Chap. 7-9 Summary For Written Report

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Chapter 7 Financial Instruments

Definition of Terms
Equity instrument any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
Derivative a financial instrument that derives its value from the movement in commodity price, foreign
exchange rate and interest rate of an underlying asset or financial instrument.
Financial instrument is any contract that gives rise to both a financial asset of one entity and a
financial liability or equity instrument of another entity.
Financial asset is any asset that is:
1. Cash;
2. An equity instrument of another entity;
3. A contractual right to receive cash or another financial asset from another entity;
4. A contractual right to exchange financial instruments with another entity under conditions that
are potentially favorable; or
5. A contract that will or may be settled in the entitys own equity instruments.
Financial liability is any liability that is:
1. A contractual obligation:
i. To deliver cash or another financial asset to another entity; or
ii. To exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavorable to the entity.
2. A contract that will or may be settled in the entitys own equity instruments.

Characteristics of a financial Instrument:


a. There must be a contract;
b. There are at least two parties to the contract; and
c. The contract shall give rise to both a financial asset of one party and a financial liability or equity
instrument of another party.

I. Cash and other Financial Assets

Initial Recognition of Financial Asset


An entity shall recognize a financial asset in its statement of financial position when it becomes a party
to the contractual provisions of the instrument.
Initial Measurement of Financial Assets
When a financial asset at fair value through surplus or deficit is recognized initially, an entity shall
measure it at its fair value. In the case of a financial asset not at fair value through surplus or deficit, the
financial asset is recognized at fair value plus transaction costs that are directly attributable to the
acquisition, issue or disposal of the financial asset. If the financial asset is measured at fair value through
surplus or deficit, transaction costs are expensed outright.

Categories of Financial Assets


a. Financial asset at fair value through surplus or deficit. A financial asset at fair value through surplus
or deficit is one that is either:
1. A held-for-trading asset, or
2. An asset designated as at fair value through surplus or deficit on initial recognition. Any
financial asset can be classified in this category if its fair value can be reliably estimated.
b. Held-to-maturity investments. These are non-derivative financial assets with fixed or determinable
payments and fixed maturity that an entity has the positive intention and ability to hold to maturity.
c. Loans and receivables. These are non-derivative financial assets with fixed or determinable payments
and are not quoted in an active market. Examples of financial assets to be recognized in this category
are loans, investments in debt instruments, trade receivables and bank deposits.
d. Available-for-sale financial assets. Available-for-sale financial assets are those nonderivative financial
assets that are designated as available for sale or are not classified as loans and receivables, held-to-
maturity investments or financial assets at fair value through surplus or deficit.

Subsequent Measurement of Financial Assets


After initial recognition, an entity shall measure financial assets, including derivatives that are assets, at
their fair values, without any deduction for transaction costs it may incur on sale or other disposal,
except for:
a. Loans and receivables and Held-to-maturity investments, which shall be measured at amortized
cost using the effective interest method; and

b. Investments in equity instruments that do not have a quoted market price in an active market
and whose fair value cannot be reliably measured and derivatives that are linked to and must be
settled by delivery of such unquoted equity instruments, which shall be measured at cost.

Impairment of Financial Assets


An entity shall assess at the end of each reporting period whether there is any objective evidence that a
financial asset or group of financial assets is impaired. If any such evidence exists, the entity shall
measure the amount of loss as the difference between the carrying amount of the asset and the present
value of estimated future cash flows discounted at the financial assets original effective interest rate.
The carrying amount of the asset shall be reduced either directly or through use of an allowance
account. The amount of the loss shall be recognized in surplus or deficit.
In case of Accounts Receivable, the Allowance for Impairment shall be provided in an amount based on
collectibility of receivable balances and evaluation of such factors as aging of accounts, collection
experiences of the agency, expected loss experiences and identified doubtful accounts.

Derecognition of Financial Assets


Derecognition is the process of removing a previously recognized financial asset, liability or equity from
the statement of financial position.
An entity shall derecognize a financial asset when, and only when:
a. The contractual rights to the cash flows from the financial asset expire or are waived; or
b. The entity transfers the financial assets provided the following conditions exist:
1. The entity transfers substantially all the risks and rewards of ownership of the financial assets;
and
2. The entity has not retained control over the financial assets.
The derecognition of financial assets is subject to the provisions of P.D. No. 1445 on the writing off of
receivables and other policies issued by the COA.

Transfer of Financial Assets


An entity transfers a financial asset if, and only if, it either:
a. Transfers the contractual rights to receive the cash flows of the financial asset; or
b. Retains the contractual rights to receive the cash flows of the financial asset, but assumes a
contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the
following conditions:
1. The entity has no obligation to pay amounts to the eventual recipients unless it collects
equivalent amounts from the original asset. Short-term advances by the entity with the right of
full recovery of the amount lent plus accrued interest at market rates do not violate this condition;
and
2. The entity is prohibited by the terms of the transfer contract from selling or pledging the
original asset other than as security to the eventual recipients for the obligation to pay them cash
flows.
3. The entity has an obligation to remit any cash flows it collects on behalf of the eventual
recipients without material delay. In addition, the entity is not entitled to reinvest such cash flows,
except for investments in cash or cash equivalents during the short settlement period from the
collection date to the date of required remittance to the eventual recipients, and interest earned
on such investments is passed to the eventual recipients.
When an entity transfers a financial asset, it shall evaluate the extent to which it retains the risks and
rewards of ownership of the financial asset. In this case:
a. If the entity transfers substantially all the risks and rewards of ownership of the financial asset, the
entity shall derecognize the financial asset and recognize separately as assets or liabilities any rights and
obligations created or retained in the transfer.
b. If the entity retains substantially all the risks and rewards of ownership of the financial asset, the
entity shall continue to recognize the financial asset.
c. If the entity neither transfers nor retains substantially all the risks and rewards of ownership of the
financial asset, the entity shall determine whether it has retained control of the financial asset.
In this case:
1. If the entity has not retained control, it shall derecognize the financial asset and recognize separately
as assets or liabilities any rights and obligations created or retained in the transfer.
2. If the entity has retained control, it shall continue to recognize the financial asset to the extent of its
continuing involvement in the financial asset.

