PROPERTY, PLANT AND EQUIPMENT Characteristics ‘© Tangible Assets '* Used in business (production/supply of goods and services, for rental and for admin purposes) '*Exoected to be used for more than one year Bio Assets and Mineral Rights and Reserves are not PPE. > apply PAS 16 for PPE used to develop or maintain bio assets and mineral rights & reserves Recognition * Probable future economic benefits ‘Cost of the asset can be measured reliably Cost of PPE > cost incurred to acquire/construct PPE > cost incurred subsequently to add to, replace part of, or service It > Spare parts & Servicing Equipment ‘© Normally carried as inventory and expensed as consumed ‘© If major spare parts and stand-by equipment, qualify as PPE if used for more than one year > depreciated over a time period not exceeding the useful life of related asset ~ Safety and Environmental Equipment ‘© Not directly increasing the future economic benefit of any existing PPE ‘© Necessary to obtain the future economic benefit from the asset in EXCESS of what it could obtain if such equipment had not been acquired © Recognize as PPE ‘Measurement @ Recognition initially measured at COST ‘= Purchase price including import duties and nonrefundable purchase taxes net of trade discount & rebates whether taken or not © Cost directly attributable to bringing the assets to the location and condition for it to be capable of operating, > cost of employee benefits from construction/acquisition of PPE cost of site preparation ~ initial delivery & handling costs > installation and assembly cost > professional fees > cost of testing whether asset is functioning properly net of proceeds from selling any items produced during testing (samples) © Initial estimate of costs of dismantling & removing the item & restoring the site on which itis located > the obligation for which the entity incurs when the item is acquired or as a consequence of having used the item Modes of Acquistion : Mode Cost of equipment [Aequlsitlon on Cash Basis | Cash price equivalent @ recognition date plus drectiy attributable costs turn sum price | atocate based on relative fir vale o assets acquired [Acquisition on Account invoice price minus discount (whether taken or not) ‘Acquistion on Installment Basis Cash rice equivalent Scanned with CamScanner+H there is cash price given + _Noavailable cash price Issuance of Share Capital @ cash price (if installment price > cash price, recognize as. Interest to be amortized over credit period Present value of all payments using implied interest rate a. Fair value of asset received b. Fairvalue of the share capital c._Par vaiue/stated value ofthe share capital Issuance of Bonds Payable 2. Fair value of bonds payable b. Fairvalue of asset received c._Face value of bonds payable Exchange ~ acquisition in exchange of nonmonetary asset or ‘combination of monetary and nonmonetary Commercial substance ~ if expected cash flows after the ‘exchange differ significantly from the expected cash flow before the exchange With commercial substance: (gain/loss fully recognized) ‘© No cash involved © Cash is involved No commercial substance (no gain/loss) ‘Trade in—nondealer acquiring asset from a dealer; usually involves significant amount of cash; exchanging property as part of payment and the balance payable in cash a. Fair value approach Trade in value approach {if FV of asset given can't be determined) a. Fairvalue of asset given b. Fairvalue of asset received © Carrying amount of asset given a. Fair value of asset given plus cash payment (payor) b. Fairvalue of asset given minus cash received (payee) Carrying amount of asset given up +/- cash received/paid Fair value of asset given plus cash payment Trade in value of asset given plus cash payment Donation ‘+ From shareholders + From nonshareholders if subsidy + if not subsidy (with restriction) ‘Construstion Tineludes Fair value of items received (credit to donated capital) ‘Expenses related to the donation (registration fees and legal fees) are added to donated capital “Expenses directly attributable to the asset is added to asset account Fair value of asset/item received (credit to income account) Fair value of asset/item received (credit to liability account nti restrictions are met where itis transferred to income) Scanned with CamScanner1. Direct cost of materials bbased on direct labor cost/hours ‘Income/loss from operations during construction NOT necessary to bring the item to location/condition for its intended use is not capitalized