Chapter 6 Financial Assets

Introduction
 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. (PPSAS
28.9)
Financial asset- any asset that is:
a. Cash;
b. An equity instrument of another entity;
c. A contractual right to receive cash or another financial asset from another entity;
d. A contractual right to exchange financial instruments with another entity under
conditions that are potentially favorable: or
e. A contract that will or may be settled in the entity's own equity instruments.
Financial liability- is any liability that is;
a. A contractual obligation to deliver cash or another financial asset to another
entity;
b. A Contractual, obligation to exchange financial assets or financial liabilities with
another entity under conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity's own equity instruments.

 Equity instrument- is any contract that evidences a residual interest in the

assets of an entity after deducting all of its liabilities.
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. (GAM for NGAs, Chapter 7,
sec. 23)
 Cash is the most basic financial instrument because it is the medium of
exchange and the basis of measurement of all financial statement elements.
Initial Recognition
A financial asset is recognized when an entity becomes a party to the contractual
provisions of the instrument. (PPSAS 29.16)
Initial Measurement
Financial assets are initially measured at fair value plus transaction costs, except for
financial assets at fair value through surplus or deficit whose transaction costs are
expensed.
  Transaction costs are incremental costs that are directly attributable to the
acquisition, issue, or disposal of a financial instrument.
 An Incremental cost is one that would not have been incurred if the entity had
not acquired, issued or disposed the financial instrument.
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.

Our succeeding discussions on financial assets are subdivided into the

following:
a. Cash and cash equivalents
b. Receivables
c. Investments
d. Derivatives

a. Cash and Cash Equivalents

 Cash- comprises cash on hand, cash in bank and cash treasury accounts.
Adjustments for Unreleased Commercial Checks
 Unreleased checks are checks drawn but not yet given to the payees as of the
end of the period. Unreleased checks are reverted back to cash as follows:
Date Cash in Bank, Local Currency-Current xxx
Accounts Payable (or other liability account) xxx
Unreleased checks are not physically cancelled. At the start of the following year, the
adjusting entry above is reversed to recognize the availability of the checks for release.
This procedure does apply to the “Cash-Modified Disbursement System (MDS)"
account because there is no actual cash with the Government Servicing Bank. Recall
that any unused NCA is reverted back to the National Government, and therefore, the
balance of the “Cash-Modified Disbursement System (MDS)" account is zeroed-out at
the end of each period
Accounting for Cancelled Checks
 Checks are cancelled when they become stale, voided or spoiled.
A check is considered stale if it has been outstanding for over 6 months from its date.
Replacement checks may be issued for cancelled checks that were already released to
payees, upon submission of the cancelled checks to the Accounting Unit. Cancelled
checks are reverted back to cash as follows:
The cancelled check pertains to:
Current year Prior period
Cash-Modified Disbursement Accumulated Surplus/ (Deficit) xxx
System (MDS), Regular xxx Accounts payable xxx
Accounts payable
xxx (To recognize the cancellation of the
(To recognize the cancellation of the stale/voided/spoiled MDS Checks in prior yr.)
stale/voided/spoiled MDS Checks)

For prior period MDS checks, the "Accumulated Surplus/(Deficit)" account is debited.
This is. because, again, the "Cash-Modified Disbursement System (MDS)" account is
zeroed- out at the end of each period.
For cancelled commercial checks, the "Cash in Bank-Local Currency, Current"
account is debited for both current year and prior period.
If a replacement check is issued, the replacement check is recorded in the regular
manner i.e., debit to accounts payable and credit to cash.
 Petty Cash Fund-Petty Cash Fund (PCP) refers to the amount granted to duly
designated Petty Cash Fund Custodian for payment of authorized petty or
miscellaneous expenses which cannot be conveniently paid through check or
ADA. (GAM for NGAs, Chapter 6, sec. 2)
Guidelines:
a. The Head of Agency shall approve the amount of PCF to be established, which
shall be sufficient to defray recurring petty expenses for 1 month.
b. The PCF Custodian shall be properly bonded (a) whenever the established
amount of PCF exceeds P5,000.
 (a) Bonded means an insurance shall be taken on the custodian. In the event
that the custodian misuses the funds, the entity can claim from the insurance
company, and the insurance company in turn will go after the custodian.
c. The PCF shall be maintained using the Imprest System. At times, total cash on
hand and unreplenished expenses shall equal to the PCF ledger balance.
d. The PCF shall be kept separately from other advances or collections and shall
not be used to pay for regular expenses, such as rentals, electricity, water, and
the like.
e. PCF payments shall not exceed P15,000 for each transaction, except when
otherwise by law or by the COA. Splitting of transaction to avoid exceeding the
ceiling is prohibited.
 f. A canvass from at least 3 supplies is required for purchases amounting to
P1,000 and above, except for purchases made while on official travel.
g. PCF disbursements shall be supported by properly accomplished and approved
petty Cash Vouchers, invoices, ORs, or other evidence of disbursements.
h. Replenishment shall be made as soon as disbursement reach at least 75% or
as needed.
i. At end of the year, the PCF Custodian shall submit all unreplenished petty Cash
Vouchers to the Accounting Unit for recording in the books of accounts.
j. The unused balance of the PCF shall not be closed at year-end. It shall be
closed only upon the termination, separation, retirement or dismissal of the PCF
Custodian, who in turn shall refund any balance to close his/her cash
accountability.
Accounting for Cash Shortage/Overage of Disbursing Officer
The disbursing officer is liable for any cash shortage while any cash overage that he
cannot satisfactorily explain to the auditor is forfeited in favor of the government.
 Cash Shortage
Date Due from officers and Employees xxx
Advances for/to..(Appropriate account) xxx
To recognize cash shortage of disbursing officer
Date Cash- Collecting Officers xxx
Due from Officers and Employees xxx
To recognize restitution of cash shortage
Date Cash-Treasury/agency deposit, regular xxx
Cash- Collecting Officers xxx
To recognize the remittance of restituted cash
shortage to the BTr
 Cash overage
Date Cash- Collecting Officers xxx
Miscellaneous Income xxx
To recognize forfeiture of cash overage of the
disbursing officer
Date Cash-Treasury/agency deposit, regular xxx
Cash- Collecting Officers xxx
To recognize the remittance of forfeited cash
overage to the BTr
 Dishonored Checks
A Dishonored check is a check that is not accepted when presented for payment, e.g.,
a check returned by the bank because of lack of sufficient funds- ‘bounced’ check.
The drawer of the dishonored check is liable for the amount of the check and all
penalties resulting from the dishonor, without prejudice to his criminal liability for a
'bounced' check.
Guidelines:
a) When a check is dishonored, the Collecting Officer shall:
i. issue a Notice of Dishonored Checks to the drawer and any endorser; and
ii. cancel the related OR.
b.) If the Collecting Officer fails to issue the notice, the dishonored check becomes
his personal liability. The drawer and any endorser not given the notice will be
relieved from any liability.
c.) A check refused by the drawee bank when presented within 90 days from its
date is a prima facie evidence that the drawer has knowledge about the
insufficiency of his funds, unless the drawer pays the check in full or makes
arrangement with the drawee bank for the full payment of the check within 5
banking days after receiving the notice of the dishonor.
d.) A dishonored Check shall be settled by payment in cash or certified check. The
dishonored check shall not be returned to the payor unless he returns first the
previous OR therefor.
 Bank Reconciliation
A bank reconciliation statement a report that is prepared for purpose of bringing the
balances of cash
(a) per records and
(b) per bank statement into agreement.
 Bank statements is a report issued by a bank which shows the credits and
debits to the depositor's account during a period, as, well as the account’s
cumulative balance.
Guidelines:
a. Bank reconciliations shall be prepared as internet control to ensure the
correctness of cash records and as deterrent fraud.
b. The Chief Accountant or designated staff shall prepare separate bank
reconciliations for each bank account maintained by the entity within 10 days
from receipt of the monthly bank statement.
c. The Adjusted Balance Method shall be used. Under this method, the
unadjusted book and bank balances are brought to an adjusted balance that is
reported on the Statement of Financial Position.
d. Bank reconciliations shall be prepared 4 copies to be submitted within 20 days
from receipt of bank statement to the following: COA Auditor, Head of Agency,
Accounting Division, and Bank, if necessary.
e. A Journal Entry Voucher (JEV) Shall be prepared to record any reconciling items.
  Cash Equivalents -are short term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value.
Only debt instruments acquired within 3 moths before their scheduled
maturity date can qualify as cash equivalents
Receivables
Receivables represent claims for cash or other assets from other entities.
Examples:
a. Accounts receivable- refers to amounts due from customers arising from regular
trade and business transactions.
b. Notes receivable — represents claims, usually with interest, for which a formal
instrument of credit is issued as evidence of debt, such as Promissory notes.
c. Loans receivable— used in the BTr-NG books to recognize loans extended by
the National Government to Government Financial Institutions 'GFIs' or GOCCs,
covered by loan agreements.
d. Other receivables, such as, interest receivable, due from
employees/officers/other NGAs, lease receivables, dividends receivable, and the
like.
Receivables are initially measured at fair value plus Transaction cost and
subsequently measured at amortized cost.
Investments
Categories of Financial Assets
For purposes of subsequent measurement, financial assets are classified as follows:
a. Financial asset at fair value through surplus or deficit — is one that is either:
a. Held-for-trading, or
b. 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
measured.
b. Held-to-maturity investment- are no-derivative financial assets with fixed or
determinable payments and fixed maturity that an entity has the positive intention
and ability hold until maturity.
c. Loans and receivables — are non-derivative financial assets with fixed or
determinable payments and are not quoted in an active market.
d. Available-for-sale financial assets — are non-derivative financial assets that are
designated as available for sale or are not classifiable under the other categories.
Summary of Measurements:
Type of Financial Asset
a. Financial asset at fair value through surplus or deficit
Examples
 Investments in quoted stocks or bonds.
Initial Measurement
 Fair Value
Substantial Measurement
 Fair value; changes in fair value are recognized in surplus/deficit
b. Held-to-maturity
Examples
 Investments in bonds and other debt securities to be held until maturity
Initial Measurement
 Fair Value plus transaction cost
Substantial Measurement
 Amortized cost (using the effective interest method)
c. Loans and receivables
Examples
 Investments in bonds and other debt securities to be held until maturity
Initial Measurement
 Fair Value plus transaction cost
Substantial Measurement
 Amortized cost (using the effective interest method)
d. Available- for-sale financial assets
Examples
 Investments in stocks or bonds not classified under (a) to (c) above.
Initial Measurement
 Fair Value plus transaction cost
Substantial Measurement
 Fair value; changes in fair value are recognized in equity

