Module 2 Packet: College OF Commerce

COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY
MODULE 2 PACKET
AE 17 - INTERMEDIATE ACCOUNTING 3
STATEMENT OF FINANCIAL POSITION
Welcome to Module 2
In this module, we will discuss the different components and the line items that comprise the statement of
financial position. During the discussion, you should be able to actively participate by giving examples of
transactions and determining the elements and its proper classification for presentation in the statement
of financial position. This symbol that is shown across the printed discussion represents an
important point for discussion or appreciation/appraisal by the student. At the end of this module, you will
be answering multiple choice questions and straight problems focusing on the proper classification of
accounts and preparation of the statement of financial position.
CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Thursday from 8am to 11am and 1pm to 4pm
LEARNING OUTCOMES:
By the end of this module, the students will be able to:
1. Discuss the recognition and measurement requirement for each of the line items that comprise the
statement of financial position
2. Classify and present the elements of the statement of financial position in accordance with
international standards and other acceptable accounting practices.
3. Prepare a properly classified statement of financial position using the Philippine Financial Reporting
Standards format as well as the IFRS format.
ASSESSMENT PLAN:
1. Graded recitation through interactive participation in a question and answer format during discussion
2. Problem solving games (points awarded to the first 5 students who can submit the correct answer
and solution)
3. Individual Submission and discussion of homework or learning tasks through research online
4. Summative examinations in multiple choice question format
LEARNING PLAN/SCHEDULE OF ACTIVITIES
STRATEGIES/DESCRIPTION/TOPICS/ TIME TO
ACTIVITIES
COURSE CONTENT COMPLETE
A. Assigned Review and 1. Read the components and elements of the 0.5 hours
Reading statement of financial position
 Read 2. Discuss your appraisal of the nature of each of 2.0 hours
1. Conceptual the components and their respective
Framework on recognition (classification) and measurement of
2020-2021 Module Packets for AE 15 and ELEC 1 (Intermediate Accounting) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines Page 1 of 22
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Statement of each of the line items that comprise the

Financial Position & statement of financial position based on your
Recognition learnings from Conceptual Framework of
Concepts Financial Reporting and Intermediate
2. Basic Accounting on Accounting 1 and 2.
Components of
Statement of
Financial Position
3. Intermediate
Accounting on Line
Items Required for
Statement of
Financial Position
B. Lecture discussion 1. Define the statement of financial 0.5 hours
1. Read Chapter 2 of IA3 2. Identify the components & elements of the 2.1 hours
2. Watch Video statement of financial position
3. Interactive participation 3. Classify of the elements of the transactions 1.0 hour
thru Q&A 4. Apply the recognition & measurement of the 2.0 hours
4. Graded recitation elements of the statement of financial position
5. Present the properly classified elements in the 1.5 hours
statement of financial position.
C. Synthesize the main points 1. Teacher summarizes the main points 1.5 hours
 Graded recitation discussed.
2. Students will be required to recite by sharing 1.0 hour
their understanding/learnings specifically
pointing out the important aspects that have
just been discussed regarding the statement of
financial position.
3. This will validate the achievement of learning
outcomes.
D. Assignment 1. Create transactions for each account that are 2.0 hours
classified under the statement of financial
position
2. Construct/Prepare a properly classified
statement of financial position from the created
transactions
3. Answer all questions and solve all problems
from the textbook.
E. Summative Quiz 1. Take multiple question quiz for (to be 1 hour
announced)
REFERENCES
2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

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1. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Conceptual framework and accounting
standards. 2019 edition. Manila : GIC Enterprises & Co., Inc. FIL 657.0218 V173c 2019
2. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume one.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 1
3. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume two.
4. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume three.
5. Cabrera, M. E. B. & Cabrera, G. A. B. (2019). Financial accounting and reporting
fundamentals. 2019-2020 edition. FIL 657.48 C117f 2019
6. Millan, Zeus Vernon B. Intermediate Financial Accounting III. Baguio City: Bandolin
Enterprise 2016
7.
COURSE CONTENT DISCUSSION
2.1 STATEMENT OF FINANCIAL POSITION – A REVIEW
 What is a statement of financial position ?