II. Financial Liability

Recognition of a Financial Liability


An entity shall recognize a financial liability in its statement of financial position when it becomes a party
to the contractual provisions of the instrument.

A financial instrument that does not explicitly establish a contractual obligation to deliver cash or
another financial asset may establish an obligation indirectly through its terms and conditions.
a. A financial instrument may contain a non-financial obligation that must be settled if, and only if, the
entity fails to make distributions or to redeem the instrument. If the entity can avoid a transfer of cash or
another financial asset only by settling the nonfinancial obligation, the financial instrument is a financial
liability.
b. A financial instrument is a financial liability if it provides that on settlement the entity will deliver
either:
1. Cash or another financial asset; or
2. Its own shares whose value is determined to exceed substantially the value of the cash or other
financial asset. Although the entity does not have an explicit contractual obligation to deliver cash or
another financial asset, the value of the share settlement alternative is such that the entity will settle in
cash. In any event, the holder has in substance been guaranteed receipt of an amount that is at least
equal to the cash settlement option.

Initial Measurement of Financial Liabilities


When a financial liability is recognized initially, an entity shall measure it at its fair value plus, in the case
of a financial liability not at fair value through surplus or deficit, transaction costs that are directly
attributable to the issue of the financial liability. (Par. 45, PPSAS 29)
For financial liability designated initially as at fair value through surplus and deficit, the related
transactions costs are expensed immediately. For financial liability measured at amortized cost,
transaction costs are included in the initial measurement.
Transaction costs are incremental costs that are directly attributable to the issue or disposal of a financial
liability. An incremental cost is one that would not have been incurred if the entity had not issued or
disposed the financial liability. Transaction costs include: (a) fees and commissions paid to agents,
advisers, brokers and dealers; (b) levies by regulatory agencies and securities exchanges; and (c) transfer
taxes and duties.

Subsequent Measurement of Financial Liabilities


After initial recognition, an entity shall measure a financial liability at amortized cost using the effective
interest method. The amortized cost of a financial liability is the amount at which the financial liability
is measured at initial recognition minus the principal repayments, plus or minus the cumulative
amortization using the effective interest method of any difference between the initial amount and the
maturity amount, and minus any reduction (directly or through the use of an allowance account) for
impairment or uncollectibility. (Par. 10, PPSAS 29)
The difference between the face amount and present value of the financial liability is amortized through
the interest expense using the effective interest method. The difference between the face amount and
present value is either discount or premium on the issue of financial liability.

III. Equity Instrument


The term equity instrument may be used to denote the following:
a. A form of unitized capital such as ordinary or preference shares;
b. Transfers of resources (either designated or agreed as such between the parties to the transaction)
that evidence a residual interest in the net assets of another entity; and/or
c. Financial liabilities in the legal form of debt that, in substance, represent an interest in an entitys net
assets.
Equity security encompasses any instrument representing ownership shares and right, warrants or
options to acquire or dispose of ownership shares at a fixed or determinable price. It represents an
ownership interest in an entity. This includes ordinary share, preference share and other share capital.
The government securities issued by the BTr are debt securities in the form of treasury bills and treasury
notes. They have maturity date and maturity value. Other examples include Bangko Sentral ng Pilipinas
commercial papers and preference shares with mandatory redemption date or are redeemable at the
option of the holder.

IV. Derivatives
Derivative is a financial instrument that derives its value from the movement in commodity price, foreign
exchange rate and interest rate of an underlying asset or financial instrument.
PPSAS 29 provides the following characteristics of a derivative financial instrument:
a. Its value changes in response to the change in a specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other
variable, provided in the case of a non-financial variable that the variable is not specific to a party to the
contract (sometimes called the underlying);
b. It requires no initial net investment or an initial net investment that is smaller than would be required
for other types of contracts that would be expected to have a similar response to changes in market
factors; and
c. It is settled at a future date.
The very purpose of derivatives is risk management. Risk management is the process of identifying the
desired level of risk, identifying the actual level of risk and altering the latter to equal the former.

V. Hedging
Hedging is a method of offsetting a potential financial loss or the structuring of a transaction to reduce
risk involving financial instruments. Hedge accounting recognizes the offsetting effects on surplus or
deficit of changes in the fair values of the hedging instrument and the hedged item.
Par. 96 of PPSAS 29 provides the 3 types of hedging relationships:
a. Fair value hedge: a hedge of the exposure to changes in fair value of a recognized asset or liability or
an unrecognized firm commitment, or an identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk and could affect surplus or deficit.
b. Cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is attributable to a
particular risk associated with a recognized asset or liability (such as all or some future interest payments
on variable rate debt) or a highly probable forecast transaction and (ii) could affect surplus or deficit.
c. Hedge of a net investment in a foreign corporation.

Two Components of Hedging


Hedging Instrument a designated derivative or a designated non-derivative financial asset or non-
derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value
or cash flows of designated hedged item.
Hedged Item an asset, liability, firm commitment, highly probable forecast transaction or net
investment in a foreign operation that (a) exposes that entity to risk of changes in fair value or future
cash flows and (b) is designated as being hedged.
VI. Presentation of Financial Instruments
The issuer of a financial instrument shall classify the instrument, or its component parts, on initial
recognition as a financial asset, a financial liability or an equity instrument in accordance with the
substance of the contractual arrangement and the definitions of a financial asset, a financial liability and
an equity instrument.
Forms and Reports to be Prepared and Maintained
The following schedules and forms shall be prepared and maintained by the agencies relative to their
financial instruments accounts:
a. To be prepared by all National Government Agencies
1. Schedule of Accounts Payable
2. Schedule of Accounts Receivable
3. Registry of Accounts Written-Off
b. The BTr shall maintain records on loan availments and repayments, grant availments and utilization,
and guaranteed loans using its computerized application.

