Afar Notes

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 20

PARTNERSHIP FORMATION When measuring the contributions of

partners, the following additional


Art. 1767. By the contract of partnership
guidance from PFRS.
two or more persons bind themselves to
contribute money, property, or industry Cash and Cash Equivalents Face amount
to a common fund, with the intention of Accounts Receivable Fair Value
dividing the profits among themselves. Inventory LCNRV
Equipment Fair Value
Characteristics of a partnership

 Ease of formation   Capital and Drawings Account


 Separate legal personality
 Mutual agency   Owners, Capital
 Co-ownership of property  Initial
 Co-ownership of profits  Permanent Investment
 Limited life   withdrawals  Additional
 Transfer of ownership of capital Investment
 Unlimited liability    Shares in  Shares in
      losses Profit
Accounting for partnership  Debit balance
Conceptual framework for Financial of drawings
Reporting and PFRS are applicable to all account
Owner’s Drawing
reporting entities regardless of type of
 Recurring
organization.
 Temporary reimbursable
FORMATION withdrawals costs paid by
during the the partner.
- a contract of partnership is consensual period
- a contract of partnership is consensual.  Temporary
- must be in a public instrument when: funds held to
a. immovable property or real be remitted to
rights are contributed to the the
partnership. partnership
b. the partnership has a capital of    
3000 or more.
c. requires inventory of any
immovable property - effect if
not, void. Two Individuals forming Partnership

1. Open the book of accounts of


Partnership
Valuation of contribution
One Individual and one Sole Proprietor
1. Prescribed in the contract of
forming Partnership
partnership.
2. Valuation by the expert chosen by 1. Close the nominal accounts of the
the partners sole proprietorship business.
2. Revalue the assets contributed. >As for the profits, industrial
3. Adjust the capital account of the partners shall receive such share
sole proprietorship business. as may be just and equitable.
4. Close the books of the sole
Note:
proprietorship business.
5. Open the books of the Partnership. The designation of losses and profits
Two or more sole proprietor forming cannot be entrusted to one of the
Partnership. partners (Art. 1798)

1. Close the nominal accounts of all A stipulation which excludes one or more
the sole proprietorship business. partners from any share in the profits or
2. Revalue the assets contributed. losses is VOID (Art. 1799)
3. Adjust the capital account of all
In addition to P/L sharing:
the sole proprietors.
4. Close the books of all the sole Salaries - addition to the share in profits as
proprietors. compensation for his services to the
5. Open the books of the Partnership. partnership.

Bonuses - bonus for excellent


management performance. This is
applicable only if the partnership earns
profit.

Interest on capital contributions - entitled


to annual interest on their capital
contributions.

Note: The items above are normally


provided first and remaining amount is
shared based on P/L ratio.

PARTNERSHIP OPERATIONS
PARTNERSHIP DISSOLUTION
Division of profit and losses (Art.
1797) Dissolution - change in the relation of the
partners caused by any partner being
1. In accordance with their
disassociated from the business.
partnership agreement
2. Only share in profits has been Liquidation - termination of business
agreed; share in losses shall be the operations or winding up of business
same: affairs.
> As for the losses, industrial
partner shall not be liable. Major considerations in the accounting
for partnership dissolutions.

1. Admission of partner
> Purchase of interest It is adjusted for the following:
-Purchase of part or all of interest
> Share of any profit or loss.
of one.
-Consideration paid is not > Share of any revaluation gains or losses
recorded in the books.
-Total capital remains the same. 3. Incorporation of the Partnership
Only transfer within equity to a) Adjust the partner’s capital
establish the new partner's balance for their share in
account. profit or loss and for
> Investment in the partnership revaluation gains or losses as
-Admitted by investing directly to at the date of the
the business. incorporation.
-Transaction with the partnership. b) Close the books of the
-Consideration paid is recorded in Partnership.
the books. c) Convert their capital accounts
-Total capital is increased. into their respective number of
-No gain or loss is recognized by shares.
the partnership. d) Open the new books of the
corporation.
Scenarios that may occur for the
investment in the partnership

> Equal to capital credit; no bonus

> Greater than capital credit; excess


treated as bonus to old partners.

> Less than capital credit; deficiency PARTNERSHIP LIQUIDATION


treated as bonus to old partners.
Liquidation- termination of business
2. Withdrawal, retirement or death operations or the winding up of affairs.
of partner
1. Assets are converted into cash
The partner's capital may be: 2. Liabilities are settled.
> Purchased by one or all of the 3. Any remaining amount is
remaining partners distributed to the owners.