 A statement of financial position or commonly called the balance sheet is a one of the basic
financial statements that shows basically the three (3) main components namely the assets,
liabilities and equity that measure the net worth of an entity.
 Financial POSITION because it shows or discloses the financial STABILITY of the entity’s
standing at a specific point in time.
 It depicts the balance of your position in terms of or between your assets (ownership) and
liabilities (owings) from which you derive your net worth that could either be heavy on one
side or lighter on the other or vice versa (either you own more than you owe or the other way
around).
 How is the statement of financial position relevant to users?
 Investors, creditors and other statement users analyze the statement of financial position to
evaluate such factors as liquidity, solvency and the need of the entity for additional financing.
 Liquidity is the ability of the entity to meet currently maturing obligations.
 Solvency is the availability of cash over the longer term to meet maturing obligations.
 Information about liquidity and solvency that are derived from the statement of financial position is
useful in predicting the ability of the entity to comply with future financial commitments and to pay
dividends to shareholders.
 Why is it required to classify assets and liabilities as either current or noncurrent in the
statement of financial position?
 There is a need to distinguish the elements of assets and liabilities between current and
noncurrent because of the application of the principle of going concern under the conceptual
framework of financial reporting.

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 Business entities must be evaluated on their continued indefinite operations based on how they
will be able to financially sustain their operations on both short term and long term basis, hence
the requirement for the presentation of current and noncurrent assets and liabilities.
 What is requirement of the accounting standard on the current and noncurrent distinction and
classification?
 PAS 1, paragraph 60, provides than an entity shall present current and noncurrent assets, and
current and noncurrent liabilities, as separate classifications in the statement of financial position.
 How is the related PAS applied?

 When an entity supplies goods and services within a clearly identifiable operating cycle, the
separate classification of current and noncurrent assets and liabilities is a useful information.
 It highlights assets that are expected to be realized within the current operating cycle, and
liabilities that are due for settlement within the same period.
 What are the components and elements of the statement of financial position?
 Pas 1, paragraph 54, states that as a minimum, the statement of financial position shall include
the following line items:
1. Cash and cash equivalents
2. Financial assets
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates using the equity method
7. Intangible assets
8. Investment property
9. Biological assets
10. Total assets classified as held for sale and assets included in disposal group classified as held
for sale
11. Trade and other payables
12. Current tax asset and liability
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities (other than 11 and 14)
16. Liabilities included in disposal group held for sale
17. Noncontrolling interest
18. Share capital and reserves
 Can we still add separate line items other than those enumerated in paragraph 54?
 Paragraph 55 provides that additional line items, headings and subtotals shall be presented on
the face of the statement of financial position when such presentation is relevant to the
understanding of the financial position of an entity.
 What is the requirement to add separate line items other than those enumerated in paragraph 54?
 Judgement on additional line items are based on the assessment of the following:
a. Nature and liquidity of assets
b. Function of assets within the entity
c. Amount, nature and timing of liabilities

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 Is there a format prescribed by the standard in presenting the components and line items thereof in
the statement of financial position?
 PAS 1, paragraph 57 provides that the standard DOES NOT PRESCRIBE the order or format in
which line items are to be presented.
 What are the common formats used in practice in the preparation and presentation of the
statement of financial position?
 The format is actually an expansion in good presentation form of the accounting equation “asset
equals liability plus equity”.
 The two (2) customary forms are:
a. Report format
 Sets forth the three (3) major section in a downward sequence of assets, liabilities and
equity.
b. Account format
 Assets are shown on the left side and the liabilities and equity on the right side
 Other formats may be equally appropriate provided the distinction is clear in accordance with
paragraph 7 of the preface of IAS 1.
 The format as illustrated in the appendix of IAS 1 is the following order:
 Noncurrent assets
 Current assets
 Equity
 Noncurrent liabilities
 Current liabilities
 This format is used in other jurisdiction such as the United Kingdom.
2.2 ASSETS – A REVIEW
 What are assets ?