but is recognized in profit or loss. J Derecognition ‘* Removal of cost of PPE with related accumulate depreciation ‘© Upon disposal or when its fully depreciated ‘© Gain/Loss on disposal shall be included in profit or loss ‘© Gain/Loss on disposal = Net disposal proceeds ~ Carrying amount of asset Fully depreciated property '* When carrying amount is equal to zero or equal to residual value '* Donot remove accounts of fully depreciated PPE still used in service Property classified as held for sale ‘Asset is available for immediate sale within one year from date of classification as held for sale Exclude from PPE but present as current asset ‘Measured at lower of carrying amount or fair value less cost to sell Not depreciated Idle or abandoned property © Do not classify as held for sale ‘© Carrying amount would be recovered through continuing use ‘© Does not preclude depreciating the asset as future benefits are consumed not only through usage but also through wear and tear and obsolescence ‘© Tobe included in PPE until the end of its economic life Optional Disclosures © CA of temporarily idle PPE ‘© Grass CA of any fully depreciated PPE still in use ‘© CA of PPE retired from active use and classified as held for sale ‘* When cost model is used, the FV of PPE when this is materially different from the CA Government Grant (PAS 20) ~ assistance by gov't in form of transfer of resources to an entity in return of past or future compliance with certain conditions relating to the operating activities of the entity. > sometimes called as subsidy, subvention, premium Requisites ‘© given by the government ‘* in return for past or future compliance with conditions Recognition and Measurement ‘© Measured at FAIR VALUE including nonmonetary grants ‘© Recognized if there is reasonable assurance that: Scanned with CamScanner> the entity will comply with the conditions > the grant will be received + Receipt of the grant does not of itself provide conclusive evidence that the conditions have been or will be fulfilled ‘© Shall NOT be recognized on a CASH BASIS Classifications a. Grant related to asset > condition is that the entity shall purchase, construct, or acquire long-term asset b. Grant related to income > grant other than related to asset ‘Accounting for Government Grants Reason for grant Pattern for Recognition of Income Recognition of specific expenses (safety and environmental expenses) ‘Over the period of the related expense (prorate) Related to depreciable asset (acquisition or construction of buildings) ‘Over the periods and in proportion to the depreciation of related asset (divide by the useful life of related asset if using straight-line method) Related to nondepreciable asset (iand) ‘Over the periods which bear the cost of meeting the conditions ‘As compensation for expenses or losses already ncurred (or for the purpose of giving immediate financial support with no further related costs Income on the period which it became receivable Presentation of Government Grant If related to asset: a. Asdeferred income b. Deducting the grant in arriving at the carrying amount of the asset (lower depreciation expense) If related to incom a. Asother income in iS b. Deducted from the related expense Repayment of Government Grant > due to noncompliance with conditions ~ change in accounting estimate (prospectively) If related to income: 2. Repayment shall be applied first against any unamortized deferred income b. Any excess shall be recognized immediately as an expense Deferred income-government grant Loss on government grant Cash Ifrelated to asset: 0x a. Repayment shall be recorded by increasing the carrying amount of the asset b. Cumulative depreciation that would have been recognized to date in the absence of the grant shall be recognized immediately as an expense Deferred income approach: Deferred income-government grant Loss on government grant 0% Scanned with CamScannerCash mx Depreciation 0K Accumulated Depreciation 0% (Cumulative depreciation not recognized) Deduction from asset approach: Building 0K cash vox Depreciation v0 Accumulated Depreciation 200% Grant of interest-free Loan ~> Difference between face amount of the loan and the present value is recognized as discount on note payable and grant income to be amortized over the term of the loan using effective interest method > Interest expense (discount amortized) and grant income may be offset against the other (zero interest expense each year) Government Assistance > action by the government