> Settled by the partnership Methods of Liquidation

Deferred settlement 1. Lump-sum Liquidation- all the


non-cash assets of the partnership
-Partner's interest is transferred to a are sold simultaneously, or within
liability account. a very short period of time, and
the proceeds are used to settle first
-Considered normal claim, subordinate to
all the liabilities and any
the outside creditors.
remaining amount is paid to the
It may also agree that interest shall accrue partners under a lump-sum basis.
on the unpaid balance of outgoing partner.
2. Installment Liquidation- partner’s 5. The liabilities to inside creditors
claim are settled on installment are partially or fully settled but
basis as cash becomes available, only after the full settlement of
but only after all the partnership the liabilities to outside
liabilities are fully settled. creditors.
6. If both the liabilities to outside
Settlement of Claims (Order of Priority) and inside creditors are fully
1. Outside creditors settled, any remaining cash less
2. Inside creditors cash set aside for future
3. Owner’s capital balances liquidation expenses is
distributed to the owners as partial
Lump-sum Procedure settlement of their interest.
1. All of the non-cash assets are Note: Expected future expenses are
converted to cash. recognized immediately as losses to be
2. The total gain or loss on sale of allocated to the partner’s capital balances.
non-cash assets is allocated to the
partner’s capital balances based in Unsold noncash assets are
their P/L ratios. considered as losses to be allocated also to
3. Actual Liquidation Expenses are the partner’s capital balances.
allocated to the partner’s capital Doctrine of Marshalling of assets
balances based on their P/L ratios.
4. The liabilities to outside creditors - Applied when the partnership and
are fully settled. some of the partners are insolvent.
5. The liabilities to inside creditors
Rules:
are fully settled.
6. Any remaining cash is distributed 1. Any available assets of the
to the owners in full settlement of partnership are used to settle the
their interests. partnership’s liabilities.
2. In case the assets of the
Installment Procedure
partnerships are insufficient to pay
1. Some of the non-cash assets are all the liabilities, the solvent
converted to cash. general partners are required to
2. The carrying amount of any provide additional funds from
unsold non-cash assets are their personal assets.
considered as a loss. This is
Claims of the personal assets f a partner
allocated to partner’s capital
(Order of Priority)
balances based on their P/L ratios.
3. Actual and estimated future i. Those owing to personal creditors
liquidation expenses are is of the partner.
allocated to partner’s capital ii. Those owing to partnership
balances based on their P/L ratios. creditors.
4. The liabilities to outside creditors iii. Those owing to partners by way of
are partially or fully settled. contribution.
3. In case some partners are 2. Maximum loss possible is
insolvent (limited partners), their computed by adding carrying
capital deficiency is offset to the amount of unsold non-cash
capital balances of the other assets, estimated future
partners. If after allocating the liquidation cost and cash set
capital deficiency of an insolvent aside for potential unrecorded
(or limited) partner, a solvent liabilities.
partner’s capital balance results to
Cash Priority Program- determines which
a negative amount, the solvent
partner shall be paid first and which
partner is required to provide
partner shall be paid last, after all the
additional contribution.
liabilities are settled.
Non-cash assets used as payment for
Assumptions:
claim
a) Unsold non-cash assets are treated
- Noncash asset is considered sold at the
as loss
amount agreed to be debited to the
b) Expected future liquidation cost
creditor’s or partner’s claim.
and potential unrecorded liabilities
- Different between the carrying amount
are recognized immediately as
of the non-cash asset and the agreed
losses.
settlement amount is treated as gain or
loss that is apportioned to all of the Maximum loss absorption capacity
partner’s capital balances.
Total partner’s interest
Safe Payment Schedule- shoes how much
Partner’s P/L percentage
cash can be safely paid to the partners
during installment liquidation, which
avoids any overpayment.
Procedure:
Assumptions:
1. Maximum loss absorption
a) Unsold non-cash assets are treated capacity of partners is determined.
as loss 2. Maximum loss absorption
b) Expected future liquidation cost capacity is equalized.
and potential unrecorded liabilities 3. Cash priorities are computed by
are recognized immediately as multiplying differences above by
losses. the respective partner’s P/L ratio.
Note: sum of a and b is referred to as
“maximum loss possible”

Procedure:

1. Actual loss on realization is


determined by adding losses on
the sales of non-cash assets and
actual liquidation cost.
liabilities for which the assets
have been pledged as security.
2. Assets pledged to partially
secured creditors- these are assets
with realizable values less than the
expected settlement amounts of
CORPORATE LIQUIDATION the related liabilities for which the
AND REORGANIZATION assets have been pledged as
security.
Insolvency
3. Free Assets- these are assets that
Under the Insolvency Act of the have not been pledged as security
Philippines, insolvency may be either: for liabilities. These also include
excess of assets pledged to fully
a. Voluntary
secured creditors over the related
b. Involuntaryp
liabilities.
Corporate Liquidation
Liabilities
Liquidation- termination of business
1. Unsecured liabilities with
operation or the winding up of affairs.
priority- these are all liabilities
- Assets are converted into cash, that although not secured by any
liabilities are settled, and any asset, are mandated by law to be
remaining amount is distributed to paid first before other unsecured
owners. liabilities.
2. Fully secured creditors- these are
Measurement Basis
all liabilities secured by the assets
Measurement bases prescribed in the with sufficient realizable values.
PFRS do not apply in liquidating entities. 3. Partially secured creditors- these
The appropriate measurement are are all liabilities secured by assets
realizable value (estimated selling price with insufficient realizable values
less disposal costs) for assets and 4. Unsecured liabilities without
expected settlement amount for priority- all other liabilities not
liabilities. classifiable under 1,2, 3 above.