 According to the revised conceptual framework, asset is a present economic resource controlled
by the entity as a result of past event.
 What is an economic resource in the context of accounting?
 An economic resource is a right that has the potential to produce economic benefits or in
short, these are properties owned.
 What about leased properties?
 Depending on the nature of the lease agreement, but the right of use asset is considered
as an economic resource to be recognized as asset. (Refer to the discussion on Leases in
Intermediate Accounting 2.)
 What are the essential characteristics of an asset?

a. The asset is controlled by the entity.
b. The asset is the result of past event .
c. The asset has the potential (probable) to produce (future) economic benefits to flow into
the entity.
d. The asset can be measured reliably.

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 What are current assets?

 Current assets are economic resources that are generally realized, sold or consumed or
converted into cash within the normal operating cycle of the business entity.
 When do we classify an asset as current?

a. The asset is cash or a cash equivalent unless the asset is restricted to settle a liability for
more than twelve months after the reporting period .
b. The entity holds the asset primarily for trading .
c. The entity expects to realize the asset within twelve months after the reporting period .
d. The entity expects to realize the asset or intends to sell or consume it within the entity’s
normal operating cycle .
 What is cash ?
 Cash is classified as current asset as it does not need any conversion.
 These include cash on hand, petty cash fund and cash in bank.
 Cash includes coins, currency, money orders, checks, and bank drafts
 It is important to note that these must be unrestricted in use, meaning available anytime for
use in the operation of the business entity and for the payment of current obligations.
 What are cash equivalents ?

a. Cash equivalents are short-term, highly liquid investments that are both
a. readily convertible to known amounts of cash and
b. so near their maturity that they present insignificant risk of changes in value such as
changes in interest rates.
c. Highly liquid investments that are acquired 3 months before maturity are cash
equivalents.
 What is important is the date of purchase which should be 3 months or less before
maturity. (The purchase date up to the maturity date must be 3 months.)
 If the term of the instruments is more than 3 months to 1 year, it is a short-term
financial asset (current), but if is more than 1 year, it is non-current or long-term
investments.
b. Examples of Cash Equivalents
a. 3-month BSP Treasury bill (Bangko Sentral ng Pilipinas)
b. 3-YEAR BSP Treasury bill purchased 3 months before maturity date
 a 3-yr bill due on October 30, 2020 purchased in August 1, 2020. (Aug – Sep – Oct =
3 months)
 If it were purchased in July, it is beyond 3 months hence will not be a cash equivalent,
but a short-term investment or marketable securities.
 A BSP treasury bill purchased 3 years ago cannot qualify as cash equivalent even if
the remaining maturity is 3 months of less. (The purchase date up to the maturity
date must be 3 months to qualify as cash equivalent.)
c. 3-month time deposit
d. 3-month money market instrument or commercial paper

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c. Important notes on Investments for cash equivalent classification

a. Equity shares cannot qualify as cash equivalent because shares do not have maturity
date
b. Preference shares on the other hand have specified redemption date and acquired
three months before redemption date can qualify as cash equivalent.
 What are financial assets held for trading?

 These are also known as trading securities which are debt and equity securities that are
purchased with the intent of selling them in the “near term” or very soon in order to generate
short-term gains or profits.
a. These are assets acquired principally for the purpose of selling them in the near future
(expected to be realized within twelve months from the end of the reporting period).
b. On initial recognition, these are part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent actual pattern of short-term
profit taking.
c. It is a derivative, except for a derivative that is a financial guarantee contract or a
designated and an effective hedging instrument.
 What are nontrade receivables?

 Nontrade receivables represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of business.
 What is the classification on nontrade receivables?
 Current asset if collectible within one year from end of the reporting period (or depending
on the length of the operating cycle), otherwise, noncurrent asset
 How are the terms “realized, sold or consumed” applicable in current asset classification?
 This categorization is referred to when properly classifying trade receivables, inventories and
prepayments as current assets.
 The current asset classification is based on the expected realization, sale or consumption
which is within the normal operating cycle or one year, whichever is shorter.
 What is an operating cycle ?

 The operating cycle of an entity is the time between the acquisition of the assets for
processing and their realization in cash or cash equivalents.
 As a general rule, when the normal operating cycle is not clearly identifiable, the duration is
assume to be twelve (12) months.
 Why is operating cycle important in the preparation of the statement of financial position?
 The normal operating cycle is significant as it is the basis of determining the proper
classification of assets into either current or noncurrent.
 How is the operating cycle applied to the different types of business entities?
 For trading companies, the operating cycle is the average period of time that it takes to
acquire the merchandise inventory, sell the inventory to customers and ultimately collect cash
from the sale.