Chapter 8 Inventories

Definition of Terms
Current Replacement Cost is the cost the entity would incur to acquire the asset on the reporting date.
Fair Value is the amount for which the same inventory could be exchanged between knowledgeable
and willing buyers and sellers in the marketplace.
Inventories are assets:
1. In the form of materials or supplies to be consumed in the production process (examples: materials
and supplies awaiting use in the production process);
2. In the form of materials or supplies to be consumed or distributed in the rendering of services
(examples: office supplies, ammunitions, maintenance materials);
3. Held for sale or distribution in the ordinary course of operations (examples: merchandise purchased
by an entity and held for resale, or land and other property held for sale, agricultural produce); or
4. In the process of production for sale or distribution (examples: goods purchased or produced for
distribution to other parties for no charge or for a nominal charge like educational books produced by a
health authority for donation to schools).
Net Realizable Value is the estimated selling price in the ordinary course of operations, less the
estimated costs of completion and the estimated costs necessary to make the sale, exchange, or
distribution. It is the net amount that an entity expects to realize from the sale of inventory in the
ordinary course of operations.
Perpetual Inventory System is a system that continually tracks all additions to and deletions from
inventory

Cost of Inventories
The cost of inventories shall comprise all costs of purchase, costs of conversion (materials, labor and
overhead) and other costs incurred in bringing the inventories to their present location and condition,
excluding abnormal amounts of wasted materials, labor, other production and selling costs,
administrative overheads that do not contribute to bringing inventories to their present location and
condition. Trade discounts, rebates, and other similar items are deducted in determining the costs of
purchase.

Measurement
Inventories shall be measured as follows:
a. At the lower of cost and net realizable value. However, where inventories are acquired through a non-
exchange transaction, their costs shall be measured at their fair value as at the date of acquisition;
b. At the lower of cost and current replacement cost where they are held for distribution at no charge or
for a nominal charge, or for consumption in the production process of goods to be distributed at no
charge or for a nominal charge; or
c. In accordance with PPSAS 27, inventories comprising agricultural produce that an entity has harvested
from its biological assets shall be measured on initial recognition at their fair value less costs to sell at
the point of harvest.

Cost Formulas
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 the specific identification of their
individual costs. Specific identification of costs means that specific costs are attributed to identified
items of inventory. This is appropriate treatment for items that are segregated for a specific project,
regardless of whether they have been bought or produced. However, specific identification of costs is
inappropriate when there are large numbers of items of inventory that are ordinarily interchangeable. In
such circumstances, the method of selecting those items that remain in inventories could be used to
obtain predetermined effects on the surplus or deficit for the period.
For interchangeable items, cost is determined using the weighted average cost formula.

Weighted Average Method


The weighted average method shall be used for costing inventories. This method calls for the re-
calculation of the average cost of all items in stock after every purchase. Therefore, the weighted
average cost is the total cost of all units subsequent to the latest purchase, divided by their total number
of units available. The Accounting Division/Unit shall be responsible in computing the cost of inventory
on a regular basis as shown in the Supplies Ledger Card (SLC).
Recognition as an Expense
When inventories are sold, exchanged, or distributed, their carrying amount shall be recognized as an
expense in the period in which the related revenue is recognized. If there is no related revenue, the
expense is recognized when the goods are distributed or the related service is rendered.
The amount of any write-down to net realizable value and all losses of inventories shall be recognized as
an expense in the period the write-down or loss occurs. Reversal of any write-down of inventories
arising from increase in net realizable value shall be recognized as a reduction in the amount of
inventories recognized as an expense in the period in which the reversal occurs.

Impairment
An asset is said to be impaired if the cost of inventories held for sale is higher than the net realizable
value or the cost of inventories held for distribution or consumption is higher than the current
replacement cost. The difference between the cost and net realizable value/current replacement cost
shall be recognized as an expense in the financial statement.

Perpetual Inventory Method


Supplies and materials purchased for inventory purpose shall be recorded using the perpetual inventory
system, resulting in a more accurate inventory records and a running total for the cost of goods sold in
each period. The system requires accounting records to show the amount of inventory on hand at all
times through the maintenance of the SLC by the Accounting Division/Unit and Stock Card (SC) by the
Supply and/or Property Division/Unit for each item in stock. Regular purchases shall be coursed through
the inventory account and issues thereof shall be recorded as they take place except for supplies and
materials purchased out of PCF for immediate use or on emergency cases which shall be charged directly
to the appropriate expense accounts.

Semi-expendable Property
Tangible items below the capitalization threshold of P15,000 shall be accounted as semi-expendable
property. The following policies apply as follows:
a. Semi-expendable property which were recognized as PPE shall be reclassified to the affected accounts.
b. These tangible items shall be recognized as expenses upon issue to the end-user.

Accountability over Semi-expendable Property


Inventory Custodian Slip (ICS) shall be issued to end-user of Semi-expendable Property to establish
accountability over them. Accountability shall be extinguished upon return of the item to the Property
and Supply Division/Unit or in case of loss, upon approval of the relief from property accountability.

Disclosure and Presentation. The financial statements shall disclose:


a. The accounting policies adopted in measuring inventories, including the cost formula used;
b. The total carrying amount of inventories and the carrying amount in classifications appropriate to the
entity;
c. The carrying amount of inventories carried at fair value less costs to sell;
d. The amount of inventories recognized as an expense during the period;
e. The amount of any write-down of inventories recognized as an expense in the period;
f. The amount of any reversal of any write-down that is recognized in the statement of financial
performance in the period;
g. The circumstances or events, such as changed economic circumstances, that led to the reversal of a
write-down of inventories; and
h. The carrying amount of inventories pledged as security for liabilities.