to provide economic benefit specific to an entity or range of entities under certain criteria the essence is that NO VALUE can reasonably be placed upon government assistance such as ‘a. Free technical or marketing advices b. Provision of guarantee . Government procurement policy that is responsible for a portion of the entity's sales Disclosures ‘a. Accounting policy adopted including method of presentation in FS b, Nature and extent of grant recognized and indication of other forms of gov't assistance from which the entity thas directly benefited Unfuffilled conditions and other contingencies attaching to government assistance that has been recognized Name of the government agency that gave the grant is NOT REQUIRED to be disclosed along with the date of sanction ‘and date when cash is received, Borrowing Cost (PAS 23) > interests and other costs that an entity incurs in connection with borrowing funds ‘Accounting for borrowing costs 1. If borrowing is directly attributable to the acquisition, construction, or production of a QUALIFYING ASSET, borrowing cost is capitalized as part of the cost of the asset (MANDATORY) 2. Allother borrowing cost shall be expensed as incurred if NOT directly attributable to a qualifying asset 3, Excluded from capitalization are: a. Assets measured at FAIR VALUE, such as bio asset 'b. Inventories produced in large quantities on a repetitive basis even if they take substantial period of time to get ready for sale Assets that are ready for intended use or sale when acquired Qualifying Asset > an asset that necessarily takes a substantial period of time to get ready for its intended use such as. a. Manufacturing plant Scanned with CamScannerb. Power generation facility €._ Intangible Assets 4. Investment Property Types of Borrowing, ‘a. Specific borrowing > funds borrowed specifically for the purpose of acquiring a qualifying asset b. General borrowing > funds borrowed are generally AND used for acquiring a qualifying asset ‘Accounting Treatment for Borrowing Costs For specific borrowing: 2. Capitalize the actual borrowing cost incurred during the period b. Deduct any investment income from temporary investment of the funds For general borrowing: > Do NOT DEDUCT any investment income from temiporery investment of funds a, Compute the average expenditures/carrying amount of the asset (if given amount is incurred evenly during the year, just divide it by 2) Date Expenditure ‘Months Outstanding. Amount Jan 400,000 2 4,800,000 Mar 31 1,000,000 3 9,000,000 June 30 1,200,000 6 7,200,000 sep 30 1,000,000 3 3,000,000 Dec 31 400,000, ° 0 Total 24,000,000/12 ‘Average carrying amount 2,000,000 b. Compute capitalization rate or average interest rate Total annual borrowing cost/total general borrowings outstanding Multiply average carrying amount of the asset by the capitalization rate. dd. Capitalizable borrowing cost shall NOT EXCEED the actual borrowing cost. (Use whichever is lower) For both specific and general borrowing: a. Compute the actual borrowing cost for the specific borrowing then capitalize ‘Compute the average expenditures/carrying amount of the asset Deduct from the average expenciture the amount of specific borrowing incurred ‘Compute capitalization rate ‘Multiply net average expenditures by the capitalization rate apitalizable general borrowing cost shall NOT EXCEED the actual general borrowing cost. (Use whichever is lower) Construction for more than one year > use the same procedure for the first year > the beginning balance of expenditures for the second year shall include the capitalized borrowing cost from first year > use the same procedure of computation for the second year Spetific Borrowing for asset used for general purposes > treated as general borrowing in determining capitalizable borrowing cost ‘Commencement of capitalization Capitalize borrowing cost when the following three conditions are present: ‘a. When the entity incurs expenditures for the asset b. When the entity incurs borrowing costs c. When the entity undertakes activities necessary to prepare the asset for the intended use or sale Scanned with CamScanner~ Activities necessary to prepare asset encompass more than physical construction of the asset (includes technical and ‘administrative work prior to commencement of physical construction such as drawing up plans and obtaining permits) > Merely holding the asset for use or development without any associated development activity does NOT QUALIFY for capitalization ‘Suspension of