Investments in unquoted equity instrument whose fair value cannot be reliably

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 asset's original effective interest rate. The
carrying amount of the asset shall be reduced either the use of an allowance account.
The amount of the loss shall be recognized in surplus or deficit.
In case of Account receivables, the Allowance for Impairment shall be provided in
an amount based on collectability of receivable-balances and evaluation of such factors
as aging of accounts, collection experiences of the agency, expected loss experiences
and identified doubtful accounts. (GAM for NGAs, Chapter 7, See 10)
Derecognition of Financial Assets
 Derecognition- is the process of removing a previously recognized asset,
liability or equity from the statement of financial position.
A financial asset is derecognized when:
a. The contractual rights to the cash flows from the financial asset expires or are
waived; or
b. The financial asset is transferred and the transfer qualifies for derecognition,
such as when the risks and rewards of ownership and control of the financial
asset are relinquished.
The derecognition of financial assets is subject to the provisions of the State Audit
Code of the Philippines (P.D. NO.1445) on the writing off of receivables and other
policies issued by the COA.
the for NGAs, Chapter 7, Sec. 10)
Derivatives
A derivative a financial instrument or other contract that derives its value from the
changes in value of some other underlying asset or other instrument.
Characteristics of a derivative
a. Its value changes in response to the change in an underlying;
b. It requires no initial net investment (or only a very minimal initial net investment); and
c. It is settled at a future date.
 An “underlying” is a specified price, rate, or other variable (e.g., interest rate,
security or commodity price, foreign exchange rate, index of prices or rates, etc.),
including a (e.g., a payment under contract) that may or may not occur.
Purpose of a derivative
The very purpose of derivatives is risk management. Risk Management is the
process of identifying the identifying the actual level of risk and altering the latter to
equal the former. (GAM for NGAs, Chapter 7, sec. 19)
  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.
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) attributable to a particular risk associated with recognized asset or liability
(such as all or some future interest payments on variable rate debt) or a
highly probable forecast transaction.
(ii) could affect surplus or deficit.
c. Hedge of a net investment in a foreign operation.
Components of a Hedging Relationship
a. 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.
b. 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.
Chapter 6 Summary
 Financial asset is any asset that is: cash or right to receive cash or other financial
asset, an equity instrument of another entity or contractual right to exchange
financial instruments under potentially favorable condition. Examples: cash and
cash equivalents, receivables, investments in debt and equity securities, and
derivative assets.
 The Petty Cash Fund of a government entity is:
- maintained using the imprest system.
- sufficient to defray recurring petty expenses for 1 month.
- used for disbursements not exceeding P15, OOO per transaction.
- replenished as soon as disbursements reach at least 75% or as needed.
 A government entity prepares monthly bank reconciliations using the adjusted
balance method.
  Only debt instruments acquired 3 months or less before their scheduled maturity
date can qualify as cash equivalents.
 Receivables are initially measured at fair value plus transaction costs and
subsequently measured at amortized cost.
 For subsequent measurement purposes, a government entity classifies its
financial assets into the following categories: (a) Financial asset at fair value
through surplus or deficit; (b) Held-to-maturity investments; (c) Loans and
receivables; and (d) Available-for-sale financial assets.