Inventory Accounting System


The Inventory Accounting System consists of the system of monitoring, controlling and recording of
acquisition and disposal of inventory. The system starts with the receipt of the purchased inventory
items. The requesting office in need of the inventory items, after the Property and Supply Division/Unit
has determined that the items are not available in stock, shall prepare and cause the approval of the
Purchase Request (PR). Based on the approved PR and after accomplishing all the required procedures
adopting a particular mode of procurement, the agency shall issue a duly approved Contract or Purchase
Order (PO).
Procedures relative to the obligation of allotment to cover the funding requirement of the Contract/PO
and payment of the inspected and accepted deliveries are discussed under Chapter 3-Budget Execution,
Monitoring and Reporting, and Chapter 6-Disbursements of this Manual.
Physical count/inventory, which is required semi-annually, is an indispensable procedure for checking the
integrity of property custodianship.

Inventory Accounting Sub-Systems


The sub-systems for inventory accounting are as follows:
a. Receipt, Inspection, Acceptance and Recording Deliveries of Inventory Items
b. Requisition and Issue of Inventory Items
c. Transfer and/or Disposal of Inventory Items

Procedures in the Receipt, Inspection, Acceptance and Recording of Deliveries of Inventory


Items
Delivery of Inventory Items
1. Property and /or Supply Division/Unit
Property and/or Supply Custodian signs Received portion of the original and Copy 2 of the
Delivery Receipt (DR). Files the original and returns Copy 2 of the DR to the
Supplier/Procurement Service.
2. Property and /or Supply Division/Unit
Property and/or Supply Custodian prepares Inspection and Acceptance Report (IAR) in four (4)
copies. Forwards Copies 1-4 of IAR, original of DR, and Copy 2 of approved PO to the Property
Inspector for inspection of deliveries.
3. Inspection Committee
Property Inspector inspects and verifies items as to quantity and conformity to specifications
based on the DR and approved PO. If delivery is not in conformity to the specifications or
delivery is incomplete, indicates notation on the IAR that the deliveries are not in conformity to
specifications and/or terms agreed under the approved PO and returns the Copies 1-4 of IAR,
original of DR, and Copy 2 of approved PO to the Property and/or Supply Division/Unit. If
delivery is in order, indicates the date of inspection, places in the box for Inspected, verified
and found in order as to quantity and specifications, and signs the Inspection portion of the
IAR. Retains Copy 2 of IAR and forwards Copies 1, 3 and 4 of IAR, original of DR and Copy 2 of PO
to the Property and/or Supply Custodian for acceptance of goods delivered.
4. Property and /or Supply Division/Unit
For deliveries not conforming to specification and/or terms of the PO, Property and/or Supply
Custodian receives Copies 1-4 of IAR, original of DR and Copy 2 of PO. Returns the items to the
supplier and requires the latter to comply with the agreed specifications and/or terms of the PO.
For deliveries in order, indicates the date of acceptance, places in the box for Complete as
to quantity and specifications or Partial (pls. specify quantity), and signs the Acceptance
portion of the IAR. Stores the items delivered for issue to the Requisitioning Office.
5. Property and /or Supply Division/Unit
Property and/or Supply Custodian forwards Copy 3 of IAR and photocopy of PO and DR to the
Accounting Division/Unit for recording the received/accepted goods and posting to the SLC, and
Copy 4 of IAR and copy 2 of PO to the Stock Card Keeper for recording in the SCs.
Note 1 Distribution of the IAR shall be as follows:
Original Property and/or Supply Division/Unit (to be attached to the DV, together with the
original DR)
Copy 2 Inspector/Inspection Committee
Copy 3 Accounting Division/Unit (attached in setting up of payables)
Copy 4 Property and/or Supply Division/Unit file
6. Accounting Division/Unit
Receiving/Releasing Staff records in the logbook the receipt of Copy 3 of IAR and photocopy of
PO and DR and forwards to the Accounting Staff concerned for the preparation of JEV.
7. Accounting Division/Unit
Based on Copy 3 of the IAR and photocopy of PO and DR, Accounting Staf prepares JEV to
recognize the receipt of inventory items in the books of account (GL). Signs the Prepared by
portion of the JEV and forwards the JEV and SDs to the Chief Accountant/Head of the Accounting
Division/Unit for approval.
8. Accounting Division/Unit
Chief Accountant/Head of Accounting Division/Unit reviews correctness of the journal entries
and signs on Certified Correct by portion of the JEV. Forwards JEV and SDs to Designated Staff
for recording in the GJ.
9. Property and /or Supply Division/Unit
Property and/or Supply Custodian prepares DV. Attaches the original IAR, Copy 2 of DR, Original
copy of PO and photocopy of PR. Forwards documents to the Accounting Division/Unit for the
processing of DV.
Note 2 For the preparation of DV, refer to Seq. 1, Sec. 12, Chapter 6-Disbursements of this
Manual.
Note 3 For succeeding activities on processing of payment for delivered inventory items and
equipment, refer to Sec. 15, Procedures in Recording Obligations, Chapter 3-Budget Execution,
Monitoring and Reporting, and Sections 12 and 48, Procedures in Disbursements by
Checks/LDDAPADA, Chapter 6-Disbursements of this Manual.
Note 4 For purchases made through the Procurement Service (PS), the DV shall be prepared on
the basis of the approved Agency Procurement Request (APR). The payment shall be made
directly to the PS.
Maintenance of SLC
10. Accounting Division/Unit
SLC Keeper records receipt of delivered/accepted goods and posts necessary information to the
SLC based on the Copy 3 of IAR, copy of PO and DR.