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 For manufacturing companies, the operating cycle is defined as the period of time between
the acquisition of materials entering into a process and their realization in cash or an
instrument that is readily convertible into cash.
 How are current assets presented in the statement of financial position?

 Current assets are usually listed in the statement of financial position in the order of liquidity.
 What is liquidity in this context?
 Liquidity pertains to the period within which the current asset as classified is converted into
cash. (Cash is a liquid asset.)
 What comprises the minimum line items required under the standard that must be presented as
current assets in the statement of financial position?
 PAS 1, paragraph 54 provides the guidance on the minimum line items under the current
assets as follows:
a. Cash and cash equivalents
b. Financial assets at fair value through profit or loss, such as trading securities and other
investments in quoted equity instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
 What are noncurrent assets?

 Noncurrent asset is a residual definition.
 PAS 1, paragraph 66 provides the definition which simply means that what is not included in
the definition of current asset , all others are classified as noncurrent assets.
 What are included in the noncurrent assets classification?

 Property, plant and equipment
 Long-term investments
 Intangible assets
 Other noncurrent assets
 Deferred tax asset (PAS 1, paragraph 56)
 What are property, plant and equipment or formerly known as fixed assets?
a. PAS 16, paragraph 56 for the definition as follows:
 Property, plant and equipment are
a. tangible assets (meaning with physical substance)
b. held by an entity for use in business such as use in production or supply of goods
and services, held for rental to others or for administrative purposes,
c. and are expected to be used over a period of more than one period or year as may
be applicable (depending on the normal operating cycle).
b. Are there assets with the same characteristics as defined above that are not classified as
property, plant and equipment?
 Assets held for sale, including land, or held for investment are not included in the
classification of property, plant and equipment.

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c. What are the examples of assets that are classified as property, plant and equipment?
a. Land
b. Land improvement
c. Building
d. Machinery
e. Ship
f. Aircraft
g. Motor vehicle
h. Furniture and fixture
i. Office equipment
j. Patterns, molds and dies
k. Tools
l. Bearer plants
 What is an investment?
 We refer to the definition of investment according to the IAS as follows:
 This is an asset held by an entity for the
a. accretion of wealth through capital distribution, such as interest, royalties,
dividends and rentals,
b. for capital appreciation or for other benefits to the investing entity such as those
obtained through trading relationship.
 What are the classifications of investments?

a. Current investment or short-term is an investment that is by nature readily realizable and
is intended to be held for not more than one year.
b. Noncurrent or long-term investment is an investment other than a current investment or
investment intended to be held for more than one year.
 What is the difference between a cash equivalent and short-term or current investment?
 The guiding element is the purchase or acquisition date of the financial instrument that
determines the classification whether cash equivalent or short-term investment.
 When the purchase or acquisition date of the financial instrument is three (3) months
or less before the maturity date, it is classified as cash equivalent.
 When the financial instrument is purchased or acquired beyond or more than three (3)
months from the maturity date, it is classified as short-term investment but such short-
term investment must be realized within 12 months after the balance sheet date
(following the criteria to be classified as current asset)
 What are the examples of long-term investment ?

a. Investment in shares and bonds
b. Investments in subsidiaries
c. Investments in associates
d. Investments in funds such as sinking fund, plant expansion fund and preference share
redemption fund
e. Investment property
f. Cash surrender value of life insurance policy

COLLEGE OF COMMERCE
g. Investment in joint venture
 What is an intangible asset?

 PAS 38, paragraph 8 defines intangible assets as follows:
 This is an asset that must be controlled by the entity as a result of past event and from
which future economic benefits are expected to flow to the entity.
 What makes an intangible asset different from other noncurrent asset?
 Intangible assets do not have physical substance.
 The essence is the future economic benefits that will flow into the entity.
 How can you classify an intangible asset?
a. When it is separable or capable of being sold, transferred, licensed, rented or
exchanged separate from the entity.
b. When it arises from contractual or other legal right.
 What are the examples of tangible assets?
a. Patent
b. Franchise
c. Copyright
d. Trademark
e. Software applications
 An example of unidentifiable intangible asset is goodwill.
 What are other noncurrent assets?