Chapter 7 Inventories
Introduction
Inventories are assets:
a. Held for sale or distribution in the ordinary course of operations (finished
goods)
b. In the process of production for sale or distribution (work in process); or
c. In the form of materials or supplies to be consumed in the production process or
distributed in the rendering of services (raw materials and supplies)
More specifically, the inventories of a government entity consist of the following:
a. Inventory Held for Sale (e.g., medicines for sale in government pharmacies)
b. Inventory Held for Distribution (e.g., rice and other welfare goods held for
distribution)
c. Inventory Held for Manufacturing (e.g., raw materials, work- in-process)
d. Inventory Held for Consumption (e.g., office supplies inventory)
e. Semi-Expendable Property — consists of machinery, equipment, furniture and
fixtures and similar items that are not capitalized as PPE because their costs are
below theP15,000 capitalization threshold for PPE.
Measurement
Inventories are initially measured at cost and subsequent measured as follows:
 Goods held for sale -Lower of Cost and Net realizable value.
 Goods held or distribution -Lower of cost and current replacement cost.
Cost comprises the following:
a. Purchase cost, excluding trade discounts, rebate, and other similar deductions
in purchase price.
b. Direct costs incurred in bringing the asset to its intended location and condition
(e.g., freight costs, conversion costs- such as costs of labor and production
overhead for manufactured items).
Cost excludes the following:
a. Abnormal amounts of wasted materials, labor, and production overhead;
b. Selling costs; and
c. Administrative overheads
Exceptions:
a. Inventories received from non-exchange transaction (e.g., donations) are initially
measured at acquisition-date fair value.
b. Agricultural produce are initially measured at fair value less cost to sell at the
point of harvest.
For these items, their initial measurements are deemed their costs for purposes of
subsequent measurement at the lower of cost or NRV/Current replacement cost.
 Net Realizable Value (NRV) estimated selling price less estimated costs of
completion and estimated selling/disposal costs.
 Current replacement cost is the cost the entity would incur to acquire the asset
on the reporting date.
Cost Formula
Cost of goods sold and cost of inventories on hand are determined using the following
cost formulas:
a. Specific identification- this shall be used for items that are not ordinarily
interchangeable (i.e., unique) and those that are segregated for specific projects.
Under this formula, specific cost are attributed to identified items of inventory.
Accordingly, cost of sales represents the actual costs of the specific items sold while
ending Inventory represent the actual costs of the specific items on hand.
b. Weighted average cost— this shall be used for large numbers of items of
inventory that are ordinarily interchangeable. This shall be applied under
perpetual inventory system
Under this formula, a new weighted average unit cost is computed after every
purchase. The computed average costs are used in determining the cost of goods sold
and inventory on hand. Accordingly, cost of sales and ending inventory are stated at
average costs, rather than at the actual costs of the inventories sold or on hand. This
method is commonly referred to in traditional accounting by business entities as the
"moving average" cost formula.
Government entities shall use the perpetual inventory system. Under this system,
purchase, sales, and other transactions affecting inventory are recorded in the
"inventory" and “cost of sales" accounts, as appropriate. Moreover, stock cards and
stock ledger are maintained. These enable the retrieval of information on costs and
quantities of inventories sold and on hand at any given point of time. However,
purchases of supplies and materials out of the petty cash fund for immediate use or on
emergency cases are charged directly as expense.
The FIFO cost formula and the periodic inventory system are not used by
government entities.

Recognition as an Expense
The carrying amount of an inventory recognized as expense in the period it is sold,
distributed, exchanged, or consumed. The write-down of inventory to its NRV or Current
replacement cost, as appropriate, is also recognized as expense.
Receipt and Disposition of Inventories
Receipt
1. End users prepare the Purchase Request (PR) form to request for the purchase
of items not available on stock. The PR is the basis in preparing the Purchase
Order.
 End users refer to the individuals who will actually be using the items. For
example, the end users of office supplies are those who are working in the
office; the end users for cleaning materials are the janitors. As an internal
control, only the appropriate end users are allowed to make purchase
requests for the items they need. It would be inappropriate for an office clerk
to make a purchase request for cleaning materials.
2. The authorized official prepares the Purchase Order (PO). The PO is a
document issued to the supplier when making a purchase. It indicates the
specifications, quantities, and agreed prices of the items being purchased. The
PO serves as contract between the entity and the supplier.
Recall that a canvass from at least 3 suppliers is required for purchases amounting
to PI, OOO and above.
3. When the purchased items are delivered, the Property/Supply Division signs the
"received" portion of the Delivery Receipt (DR) and prepares the Inspection and
Acceptance Report (IAR). The IAR will be used by the Property Inspector in
inspecting and accepting the delivered items.
The Property/Supply Division forwards the DR, IAR and PO to the Property
Inspector.
4. The Property Inspector inspects the conformance of the delivered items with the
specifications in both the PO and DR and indicates the result of the inspection
(i.e., acceptance or rejection) in the IAR. Rejected deliveries will be returned to
the supplier.
 The Property Inspector forwards the copies of DR, IAR and PO to both the Property/
Supply Division and Accounting Division for recording.
5. The Property/Supply Division, through the Stock Card Keeper, records the
accepted deliveries in the Stock Card (SC)The SC shows the of all receipts and
issuances of inventory, as well as the available balance at any given point of
time.
6. The Accounting Division records the accepted deliveries in the books of accounts
and in the Supplies Ledger Card (SLC). The SLC shows both the quantities and
monetary amounts of all receipts and issuances of inventory, as well as the
available balance at any given point of time.
As an internal control, the SC (maintained by the Property/Supply Division) and
SLC (maintained by the Accounting Division) are periodically reconciled.
7. The Property/Supply Division prepares the Disbursement Voucher (DV) then
forwards it, together with supporting documents, to the Accounting Division for
processing of payment.
Disposition
8. End users prepare the Requisition and Issue Slip (RIS) to request for the
issuance of items available on stock. The Head of the requesting individual shall
approve the RIS. The approved RIS is then forwarded to the Property/Supply
Division.
9. The Property/Supply Division prepares the Report of Supplies and Materials
Issued (RSMI). The RSMI will be used by the Stock Card Keeper in updating the
SC and the Accounting Division in journalizing the items issued.
10. The Accounting Division records the items issued in the books of accounts and
updates the SLC.
11. The following are other documents used in the disposition of inventories:
a. Waste Materials Report — prepared by the Property or Supply Custodian to
report wasted materials, such as destroyed spare parts and other spoilages.
b. Report on the Physical Count of Inventories — used in reporting the results of
physical counts. It shows the balance of inventory, as well as any shortages or
overages.
c. Report of Accountability for Accountable Forms — used to report the
movement and status of accountable forms in the possession of an officer.
d. Inventory Custodian Slip — prepared when issuing semi- expendable property.
Chapter 7 Summary:
 The inventories of government entities include the following: Inventory Held
for Sale, Inventory Held for Distribution (e.g., welfare goods held for
distribution), Inventory Held for Manufacturing, Inventory Held for
 Consumption (e.g., office supplies), and Semi-Expendable Property (PPE-like
items below the P15,000 capitalization threshold for PPE).
 Goods held for sale are subsequently measured at the Lower of Cost and
NRV while goods held for distribution are subsequently measured at the
Lower of Cost and Current replacement cost.
 The FIFO cost formula and the Periodic inventory system are not used by
government entities.

Chapter 8 Agriculture
Introduction 

 Agriculture means farming or the process of producing crops and raising

livestock. In this chapter, we will learn the accounting principles used for assets,
liabilities, income and expenses resulting from agricultural activities. 

 Agricultural Activity – is the management by an entity of the biological

transformation and harvest of biological assets for sale, including exchange or
non-exchange transactions, or for conversion into agricultural produce, or into
additional biological assets. 

Examples of agricultural activities include: raising livestock, forestry, annual or

perennial cropping, cultivating orchards and plantations, floriculture, and aquaculture
(including fish farming). 

The following are the common features of agricultural activities: 

a. Capability to change - living animals and plants are capable of biological
transformation; 
b. Management of change - management facilitates biological transformation by
enhancing, or at least stabilizing, conditions necessary for the process to take place.
Such management distinguishes agricultural activity from other activities. For example,
harvesting from unmanaged sources (such as Ocean fishing and deforestation) is not
agricultural activity; and
c. Measurement of change – the change in quality or quantity brought about by
biological transformation or harvest is measured and monitored as a routine
management function. 

 Biological Transformation – comprises the following processes that cause

qualitative or quantitative changes in a biological asset: 

I. Asset changes through: 

a. Growth – is an increase in quantity or improvement in quality of an animal or plant.
b. Procreation – is the creation of additional living animals or plants.
c. Degeneration - is a decrease in the quantity or deterioration in quality of an animal or
plant.
II. Production of agricultural produce. 