Procedures in the Requisition and Issue of Inventory Items


1. Requesting Office
Requesting Personnel prepares Requisition and Issue Slip (RIS) in three (3) copies.
Note 1 The RIS shall be distributed as follows:
Original Accounting Division/Unit
Copy 2 Requesting Office
Copy 3 Property and/or Supply Division/Unit
2. Requesting Office
Requesting Personnel fills up all the necessary information except for the Issue column. Initials
in the Requested by portion and forwards the RIS to authorized official for review.
3. Requesting Office
Head/Authorized Official determines the reasonableness of the quantity and nature of item/s
being requested and ensures that the same does not exceed the planned usage for the period.
Signs the Approved by portion of the RIS.
4. Requesting Office
Requesting Personnel receives signed RIS and forwards to the Property and/or Supply
Division/Unit for determination of availability of stocks and/or withdrawal of inventory items
requested.
5. Property and /or Supply Division/Unit
Property and/or Supply Custodian receives RIS from Requesting Personnel. Reviews and verifies
the completeness of information. Indicates a in the Stock Available? Yes column, if item/s
being requisitioned is/are available on stock, or X in the Stock Available? No column if not
available. If item/s requisitioned is/are available, issues the item/s requisitioned, indicates the
quantity issued in the Issued-Quantity column and any remarks in the Issued-Remarks column,
and signs the Issued by portion. If item/s requisitioned is/are not available, returns the RIS to
the Requisitioning Office for the preparation of the PR.
6. Requesting Office
Requesting Personnel receives supplies requested and signs in the Received by portion of the
RIS.
Note 2 For items not available on stock, prepares the PR in accordance with the instructions
provided at the back of the form.
7. Property and /or Supply Division/Unit
Property and/or Supply Custodian files permanently in numerical order Copy 3 of RIS and
temporarily the originals of RIS for the preparation of Report of Supplies and Materials Issued
(RSMI).
8. Property and /or Supply Division/Unit
Property and/or Supply Custodian retrieves the original copies of RIS from temporary file,
ensures the completeness of the RIS and prepares the RSMI in two (2) copies at the end of the
day.
9. Property and /or Supply Division/Unit
Property and/or Supply Custodian signs the Certified by portion of the RSMI.
10. Property and /or Supply Division/Unit
Stock Card Keeper receives signed RSMI and forwards to the Accounting Division/Unit the
original copy of RSMI together with original RIS. Files Copy 2 of RSMI.
11. Accounting Division/Unit
Accounting Staf receives the original copy of RSMI and original RIS. Checks and verifies the
completeness of information. Retrieves SLC from file and fills up the To be filled up in the
Accounting Division/Unit portion of RSMI. Records the RSMI in the SLC and signs in the Posted
by/date portion.
12. Accounting Division/Unit
Accounting Staf prepares JEV in two (2) copies based on the RSMI to record the issue of stock.
13. Accounting Division/Unit
Accounting Staf signs the Prepared by portion of the JEV and forwards JEV and SDs to the
Chief Accountant/Head of the Accounting Division/Unit for review and approval.
14. Accounting Division/Unit
Chief Accountant/Head of Accounting Division/Unit reviews correctness of the accounting entry
and completeness of SDs. If in order, signs the Certified Correct by portion of the JEV and
forwards Copies 1 and 2 of JEV to the Bookkeeper. If not in order, returns the JEV and SDs to the
Accounting Staff concerned for correction.
15. Accounting Division/Unit
Bookkeeper receives signed JEV supported with the RSMI and RIS and records JEV in the GJ. Files
copy 2 of JEV.
Note 3 For succeeding activities, refer to Section on the Preparation and Submission of Trial
Balances, Financial Statements and Other Reports in Chapter 19-Financial Reporting of this
Manual.
16. Accounting Division/Unit
Accounting Staf receives JEV and SDs for the correction of accounting entry. Returns the JEV and
SDs to the Chief Accountant/Head of the Accounting Division/Unit for approval.

Records, Forms and Reports to be prepared and/or maintained


Stock Card (SC) shall be used to record all receipts and issues of supplies and the balance in quantity at
any time. It shall be maintained by the Property and/or Supply Division/Unit for each item in stock. The
IAR, RIS, PO and DR serve as the original sources of information for making entries on the card.
Supplies Ledger Card (SLC) shall be used to record materials received, issued and the balance both in
quantity and amount at any time. It shall be maintained by the Accounting Division/Unit for each kind of
supplies and materials. The IAR, RIS, RSMI, PO and DR serve as the original sources of information for
making entries on the card.
Requisition and Issue Slip (RIS) shall be used by the end-user to request issue of supplies and materials
that are carried on stock. It is also used by the Property and/or Supply Division/Unit to indicate
availability or non-availability of items requisitioned and/or to record issues of item/s requisitioned.
Purchase Request (PR) shall be used by the end-user to request for the purchase of inventory or item/s
not available on stock. It shall be the basis of preparing the PO.
Purchase Order (PO) shall be used by the Property and/or Supply Custodian to support the purchase of
property, supplies and materials, etc. It shall be issued to the selected supplier indicating, among other
information, the specifications, quantities, and agreed prices of property, supplies and materials to be
purchased.
Report of Supplies and Materials Issued (RSMI) shall be prepared by the Property and/or Supply
Custodian based on the RIS and shall be used by the Accounting Division/Unit as basis in preparing the
JEV to record the supplies and materials issued.
Waste Materials Report (WMR) shall be used by the Property and/or Supply Custodian to report all
waste materials such as destroyed spare parts and other materials considered scrap due to replacement.
Report on the Physical Count of Inventories (RPCI) shall be used to report the physical count of
supplies by type of inventory as at a given date. It shows the balance of inventory items per card and per
count and shortage/overage, if any. These include the semi-expendable property wherein the issue is
covered by ICS.
Inspection and Acceptance Report (IAR) shall be used for inspection and acceptance of purchased and
delivered property, supplies and materials.
Report of Accountability for Accountable Forms (RAAF) shall be prepared by the Accountable Officer
to report on the movement and status of accountable forms in his/her possession. The accountable
forms include those with or without face value.
Inventory Custodian Slip (ICS) shall be prepared upon issue of semi-expendable property covered by
approved RIS.