 Again, this is a residual definition where all assets that do not fit into the definition of
noncurrent assets are classified as other noncurrent assets.
 Examples include
a. Long-term advances to officers, directors, shareholders and employees
b. Abandoned property
c. Long-term refundable deposits
2.3 LIABILITIES – A REVIEW
 What are liabilities?

 We refer to the Revised Conceptual Framework which defines liabilities as
“A present obligation of an entity to transfer an economic resource as a result of past events.”
 What are the essential characteristics of a liability?
a. The entity has a present obligation
 The entity liable (the one who incurred the liability or debtor) must be identified.
 Note that the payee or the entity to whom the obligation is owed does not necessarily
be identified.
b. The obligation is to transfer an economic resource.
 The obligation must be settled or extinguished through the payment of cash, transfer of
noncash asset or provision of service at some future time.
c. The liability arises from past event.
 An obligating event has been incurred in the past hence a present liability arises.
d. The liability can be measured reliably.

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 When do we classify an obligation as a current liability?

a. We refer to PAS 1, paragraph 69 as follows:
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 (12) months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability
for at least twelve (12) months after the reporting period.
 What are examples of current liabilities?

a. Trade payables and accruals for the employee and other operating costs are part of the
working capital used in the entity’s normal operating cycle.
 Important note that such operating items are classified as current liabilities even if they
are settled more than twelve (12) months after the end of the reporting period.
b. Obligations that are not settled as part of the normal operating cycle but are due for
settlement within twelve (12) months after the end of the reporting period.
 Examples are bank overdrafts, dividends payable, income taxes, other nontrade payable
and current portion of noncurrent financial liabilities.
 Why are these considered as current?
 For practical application, it is because by its very nature, these obligations require an
immediate settlement otherwise, this will result in negative implications to the
financial position of the entity.
 Imagine the consequences if not settled such as a negative cash balance for your
disbursing account with the bank, no provision for payment of dividends payable to
shareholders who are the owners of the entity, delaying income taxes resulting in
penalties & surcharges and possible criminal charges, non-servicing of currently
maturing loans with banks will result in default and negative credit standing.
c. Financial liabilities held for trading are financial liabilities that are incurred with an intention to
repurchase them in the near term.
 An example of financial liability held for trading is a quoted debt instrument that the
issuer may buy back in the near term depending on changes in fair value.
 What are the requisites for the currently maturing portion of a long-term debt to be classified
as current liability?
 PAS 1 paragraph 72 which provides that a liability which is due to be settled within twelve
(12) months after the end of the reporting period is classified as current, even if:
a. The original term was for a period longer than twelve (12) months
 Applicable only for that portion of the long-term debt that will due to be settled with
twelve (12) months after the end of the reporting period
b. An agreement to refinance or to reschedule payment on a long-term basis is completed
AFTER the end of the reporting period AND BEFORE the financial statements are
authorized for issue.
 Note however that if the refinancing on a long-term basis is completed on or
before the end of the reporting period, the refinancing is an adjusting event and
therefore the obligation is classified as noncurrent.
 Indicators for refinancing to be classified as current liability

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o After the end of the reporting period