 Biological Asset - is a living animal or plant 

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

Recognition
A biological asset or agricultural produce is recognized when it meets the asset
recognition criteria, including the reliable measurement of its fair value or cost. 

Measurement 
Biological assets are initially and subsequently measured at fair value less costs to
sell. The gain or loss arising from initial measurement and subsequent changes in fair
value less costs to sell are recognized in surplus or deficit. 

Biological assets whose fair value cannot be reliably determined on initial

recognition are initially measured at cost and subsequently measured at cost less
accumulated depreciation and accumulated impairment losses. 

Agricultural produce is initially measured at fair value less costs to sell at the point of
harvest. This will be the deemed cost when subsequently measuring the agricultural
produce using the measurement basis for inventories or other basis. 

The gain arising from the initial measurement is recognized in surplus or

deficit. 

 Costs to Sell – are the incremental costs directly attributable to the disposal of
an asset, excluding finance costs and income taxes.
Determination of Fair value
a. Fair value is determined as follows:
Quoted price in an active market xxx
Less: Transport Costs xxx
Fair Value xxx
 Active Market - is a market in which all the following conditions exist:
a. the items traded in the market are homogeneous;
b. willing buyers and sellers can normally be found at any time; and 
c. prices are available to the public. 

 If there are more than one active markets, the entity shall use the price in the
market expected to be used. 
 If there is no active market, the entity shall estimate the market price based on
one of the following:
 i. The most recent market transaction price, provided that there is no significant
change in economic circumstances between the date of that transaction and the
reporting date;
ii. Market prices for similar assets with adjustment to reflect differences; 
iii. Sector benchmarks, such as the value of an orchard expressed per export tray,
bushel, or hectare, and the value of cattle expressed per kilogram of meat; 
iv. Present value of expected net cash flows from the asset discounted at a current
market-determined rate, in circumstances where market-determined prices or
values are not available for a biological asset in its present condition. 

Estimates of cash flows exclude finance costs, taxes, and costs of reestablishing
biological assets after harvest (e.g., the cost of replanting trees in a plantation forest
after harvest). 

 Contract prices are irrelevant when determining fair value. 

 Transport costs refer to all costs necessary in getting the asset to the market for
the sale. 
b. The determination of fair value may be facilitated by grouping biological assets or
agricultural produce according to significant attributes, e.g., by age or quality. 
c. Cost may sometimes approximate fair value, particularly when: 
i. Little biological transformation has taken place since initial cost incurrence
(e.g., seedlings planted immediately prior to reporting date); or 
ii. The impact of the biological transformation on price is not expected to be
material (e.g., the initial growth in a 30-year pine tree plantation production
cycle). 
d. Biological assets attached to land (e.g., trees in a plantation forest) may not have a
separate market but an active market may exist for the combined assets (i.e., biological
assets, raw land, and land improvements) as a package. In such case, the fair value of
the raw land and land improvements may be deducted from the fair value of the
combined assets to arrive at the fair value of the biological assets. 
e. A biological asset that is previously measured at fair value less costs to sell shall be
measured at fair value less costs to sell until it is disposed. 

Disclosures 
The following are the peculiar disclosures related to agriculture. 

a. The aggregate gain or loss on initial recognition of biological assets and agricultural
produce and from the change in fair value less costs to sell of biological assets. 
b. Consumable and Bearer biological assets and biological assets held for sale and held
for distribution at no charge or for a nominal charge. 
 Consumable Biological Assets – are those that are to be harvested as
agricultural produce or to be sold or distributed as biological assets. Examples:
livestock intended for production of meat, annual crops like maize and rice, and
trees being grown for lumber. 
 Bearer Biological Assets – are those that are self-generating and are used
repeatedly for more than one year. Examples: dairy cattle held for the production
 of milk, fruit trees, and trees from which firewood is harvested while the tree
remains. 
c. Mature and immature biological assets 
 Mature Biological Assets - are those that have attained harvestable specifications
(for consumable biological assets) or are able to sustain regular harvests (for
bearer biological assets). 
d. The amount of change in fair value less costs to sell due to physical changes and
due to price changes. 

Chapter 8 Summary: 

 Biological Asset - is a living animal or plant. 

 Agricultural Produce – is the harvested product of the entity's biological assets.
An agricultural produce subjected to post harvest processing is inventory. 
 Biological assets are initially and subsequently measured at fair value less
costs to sell. Gain or loss arising from measurement are recognized in surplus
or deficit.
 Agricultural produce is initially measured at fair value less costs to sell at the
point of harvest.
 Fair value = Quoted price in an active market less Transport costs
 If there are more than one active markets, the entity shall use the price in the
market expected to be used.

Chapter 9 Investment Property

Introduction
 Investment Property – is land and/or building held for rentals or capital
appreciation. 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. 
Examples of 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 investment
property; 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. (GAM for NGAs, Chapter 9, Sec. 3) 

The following are 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: 
i. Property held for future use as owner-occupied property;
ii. Property held for future development and subsequent use as owner-
occupied property;
iii. Property occupied by employees; or 
iv. 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. (GAM for NGAs, Chapter 9, Sec. 4) 

Initial Measurement
An investment property is initially measured at cost. The measurement of cost depends
on the mode of acquisition. 

Modes of Acquisition
1. Cash purchase - the cost of an investment property acquired through cash
purchase comprises the purchase price and any direct costs necessary in
bringing the asset to its intended condition, e.g., professional fees for legal
services and property transfer taxes. 
2. Installment purchase - the cost of an investment property acquired through
installment purchase is the cash price equivalent. The difference between this
amount and the total payments is recognized as interest expense over the
period of credit. 
3. Non-exchange transaction – the cost of an investment property acquired
through a non-exchange transaction is the fair value at the acquisition date. 
4. Self-construction - the cost of a self-constructed investment property includes
the costs of direct materials, labor, and construction overhead. The cost of
wasted materials, labor or other resources incurred in constructing the property
are recognized as expense. 
 Construction costs incurred are initially recorded in the "Construction in
Progress" account pending the completion of the investment property. Upon
completion, the construction costs are reclassified to the "Investment Property"
account.
The cost of an investment property does not include the following: 
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. 

Subsequent Measurement
Investment properties are subsequently measured under the cost model. Under this
model, investment properties are measured at cost less accumulated depreciation and
accumulated impairment losses. 

The fair value model, which is available to business entities, is not allowed for
government entities. 

Transfers To or From Investment Property

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

A government entity accounts for transfers to or from investment property at cost.

Accordingly, no gain or loss shall arise from the transfer, except when the transferred
asset is impaired, in which case, impairment loss shall be recognized first before
making the reclassification. 

Derecognition
An investment property is derecognized when it is disposed or when it is
permanently withdrawn from use and no future economic benefits or service potential is
expected from its disposal. 

When an investment property is derecognized, the difference between the net

disposal proceeds (if any) and its carrying amount is recognized as gain or loss in
surplus or deficit. 

Impairment
An asset is impaired if its carrying amount exceeds its recoverable amount. The
excess represents impairment loss which shall be recognized in surplus or deficit. 
 Recoverable amount is the higher of an asset's fair value less costs to sell and
value in use.
  Value in use is the present value of the estimated future cash flows expected to
be derived from the continuing use of an asset and from its disposal at the end of
its useful life. 
The reversal of impairment shall not result to a carrying amount in excess of the
asset's carrying amount had no impairment loss been recognized in prior periods. 