Chapter 9 Investment Property

Definition of Terms
Carrying amount is the amount at which an asset is presented in the statement of financial position.
Cash Generating Unit the smallest identifiable group of assets held with the primary objective of
generating a commercial return that generates cash inflows from continuing use that are largely
independent of the cash inflows from other assets or groups of assets.
Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to
acquire an asset at the time of its acquisition or construction.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Impairment a loss in the future economic benefits or service potential of an asset, over and above the
systematic recognition of the loss of the assets future economic benefits or service potential through
depreciation.
Investment Property is a property (land or buildings-or part of a building-or both) held to earn rentals,
or for capital appreciation or both. It is not held for use in the production or supply of goods or services,
for administrative purposes, or sale in the ordinary course of business.
Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for
use in the production or supply of goods or services or for administrative purposes.
Recoverable amount is the higher of a cash-generating assets fair value less costs to sell and its value
in use.

Items considered as Investment Property


a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of
operations;
b. Land held for a currently undetermined future use;
c. A building owned by the entity (or held by the entity under a finance lease) and leased out under one
or more operating leases on a commercial basis;
d. A building that is vacant but is held to be leased out under one or more operating leases on a
commercial basis to external parties;
e. Property that is being constructed or developed for future use as IP; and
f. Significant portion of a property that is held to earn rentals or for capital appreciation rather than to
provide services, and insignificant portion that is held for use in the production or supply of goods or
services or for administrative purposes.

Items not considered as Investment Property


a. Biological assets related to agricultural activity;
b. Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources;
c. Property held for sale in the ordinary course of operations or in the process of construction or
development for such sale;
d. Property being constructed or developed on behalf of third parties;
e. Owner-occupied property, including:
1. Property held for future use as owner-occupied property;
2. Property held for future development and subsequent use as owner-occupied
property;
3. Property occupied by employees; or
4. Owner-occupied property awaiting disposal.
f. Property that is leased to another entity under a finance lease;
g. Property held to provide a social service and which also generates cash inflows;
h. Property held for strategic purposes; and,
i. Property held for use in the production or supply of goods or services or for administrative purposes.

Criteria for Recognition


IP shall be recognized as an asset when, and only when:
a. It is probable that the future economic benefits or service potential that are associated with the IP will
flow to the entity; and
b. The cost or fair value of the IP can be measured reliably.

Measurement at Initial Recognition


IP shall be measured initially at its cost. Transaction costs shall be included in this initial measurement.
Cost includes purchase price and any directly attributable expenditures, such as:
a. Professional fees for legal services;
b. Property transfer taxes; and
c. Other transaction costs.

Costs not included at initial recognition:


a. Start-up costs unless they are necessary to bring the property to the condition necessary for it to be
capable of operating in the manner intended by management;
b. Operating losses incurred before the investment property achieves the planned level of occupancy; or
c. Abnormal amounts of wasted materials, labor or other resources incurred in constructing or
developing the property.

Mode of Acquisition of Investment Property


a. Cash Purchase. The cost of a purchased IP consists of the purchase price and all costs directly
attributable to its acquisition, such as, professional fees for legal services, property transfer taxes and
other transaction costs.
b. Non-exchange Transaction. Where an IP is acquired through a non-exchange transaction, its cost shall
be measured at its fair value as at the date of acquisition. Non-exchange transactions may be through
transfer of property at no cost (donation), or by the exercise of powers of sequestration.
c. Self-constructed Property. If an IP is self-constructed, whether by contract or by administration, all
costs related to the construction shall be recognized as Construction in Progress while it is not
completed. Upon completion, these costs shall be transferred to an Investment Property account
when the criteria for recognition of such are met.
d. Installment Payment. If payment for IP is deferred, its cost is the cash price equivalent. The
difference between this amount and the total payments is recognized as interest expense over the
period of credit.

Measurement after Recognition


After initial recognition, an entity shall use the cost model as its accounting policy and this shall be
applied to all of its investment property. Under this model, IP shall be measured at cost less any
accumulated depreciation and any accumulated impairment losses. The depreciation expense and
impairment loss to be recognized shall be computed in the same manner as that for PPE.

Transfers To or From Investment Property


Transfers to or from IP shall be made when, and only when, there is a change in use, as evidenced by the
following:
a. Commencement of owner-occupation, for a transfer from IP to owner-occupied property;
b. Commencement of development with a view to sale, for a transfer from IP to inventories;
c. End of owner-occupation, for a transfer from owner-occupied property to IP; or
d. Commencement of an operating lease (on a commercial basis) to another party, for a transfer from
inventories to IP.

Transfer from Investment Property to Owner-occupied Property


Consistent with application of cost model in recognizing subsequent measurement of PPE, when an
entity converts its IP to owner-occupied property, the latter shall be carried at cost less any accumulated
depreciation and any accumulated impairment loss.

Transfer from Investment Property to Inventories


When an entity converts its IP to Inventories, the latter shall be recognized at the carrying amount of the
former and shall be measured in accordance with PPSAS 12-Inventories.

Transfer from Owner-occupied Property to Investment Property


Consistent with application of cost model in recognizing subsequent measurement of IP, when an entity
converts its owner-occupied property to IP, the latter shall be carried at cost less any accumulated
depreciation and any accumulated impairment loss.

Transfer from inventories to investment property


When an entity converts its inventories to IP, the latter shall be recognized at the carrying amount of the
former and shall be depreciated over its remaining useful life applying the policies in this Chapter.

Derecognition of Investment Property


An IP shall be derecognized on disposal or when the IP is permanently withdrawn from use and no future
economic benefits or service potential is expected from its disposal.

Gains/Losses
Gains or losses arising from the retirement or disposal of IP shall be determined as the difference
between the net disposal proceeds and the carrying amount of the asset, and shall be recognized in
surplus or deficit in the period of the retirement or disposal.