o Before or after authorization for issuance of FS
o Why? Because the report has already been done and adjustments are not
permitted anymore since it is only the authorization for issuance of the FS that is
pending
 Indicators for refinancing to be classified as noncurrent liability
o Before the end of the reporting period
o Why? Because the FS is not yet finalized, hence, can still be adjusted
 What is the impact of the DISCRETION to refinance in the classification of the obligation to either
current or noncurrent liability?
 We refer to PAS1 paragraph 73 which provides that if the entity has the discretion to
refinance or roll over an obligation for at least twelve (12) months after the reporting period
under an existing loan facility, the obligation is classified as noncurrent even if it would
otherwise be due within a shorter period.
 Note that the refinancing or rolling over must be at the discretion of the entity
 For practical application, the assumption for its classification as noncurrent liability is that
entities would normally choose to refinance a loan facility at a much longer term as a
financing benefit may be derived from the loan agreement that they would want always to
keep in case of financing requirements whether for operations or capital expenditures for
expansion projects.
 Otherwise, if the refinancing or rolling over is not at the discretion of the entity, the
obligation is classified as current liability.
 What are loan covenants?
 Covenants commonly known as loan covenants are commitments or accountabilities often
attached to borrowing agreements which represent the undertakings imposed on the
borrower by the financing institution such as banks, etc. that must adhere to and/or be
complied with while the agreement is still unextinguished.
 These covenants usually cover restrictions on the borrower such as applications for further
borrowings, paying dividends, maintaining specified level of working capital and so forth.
 How does a breach of loan covenant affect the classification of an obligation?
 When certain conditions set forth under the covenants in the borrowing agreement are
breached, a default situation arises and the liability becomes payable on demand.
 What is the rule on default situation?
 PAS 1, paragraph 74 states that such liability under default is classified as CURRENT
even if the lender has agreed, AFTER the end of the reporting period and BEFORE the
financial statements are authorized for issue, not to demand payment as a consequence
of the breach or default.
 Paragraph 75 however states that the liability is classified as NONCURRENT if the
lender has agreed on or before the end of the reporting period to provide a grace
period ending at least twelve (12) months after the end of the reporting period.
 What is a grace period?
o It is a period within which the borrower can rectify or cure the breach and during
which the lender cannot demand immediate payment.
 Indicators for classification in case of breach or default on borrowing agreements
o Current once defaulted – general rule because a default means the lender requires
immediate payment to prevent further non compliance

COLLEGE OF COMMERCE
o Noncurrent if borrower is given a grace period to rectify or cure within 12 months

after the end of the reporting period.
 How are current liabilities presented in the statement of financial position?

 We refer to PAS 1, paragraph 54 which provides that as a minimum, the face of the statement
of financial position shall include the following line items for current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
 What line items comprise trade and other payables?
a. Accounts payable
b. Notes payable
c. Accrued interest on not payable
d. Dividends payable
e. Accrued expenses
 Note that trade accounts and notes payable may be separately presented.
 Why is the current and noncurrent classification of components of the statement of financial
position important or relevant?
 The classification of an asset or liability whether these are current or noncurrent has an impact
on the evaluation of the entity's liquidity (working capital) and solvency and is of
primary concern to most statement users.
 What is working capital?

 It simply relates to the current assets and currently liabilities and the association of each
other in relation to the financial condition of an entity.
 Working capital is the excess of the current assets over current liabilities.
 Working capital ratio is the current assets divide by current liabilities.
 What are noncurrent liabilities?

 Again, this is a residual where PAS 1, paragraph 69 states that all liabilities not classified as
current liabilities are classified as noncurrent liabilities.
 Therefore, it is important to properly classify the elements of an obligating event/transaction
as current so that the noncurrent liabilities can be determined.
 What are the examples of noncurrent liabilities?

a. Non current portion of a long-term debt
b. Lease liability
c. Deferred tax liability
 PAS 1, paragraph 56, provides that deferred tax liability is classified as noncurrent liability
d. Long-term obligations to entity officers
e. Long-term deferred revenue

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 What is a deferred tax liability?

 It is the amount of the income tax payable in the future periods with respect to a taxable
temporary difference.
 This arises when:
a. The accounting income is higher than the taxable income because of timing
differences.
b. When the carrying amount of an asset is higher than the tax base
c. When the carrying amount of a liability is lower than the tax base.
 What are estimated liabilities?

 Estimated liabilities are obligations which exist at the end of the reporting period
although the amount is not definite.
o normally, the date when it is due or payable is not also definite
o in some instances, the exact payee cannot be identified or determined
o common examples include
1. estimated liability for premiums
2. estimated liability for warranties
3. estimated liability under customer loyalty program
 What is a contingent liability ?

 We refer to PAS 37 paragraph 10, defines a contingent liability in two ways
a. A possible obligation that arises from past event and whose existence will be
confirmed only by the occurrence or non occurrence of one or more uncertain future
events not wholly within the control of the entity.
b. A present obligation that arises from past event that is not recognized because:
1. It is not probable that an outflow of resources embodying economic benefits

will be required to settle the obligation.
 The range of outcome of uncertainty relating to future event may be the
described as:
o Probable
 The future event is likely to occur. As a rule of thumb, probable means
more than 50% likely to occur or happen.
o Possible
o The future event is less likely to occur. The occurrence is 50% or less.
o Remote
o the future event is least likely to occur or the chance of the future event
occurring is very slight or the occurrence is 10% or less
2. The amount of obligation cannot be measured reliably.