The reversal of impairment is recognized in surplus or deficit in the period of

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

Chapter 9 Summary: 
 Investment Property is land and/or building held for rentals or capital
appreciation.
 Investment property is initially measured at cost and subsequently measured at
cost less accumulated depreciation and impairment losses. The fair value model
is not allowed for government entities.
 Transfers to or from investment property shall be made only when there is a
change in use. A government entity accounts for transfers to or from investment
property at cost. Accordingly, no gain or loss shall arise from the transfer, except
when the transferred asset is impaired.
 On derecognition of an investment property, the difference between the net
disposal proceeds (if any) and the carrying amount is recognized as gain or loss
in surplus or deficit.
 An asset is impaired if its carrying amount exceeds its recoverable amount.
Recoverable amount is the higher of an asset's fair value less costs to sell and
value in use.
 The reversal of impairment shall not result to a carrying amount in excess of the
asset's carrying amount had no impairment loss been recognized in prior
periods. 

Chapter 10 Property, Plant and Equipment

Introduction
Property, Plant and Equipment are:
a. tangible assets;
b. held for use in the production or supply of goods, services or program outputs,
for rental to others, or for administrative purposes, and not intended for resale in
the ordinary course of operations; and
c. expected to be used for more than one reporting period 

Recognition
An item of PPE is recognized if it meets the definition of a PPE and the recognition
criteria for assets, as well as the capitalization threshold of P15,000. 
 The 15,000 capitalization threshold is the minimum cost an item should have
before it is capitalized as PPE. This threshold is applied on a per item basis, except as
follows:
a. Individual items with values below the threshold but work together as a group
of assets are recognized as PPE if the total cost of the assets as a group is P15,000 or
more (e.g., the costs of web servers, routers, modems, and other hardware comprising
a communications network are capitalized as PPE under the communications network'
account).
b. Bulk acquisitions of small items of PPE like library bool computer peripherals,
and small items of equipment recognized as PPE if their aggregate cost is P15,000 or
more 
Items below the capitalization threshold are recognized as inventories (i.e., Semi-
Expendable Property). 

Initial Measurement
PPE are initially measured at cost. The initial cost comprises the following:
a. Purchase price, including import duties and non-refundable 
purchase taxes, after deducting trade discounts and rebates;
b. Direct costs of bringing the asset to the location and condition necessary for it to be
capable of operating in the manner | intended by management; and
c. Present value of Decommissioning and Restoration costs - Decommissioning
costs refer to the costs of dismantling or uninstalling a PPE at the end of its useful life.
Restoration costs refer to the cost of restoring the site where the PPE is previously
installed. The present value of these estimated costs are capitalized as cost of the PPE,
with a corresponding credit to a liability account (i.e., 'Other Provisions'). 

Examples of directly attributable costs:

a. Costs of employee benefits arising directly from the construction or acquisition of
PPE; b. Costs of site preparation;
C. Initial delivery and handling costs (e.g., freight costs);
d. Installation and assembly costs;
e. Testing costs, net of disposal proceeds of samples generated during testing; and f.
Professional fees. 
Examples of costs that are expensed outright:
a Costs of opening a new facility.
b. Costs of introducing a new product or service (including costs of advertising and
promotional activities).
c. Costs of conducting business in a new location or with a new class of customers
(including costs of staff training).
d. Administration and other general overhead costs. 