Statement of Affairs Procedure

- Shows the financial position of a 1. Restate the assets and liabilities.


liquidating entity. 2. Identify the classification of the
assets and liabilities.
Assets 3. Compute for the Estimated
1. Assets pledged to fully secured recovery percentage
creditors- these are assets with Estimated Recovery Percentage
realizable values equal to or Net free Asstes
greater than the expected net Total unsecured liabilities without priority
settlement amounts of the related
*Net Free Assets
Total Free Assets XX  Liabilities to be liquidated- total
liabilities to be settled as at the
Less: Total Unsecured liabilities XX
beginning of the period (measured
without priority at book value).
 Liabilities to be assumed-
Net Free Assets XX
previously unrecorded liabilities
4. The statement of affairs is that were recognized during the
prepared. period (Additional liabilities/ New
liabilities).
Statement of realization and liquidation
 Liabilities liquidated- actual net
- Periodic financial reports that show settlement amounts of liabilities
information on the progress of the paid during the period.
liquidation process, most especially  Liabilities not liquidated- unpaid
when the winding up of affairs is liabilities as at the end of the
entrusted to a receiver. period (measured at book value).

Debits Credits Debits Credits


 Assets to be realized  Assets realized  Liabilities to be
 Assets acquired  Assets not realized  Liabilities liquidated liquidated
 Liabilities liquidated  Liabilities to be  Liabilities assumed
 Liabilities not liquidated  Liabilities not
liquidated  Liabilities assumed liquidated
 Supplementary  Supplementary
expenses  Supplementary expenses/income-
income
Assets income and expenses realized/incurred
during the period.
 Assets to be realized- total non-cash
assets available for disposal as at the Note: The assets and liabilities are
beginning of the period. measured at book value in order to
highlight the actual gains or losses from
 Assets Acquired- previously
sale of assets and liabilities.
unrecorded assets that were
recognized during the period Reorganization- means the
(Additional assets/ new assets). implementation of business plan to
 Assets realized- represents the actual restructure or rehabilitate a corporation
net proceeds from the conversion of with the hopes of increasing company
non-cash assets into cash during the value. It also involves changing the
period. entity’s capital structure.
 Assets not realized- the unsold non-
Types of corporate organization
cash assets as at the end of the period
(measured at book value). 1. Group reorganization- ownership
Debits Credits within a group of companies
 Assets to be realized changes due to new acquisitions,
(excluding cash) formation of new holding
 Assets acquired  Assets realized company, buyouts, takeovers,
 Assets not realized reverse acquisitions, disposal of
Liabilities
subsidiaries, demergers, and other investment in associate (PAS 28)
forms of changes in ownership. and investment in subsidiary (PFRS
2. Recapitalization- change in the 3 and 10).
capital structure through o The contractual arrangement
replacement of old shares with establishes joint control over the
new shares. joint arrangement. Such a
a. Change form par to no par or requirement ensures that no single
vice versa party is in a position to control the
b. Increase or decrease in par or activity unilaterally.
stated value  Joint control 
c. Share split o Joint control is the contractually
3. Quasi-reorganization- accounting agreed sharing of control of an
procedure whereby a financially arrangement which exists only when
troubled corporation revalues its decisions about the relevant
assets and liabilities and realigns activities require the unanimous
its equity. consent of the parties sharing
4. Corporate rehabilitation- process control.
whereby a financially troubled Note: An arrangement is considered a
corporation is administered by joint arrangement even if not all of the
another party in order to bring parties to the arrangement have joint
back the corporation to its former control. It is sufficient that at least two of
financial condition. those parties share joint control.
5. Troubled debt restructuring- PFRS 11 distinguishes between:
involves the settlement of
 parties that have joint control of a
obligation at other than the
joint arrangement (referred to as joint
original agreed method of
operators or joint venturers), and 
settlement.
 parties that participate in but do not
have joint control of, a joint
arrangement.
Types of joint arrangement
JOINT ARRANGEMENTS  Joint operation
Joint arrangement is an arrangement of o contractually agreed
which two or more parties have joint o have rights to the assets and