 How will a contingent liability be presented in the statement of financial position?

COLLEGE OF COMMERCE
 A contingent liability is not recognized in the financial statements but shall be

disclosed only.
o The required disclosures are:
a. brief description of the nature of the contingent liability
b. an estimate of the financial effects
c. an indication of the uncertainties that exist
d. the period possibility of any reimbursement
 If the contingent liability is remote, no disclosure is necessary.

 If the present obligation is probable and the amount can be measured reliably, the
obligation is not a contingent liability but shall be recognized as a provision.
o an expense and an estimated liability shall be recorded in recognizing a provision.
 Thus, a contingent liability is either probable or measurable but not both.
 What is a contingent asset?

 We refer to PAS 37 paragraph 10, defines a contingent asset as a possible asset that
arises from past event and whose existence will be confirmed by the occurrence or
nonoccurrence of one or more uncertain future events not wholly within the control of the
entity.
 Contingent assets usually arise from unplanned or other unexpected events that give
rise to the possibility of an inflow of economic benefits to the entity.
 What is the treatment of contingent assets for financial reporting purposes?

 A contingent asset shall not be recognized because this may result in recognition of
income that may never be realized.
 However, when the realization of income is virtually certain, the related asset is no
longer contingent asset and its recognition is appropriate.
 The outcome of a contingent asset is reported as follows:
a. a contingent asset is recognized in the period when realized
b. a contingent asset is only disclosed when it is probable
c. if the contingent asset is possible, no disclosure is required
d. if the contingent asset is remote, no disclosure is required
2.4 EQUITY – A REVIEW
 What is equity ?
 Equity is a general term that refers to the residual interest in the assets of the entity after
deducting all of the liabilities.
 It is sometimes referred to net assets that is derived from the accounting question which is “total
assets minus liabilities”.
 How does equity behave in relation to the entity’s performance ?
 Equity is increased by profitable operations and contribution by owners.
 Conversely, equity is decreased by unprofitable operations and distribution to owners.
 What are the terms used in reporting the equity in the statement of financial position?

COLLEGE OF COMMERCE
 Depending on the form of the entity such as :

a. PROPRIETORSHIP - Owner's Equity
b. PARTNERSHIP - Partners’ Equity
c. CORPORATION - Shareholders’ Equity
 What is a shareholders’ equity?

 Sometimes called stockholders’ equity is simply the residual interest of owners in the net
assets of a corporation measured by the excess of assets over liabilities.
 What are the others used for shareholders’ equity?
Philippine Term IAS Term
Capital stock Share capital
Subscribed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preference share capital
Additional paid capital Share premium
Retained earnings (deficit) Accumulated profit (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
 What is a share capital?

 Share capital is the portion of the paid in capital representing the total par or stated value of
the shares issued.
 What is a share premium?
 Share premium is the amount of capital contributed by the shareholders in in excess of the
total par or stated value of the shares subscribed and issued.
 What is a subscribed share capital?
 Subscribed share capital is the portion of the authorized share capital that has been
subscribed but not yet fully paid and therefore still unissued.
 What is a subscriptions receivable?
 Subscriptions receivable represents the amount of the subscribed share capital that has not
been fully paid.
 It is preferably reflected as a deduction from the related subscribed share capital.
 However, subscriptions receivable collectible within one year shall be classified as current
asset.
 What is retained earnings?
 Retained earnings represent the cumulative balance of periodic net income or loss, dividend
distributions, prior period errors, changes in accounting policy and other capital/equity
adjustments.
 What is unappropriated retained earnings?
 Unappropriated retained earnings represent that portion which is free and can be declared as
(stock) dividends to the shareholders.

COLLEGE OF COMMERCE
 What is appropriated retained earnings?

 Appropriated retained earnings represent that portion which is restricted and therefore not
available for any dividend declaration
 How is a deficit presented in the retained earnings portion of the equity?