Modes of Acquisition a. Acquisition by Purchase – acquisitions of PPE through

purchase 
are classified as Capital Outlays (CO) in the budget registries. 
Cash discounts, whether taken or not, are excluded from the initial measurement of an
item of PPE. A cash discount not taken is recognized as "Other Losses." A PPE
purchased under installment basis is initially measured at the cash price equivalent. The
difference between the cash_price and the installment price is amortized as interest
expense over the credit term. Promotional items acquired in conjunction with the
purchase of PPE are accounted for as follows: a. If the promotional item is the same as
those 
purchased, the total acquisition cost is allocated to all the items acquired including the
promotional item. 
b. If the promotional item is different from the other 
items acquired, the initial cost of the promotional ten is its fair value. The purchase
price, net of the fair value of the promotional item, is allocated to the other assets
acquired. 
• The individual costs of items of PPE acquired at a "lump 
sum price" are determined by allocating the "lump sum price" based on the relative fair
values of the items acquired. 
• 
If the individual costs of items of PPE acquired at a "luma sum price” are indicated in the
invoice, the items shall be recognized at their individual costs as indicated in the
invoice. 
Example: Entity A acquires a laptop computer and a printer for $100,000. The invoice
indicates the following individual costs: P70,000 for the laptop and P30,000 for the
printer. In this case, the laptop and the printer are initially recognized at their individual
costs of 270,000 and $30,000, respectively. 
2) b. Acquisition by Construction - acquisitions of PPE through 
construction are also classified as Capital Outlays (CO) in the budget registries. 
Construction costs incurred are initially recorded in the "Construction in Progress"
account pending the completion of the asset. Upon completion, the construction costs
are reclassified to the appropriate PPE account. 
a. Acquisition through Construction Contracts awarded to 
contractors – the cost of PPE acquired through a construction contract is the contract
price. 
b. Construction by Administration (Self-construction) – the 
cost of a self-constructed PPE includes the costs of direct materials, labor and other
construction overheads. The cost of wasted materials, labor or other resources incurred
in constructing the property are recognized as expense. 
Acquisition through Exchange – the measurement of the asset acquired depends on
whether the exchange transaction has commercial substance or not. 
i. With Commercial Substance - an exchange has a 
commercial substance if the subsequent cash flows of the entity change as a result of
the exchange. The asset received is measured using the following order of priority: (3)
1. Fair value of asset Given, up (plus any cash paid or 
minus any cash received); 2. Fair value of asset Received; or 3. Carrying amount of
asset Given up (plus any cash 
paid or minus any cash received) 
Lacks Commercial Substance - The asset received is measured at the: ( 1. Carrying
amount of asset Given up (plus any cash 
paid or minus any cash received) 
No gain or loss shall arise if the asset received 15 measured at the carrying amount of
the asset given up (plus any cash paid or minus any cash received). 
ni Acquisition through Non-Exchange Transaction - The asset 
acquired in a non-exchange transaction (e.g., donation, grant) is initially measured at its
fair value at the acquisition date. 
Those received without condition are recognized immediately as income (i.e., 'Income
from Grants and Donations in Kind'). 
Those with condition are initially recognized as liability (i.e., 'Other Deferred Credits')
and subsequently recognized as income when the condition is met. 
gle. Acquisition through Intra-agency or Inter-agency Transfers – The 
asset acquired from either intra or inter-agency transfer is measured at the carrying
amount of the asset received. 
Intra-agency transfers are transfers within the same agency (e.g., from Central Office to
a Regional Office or Operating Unit, and vice versa. 
Inter-agency transfers are transfers between different agencies (e.g., from BIR to
DPWH). 
* If the transfer is made in the year the equipment is purchased, the "Subsidu from
Central Office" and "Subsidy to Regional Offices" accounts are used in lieu of the
“Accumulated Surplus (Deficit)" account 
Similar entries are made for inter-agency transfers. 
6)f. Acquisition through Finance Lease - we will discuss this later in 
Chapter 13. 
Subsequent Expenditures on recognized PPE Capitalization of costs ceases when the
PPE is in the location and condition necessary for it to be capable of operating in the
manner intended by management. Therefore, costs incurred in using or redeploying a
PPE are not capitalized. 
The following subsequent expenditures on PPE are recognized as expenses: a. Costs
incurred while an item capable of operating in the 
manner intended by management has yet to be brought into 
use or is operated at less than full capacity. b. Initial operating losses, such as those
incurred while demand 
for the item's output builds up. C. Costs of relocating or reorganizing part or all of the
entity's 
operations. 
As a general rule, subsequent expenditures on recognized PPE are expensed.
Subsequent expenditures are capitalized only when it is clear that they meet the
recognition criteria for PPE, including the P15,000 capitalization threshold. 
The GAM for NGAs provides the following guidelines when accounting for subsequent
expenditures on recognized PPE: 
Repairs and Maintenance – these are classified into:(2) 
1. Minor repairs – costs of day-to-day servicing of an item of 
PPE, necessary to maintain its operating capability. These 
are charged as expenses. 2. Major repairs are considered 'betterments' and are 
capitalized. See discussion in 'd' below. 
If it is not clear that a cost is a major repair, it shall be treated as expense. 
b. Replacement costs – the cost of replacing a part of an item of 
PPE is capitalized. The carrying amount of the replaced part is derecognized and
recognized as loss on derecognition. 
If the carrying amount of the replaced part cannot be determined, the cost of the
replacement part is used as an indication of what the cost of the replaced part was at
the time it was acquired or constructed. 
c. Spare parts and servicing equipment - Minor spare parts are 
recognized as inventory and charged as expense when consumed. 
Major spare parts and stand-by equipment are recognized as PPE when they meet the
recognition criteria, e.g., they are expected to be used over more than one period. 
Spare parts and servicing equipment that can only be used in conjunction with an item
of PPE are accounted for as PPE. 
Betterments - are enhancements to the future economic benefits or service potential of
a PPE, such as: a. an increase in the previously assessed physical output or 
service capacity; b. a reduction in associated operating costs; C. an extension of the
estimated useful life; or d. an improvement in the quality of output. 
ntly depreciated 
Costs of betterments are capitalized (if they meet recognition criteria for PPE) and are
subsequently depre as follows: 
Over the remaining useful life, if the betterment incres the service potential of the asset
without extendine useful life; or Over the extended useful life, if the betterment extends
the useful life of the asset. The extended period shall no exceed the original estimate of
useful life of the asset. 
If the betterment involves the replacement of an asset the replacement is accounted for
under 'b' above. 
If it is not clear that a cost is a betterment, it shall be treated as expense. 
e: Additions and Rearrangements 
Additions are modifications which increase the physical size or function of the PPE. An
addition can be: 
i. a new unit that is physically distinct from the old unit (e.g., 
a wing of a building); or ii. an expansion, extension or enlargement of the old unit (e.g.,
a 
new floor to a building). 
The cost of an addition that is a new unit is depreciated over its own useful life while an
expansion cost is depreciated over the shorter of its useful life and the remaining life of
the PPE of which it is part. 
Rearrangement is the relocation or reinstallation of an asset which proves to be less
efficient in its original location. Rearrangement costs are capitalized and depreciated
over remaining life of the related asset. The carrying amount of original installation cost
is derecognized and charged as ! (GAM for NGAs, Chapter 10, Sec. 26) 
An entity should be very careful when assessing, rearrangement costs qualify for
capitalization as GAM NGAs, Chapter 10, Sec. 9 states the following: "Recognition 
Ognition of 
costs in the carrying amount of an item of PPE ceases which the item is in the location
and condition necessary for it to be capable of operating in the manner intended by
management. Therefore, costs incurred in using or redeploying an item are not included
in the carrying amount of that item. 
Subsequent Measurement PPE are subsequently measured using the cost model.
Under this model, an item of PPE is measured at its cost less any accumulated
depreciation and any accumulated impairment losses. 
• Depreciation - is the systematic allocation of the depreciable 
amount of an asset over its useful life. 
• Depreciable Amount - is the cost of an asset, or other amount 
substituted for cost, less its residual value. Residual Value - is the amount the entity
would currently obtain from disposal of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition expected at the end of
its useful life 
Depreciation is recognized as expense unless it forms part of the carrying amount of
another asset (e.g., depreciation of a factory equipment is included in the carrying
amount of inventory). 
Guidelines in depreciating items of PPE:(10) a. The three factors considered when
determining depreciation 
are: initial cost, useful life, and residual value. b. All items of PPE shall be depreciated,
except land and heritage 
assets. C. Depreciation begins when the asset is available for its 
intended use. For simplicity, if a PPE becomes available for its intended use: i On or
before the 15th of the month – depreciation is computed 
at the beginning of that month. 
ii. After the 15th of the month – depreciation is computed at 
beginning of the following month. 
on the asset 
d. Depreciation ceases when the asset is derecognized or for 
depreciated. Depreciation does not cease when the becomes idle or retired from active
use and held for disposa 
e. The straight line method of depreciation shall be used unless 
another method is more appropriate. That method is applied consistently from period to
period unless there is a change in the expected pattern of consumption of those future
economic benefits or service potential. 
f. 
The estimation of the useful life of an asset is a matter of judgment, based on the
entity's experience with similar assets. As a guideline, PPE shall be depreciated over
the following life spans: 
0 Property, Plant and Equipment Estimated Useful Life 
| Infrastructure Assets 
> 20 to 50 years 2 Buildings and Other Structures > 30 to 50 years Machinery and
Equipment | > 5 to 15 years 4Transportation Equipment: 
a Motor Vehicles 
> 5 to 15 years bMilitary Vehicles 
► 3 to 20 years cTrains 
> 10 to 20 years dAircrafts and Ground Equipt. ► 10 to 20 years | Watercrafts 
>> 10 to 25 years k Furniture, Fixtures and Books 2 to 15 years 
Leased assets, excluding land > Shorter of the asset's useful life 
and lease term, including extension period if renewal 15 
expected. h Leased Assets Improvements → Shorter of the asset's useful lite 
and lease term, including extension period if renewal 15 expected. 
Spected. 
Service Concession Assets 
4 Land Improvements 
> Shorter of the asset's useful life 
and term of service concession arrangement, including extension period if renewal is
expected Over the useful life of the asset to which the improvement was made or the
useful life of the improvement if significantly 
shorter 
► 2 to 15 years 
Y Others 
(GAM for NGAs, Chapter 10, Sec. 27.f) 
g. Residual value shall be at least 5% of cost, unless an entity 
determines a more appropriate estimate, subject to the approval of COA. 
h. The residual value and the useful life of an asset shall be 
reviewed at least at each annual reporting date and, if expectations differ from previous
estimates, the change(s) shall be accounted for as a change in an accounting estimate 
i. Depreciation shall be recognized on a monthly basis. 
j. 
Each part of an item of PPE with a cost that is significant in relation to the total cost of
the item shall be recorded and depreciated separately. 
For example, each part of an aircraft (i.e., its engines, passenger seats, and other parts)
shall be depreciated separately. Each part shall also be assigned a 5% residual value
based on the cost of each part. 
Impairment A PPE is impaired if its carrying amount exceeds its recoverable service
amount or recoverable amount. 
Recoverable service amount – is the higher of a non cash generating asset's fair value
less costs to sell and its value in use. 
At each reporting date, an entity shall assess whether there is an indication that an
asset may be impaired. If such indication exists, the entity shall estimate the
recoverable amount of the asset. An entity shall consider the following indications of
impairment: 
1. External sources of information: 
a. Cessation, or near cessation, of the demand for services 
provided by the asset. 
b. Significant long-term 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, legal, or government policy environment in which the entity operates. 
2 Internal sources of information: 
a. Physical damage of an asset. b. Significant changes in the expected use of an asset
that 
adversely affect its recoverable amount (e.g., the asset becomes idle, plan to
discontinue or restructure the operation to which an asset belongs, plan to dispose of
the asset earlier than expected, and reassessment of an asset's 
useful life from indefinite to finite). c. Cessation of the construction of an asset before it
is 
completed. d. Indications that the service performance of an asset is, or 
will be, significantly worse than expected. 
Computation of Value in Use 
• Value in use of a cash generating asset – the present value of the 
estimated future cash flows expected to be derived from the continuing use of an asset
and from its disposal at the end of its useful life. Value in use of a non-cash generating
asset – the present value of the asset's remaining service potential. 
Value in use can be computed using one of the following methods: 
a. Depreciated Replacement Cost Approach 
Under this approach, value in use is equal to the asset's replacement cost adjusted for
depreciation to reflect the asset's used condition. 
Replacement cost is the cost of replacing or reproducing the asset, whichever is lower. 
When determining the replacement cost of an asset, a overdesign or overcapacity of
that asset is ignored * Overdesign refers to features that are unnecessary for the 
goods or services the asset provides. 1Overcapacity refers to excess capacity over
what is needed to meet the demand for the goods or services the asset provides. 
b. Restoration Cost Approach 
Under this approach, value in use is equal to the asset's depreciated replacement cost
or depreciated reproduction cost (whichever is lower) minus estimated restoration cost. 
Restoration cost is the cost of restoring the service potential of an asset to its pre-
impaired level. 
C. Service Units Approach 
Under this approach, value in use is equal to the asset's depreciated replacement cost
or depreciated reproduction cost (whichever is lower) minus a proportionate reduction to
reflect the reduced number of service units expected from the asset in its impaired
state. 
The choice of the most appropriate approach to measuring value in use depends on the
availability of data and the nature of the impairment: 
Method Depreciated replacement cost approach or Service units approach, whichever
is more appropriate. 
Indication of impairment a. Significant long-term 
changes in the technological, legal, or government policy 
environment b. Significant long-term 
change in the extent or manner of use, including cessation or near cessation of
demand 
Depreciated replacement cost approach or Service units approach, whichever is more
appropriate 
Physical damage 
Restoration cost approach or Depreciated replacement cost approach, whichever is
more appropriate 
Reversal of Impairment The principles used in recognizing reversals of impairment loss
on items of PPE are the same as those used for investment property. See discussions
in Chapter 9. 
Heritage Assets Heritage assets are those which have historical, cultural and
environmental significance, and are intended to be preserved for future generations. 
Examples include: historical buildings and monuments, statues, museum and gallery
collections, archeological sites, national archives, ruins, conservation areas, nature
reserves, and works of art. 
The characteristics of heritage assets are: (4) a. Their value in cultural, environmental,
educational, and 
historical terms is unlikely to be fully reflected in a financial 
value based purely on market price; b. The law may impose restrictions on their
disposal by sale; 
They are often irreplaceable and their value may increase over 
time, even if their physical condition deteriorates; and d. It may be difficult to estimate
their useful lives, which in some 
cases could be several hundred years. (GAM for NGAs, Chapter 10, Sec. 30) 
Heritage assets are measured at cost. If acquired through non-exchange transaction,
the cost is the fair value at the acquisition date. 
Heritage assets are not depreciated, but subject to impairment. If determinable, a
heritage asset's fair value is disclosed. 
However, heritage assets that have future economic benefits or service potential other
than their heritage value are depreciated similar to the other items of PPE, e.g., a
historic building being used as office. 
Heritage assets not recognized in the books of accounts are recorded in the Registry of
Heritage Assets. 
Infrastructure Assets Infrastructure assets include road networks (including facilities,
such as traffic lights and road signage), flood control, sewer, water and power supply
systems, communications networks, railways, seaports, airports, and the like. 
Infrastructure assets have the following additional characteristics: a. Part of a system or
network; b. Specialized in nature and do not have alternative uses; C. Immovable; and
4. May be subject to constraints on disposal. 
Measurement! 
Infrastructure assets are accounted for similar to the other items of PPE, i.e., they are
initially measured at_ cost and subsequently depreciated. 
ave no residual 
However, generally, infrastructure assets have no re value. In cases where a part of an
infrastructure asset ha residual value, it shall be at least 5% of the cost of that part. 
sset has a 
Reforestation Projects Reforestation refers to the renewal of a forest cover by plantino
seeds or young trees. 
Reforestation projects are recorded as land improvement in the books of accounts of
the Department of Environment and Natural Resources (DENR) or other entity
concerned. 
The initial costs of reforestation projects include the following: a. Survey, mapping and
planning b. Nursery operation and seedling production or procurement C. Plantation
establishment (site preparation, hauling of 
seedlings and planting) 
Initial costs are recorded in the “Construction in Progress Land Improvements" account
pending the completion of the project, which normally takes 3 years. Upon completion
and turn over of the project, the costs are reclassified to the "Land Improvements,
Reforestation Projects" account. 
Subsequent costs on reforestation projects are accounted for as follows: a.
Maintenance and protection costs incurred within the 
duration of the project, such as construction of fire lines, strip brushing, replanting, pest
control, and patrolling, are 
capitalized. b. Maintenance and protection costs incurred after the turn-over 
of the project are charged as repairs and maintenance expense. c. The cost of replacing
trees are expensed where small numbers 
of trees are being replaced in any one particular area. 
Reforestation projects are not depreciated but subject to impairment. Impairment loss is
recognized when a reforestation project is destroyed by a force majeure or fortuitous
event beyond 
Derecognition The carrying amount of a PPE is derecognized when it is disposed of
when no future economic benefits or service potential 15 expected from the asset. 
On derecognition, the difference between the carrying amount of the derecognized PPE
and the net disposal proceeds, if any, is recognized as gain or loss in surplus or deficit. 
Disposals of PPE shall be in accordance with the Supply and Property Management
Manual and Sec. 79 of P.D. No. 1445. 
lv taken out of 
Idle, Fully Depreciated, Unserviceable and Lost PPE 
• Idle PPE refers to assets that are temporarily taken o 
active use or temporarily abandoned. Idle PPE ar derecognized but continued to be
depreciated because fut benefits are consumed not only through usage but al through
obsolescence and wear and tear. 
A PPE is fully depreciated when its carrying amount is equal to zero or its residual
value. Fully depreciated PPE are not derecognized, meaning the historical cost and
accumulated depreciation are not removed from the books of accounts. 
Unserviceable property are those which do not have future economic benefits or service
potential. Unserviceable property is derecognized. The carrying amount is recognized
as impairment loss. Unserviceable properties are reported in the Inventory and
Inspection Report of Unserviceable Property. 
• 
When a PPE is lost, either through theft, fire or other force majeure, the officer having
custody of the PPE shall immediately notify the COA within 30 days and shall submit an
application for relief, together with supporting evidence. If warranted by the evidence, a
credit for loss shall be allowed. Failure to do the requirements will not relieve the officer
of liability. (P.D. No. 1445, Sec. 73) 
The carrying amount of the lost PPE is derecognized and charged as loss, upon receipt
of the Report of Lost, Stolen, Damaged, or Destroyed Property together with the Notice
of Loss by the Accountable Officer. 
Pending the result of the investigation, the accountability of the officer shall be
established, equal to the depreciated replacement cost of the lost PPE. If a credit for
loss 15 subsequently allowed to the officer, the entry to establish the accountability is
simply reversed. If not, the officer shall pay cash to settle his accountability. 

Chapter 11 Intangible Assets

Introduction
 Intangible Assets are identifiable non-monetary assets without physical
substance. 
Essential elements of an intangible asset
1. Identifiability - an intangible asset is identifiable when it: 
a. is separable, i.e., capable of being separated and divided from the entity and
sold, transferred, licensed, rented, or exchanged, either individually or together
with a related contract, identifiable asset or liability, regardless of whether the
entity intends to do so; or
b. arises from binding arrangements including contractual or other legal rights,
regardless of whether those rights are transferable or separable from the entity or
from other rights and obligations. 
2. Control - the entity has the ability to benefit from the intangible asset or prevent
others from benefitting from it. 

Control of an intangible asset normally arises from legal rights that are
enforceable in a court of law. However, legal enforceability of a right is not a necessary
condition for control because an entity may be able to control the future economic
benefits or service potential in some other way. 
3. Future economic benefits or service potential - the future economic benefits or
service potential flowing from an intangible asset may include revenue from the sale of
products or services, cost savings, or other benefits resulting from the use of the asset
by the entity. For example, the use of intellectual property in a production or service
process may reduce future production or service costs or improve service delivery
rather than increase future revenues (e.g., an on-line system that allows citizens to
apply or renew licenses more quickly on-line, resulting in a reduction in office staff
required to perform this function while increasing the speed of processing). 

Common examples of intangible assets are computer software, patents,

copyrights, franchise, motion picture films, trademarks or brand names, licenses;
acquired import quotas, lists of users of a service, and relationships with users of a
service. 

Recognition
An intangible asset is recognized if it meets the definition of an intangible asset and the
recognition criteria for assets. 

Initial Measurement 
An intangible asset is initially measured at cost. 
 The measurement of cost depends on the mode of acquisition, which is similar to
those of PPE and investment property. A summary is provided below: 

Mode of Acquisition
a. Purchase 
Measurement of Initial Cost 
 Purchase price plus Direct costs (including non-refundable taxes but excluding
trade discounts and rebates).
 If payment is deferred, the cost is the cash price equivalent. 
b. Non-exchange transaction
Measurement of Initial Cost 
 fair value at the acquisition date 
c. Exchange 
Measurement of Initial Cost 
 With commercial sustenance (order of priority):
a. FV of asset given up (plus cash paid/minus cash received).
b. FV of asset received.
c. CA of asset given up (plus cash paid/minus cash received). 
 Without commercial substance: CA of asset given up (plus cash paid/minus cash
received). 
d. Entity Combination
Measurement of Initial Cost 
 fair value at the acquisition date 

 Peculiar measurement is made when the intangible asset is internally

generated (self-generated). 
e. Internal Generation – to assess whether an internally generated intangible asset
meets the criteria for recognition, an entity classifies the generation of the asset into:
(a) research phase; and
(b) development phase. 
2 CLASSIFIES THE GENERATION OF THE ASSET
1. Research – is original and planned investigation undertaken with the prospect of
gaining new scientific and technical knowledge and understanding. 
Expenditures during the research phase are recognized as expense. 

Examples of research activities:

i. Activities aimed at obtaining new knowledge;
ii. The search for, evaluation and final selection of, applications of research
findings or other knowledge;
iii. The search for alternatives for materials, devices, products, processes,
systems or services; and 
iv. The formulation, design, evaluation, and final selection of possible
alternatives for new or improved materials, devices, products, processes,
systems, or services. 
2. Development – is the application of research findings or other knowledge to a
plan or design for the production of new or substantially improved materials,
 devices, products, processes, systems, or services before the start of
commercial production or use. 
Expenditures during the development phase are capitalized if the entity can
demonstrate all of the following:
a. Technical feasibility of completing the intangible asset;
b. Intention to complete the intangible asset;
C. Ability to use or sell the intangible asset;
d. Probable future economic benefits or service potential;
e. Availability of adequate resources needed to complete the development and to
use or sell the intangible asset; and
f. Reliable measurement of the cost of the intangible asset. 

 If it is not clear whether an expenditure is a research or a development cost, it

shall be treated as research cost. 
 Expenditures already charged as expenses cannot be subsequently capitalized,
i.e., reinstatement of expenditure previously recognized as an expense is
prohibited. 
 Internally generated brands, mastheads, publishing titles, customer lists, and
similar items shall not be recognized as intangible assets. 
 Selling, administrative and other general overhead, costs of inefficiencies, initial
operating losses, and training costs are expensed and shall not form part of the
cost of an intangible asset. 
 Subsequent expenditures on recognized intangible asset generally expensed,
unless they meet the definition intangible asset and the asset recognition
criteria. 
 The accounting for replacement of a part of an intangible ase is the same as
those of PPE and investment property. 

Subsequent Measurement
An intangible asset is subsequently measured at cost less any accumulated
amortization and any accumulated impairment losses. 

Amortization
 Amortization is the systematic allocation of the depreciable amount of an
intangible asset over its useful life. 

For purposes of amortization, intangible assets are classified according to their

assessed useful life as follows:
a. Indefinite life – an intangible asset is considered to have an indefinite life if there
is no foreseeable limit to the period over which it is expected to provide economic
benefits or service potential to the entity. 
Intangible assets with indefinite life are not amortized but tested for impairment at
least annually. 
b. Finite life – an intangible asset is considered to have a finite life if it has a limited
period of benefit to the entity. 
 Intangible assets with finite useful life are amortized using the straight-line method
over a period of 2 to 10 years. Amortization starts when the intangible asset is available
for use and ceases when the asset is derecognized or classified as held for sale,
whichever comes earlier. Amortization does not cease when the asset is no longer
used, except when it is fully depreciated or classified as held for sale. 
The residual value is assumed to be zero except when there is a third party
commitment to purchase the asset at end of its useful life or there is an active market
where entity expects to sell the asset at the end of its useful life. 
The amortization period and amortization method shall be reviewed at each reporting
date. Changes in useful life or amortization method shall be accounted for as changes
in accounting estimates. 

Impairment
An entity is required to test for impairment an intangible asset with indefinite
useful life or an intangible asset not yet available for use at least annually or
whenever there is an indication of impairment. 
An entity shall test for impairment an intangible asset with definite useful life
only when an indication of impairment exists. Indications of impairment shall be
assessed at each reporting date. 
The accounting for impairment of intangible assets, and reversal thereof, is the
same as those of investment property and PPE (see discussions in Chapters 9 and 10,
respectively). 

Derecognition
An intangible asset is derecognized when it is disposed or when no future
economic benefits or service potential is expected from the asset. 
On derecognition, the difference between the carrying amount and the net
disposal proceeds, if any, is recognized as gain or loss in surplus or deficit. 

Chapter 11 Summary: 
 Intangible Assets are identifiable non-monetary assets without physical
substance.
 Essential elements: (1) Identifiability (separable or arises from binding
arrangements); (2) Control; and (3) Future economic benefits or service potential.
 Intangible assets are initially measured at cost. The measurement of cost
depends on the mode of acquisition, which is similar to those of PPE and
investment property.
 Internal generation:
1. Research cost – recognized as expense.
2. Development cost – capitalized only if all of the conditions listed in the GAM
for NGAs are met.
 If it is not clear whether an expenditure is a research or a development cost, it is
treated as research cost. 
 Reinstatement of costs already expensed is prohibited. 
 Internally generated brands, mastheads, publishing titles, customer lists, and
similar items are not recognized as intangible assets. Subsequent expenditures
 on recognized intangible assets are generally expensed, unless they meet the
definition of an intangible asset and the asset recognition criteria.
 Subsequent measurement:
1. Indefinite life - not amortized but tested for impairment at 
least annually.
2.Finite life - amortized using the straight-line method over a period of 2 to 10
years. The residual value is assumed to be zero except when the entity has the
ability to sell the asset at the end of its useful life.