control (PFRS11.4) obligations for the liabilities
Essential elements in the definition of o held in or not structured separate
control  vehicle 
 Contractual arrangements o parties are called joint operators.
o A contractual agreement for the  Joint venture 
sharing of joint control over an o contractually agreed
investee distinguishes an interest in o equity method 
a joint arrangement from other o have rights to the net assets
types of investments, such as o held in a separate vehicle 
investment in equity securities o joint venturers 
measured at fair value (PFRS 9),
Note: Party to a joint arrangement is “an are recorded in each of the joint
entity that participates in a joint operator’s individual books using
arrangement, regardless of whether that the “Joint Operation” account.
entity has joint control of the arrangement. Joint Operation
Summary of Investments Debits Credits
 Merchandise  Merchandise
Regular Investor (less than 20%)
contributions withdrawals
- FVPL or FVOCI asset  Purchases and  Purchase returns and
- PFRS 9 (Fair Value Method) freight-in discounts
 Sales return and  Sales and other
Significant Influence (20%-50%) discounts income
- Investment in Associate  Expenses  Unsold merchandise,
if any
- PAS 28 (Equity Method)
Note:
Control (51%-100%)
- Personal accounts are used. ei.
- PFRS 3 and 10 (Consolidation receivable from or payable to, a
Method) joint operator.
Joint Control - Management fees are treated as
a. Joint Operation (PFRS 11 and expense by the joint operation and
other relevant PFRS) as income by the manager.
- Recognize own asset, liabilities, - The Joint Operation, personal
revenues and expenses plus share accounts and other JO accounts
in the assets, liabilities, revenues are maintained alongside a joint
and expenses of the joint operator’s regular accounts, but
operation. these are closed when the joint
b. Joint Venture (PFRS 11 and PAS operator prepares its general-
28) purpose financial statements.
- Equity Method b. Separate records are maintained
Note: In the separate financial - Joint operations transactions are
statements, investment ins associates, recorded in those separate books
subsidiaries and joint ventures are in the separate books in the
accounted for as either at cost, at fair regular manner.
value in accordance with PFRS 9 or - Joint operators record only their
using the equity method. own transactions in their
Separate vehicle respective books.
- A separately identifiable financial Note: An entity that acquires an interest in
structure, including separate legal joint operation whose activity constitutes a
entities or entities recognized by business shall account for its share as a
statue, regardless of whether those business combination.
entities have a legal personality. Joint Venture
Accounting for join operation - Entity recognizes its interest as an
transactions investment and account for it
a. No separate records are using the equity method.
maintained - Under the equity method, the
- Joint operations transactions investment is initially recognized
involving income and expenses at cost and subsequently adjusted
for the investor’s share in the Step 1: Identify the contract with the
investee’s changes in the equity. customer
Investment in Joint Venture  The contract is with a customer
Debits Credits and (among others) to
 Initial Investment  Dividends collectability of consideration is
 Share in Profit
 Share in OCI probable.
 Accounted when all of the
Presentation following criteria are met:
Presented as non-current assets, except a. The contracting parties have
when they are classified as held for sale approved the contract and are
under PFRS 5 Non-Current Assets Held committed to perform the
for Sale and Discontinued Operations. respective obligations.
b. The entity can identify each
party’s rights regarding the goods
or services to be transferred 
CONSTRUCTION CONTRACTS c. The entity can identify the
An entity applies PFRS 15 revenue from payment terms for the goods or
contracts with customers to account for services to be transferred
revenue from contracts with customers. d. The contract has commercial
PFRS 15 supersedes PAS 11 Construction substance
Contracts. e. The consideration in the contract
Core principle under PFRS 15 is probable of collection.
An entity recognizes revenue to No revenue is recognized on a contract
depict the transfer of promised goods or that does not meet the criteria above. Any
services to customers in an amount that consideration received from such contract
reflects the consideration to which the is recognized as a liability and recognized
entity expects to be entitled in exchange as revenue only when either of the
for those goods or services. following has occurred.
Construction contract  a) The entity has no remaining
 is a contract specifically obligation to transfer goods or
negotiated for the construction of services to the customer and all or
an asset or a combination of assets substantially all of the
that are closely interrelated or consideration has been received
interdependent in terms of design, and is non-refundable.
technology and function or their b) The contract has been terminated
ultimate purpose or use. and the consideration received is
 Construction contracts are non-refundable.
generally long term. Note: Each contract is accounted for
 The primary issue in the separately.
accounting for construction However, two or more contracts entered
contracts is the timing of into at near the same time with the same
recognition of contract revenue customer are combined and accounted for
and contract cost. as single contract if:
Revenue recognition principles under
PFRS 15
a. The contracts are negotiated as a
package with a single commercial
objective.
b. The amount of consideration to be Satisfaction of performance obligations
paid in one contract depends in the 1. Over time
price or performance of the other a. The customer simultaneously
contract. receives and consumes the
c. Some or all of the goods or benefits provided by the
services promised in the contracts entity’s performance as the
are a single performance entity performs.
obligation. b. The entity’s performance
Step 2: Identify the performance creates or enhances an asset
obligations in the contract that the customer controls as
Each promise to transfer the following is a the asset is created or
performance obligation that is accounted enhanced.
for separately: c. The entity’s performance
a. Distinct good or service does not create an asset with
b. A series of distinct goods or an alternative use to the
services that are substantially the entity has an enforceable
same and have the same pattern of right to payment for
transfer to the customer. performance completed to
A promise good or service is distinct if: date.
a. The customer can benefit from the 2. At a point in time
good or service  If the entity cannot demonstrate that a
b. The promise to transfer the good performance obligation is satisfied over
or service is separately time, it is presumed that the performance
identifiable. obligation is satisfied at a point in time.
Note: Separately identifiable if the good Step 3: Determine the transaction price 
or service:  Transaction price is the amount
I. Is not an input to a combined that the entity expects to be
output entitled to in exchange for
II.  does not significantly modify satisfying a performance
another good or service promise in obligation.
the contract  In a construction contract the
III.  is not highly interrelated with transaction price normally consist
other goods or services promise in of the following:
the contract. o  the contract prices
Note: Series of distinct goods or services o  any subsequent variations in
that are substantially the same and have the contract price to the extent
the same pattern of transfer to the that it is probable that they
customer are accounted for a single will result in revenue and they
performance obligation if each good or are capable of being measured
service in the series represents a reliably. 
performance obligation that would be o A construction contract may
satisfied over time. be either:
a. Fixed price contracts - in which  Revenue is measured at the
the contractor agrees to a fixed amount of transaction price
contract price are fixed rate per allocated to the performance
unit of output. obligation satisfied.
b. Cost plus contract- a Methods of measuring progress
construction contract in which 1. Input Methods- recognize
the contractor is reimbursed for revenue on the basis of efforts or
allowable or defined costs plus a inputs expended relative to the
fee. total expected inputs needed to
i. Cost-plus variable fee fully satisfy a performance
contract-the contractor obligation.
is reimbursed for the 2. Output Methods- recognize
costs plus a percentage revenue on the basis of direct
of those costs. measurements of the value to the
ii. Cost-plus fixed fee customers of the goods or services
contract-the contractor transferred to date relative to the
is reimbursed for the remaining goods or services
costs plus a fixed promised under the contract.
amount. Accounting for Construction Contracts
Step 4: Allocate the transaction price to
the performance of obligations. Can reasonably
Percentage of
Completion
 The transaction price is allocated be estimated
Method
to the performance obligations Outcome of
based on the relative stand-alone the contract Cannot
Zero Profit
reasonably be
prices of the distinct goods or estimated
Method

services.
 The stand-alone selling price us Cost to cost method- refers to the
the price at which a promised estimation of stage of completion by
good or service can be sold reference to the proportion that contract
separately to a customer. costs incurred or work performed to date
Step 5: Recognize revenue when or as a bear to the estimated total contract cost.
performance obligation is satisfied  Percentage of completion- is determined
 For a performance obligation as the ratio of total cost incurred to date
satisfied over time, revenue is over the estimated total contract costs.
recognized as the entity > Total cost incurred to date represents the
progresses towards the complete cumulative costs incurred from contract
satisfaction of the performance inception up to the current reporting date.
obligation. > Estimated total contract costs pertain to
 For a performance obligation is the forecasted total cost of completing the
satisfied at a point in time contract. This can also be determined as
revenue is recognized when the the sum of total cost incurred to date and
entity completely satisfies the estimated cost to complete.
performance obligation.
> Estimated cost to complete pertain to the Record cash collection
anticipated additional cost required to fully Cash XX
complete the contract. Contract retention (if any) XX
Formula #1 A/R XX
POC= Total costs incurred to date
Estimated total contract costs Efforts-expended method
Formula #2 The percentage of completion is based on
POC= Total costs incurred to date efforts-expended in completing the
Total costs incurred to date + Estimated contract - normally in direct labor hours,
total contract costs rather than on cost.
Contact costs
Formula #1
1. Incremental Costs of obtaining a
POC= Total labors to date
contract
Estimated total contract labor hours
2. Cost to fulfill a contract
Formula #2
POC= Total labors hours to date Incremental costs of obtaining a contract
Total labor hours to date + Estimated - Costs incurred in obtaining a
total labor hours contract with a customer that the
General Formula entity would not have incurred had
Contract Price XX the contract not been obtained.
Less: Estimated Total Construction Cost -asset if recoverable.
XX - expense if costs would have been
*Prior period cost incurred incurred regardless of whether the
*Current period cost incurred contract was obtained.
*Estimated cots to complete
Costs to fulfill a contract
Estimated Gross Profit
Multiply by Percent of Completion XX - Costs incurred in fulfilling a
% contract that are within the scope
Realized gross profit (RGP) to date of other standards.
Less: RGP in prior period XX - If costs are outside the scope of
RGP(L) for the current period those standards, it will be
classified as asset if costs are:
Pro Forma Entries a. Directly related to a contract
Incurrence/Payment of construction or specifically identifiable
cost anticipated contract.
b. Generate or enhance resources
CIP XX
that will be used in satisfying
Cash XX
performance obligations in the
Construction revenue recognition
future.
Construction cost XX
c. Expected to be recovered
CIP (If RGP) XX
Amortization and impairment
Construction XX
revenue - Contract costs recognized as asset
CIP (If RGL XX are amortized on a systematic
Record progress billing basis that is consistent with the
A/R XX transfer of the related goods or
PB XX services to the customer.
- Impairment loss is recognized to • Receivable- is an entity's right to
the extent that the carrying amount consideration that is unconditional.
of the asset exceeds: *Construction in progress XX
a. The remaining amount of Less: Progress billings (XX)
consideration that the entity Contract asset (liability) XX(XX)
expects to receive in exchange *Cost incurred XX
for the goods or services to Add: RGP XX
which the asset relates; less Less: RGL XX
b. The costs that relate directly CIP XX
to providing those goods or  CIP>PB (Contact Asset or Due
services and that have not from customer)
been recognized as expenses.
 CIP<PB (Contract Liability or Due
When using the cost-to-cost method, an
to customer)
entity excludes the following when
Changes in measure of progress
measuring its progress on a contract:
• The measure of progress shall be
a. Costs that do not contribute to the
updated as circumstances change over
entity’s progress in satisfying the
time to reflect any changes in the outcome
performance obligation.
of the performance obligation. Such
b. Costs incurred that are not
changes are accounted for prospectively as
proportionate to the entity’s
a change in accounting estimate in
progress in satisfying the
accordance with PAS 8 Accounting
performance obligation.
Policies. Changes in Accounting Estimates
Note: The entity may adjust the input
and Errors.
method to recognize revenue only to the
extent of that costs incurred if the entity Cost recovery approach
expects at contract inception. • If the outcome of a performance
obligation that is satisfied over time
cannot be measured reasonably, revenue
shall be recognized only to the extent of
Presentation
costs incurred that are expected to be
A contract where either party has
recovered (ie. zero profit" method).
performed is presented in the statement of
Onerous contract
financial position as a contract liability,
•A construction contract becomes
contract asset or receivable.
onerous if the expected costs in fulfilling
•Contract liability- is an entity's
the performance obligation exceed the
obligation to transfer goods or services to
transaction price.
a customer for which the entity has
•The entity recognizes and
received consideration (or the amount is
measures the present obligation under an
due) from the customer.
onerous contract as a provision in
• Contract asset- is an entity's
accordance with PAS 37 Provisions,
right to consideration in exchange for
Contingent Liabilities and Contingent
goods or services that the entity has
Assets.
transferred to a customer when that right is
Variable consideration
conditioned on something other than the
• If the consideration includes a
passage of time.
variable amount. the entity shall estimate
the amount to which it will be entitled in the stand-alone selling prices of those
exchange for transferring the promised additional goods or services.
goods or services to the customer. The balance of the transaction
• "Constraining estimates of price from the original contract +
variable consideration" principle— The consideration from the modification =