 A deficit is presented as a deduction from shareholders equity.
 What is equity revaluation surplus?
 Revaluation surplus is the excess of sound value over carrying amount of the revalued asset.
 What is sound value?
 Sound value is equal to the fair value or depreciated replacement cost.
 How is depreciated replacement cost computed?
 Depreciated replacement cost is equal to replacement cost minus the accumulated
depreciation.
 How is carrying amount computed?
 Carrying amount is computed by deducting accumulated depreciation from
historical cost.
 What are treasury shares?
 Treasury shares are an entity’s own shares that have been issued and then reacquired but
not cancelled.
 When the shares are rounded off for convenience to reflect undivided values/figures, there
will be excess shares which will be reacquired by the entity and available for issuance.
 How are treasury shares measured and valued?
 Treasury shares are usually recorded at cost and are not recognized as an asset.
 How are treasury shares presented in the equity portion?
 The cost of treasury shares shall be reported as a deduction from the shareholders’ equity.
 What are the requirements to reacquire the treasury shares?
 When the treasury shares are acquired, the retained earnings must be appropriated to the
extent of the cost of the treasury shares.
 What are reserves?
 The term “reserves” is not officially defined in any accounting standard or in the conceptual
framework.
 Under international accounting standards, the use of equity reserves is based on whether a
reserve is part of distributable equity or non-distributable equity.
 What is distributable equity reserve?
 Distributable equity reserve is that portion that can be distributed to shareholders as
dividends without impairing the legal capital of the entity.
 This is clearly pertaining to unappropriated retained earnings.
 What is non distributable equity reserve?
 Non distributable equity reserve is that portion that cannot be distributed to the shareholders
in any form during the lifetime of the entity.

COLLEGE OF COMMERCE
 Generally, non distributable equity reserves refer to those items of equity other than
the aggregate par or stated value of share capital and retained earnings unappropriated.
 What are examples of reserves
a. share premium reserve or additional paid in capital
b. appropriation reserve or technically known as retained earnings appropriated
c. asset revaluation reserve for revaluation surplus
d. other comprehensive income reserved

COLLEGE OF COMMERCE
1
a
2
c

COLLEGE OF COMMERCE
Details
of the
Accounts

COLLEGE OF COMMERCE

COLLEGE OF COMMERCE
1 2
a c
b d


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COLLEGE OF COMMERCE

BACHELOR OF SCIENCE IN ACCOUNTANCY

LEARNING PLAN/SCHEDULE OF ACTIVITIES

Statement of each of the line items that comprise the

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

COURSE CONTENT DISCUSSION

2.1 STATEMENT OF FINANCIAL POSITION – A REVIEW

 What is a statement of financial position ?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

 How is the related PAS applied?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

2.2 ASSETS – A REVIEW

 What are assets ?

 What are the essential characteristics of an asset?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

 What are current assets?

 When do we classify an asset as current?

 What are cash equivalents ?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

c. Important notes on Investments for cash equivalent classification

 What are financial assets held for trading?

 What are nontrade receivables?

 What is an operating cycle ?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

 How are current assets presented in the statement of financial position?

 What are noncurrent assets?

 What are included in the noncurrent assets classification?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

 What are the classifications of investments?

 What are the examples of long-term investment ?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

g. Investment in joint venture

 What is an intangible asset?

 What are other noncurrent assets?

2.3 LIABILITIES – A REVIEW

 What are liabilities?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

 When do we classify an obligation as a current liability?

 What are examples of current liabilities?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

o After the end of the reporting period

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

o Noncurrent if borrower is given a grace period to rectify or cure within 12 months

 How are current liabilities presented in the statement of financial position?

 What is working capital?

 What are noncurrent liabilities?

 What are the examples of noncurrent liabilities?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

 What is a deferred tax liability?

 What are estimated liabilities?

 What is a contingent liability ?

1. It is not probable that an outflow of resources embodying economic benefits

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

 A contingent liability is not recognized in the financial statements but shall be

 If the contingent liability is remote, no disclosure is necessary.

 What is a contingent asset?

 What is the treatment of contingent assets for financial reporting purposes?

2.4 EQUITY – A REVIEW

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

 Depending on the form of the entity such as :

 What is a shareholders’ equity?

 What is a share capital?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |