2.unrealized gain or loss on debt investment measured at fair value through other
comprehensive income.
3. Gain or loss from translation of the nancial statements of a foreign operation.
B. OCI that will not be reclassi ed subsequently to pro t or loss
4.prevaluation surplus during the year.
5. Unrealized gain or loss from derivative contracts designated as cash ow hedge.
6. "remeasurements" of de ned bene t plan, including actuarial gain or loss.
7. Change in fair value attributable to credit risk of a nancial liability designated at fair value
through pro t or loss.

Presentation of other comprehensive income

PAS 1 paragraph 82A, provides that the statement of comprehensive income shall present
line items for amounts of other comprehensive income during the period classi ed by nature.

The line items for amounts of OCI shall be grouped as follows.

PRESENTATION OF COMPREHENSIVE INCOME

1. TWO STATEMENTS

A. An income statement showing the components of pro t or loss.

B. A statement of comprehensive income beginning with pro t or loss as shown in the income
statement plus or minus the components of other comprehensive income
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 2. Single statement of comprehensive income:
This is the combined statement showing the components of pro t or loss and components of
other comprehensive income in a single statement.

3. Income statement:
A formal statement showing the nancial performance of an entity for a given period of time.

4. Statement of changes in equity

Shows the movements in the elements or components of the shareholders equity

5. Statement of cash ows:

Summarizes the operating, investing and nancing activities of an entity.

6. Notes, comprising a summary of signi cant accounting policies and other explanatory
notes

7.Disclosure of accounting policies:

Shall identify and describe the accounting principles followed by the entity and the methods of
applying those principles that materially affect the determination of nancial position, cash
ows, or results of operations. In general, the disclosure shall encompass important
judgments as to appropriateness of principles relating to recognition of revenue and allocation
of asset costs to current and future periods; in particular, it shall encompass those accounting
principles and methods that involve any of the following:

1. A selection from existing acceptable alternatives

2. Principles and methods peculiar to the industry in which the entity operates, even if such
principles and methods are predominantly followed in that industry
3. Unusual or innovative applications of GAAP.

Disclosure shall encompass

ofaccounting principles to
relates
important judgement accordance to principles
revenue and allocation asset costs
recognition of of
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 TOPIC 4
PAS 7

1. De nition of Statement of Cash Flows: A statement of cash ows is a component of

nancial statements summarizing the operating, investing and nancing activities of an
entity.
The purpose of this is to provide relevant information about cash receipts and casa payments
of an entity during a period. And to provide information about the cash receipts and cash
payments of the entity during the period.

2. Cash and cash equivalent: Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term highly liquid investments that are readily convertible to
known amount of cash and which are subject to an insigni cant risk of change in value.

PAS 7, paragraph 7, provides that an investment normally quali es as a cash equivalent

only when it has a short maturity of three months or less from date of acquisition. In other
words, the investment must be acquired three months or less before the date of maturity.
Ex. Three-month time deposit

3. Operating: the cash ows derived primarily from the principal revenue producing activities
of the entity.
• it is a result from transactions and other events that enter into the determination of net
income or loss.
a. Cash receipts from sale of goods
b.Cash receipts from royalties, rental, fees, commissions and other revenue
c. Cash payments to suppliers for goods purchased
d. Cash payments for selling, administrative and other expenses
e. Cash receipts and payments for securities held for trading
f. Cash payment or refund of income taxes unless can be identi ed speci cally with nancing
and investing activities

CFDPFTPR PAOTE
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 Investing activities: are the cash ows derived from the acquisition and disposal of long-
term assets and other investments not included in cash equivalent.

As a simple guide, investing activities include cash ows from transactions involving non-
operating assets.
a. Cash payments to acquire property, plant and equipment, intangible asset and other long-
term asset
b. Cash receipts from sale of property, plant and equipment, intangible asset and other long-
term asset
c. Cash payments to acquire equity or debt instruments of other entities (current and long-
term investments)
d.Cash receipts from sale of equity or debt instruments of other entities
e. Cash advances and loans to other parties other than advances and loans made by
nancial institution.
f. Cash receipts from repayment of advances and loans made to other parties-

Financing activities: are the cash ows derived from the equity capital and borrowings of
the entity.

Otherwise stated, nancing activities are the cash ows that result from transactions:
a. Between the entity and the owners - equity nancing
b. Between the entity and the creditors - debt nancing

As a simple guide, nancing activities include the cash ows from transactions involving
nontrade liabilities and equity of an entity.
a. Cash receipts from issuance of ordinary and preference shares
b. Cash payments to acquire treasury shares
c. Cash receipts from issuing bonds, loans, notes, mortgages and other short or long terın
borrowings
d. Cash payments for amounts borrowed
e. Cash payments by a lessee for the reduction of the outstanding principal lease liability
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 Noncash transactions: Noncash investing and nancing transactions shall be disclosed only
either in the notes to nancial statements or in a separate schedule or in a way that provides
all relevant information about these transactions.

The statement of cash ows is strictly a cash concept.

Accordingly, the following noncash are disclosed separately:

a. Acquisition of asset by issuing share capital
b. Acquisition of asset by issuing bonds payable
c. Conversion of bonds payable into share capital
d. Conversion of preference shares into ordinary shares

Interest paid and interest received: PAS 7, paragraph 33, provides that interest paid and
interest received shall be classi ed as operating cash ows because such items enter into the
determination of net income or loss.

Alternatively, interest paid may be classi ed as nancing cash ow because it is a cost of

obtaining nancial resources.

Alternatively, interest received may be classi ed as investing cash ow because it is a return

on investment.

For a nancial institution, interest paid and interest received are usually classi ed as
operating cash ows.

Dividends received

PAS 7, paragraph 33, provides that dividend received shall be classi ed as operating cash
ow because it enters into the determination of net income.

Alternatively, dividend received may be classi ed as investing cash ow because it is a

return
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on investment.

Dividends paid

PAS 7, paragraph 34, provides that dividend paid shall be classi ed as nancing cash ow
because it is a cost of obtaining nancial resources.

Alternatively, dividend paid may be classi ed as operating cash ow in order to assist users
to determine the ability of the entity to pay dividends out of operating cash ows.

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 April 22,2024
Topic 5
Inflow /out of Cash involving Current lia /Asset =
operating

Current Assets Non Current Lia

Investing
=
=

Noncurrent lia
Financing
= =

Financial instovement: contracts that gives rise to both nancial asset of one entity and a
nancial liability or equity instrument of another equity.
Topic 5: Financial Instruments
Framework (PFRS 9 and PAS 32)
1. What are nancial
instruments?
2. Receivables, classi cation,
recognition and measurements
3. Uncollectible or impaired
accounts
4. Recognition of Expected Credit
Losses
5. What are nancial assets?
nancial liability?
6. What is an equity instrument?
7. What are non – nancial
assets?
8. Recognition of nancial asset,
and liability
9. Financial assets and liabilities
classi cation, measurement,
reclassi cation, derecognition,
gains and losses
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 Topic 5
Financial instruments framework ( PFRS 9 and pas 32)

1. What are nancial instruments?

Financial instrument in pas 32, paragraph II de nes a nancial instrument as any contract
that gives rise to both a nancial asset of one entity and a nancial liability or equity
instrument of another equity.

There are characteristics of a nancial statement instrument ;

A. there should be a contract.
B. There are at least two parties involved in the contract.
C. Contract should provide a rise on asset in one entity and a liability or equity instrument to
the other party.

Financial asset:
A. Cash
B. Contractual right to receive cash or any other nancial asset from the other entity.
C. Contractual right to exchange nancial instrument with other entity under favorable
condition.
D. Equity instrument of other entity.

Examples of nancial asset:

a. Cash or currency.
b. Cash deposit in bank
C. Accounts receivable
d. Notes receivable
e. Loans receivable
f. Investment in shares or equity instrument.
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Non - nancial asset:
a. Physical assets, such as inventory and property, plant and equipment.
b. Intangible assets, such as patent and trademark.
c. Prepaid expenses

Financial liability contractual Obligation

a. to deliver cash or other nancial asset to another entity.
b. To exchange nancial instruments with another entity under conditions that are potentially
unfavorable.

Examples of nancial liabilities:

a. Accounts payable
b. Notes payable
c. Loans payable
d. Bonds payable

Non- nancial liabilities

a.deferred revenue and warranty obligation is not part of nancial liabilities, because the
out ow of economic bene t is the delivery of goods and service rather than cash.
b. Income tax is Hindi din part ng nancial liabilities because it was imposed by law and non
contractual.
c. Constructive obligation is not nancial liability because obligation doesn't arise from
contract.

Equity instrument is any contract that evidences as the residual amount of asset after
deducting liabilities.
Equity instruments:
a. Ordinary share capital
b. Preference share capital
c. Share options or share warrants
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 Compound nancial instrument
Pas 32, paragraph 28, contains both liability and an equity element from the
Perspective of the issuer.

Examples of compound nancial instrument

a. Bonds payable issued with share warrants.
b. Convertible bonds payable.

Accounting for compound instrument

Issuer of the nancial statement shall evaluate the terms of the instrument whether it contains
both a liability and an equity component. And if it contains both, then it shall be accounted for
separately as it is mandates on pas 32.

Bonds payable issued with the share warrants

Considered as compound nancial instrument. Accordingly, the proceeds from the issuance
of the bonds payable with share warrants shall be accounted for as partly liability and partly
equity.

Convertible bonds
A xed-income corporate debt security that yields interest payments but can be converted
into a predetermined number of common stock or equity shares.
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 CHAPTER 36
PFRS 9
Initial measurement of nancial asset
PFrs 9 paragraph 5.1.1, provides that at initial recognition, an entity shall measure a nancial
asset at fair value.

Transaction costs
Directly attributable to the acquisition of the nancial asset at fair value through other
comprehensive income shall be capitalized as cost of the nancial asset.

Subsequent measurement
PFRS 9, paragraph 5.2.1 after the initial recognition, an entity shall measure a nancial asset
a. (Fvpl) Fair value through profit or loss

b. (Fvoci) Fair value through other comprehensive income

.

c. Amortized cost

Equity and debt investments

Equity security or equity investment encompasses any instrument representing ownership
shares and right warrants or options to acquire ownership shares at a xed or determinable
price.

Debt security or dept investment is any security that represents a creditor relationship with an
entity.it has maturity date and maturity value.

Measurement of equity investments

1. Held for trading- at fair value through pro t or loss.
2. Not held for trading - any changes in fair value are shown in the income statement
3. Not held for trading - at fair value through other comprehensive income by irrevocable
election
4. All other investments in quoted equity instruments - at fair value through pro t or loss.
5. Investments in unquoted equity instruments- at cost.
6. Investments
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Measurement of debt investments

1. Held for trading - at fair value through pro t or loss

2. Held for collection of contractual cash ows - at amortized cost

3. Held for collection of contractual cash ows - at fair value through pro t or loss by
irrevocable designation or fair value option

4. Held for collection of contractual cash ows and for trading of the nancial asset at fair
value through other comprehensive income

5.Held for collection of contractual cash ows and for trading of the nancial asset at fair
value through pro t or loss by irrevocable designation or fair value option.

Trading securities (ts)

• the unrealized gain is classi ed in the income statement as other income.
• the unrealized loss is reported in the income statement as other expense.
• the trading securities or nancial assets held for trading should be shown as current asset.

Sale of trading securities

PFRS 9, paragraph 3.2.12, provides that disposal of nancial asset the difference between
the carrying amount and the consideration received is recognized as gain or loss on disposal
to be reported in the income statement.

Financial asset at FVOCI

PFRS 9, paragraph 5.7.5, provides that an entity may make an irrevocable election to present
in other comprehensive income or OCI subsequent changes in fair value of an equity
investment not held for trading.
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If the equity investment is held for trading, the election to present gain and loss in other
comprehensive income is not allowed.

FVOCI means the nancial asset is measured at fair value through other comprehensive
income.

PFRS 9, paragraph 5.1.1 a nancial asset measured at fair value through other
comprehensive income shall be recognized initially at fair value plus transaction lost directly
attributable to the acquisition

The unrealized gain is presented as component of other comprehensive income in the 2022
statement of comprehensive income.

The nancial asset is normally classi ed as non current asset.

Sale of equity investment - FVOCI

Gain or loss on disposal of equity investment measured at fair value through other
comprehensive income is recognized directly in retained earnings in accordance with PFRS
9, paragraph 5.7.1b.

Moreover, the cumulative gain or loss previously recognized in other comprehensive income
is also transferred to retained earnings in accordance with PFRS 9 Application Guidance
paragraph 5.7.1.

The amount recognized in other comprehensive income is not reclassi ed to pro t or loss
under any circumstances.

The sale of the nancial asset and the reclassi cation of the cumulative unrealized gain
previously recognized can be compounded in one entry.
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 Debt investment at amortized cost

PFRS 9, paragraph 4.1.2, provides that a nancial asset shall be measured at amortized cost
if both of the following conditions are met:
A. The business model is to hold the nancial asset in order to collect contractual cash ows
on speci ed date.
B. The contractual cash ows are solely payments of principal and interest on the principal
amount outstanding.

In other words, the business model is to collect contractual cash ows if the contractual cash
ows are solely payments of principal and interest.

Debt investment at fair value through OCI

PFRS 9, paragraph 4.1.2A, provides that nancial asset shall be measured at fair value
through other comprehensive income if both of the following conditions:

a. Business model achieved by collecting contractual cash ows and by selling or trading the
nancial asset.
b. The contractual cash ows are solely payments of principal and interest on the principal
outstanding.

On derecognition, the cumulative gain and loss recognized for debt investment at FVOCI
shall be reclassi ed to pro t or loss.
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 Chapter 18
PAS 28

Associate
It is de ned as an entity over which the investor has signi cant in uence.

Signi cance in uence

The power to participate in the nancial and operating policy decision of the associate but not
control or joint control over those policies.

Measurement of investment in associate

It is measured using the equity method of accounting.

Accounting procedures:
a. The investment is initially recognized at cost.
b. Carrying amount increased by investor's share of the pro t of the investee and decreased
by the investor’s share of the loss of the investee.
c. Dividends received from equity investe reduce the carrying amount of the investment
d. Note that the investment must be in ordinary shares.
e. If investor has signi cant in uence to investee then the investee is an associate

Under equity method, cash dividend is not an income but a reduction of investment.

Excess of cost over carrying amount

If investors pays more or less for an investment than the carrying amount of underlying net
assets.

Investors pay more than the carrying amount of the net assets acquired, the difference is
commonly known as excess of cost over carrying amount and maybe attributed by:
a. Undervaluation of the investee’s assets, such as building land and inventory.
b. Goodwill
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 ● If the excess is attributable to undervaluation of land, it is not amortized because the land
is non depreciable.
● If the excess is attributable to goodwill, it is included in the carrying amount of the
investment and not amortized.

Excess of fair value over cost

Pas 28, paragraph 32 any excess of the investor's share of the net fair value of the
associates identi able assets and liabilities over the cost of the investment is included as
income in the determination of the investors share of the associates pro t or loss in the period
in which the investment is acquired.

Discontinuance of equity method

Pas 28, paragraph 22 investors shall discontinue the use of the equity method from the date
that it ceases to have signi cant in uence over an associate.

Equity method not applicable

Pas 28, paragraph 17, provides that an investment in associate shall not be accounted for
using the equity method if the investor is a parent that is exempt from preparing consolidated
nancial statements or if all of the following apply.

a. The investor is a wholly-owned subsidiary, or a partially owned subsidiary of another entity

and the other owners do not object to the investor not applying the equity method.

b. The investor's debt and equity instruments are not traded in a public market or over the
counter market.

c. The investor did not le or it is not in the process of ling nancial statements with the SEC
for the purpose of issuing any class of instruments in a public market.
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d. The ultimate or any intermediate parent of the investor produces consolidated nancial
statements available for public use that comply with Philippine Financial Reporting Standards.

Impairment of investments in associates

provides clear guidance that its requirements apply to impairment losses of investments in
associates when the associate is accounted for using the equity method. However, in its
separate nancial statements, the investor may account for its investment in an associate at
cost.
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 Chapter 14
Inventories

INVENTORIES: are assets held for sale in the ordinary course of business, in the process of
production for such sale or in the form of materials supplies to be consumed in the production
process or in the rendering of services.

A trading concern is one that and sells goods the same form purchased. The term
"merchandise inventory" is generally applied to goods held by a trading concern.

A manufacturing concern is one that buys goods which are altered or converted into another
form before they are made available for sale.

Cost of inventories: shall comprise cost of purchase, cost of conversion and other cost
incurred in bringing the inventories to their present location and condition.

The cost of purchase of inventories comprises the purchase price, import duties and
irrecoverable taxes, freight, handling and other costs directly attributable to the acquisition of
nished goods and materials

Trade discounts, rebates and other similar items are deducted in determining the cost
purchase.

The cost of conversion of inventories includes cost directly related to the units of production
such as direct labor.

Other cost is included in the cost of inventories only to the extent that it is incurred in bringing
the inventories to their present location and condition.
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Excluded from cost of inventories
a. Abnormal amount of wasted material
b. Storage cost, unless necessary in the production process prior to a further production
stage. Thus, storage cost on goods in process is capitalized but storage cost on nished
goods is expensed
c. Administrative overhead
d. Distribution or selling cost

Cost formulas: PAS paragraph 25, expressly provides that the cost of inventories shall be
determined by using either:
a. First in, First out
b. Weighted average

The standard does not permit anymore the use of the last in, rst out (LIFO) as an alternative
formula in measuring cost of inventories.

First in, First out (FIFO)

The FIFO method assumes that the goods rst purchased are rst and consequently the
goods remaining in the inventory at the end of the period are those most recently purchased
or produced.
The rule is rst come, rst sold.

Weighted average: The cost of the beginning inventory plus the total cost of purchases
during the period is divided by the total units purchased plus those in the beginning inventory
to get a weighted average unit cost.
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Speci c identi cation means that speci c costs are attributed to identi ed items of
inventory.

The cost of the inventory is determined by simply multiplying the units on hand by the actual
unit cost.

PAS 2, paragraph 23, provides this method is appropriate for inventories that are segregated
for a speci c project and inventories that are not ordinarily interchangeable.

Measurement of inventory: PAS 2, paragraph provides that inventories shall be measured

at the lower of cost and net realizable value.
The measurement of inventory at the lower of cost and net realizable value is known as
LCNRV.

Net realizable value: is the estimated selling price in the ordinary course of business less the
estimated cost of completion and the estimated cost of disposal.

Accounting for LCNRV

If the cost is lower than net realizable value, there is no accounting problem because the
inventory is stated at cost and the increase value is not recognized.

● Net realizable is lower than cost, it is measured as net realizable value.

● The writedown of inventory to net realizable value is accounted for using the allowance
method.

Allowance method: The inventory is recorded at cost and any loss on inventory writedown is
accounted for separately.

The allowance method is also known as loss method because a loss account "loss method is
also tedown" is debited and a valuation account "allowance entonventory writedown" is
credited.
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 Chapter 22
Agriculture

De nition of terms: biological assets are living plants and animals.

Agricultural produce is the harvested product of an entity's biological assets.
Harvest is detachment of produce from a biological asset or the cessation of a biological
assets life processes.

Examples of biological assets:

Product after hares

Biological Asset
set

Agricultural Yarn carpet

produce
·

,
I : Sheep
2 . Trees in plantation forest
· Wool
·
Logs ,
lumber
3
.
3 .

Sugarcane plat ↑ Felled frees ·

Sugar
ttle
cattle Harvested
Y
4
Dairy ca
D
·
cane
airy Cheese
.

·
· Milk
5
.
5
PigS
Carcass
Sausage , cured ham
.

·
·

:
6 Tobacco plant
P
lant ·
Picked leaves
·
Cured tobacco

Agricultural activity or simply "agriculture"

Is the management by an entity of the biological transformation and harvest of biological
assets for sale or for conversion into agricultural produce into additional biological assets.

Examples of agricultural activity:

1. raising livestock
2. Annual or perennial cropping
3. Cultivating orchards and plantations
4. Floriculture
5. Aquaculture, including sh farming
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Recognition: An entity shall recognize a biological asset or agricultural produce when:

a. The entity controls the asset as a result of past event.

b. It is probable that future economic bene ts associated with the asset will ow to the entity.
c. The fair value or cost of the asset can be measured reliably.

Measurement: A biological asset shall be measured on initial recognition and at the end of
each reporting period at fair value less cost of disposal.

Agricultural produce harvested shall be measured at fair value less cost of disposal at the
point of harvest.

Agricultural produce growing on bearer plant is measured at fair value less cost of disposal.

Gain on biological asset and agricultural produce: A gain or loss arising on initial
recognition of a biological asset at fair value less cost of disposal and any subsequent
changes in fair value less cost of disposal shall be included in pro t or loss.

● A loss may arise on initial recognition of a biological asset because cost of disposal is
deducted in determining fair value less cost of disposal of a biological asset.
● A gain may arise on initial recognition of a biological asset, for example, when a calf is
born.
● A gain may arise on initial recognition of agricultural produce as a result of harvesting
which shall also be included in pro t or loss.

Agricultural land is not deemed a biological asset.

The agricultural land may be classi ed either as property, plant and equipment or investment
property for purposes of measurement.
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Bearer plants: Under IFRS, bearer plants should be accounted for in the same way as
property, plant and operation of bearer plants is similar to that of manufacturing.

● A bearer plant is a living plant used in the production of agricultural produce, expected to
bear produce for more than one period and has a remote likelihood of being sold as
agricultural produce, except as incidental scrap.
● Bearer plants are used solely to grow agricultural produce over several periods. At the
end of their productive life, the bearer plants are usually scrapped.
● A bearer plant that no longer bears produce is commonly cut down and sold as scrap at
the end of the productive life.

Examples of bearer plants

a. Trees that produce fruits are bearer plants while the fruits growing on the trees are
agricultural produce until harvested.
● In an oil palm plantation, a coconut tree is the bearer plant and the fruit is the agricultural
produce.
● When immature, the coconut fruit can be harvested for drinking, known as "buko" juice in
the vernacular.
● When mature, the coconut fruit can be processed to give oil, charcoal from the hard shell
and copra from the dried coconut esh.
b. In a vineyard, the grape vines are the bearer plants and the grapes are the agricultural
produce.

Not considered bearer plants

a. Trees grown to be harvested and sold as log or lumber are not bearer plants.
b. Annual crops which do not bear produce for more than one period are held solely to be
harvested as agricultural produce such as corn and rice are not bearer plants.
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Agricultural produce growing on bearer plants: The agricultural produce as it grows is
measured at the end of each reporting period prior cost of disposal. to harvest at fair value
less
● The agricultural produce growing on bearer plant is classi ed as biological asset.
● Once harvested, the agricultural produce is measured at fair value cost of disposal at the
point of harvest.
● The fair value less cost of disposal at the point of harvest is the deemed cost of inventory.
● The harvested product is recorded as inventory and recognized os gain from agricultural
produce.

Bearer animals
Bearer animals, like bearer plants, may be held solely for the produce that they bear.
However, bearer animals continue to be reported as biological assets.

Animal-related recreational activities: Managing recreational activities, for example, game

parks and zoos, is not agricultural activity.
● The reason is that there is no management of the biological asset but simply control of
the number of animals.
● Accordingly, animals related to recreational activities shall be accounted for as property,
plant and equipment.