estimated amount of variable allocated to the remaining performance
consideration will be included in the obligations
transaction price only to the extent that it •As if the modification is part of
is highly probable that a significant the existing contract — if the additional
reversal in the amount of cumulative goods or services are not distinct
revenue recognize° will not occur when The effect of the modification is
the uncertainty associated with the accounted for as a prospective catch-up
variable consideration is subsequently adjustment to revenue.
resolved. Claims for reimbursements on tie
Examples of contract stipulations that contract
could make the consideration in a •A claim is an amount that the
construction contract to be variable: contractor seeks to collect from the
1. Penalties customer or another party as
2.Incentive payments reimbursement for costs not included in
3.Cost escalations the contract price.
Contract modification • If the entity has an enforceable
•A contract modification is a right on the claim, the entity shall account
change in the scope and/or price of a for the claim as a contract modification
contract that is approved by the using the principles in PFRS 15.
contracting parties, in writing, orally or Significant financing composition in a
implied by customary business practices. contract
Similar terms are "change order," • Promised consideration is
"variation" and "amendment." discounted if the timing of the agreed
Contract modification: it is accounted payments provides the customer or the
for: entity with a significant benefit of
• As a separate contract- if the financing the transfer of goods and
modification results to additional goods or services. The difference between the
services that are distinct and the modified promised consideration and the present
contract price reflects the stand-alone value is recognized separately as interest
selling prices of those additional goods or revenue or interest expense.
services. Uncertainty in the collectability of
Account for the existing contract contract revenue
as is and the accounts • If the uncertainty in the
for the modification as a new and separate collectability of contract revenue arises at
contract. contact inception, the entity does not
• As if the modification is a recognize any revenue from the contract.
termination of an existing contract and the Any consideration received is recognized
creation of a new contract — if the as a liability.
additional goods or service are distinct but • If the uncertainty in the
the modified contract price does not reflect collectability of contract revenue arises
subsequent to contract inception, the  software and technology
collectability is accounted for as  motion pictures, music and other
impairment of trade receivable and/or forms of media and entertainment
contract asset.
 franchises
Non-cash considerations
 patents, trademarks and copyrights
• The contributed goods and
Franchise
services are treated as non-cash
consideration and included in the A franchise is a contractual
transaction price if the entity obtains agreement under which the franchisor
control over them. Non-cash consideration grants the franchisee the right to sell
is measured: certain products or services, to use certain
At fair value or Selling Price of the good trademarks or trade names or to perform
or serviced promised in exchange for the certain functions usually within a
consideration. designated geographical area
ACCOUNTING FOR FRANCHISE
OPERATIONS - FRANCHISOR Franchises are two types
1. Contractual arrangement between
An entity applies PFRS 15 revenue from two private entities or individuals
contracts with customers to account for - The franchisor having developed
revenue from contracts with customers. a unique concept of product
PFRS 15 supersedes PAS 18 Revenue. protects the concept or product
Core principle under PFRS 15 through a patent copyright or
An entity recognizes revenue to depict the trademark or trade name
transfer of promised goods or services to 2. Contractual arrangement between
customers in an amount that reflects the a private entity or an individual
consideration to which the entity expects and the government - a
to be entitled in exchange for those goods governmental body allows a
or services. private entity to use public
Revenue recognition principles under property in performing its services
PFRS 15 Promise to grant license is:
Not distinct Distinct
Step 1: Identify the contract with the
The promises are The promise to grant
customer. accounted for the license is treated
Step 2: Identify the performance together as a single as a separate
obligations in the contract. performance performance
Step 3: Determine the transaction price  obligation. obligation
Step 4: Allocate the transaction price to Use general Use specific
the performance of obligations. principles to principles:
Step 5: Recognize revenue when or as a determine whether Right to access - the
performance obligation is satisfied  the performance entity's intellectual
obligation is property as it exists
Licensing
satisfied over time throughout the
PFRS15 defines a license as one or at a period in license period, the
that “establishes a customer’s right to the time. performance of
intellectual property of an entity”. obligation is
Example of licenses of intellectual satisfied over time.
property include: Right to use - the
entities intellectual Continuing franchise fees- these are the
property as it exists periodic payments made by the franchisee
at the point in time to the franchisor for the ongoing
at which the license franchisee support. Continuing franchise
is granted, the
fees are also referred to as a royalty fees
performance of
obligation is and are usually based on a certain
satisfied at a point percentage of the franchisee’s sales, but
in time. can also be set up as fixed amount or on a
sliding scale and are payable periodically.
The customer The customer can Sale of equipment and other tangible
cannot detect the detect the use of and assets- in most franchise agreements the
use of and obtain all obtain all the
franchisor provides equipment and other
the remaining remaining benefits
tangible assets to the franchisee for a
benefits from the from the license at
license at the time it the time it was
separate fee.
was granted. granted. Option to Purchase
Intellectual property Intellectual property When the franchise agreement includes the
changes throughout does not change provision that the franchisor has an option