Compensation from third parties


Compensation from third parties for IP that was impaired, lost or given up shall be recognized in surplus
or deficit when the compensation becomes receivable.

Impairment of Investment Property


An asset is said to be impaired when its carrying amount in the SFP exceeds its recoverable amount due
to fall in market value of an asset.
The following policies apply to impairment of an asset:
a. At each reporting date, an entity shall assess whether there is an indication that an asset may be
impaired. If an indication of impairment exists, the entity shall estimate the recoverable amount of the
asset. In assessing whether there is an impairment of an asset, an entity shall consider, as a minimum,
the following indications:
1. External sources of information:
i. During the period, an assets market value has declined significantly more than would be
expected as a result of the passage of time or normal use;
ii. Significant changes with an adverse effect on the entity have taken place during the period, or
will take place in the near future, in the technological, market, economic, or legal environment in
which the entity operates, or in the market to which an asset is dedicated;

iii. Market interest rates or other market rates of return on investments have increased during the
period, and those increases are likely to affect the discount rate used in calculating an assets value
in use and decrease the assets recoverable amount materially;
2. Internal sources of information:
i. Evidence is available of obsolescence or physical damage of an asset;
ii. Significant changes with an adverse effect on the entity have taken place during the period, or
are expected to take place in the near future, in the extent to which, or the manner in which, an
asset is used or is expected to be used. These changes include the asset becoming idle, plans to
discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset
before the previously expected date, and reassessing the useful life of an asset as finite rather
than indefinite;
iii. A decision to halt the construction of the asset before it is complete or in a usable condition;
and
iv. Evidence is available from internal reporting that indicates that the economic performance of
an asset is, or will be, worse than expected, which includes the existence of:
(a) Cash flows for acquiring the asset, or subsequent cash needs for operating or
maintaining it, that are significantly higher than those originally budgeted;
(b) Actual net cash flows or surplus or deficit flowing from the asset that are significantly
worse than those budgeted;
(c) A significant decline in budgeted net cash flows or surplus, or a significant increase in
budgeted loss, flowing from the asset; or
(d) Deficits or net cash outflows for the asset, when current period amounts are aggregated
with budgeted amounts for the future. (Par. 25 and 27, PPSAS 26)
b. The computation for impairment loss is shown in the formula below:
Impairment Loss = Carrying Amount less Recoverable Amount
Carrying amount =Cost less Accumulated Depreciation and Accumulated Impairment Loss
Recoverable Amount = Higher of Fair Value less Cost to sell and Value in Use
Value in Use = Present Value of the Assets estimated future cash flows
Estimates of future cash flows shall include:
1. Projections of cash inflows from the continuing use of the asset;
2. Projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset (including cash outflows to prepare the asset for use) and can be
directly attributed, or allocated on a reasonable and consistent basis, to the asset; and
3. Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its
useful life. (Par. 52, PPSAS 26)

c. The impairment loss shall be recognized as an expense in the financial statement.

d. After the recognition of an impairment loss, the depreciation charge for the asset shall be adjusted in
future periods to allocate the assets revised carrying amount, less its residual value, on a systematic
basis over its remaining useful life. Depreciation after the recognition of an impairment loss shall be
computed as follows:

Depreciation Expense = (Revised Carrying Amount Residual Value Remaining)


Estimated Useful Life (in months)

e. If there is any indication that an asset may be impaired, the recoverable amount shall be estimated for
the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an
entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs
(the assets cash-generating unit).
An impairment loss shall be recognized for a cash-generating unit if, and only if, the recoverable amount
of the unit is less than the carrying amount of the unit. The impairment loss shall be allocated to reduce
the carrying amount of the cash-generating assets of the unit on a pro rata basis, based on the carrying
amount of each asset in the unit. These reductions in carrying amounts shall be treated as impairment
losses on individual assets and recognized immediately in surplus or deficit.
In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below the
highest of:
1. Its fair value less costs to sell (if determinable);
2. Its value in use (if determinable); and
3. Zero.
The amount of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to the other cash generating assets of the unit.

Reversal of Impairment Loss


An entity shall assess whether there is any indication that an impairment loss recognized in prior periods
for an asset may no longer exist or may have decreased. If such indication exists, the entity shall estimate
the recoverable amount of that asset.
a. The entity shall consider, at the minimum, the following indications in assessing whether an
impairment loss recognized in prior periods for an asset may no longer exist or may have decreased:
1. External sources of information:
i. The assets market value has increased significantly during the period;
ii. Significant changes with a favorable effect on the entity have taken place during the period, or
will take place in the near future, in the technological, market, economic, or legal environment in
which the entity operates or in the market to which the asset is dedicated; and
iii. Market interest rates or other market rates of return on investments have decreased during the
period, and those decreases are likely to affect the discount rate used in calculating the assets
value in use and increase the assets recoverable amount materially.
2. Internal sources of information:
i. Significant changes with a favorable effect on the entity have taken place during the period, or are
expected to take place in the near future, in the extent to which, or the manner in which, the asset is
used or is expected to be used. These changes include costs incurred during the period to improve or
enhance the assets performance or restructure the operation to which the asset belongs;
A decision to resume construction of the asset that was previously halted before it was completed or in a
usable condition; and
ii. Evidence is available from internal reporting that indicates that the economic performance of the
asset is, or will be, better than expected.

b. If the impairment loss recognized for an asset no longer exists or may have decreased, this indicates
that the remaining useful life, the depreciation method or the residual value may need to be reviewed
and adjusted even if no impairment loss is reversed for the asset.

c. An impairment loss recognized in prior periods for an asset shall be reversed if, and only if, there has
been a change in the estimates used to determine the assets recoverable amount since the last
impairment loss was recognized. If this is the case, the carrying amount of the asset shall be increased to
its recoverable amount. That increase is a reversal of an impairment loss.

d. The increased carrying amount of an asset attributable to a reversal of an impairment loss shall not
exceed the carrying amount that would have been determined (net of depreciation or amortization) had
no impairment loss been recognized for the asset in prior periods.

e. A reversal of an impairment loss for an asset shall be recognized immediately in surplus or deficit.

The following are the procedures in recognizing reversal of impairment loss:


1. Determine the recoverable amount, which is the higher between the fair value less cost to sell and the
value in use, of the investment property.
2. Compare the recoverable amount with the carrying amount (net of accumulated depreciation and
accumulated impairment losses) as at the reporting period. If the recoverable amount is higher than the
carrying amount, the difference is the estimated reversal of previously recognized impairment loss or a
portion thereof. On the other hand, if the recoverable amount is equal to or lower than the carrying
amount, no reversal shall be recognized.
3. Compute the carrying amount (net of accumulated depreciation) had no impairment loss been
recognized in prior periods.
4. Compare the carrying amount (net of accumulated depreciation and accumulated impairment losses)
with the carrying amount (net of accumulated depreciation) had no impairment loss been recognized in
prior periods. If the former is lesser than the latter, the difference is compared with the estimated
reversal computed in (2).
5. The amount of reversal of the impairment loss is the lower of the difference between the two carrying
amounts referred to in (4) and the estimated reversal in (2).

f. After a reversal of an impairment loss is recognized, the depreciation (amortization) charge for the
asset shall be adjusted in future periods to allocate the assets revised carrying amount, less its residual
value (if any), on a systematic basis over its remaining useful life.
g. A reversal of an impairment loss for a cash-generating unit shall be allocated to the cash-generating
assets of the unit pro rata with the carrying amounts of those assets. These increases in carrying
amounts shall be treated as reversals of impairment losses for individual assets and recognized
immediately in surplus or deficit. No part of the amount of such a reversal shall be allocated to a non-
cash-generating asset contributing service potential to a cash-generating unit. In allocating a reversal of
an impairment loss for a cash-generating unit, the carrying amount of an asset shall not be increased
above the lower of:
1. Its recoverable amount (if determinable); and
2. The carrying amount that would have been determined (net of amortization or depreciation) if no
impairment loss had been recognized for the asset in prior periods.
The amount of the reversal of the impairment loss that would otherwise have been allocated to the
asset shall be allocated pro rata to the other assets of the unit.

Accounting Records to be Prepared and Maintained


The Accounting Division/Unit shall record promptly the acquisition, description, estimated life,
depreciation, impairment loss, disposal, and other information for each class of IP in the Investment
Property Ledger Card (IPLC). The IPLC shall be reconciled with the inventory of the asset and the control
accounts and any discrepancies shall be immediately verified and adjusted.

Disclosures
An entity shall disclose:
a. That it applies the cost model;
b. When classification is difficult, the criteria it uses to distinguish IP from owner-occupied property and
from property held for sale in the ordinary course of operations;
c. The amounts recognized in surplus or deficit for:
1. Rental revenue from IP;
2. Direct operating expenses (including repairs and maintenance) arising from IP that generated
rental revenue during the period; and
3. Direct operating expenses (including repairs and maintenance) arising from IP that did not
generate rental revenue during the period.
d. The existence and amounts of restrictions on the realizability of IP or the remittance of revenue and
proceeds of disposal;
e. Contractual obligations to purchase, construct or develop IP or for repairs, maintenance, or
enhancements;
f. The depreciation methods used;
g. The useful lives or the depreciation rates used;
h. The gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period;
i. The reconciliation of the carrying amount of IP at the beginning and end of the period, showing the
following:
1. Additions, disclosing separately those additions resulting from acquisitions and those resulting
from subsequent expenditure recognized as an asset;
2. Additions resulting from acquisitions through entity combinations;
3. Disposals;
4. Depreciation;
5. The amount of impairment losses recognized, and the amount of impairment losses reversed,
during the period in accordance with PPSAS 21 or PPSAS 26, as appropriate;
6. The net exchange differences arising on the translation of the financial statement into a
different presentation currency, and on translation of a foreign operation into the presentation
currency of the reporting entity;
7. Transfers to and from inventories and owner-occupied property; and
8. Other changes.

Procedures in Recording Investment Property


Acquisition of IP
Property and/or Supply Division/Unit
1. Cash purchase/Installment payment
Follow the same procedures as prescribed under Sec. 46, Chapter VI Disbursements. Assigns
property number on the IP and indicates the same on the IAR. Forwards the IAR to the
Accounting Division/Unit.

2. Self-construction of IP (by administration or by contract)


Follow the same procedures as prescribed under Sec. 46-47, Chapter 10 Property, Plant and
Equipment. Assigns property number on the IP and indicates the same on the Certificate of
Acceptance (CAc). Forwards the CAc to the Accounting Division/Unit.
Accounting Division/Unit
3. Initial Recognition
Based on the supporting documents, prepare JEV to recognize the IP in the books of
accounts (GJ, GL and IPLC).
Cash/Treasury Unit
4. Generation of Income
Issues OR for the rent income. Follows the same procedures as prescribed under Sec. 43
Procedures on Collections and Deposits, Chapter V Revenue and Other Receipts.
Accounting Division/Unit
5. Depreciation
Prepares JEV to recognize the monthly depreciation in the books of accounts (GJ, GL and
IPLC).
6. Impairment Loss, if applicable
Prepares JEV to recognize impairment loss, if applicable, in the books of accounts (GJ, GL and
IPLC).
7. Reversal of Impairment Loss, if applicable
Prepares JEV to recognize reversal of impairment loss, if applicable, in the books of accounts
(GJ, GL and IPLC).
8. Disposal
Sale of IP held for capital appreciation
Upon sale of IP, prepares JEV to derecognize the IP and recognize the gain/loss in the books
of accounts (GJ, GL and IPLC) based on SDs.

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