the license period. throughout the to purchase the franchise business, the
a. The entity license period. initial franchise fee must be deferred and
continues to be when the option is exercise, the deferred
involved with the
revenue from initial franchise fee is treated
intellectual property.
as reduction from the investment.
b. The entity
undertakes activity
that significantly
affect the
intellectual property.
May be evidenced
by a sales-based
royalty agreement
between the entity
and the customer.
Franchise fees
Franchise fees refer to the fees that the
franchisee agrees to pay to the franchisor CONSIGNMENT SALES
in a franchise agreement.  An entity (called the consignor)
delivers goods to another party
(called the consignee).
Franchise fees come into the form of:  The consignor recognizes revenue
Initial franchise fee- this is the one of only when the consignee sells the
payment made by the franchisee to the consigned goods to end
franchisor to obtain the franchise right. customers.
This is normally paid at the signing of the  Consigned goods – inventory of
agreement and are normally non- consignor; consignee records
refundable. memo entries.
 Freight and other incidental costs Principal vs agent
– capitalized as cost of the
consigned goods
 Typical consignment, the
consignee is entitled to a
commission.
 Commission – recognized as
expense by the consignor but
income of the consignee.
 When the consigned goods are
sold to end customers.
- The consignor recognized
revenue at gross amounts of
consideration INSTALLMENT SALES METHOD
- The consignee recognized
revenue at the commission or Installment sales method is a special case
fee to which it is entitled. of revenue recognition that deviates from
- Pro forma entries revenue recognition principles of PFRS15.
Consignor Books Consignee Books This method may be used for taxation
Consignment of Goods purposes or when the entity is a micro
Memo Entry Memo Entry entity and has opted to use the income tax
Sale of Goods basis of accounting. 
No Entry Cash XX Under the installment sales method the
Principal AgentCI XX
gross profit from an installment sale is
Payable to XX
initially deferred and subsequently
It controls the Remittance of Sale
good Its performance
realize on a piecemeal basis as the
or service
Cash before the XX obligation
Payableisto to
XX
installment payments are received using
good CEor service isXX arrange Cash theXX
Revenue XX the formula below:
transferred to the provision of
Collection on a sale
customer.
COGS XX goods or services
x Gross profit rate
Inventory XXby another party
Realize gross profit
May personally Recognized as
satisfy a performance revenue at the Deferred gross profit
Installment account receivable
obligation. commission or
fee to which it is
Realized Gross Profit
entitled
Amount Collected
It may engage
another party to DGP beg. – DGP, end.
satisfy some or all of
the performance Gross profit
obligation on its Sales
behalf. Sales 100
Cost of sales 60
Recognized as
Gross profit 40
revenue at the gross
amount
consideration.
GPR 40% Inventory @ FV XX
Formula for determination of Collections Deferred gross profit @ CA XX
Installment AR beg. Loss on repossession XX
Less: Installment AR end Installment receivable @ CA XX
Amount of collections Gain on repossession XX
Accounting Procedures to record
Realized Gross Profit repossession
Gross Profit Rate 1. Record the repossessed
DGP, beg. /GPR merchandise in an appropriate
Less: DGP, end/ GPR inventory account at its fair value
Amount of collections (Estimated Selling Price less
Note: The amount of collection must be Reconditioning Cost and normal
multiplied by GPR must be the principal profit margin) at the date of
amount and do not include the interest repossession.
collections. In case there is collection from 2. Cancel the uncollected installment
customer who issued a non-interest- account receivable balance related
bearing note, the amount to be multiplied the account defaulted only.
must be present value of the amount 3. Write-off the balance of the
collected. Hence, exclude the interest deferred gross relating to the
compound. above receivable.
Repossession 4. Recognize the resulting gain or
loss on repossession.
The seller may repossess the good sold in Note: If the given is the FV and silent if it
case of default by the buyer. On is after or before reconditioning cost, then
repossession date: it is construed as before reconditioning
a. The repossessed good is debited to cost and no need to deduct the
an inventory account at “fair reconditioning cost from its FV. But if the
value”. For purposes of applying given is the selling price, then you have to
the installment sales method, “fair deduct the reconditioning cost and normal
value” is either: profit margin even if it is not stated the
i. The appraised value, or selling price is after or before
ii. The estimated resale price of reconditioning costs. Another tip is if the
the repossessed good less given is selling price then deduct the
reconditioning costs and normal profit margin while if the given is
normal profit margin FV whether after or before reconditioning
b. The carrying amounts of the cost then ignore the normal profit margin.
related installment receivable and Trade-ins
deferred gross profit are A seller may accept from a buyer a trade-
derecognized in of old merchandise. Trade-ins under the
c. The difference between (a) and (b) “installment sales method” are accounted
is recognized as gain or loss on for as follows:
repossession a. The trade-in merchandise is
debited to inventory at fair value.
Pro-forma Entry: For purposes of applying the
installment sales method, “fair
value is either:
i. The appraised value of the
traded-in merchandize
ii. The estimated resale price
of the traded-in
merchandise less
reconditioning costs and
normal profit margin.
b. The seller gives the buyer a trade-
in value for the old merchandise.
The trade-in value is the amount
that is treated as part payment of
the new merchandize being sold.
Note:
 Trade-in value > FV (debited to
over allowance and deducted from
the sale price when computing for
the GPR.
 Trade-in value < FV (credited to
under allowance and added to the
sale price when computing for the
GPR.
 When there is under or over
allowance arising from trade in,
GPR may be changed.

Pro-forma Entry:
Inventory @ FV XX
Over Allowance XX
Installment receivable XX
Installment sale XX
Under allowance XX

You might also like