Capitalization > if due to temporary delay which is a necessary part of the process of getting an asset ready for its intended use, continue capitalization of borrowing costs (eg. Period of high water levels that delay the construction of a bridge if such high water level is common during construction period in the geographical region involved.) Cessation of Capitalization > Ceases when substantially al the activities necessary to prepare the asset are complete Disclosures ‘2. Amount of borrowing costs capitalized during the year b. Capitalization rate used Segregation of qualifying assets from other assets in FS is NOT REQUIRED to be disclosed Land Account > recognize as PPE if a. Used asa plant site b. Held definitely as a future plant > other uses of land not recognized under PPE: a. For currently undetermined future use (investment property) b. Held for long term capital appreciation {investment property) ¢. Held for current sale by a real estate developer (inventory) Costs chargeable to land Purchase price Legal fees and other expenditures for establishing clean ttle Broker's commission Escrow fees Fees for registration and transfer of ttle Cost of relocation or reconstruction of property belonging to others in order to acquire possession Mortgages, encumbrances, and interests on such assumed by the buyer Unpaid taxes up to date of acquisition assumed by the buyer (in general, outright expense) Cost of survey j. Payments to tenants to vacate the LAND k. Cost of permanent improvements such as cost of grading, leveling and landfil |. Cost of option to buy the acauired land, If land is not acquired, cost of option is expensed. im. Special assesements made by gov't (increase the value of land) Land Improvements > if additions to cost not subject to depreciation, charge to land account > if land improvements are depreciable, charge to land improvement such as Fences Water system Drainage system Sidewalks Pavements Cost of trees, shrubs and other landscaping Scanned with CamScanner> depreciate over their useful ife Building Account Mf purchased a. Purchase price b. Legal fees and other expenses incurred in connection to the purchase ©. Unpaid taxes up to date of acquisition 4. Interest, mortgage, liens and other encumbrances on the building assumed by buyer fe. Payments to tenants to induce them to vacate building Any renovating or remodeling costs Incurred to put a building purchased in a condition suitable for its intended H constructed 2. Materials used, labor employed and overhead incurred during construction b. Building permit or license < Architect fee d. Superintendent fee . Cost of clearing and demolishing unwanted old structures, less proceeds from salvage f. Payments to tenants to induce them to vacate building Cost of excavation h. Cost of temporary buildings used as construction offices and tools or materials shed i. Expenditures incurred during the construction period such as interest on construction loans and insurance i. Expenditures for service equipment and fixtures made permanent part of the structure k. Cost of temporary safety fence around construction and cost of subsequent removal thereof (permanent fence isa land improvement) Safety inspection fee ‘Sidewalks, pavements, parking lot, driveways if part of the blueprint for the construction of the building, charge to Building + if expenditures are occasionally made or incurred not in connection with the construction of a new building, charge to Land Improvements Claims for Damages > ifinsurance is taken during construction of a building, charge to Building > claims for damages when there is no insurance for injuries sustained during construction, expense outright (itis due to management's negligence) Building Fixtures. immovable shelves, cabinets, and partitions (attached to the building), charge to Building 5 movable shelves, cabinets, and partitions, charge to Furniture and Fixtures (depreciated over it useful life) Ventilating system, lighting system, elevator > installed during construction, charge to Building > otherwise, charge to Building Improvements (depreciated over their useful life or remaining life of building, whichever is shorter) New Provision (PIC Interpretation approved June 2013) 1. Acquisition of Land & Old Building @ a single cost 2. Single cost is allocated based on fair value if the old bldg. is by itself useable b.. Single cost is allocated to the LAND ONLY if the old building is unuseable and therefore to be demolished immediately 2. Old building is demolished immediately to make room for the construction of the new building Scanned with CamScanner2. The allocated carrying amount of the old building is charged to loss if the new building is accounted for as PPE or investment property The allocated carrying amount of the old building is capitalized as cost of the new building ifthe latter is accounted for as inventory The cost of demolition net of salvage value (including payment to tenants to vacate premises) is capitalized as cost of building 3. If an old building owned by the company is to be demolished to make room for the construction of the new building a. The carrying amount of the old building is recognized as loss whether the new building is accounted for as. PPE, investment property, or inventory The cost of demolition net of salvage value is capitalized as cost of the new building, Machinery Costs chargeable to machinery are as follows: a. Purchase price Freight, handling, storage, and other cost related to the acquisition Insurance while in transit Installation cost, including site preparation and assembling Cost of testing and trial run, and other costs necessary in preparing the machinery for its intended use Initial estimate of cost of dismantling and removing the machinery and restoring the site on which itis located, and for which the entity has a present obligation {required to be capitalized by law or contract), & Fee paid to consultants for advice on the acquisition of the machinery fh. Cost of safety ral and platform surrounding the machine |. Cost of water device to keep machine cool > if machinery is moved to new location, the undepreciated cost of old installation cost is expensed and the new Installation cost is charged to new asset + if machinery is remover and retired to make room for the installation of a new one, the removal cost NOT previously recognized as a provision is charged to expense not capitalizable > VAT on the purchase of machinery is not capitalizable but charged to input tax to be offset against output tax. Any irrevocable purchase tax is capitalized as cost of the assot. Tools > machine tools are those used in connection with the operation of machines > hand tools are those not used in operating the machines, segregated from the machinery account Patterns and dies > used in designing or forging out a particular product > if used for the regular products, recorded as asset (depreciated over their useful life) > if used for specially ordered products, expensed outright {form part of the cost of the special product) Equipment > includes delivery equipment, store equipment, office equipment, furniture and fixtures, and similar assets > Delivery equipments © Cars © Trucks ‘© Other vehicles used in business operations ‘© Motor vehicle registration fees > expensed outright > Store and Office equioment ‘© Computers + Typewriters Scanned with CamScannerAdding machines Cash registers Calculators ‘* For selling function - store equipment > Furnitures & Fixtures © Showcases © Counters © Shelves Display Fixtures Cabinets Partitions Safes Desks Tables Returnable containers > bottles, boxes, tanks, drums, barrels, and similar items returned to the seller by the buyer when contents are consumed if containers are in big units or of great bulks (tanks, drums, barrels) -> PPE > if containers are in small units and individually involve small amounts (bottles and boxes) -> Other Noncurrent Assets > if not returnable > expense outright Capital Expenditures Revenue Expenditures Expenditure that benefits current and future periods Expenditure that benefits current period only [expense outright Recognition of subsequent cost > if will increase future service potential of the asset -> capitalized level of performance > expensed Future Economic Benefit '* Extends the life of the property © Increases the capacity of the property and quality of output + Improves efficiency and safety of the property Subsequent Costs ‘Additions > modifications or alterations which increase the physical size or capacity of the asset ‘© Anentirely new unit ~ capitalized; depreciated over its useful life ‘+ Anexpansion, enlargement, or extension of the > capitalized; depreciated over its useful life or remaining old asset life ofthe asset of which itis a part, whichever is shorter Improvement or Betterments > modification or alterations which increase the se life or the capacity ofthe asset > may represent replacement of an asset or a part thereof with one of a better or superior quality > capitalized if tdo not involve replacement of parts, simply added to cost of existing asset Replacements > substitution but the new asset is not better than the old ‘asset when acquired | 5 replacement isa substitution of an equal or lesser Scanned with CamScanner‘+ Replacement of old asset by new asset ‘+ Replacement of major parts + _ Replacement of minor parts ‘quality > capitalizable as a new asset extraordinary repairs, capitalized ~ ordinary repairs, expensed outright Repairs ‘* Extraordinary Repairs ‘+ Ordinary Repairs (Maintenance) expenditures used to restore assets to good operating condition upon their breakdown or replacement of broken parts > material replacement of parts, involving large sums and normally extend the useful life of asset; capitalized > minor replacement of parts, involving small sums and are frequently encountered; expensed Rearrangement Cost ~ relocation or reinstallation of an asset which proves to be less efficient in its original location > normally increases the future potential of the asset; capitalized ~ if it merely maintains the existing level of performance; expensed ‘Accounting for major replacement ‘© Separate identification of the partis practicable > debit to asset account > cost of the part eliminated and related accumulated depreciation are removed and the carrying amount of the old partis treated as a loss Eliminate original cost of the part Loss on retirement of asset ‘Accumulated Depreciation PPE Record the Replacement PPE cash Record Subsequent Annual Depreciation Depreciation ‘Accumulated Depreciation Assets original cost Less: Cost of part replaced ‘Add: Cost of replacement 0x Less: Accumulated depreciation (related to old part excluded) oe Carrying amount Divided by remaining life Annual depreciation (new) ‘+ Separate identification is not practicable > use the cost of the replacement as an indication of the “likely original cost” of the replaced part at the time it ‘was acquired (current replacement cost shall be discounted to estimate original cost of replaced part) > same accounting procedure with above Scanned with CamScannerDepreciation Cost allocation in recognition of the exhaustion of useful ife of an item > depreciation -> PPE depletion > wasting asset > amortization > intangible assets Depreciation Period > begins > when itis available for use (asset isin the location and condition necessary for it to be capable of operating) > ceases > when asset is derecognized > temporary idle activity DOES NOT PRECLUDE depreciating the asset ~ if asset is classified as held for sale, discontinue depreciation Kinds of Depreciation ‘2. Physical depreciation > roiated to depreciable asset’s wear and tear and deterioration over a period > results to the ultimate retirement of the property or termination of the service of the asset 1. Wear and tear due to frequent use Passage of time due to nonuse Action of the elements such as wind, sunshine, rain or dust. Accidents such as fire, flood, earthquake and other natural disaster Disease -> physical cause is due to animals and wooden buildings b. Functional or economic depreciation -> arises from obsolescence or efficiently 1. Obsolescence arise due to the following: a. When there is no future demand for the product which the depreciable asset produces. b. When a new depreciable asset becomes available and can perform the same function for substantially lesser cost 2. inadequacy arises when asset is no longer useful to the firm because of increase in the volume of operations adequacy of the asset to perform Factors of depreciation a. Depreciable araunt 'b. Residual value > may be equal to carrying amount where dep’n will be zero until it becomes lower than CA but rnever it becomes MORE THAN the carrying amount of the asset Useful life Methods of Depreciation 1. Equal or Uniform charge methods ‘a. Straight Line <5 b. Composite Method (Assets are dissimilar in nature) c. Group Method (Assets are similar in nature) Procedures: a, Depreciation is reported in single accumulated depreciation account b. Composite or group rate is multiplied by the total cost of the asset in the group to get periodic depreciation ©. When an asset is retired, no gain or loss is reported. The asset account is credited for the cost of the asset retired and the accumulated depreciation account is debited for the cost minus Scanned with CamScannersalvage proceeds ] dd. When the retired asset is replaced by a similar asset, the replacement is recorded by debiting the asset account and crediting cash or other appropriate account 2. Variable charge or use-factor methods ‘a. Working hours or service hours — bb._Output or production method 3. Decreasing charge or accelerated or diminishing balance method a. Sum of years’ digits ( —+ Annual depreciation= SYD fraction x Depreciable Amount a.1 Sum of half years’ digits (eg. 2% years) > multiply life by 2 to get “life” (eg. 2% times 2 = 5 years) ~ use two fractions for 1 year (one fraction = 6 months) (eg. 5/15 and 4/15) .2 Fractional depreciation (eg. acctg period is -> compute per years’ depreciation then prorate based on from March 1 to February 28) ‘calendar period (annual depreciation x 9/12) 'b. Declining balance method > Vv n= useful Ife Depreciation = Rate x Declining Carrying Amount c. Double declining balance ~ = n= useful Ife Depreciation = Rate x Declining Carrying Amount d. 150% declining balance 5 n= useful Ife Depreciation = Rate x Declining Carrying Amount 4. Other methods a. Inventory or appraisal (assets with small value -> Depreciation = Balance of asset account, beginning less such as tools) Value at the end of the year b. Retirement method {depreciation only when | -> Depreciation = Original cost of asset ~ Salvage Value retired) Replacement method (depreciation only when -> Depreciation = Replacement Value ~ Salvage Value retired and replaced) ‘Change in Useful Life or Residual Value or DepreciationMethod(Prospectvely) > depreciation charge for the eurrent and future periods shall be adjusted > past depreciation is not corrected > shall be reviewed atleast at each financial year-end. > change in accounting estimate Scanned with CamScannerRevaluation and Impairment ‘Accounting method for PPE 1. Cost Method 2. Revaluation Method ‘Cost Method Revaluation Method if if Carrying Amount < Recoverable amount = No Impairment | Carrying Amount > Revalued Amount Loss Impairment Loss Carrying Amount > Recoverable amount = Impairment Loss | Carrying Amount < Revalued Amount Surplus Recoverable amount = Fair value less cost to sell or Value in Use whichever is HIGHER Revalued amount = Fair Value or Depreciated replacement cost Fair Value less Cost to sell > Fair Value - price that would be received to sell an | Fair Value asset > Fair Value > price that would be received to sell an > Cost to sell > incremental cost directly attributable to asset the disposal of an asset excluding finance cost and income tax expense Depreciated Replacement Cost Fair Value Hierarchy > replacement cost of asset minus corresponding 1. Quoted price of identical asset in an active market | depreciation (sound value of asset) 2. Quoted price of similar asset in an active market 3. Quoted price for identical/similar asset in inactive Cost Replacement | Appreciation market Cost 4, Price developed by the entity using best Original Cost | Replacement 7 information from entity's own data Cost (Salvage Value)” | (Salvage Value) 5 Value in Use Depreciable | Depreciable 5 > present value or discounted value of future NET cash ‘Amount Amount flows (inflow minus outflow) expected to be derived from || (Accumulated | (Accumulated 7 the asset using pretax cashflow and pretax discountrate || Depreciation)** | Depreciation) Carrying Value | Sound Value a Entries: “Salvage Value > use new if there is change in SV; use old Impairment Loss ox if there isno change in SV Goodwill jf any) 200 **Accumulated Depreciation > based on original amount ‘cc. Depreciation sax Nondepreciable Asset 00 Entries: Revaluation Surplus Depreciation will be based on RECOVERABLE AMOUNT | pe sit ‘ee. Depreciation 100 Revaluation Surplus ox Revaluation Decrease ‘ce. Depreciation 0 Revaluation Loss vex Machinery mx Depreciation will be based on SOUND VALUE Reversal of impairment Loss Reversal of Revaluation increase If recoverable amount of previously impaired asset turns _| if asset's carrying amount is decreased as a result of Scanned with CamScanner‘out to be higher than the asset's current carrying amount, the carrying amount is increased to its new recoverable amount Rules: The increase in carrying amount shall not exceed the ‘carrying amount that would have been determined had no impairment loss been recognized in prior years Reversal of impairment loss shall be recognized immediately as an income in P&L Any impairment loss recognized for goodwill shall not be reversed in subsequent periods Entries: ‘Acc. Depreciation Gain on reversal of impairment ‘evaluation, decrease Is an expense Rules: Revaluation decrease should be applied first against any revaluation surplus then the excess to revaluation impairment loss Entries: ‘Acc. Depreciation 0x Revaluation Surplus (if'any} xx Revaluation Loss 0% Machinery ox Reversal of Revaluation Decrease If asset's carrying amount is increased as a result of revaluation, increase is a revaluation surplus Rule: Revaluation increase should be recognized first as revaluation gain(P&L) to the extent of previously recognized revaluation loss then the excess to revaluation surplus PPE 00% Ace. Depreciation 0x Revaluation Gain 0K Revaluation Surplus 0% Impairment Loss Impairment loss is part of income statement as an expense Revaluation Surplus Revaluation surplus is part of other comprehensive income Realization in whole -> when asset is derecognized (retirement or disposal) Realization in part > in proportion with depreciation (revaluation surplus/remaining life of asset) Realization of revaluation surplus transfers it to retained earnings Scanned with CamScannerINTANGIBLE ASSETS 1. Identifabilty + Separable and arises from contractual or other legal rights 2. Control Under the control ofthe entity as a result from a past event Able to enjoy future economic beneft from the assets and, prevent others from enjoying the same. 3. Future Economic Benefit (FEB) Recognition of an intangible Asset Recognized if the ff. conditions are met: ‘a. Probable that FEB attributable to the asset will flow to the enti. b. Cost can be measure reliably Initial Measurement of Intangible Assets ‘A. Separate Acquisition ~ Acquired separately and can be measured reliably. + The cost includes: 2. Purchase price ». Import Duties and non-refundable purchase taxes . Directly atrbuiable costs of preparing the asset for the intended use. Costs of employee benefits arising directly from bringing the asset to its working condition - Professional fees arising direct from bringing the ‘asset tits working condition = Testing Costs Acquisition as part of Business Combination = Costis based on the Fair Value on the date of acquisition ‘Acquisition by Government Grant Maybe initally recorded at: a. Fair Value ». Nominal Amount or Zero, plus any expencitue directly attributable. D. Acquisition by Exchange = lf there's Commercial Substance: - Fair Value ofthe asset given up + Cash payment + Hfthere's non: + Carrying Amount ofthe asset given up + Cash Payment E. Internally Generated Intangible Asset ~All directly attributable costs necessary to creat, produce, ‘and prepare the asset fr its intended use. - Brands, Mastheads, Pubishing Ties, Customer Lists, and the like shall not be recognized as Intangible Assets. Shall be ‘expensed when incurred. Recognition as an Expense ~ Expenditure that doesn't meet the criteria fr intangible assets. = Startup Costs, Training Costs, Advertising and Promotional Costs, Business Relocation/Reorganizaton Coss, etc ‘Subsequent Expenditures - Recognized as Expense. ‘entifiable Intangible Assets = Acquired thru purchase, transfer of egal right. = Could be so, transferred, icensed, rented, or sold ‘separately. Unidentifiable Intangible Assets Not separable, identfied with the entity as a whole, described as goodwil Classifications of intangible Assets a. Definite Life = Amorized over usefullega fe, can also be impaired when there's an indication at the end of each period, ». Indefinite Life Tested for impairment atleast annually and when there's an indication at the end of each period. Measurement after Recognition Cost Model ~ Cari a cost, less any accumdated amortization andor impaiment loss. Revaluation Model = Carid a revalued amount, less any accumulated ‘amortization andlor impairment oss ‘Amortization and Impairment of intangible Assets - Impairment Loss is when the recoverable amount exceeds Carrying Amount. = Recoverable is the higher ofthe “Fair Vale less costo sel” and “Value in use’ 2. Definite Life (Years or No. of units tobe produced) ‘Amortized over usefullega lf, can also be impaired when there's an indication atthe end of each period ». Indefinite Life Tested for impairment at least annually and when there's an indication at the end of each period ‘Amortization Method - Sha elect the pater in which the FEB are expect o be ‘consumed. Otherwise, straghtine Residual Value - Presumed to be zero, unless: a. Third part commits to buy the asset atthe end ofthe useful lite; ». There's an active marke forthe asset. Change in Amortization Method and Useful Life A change in accountng estimate, treated curently and proactively. Derecognition ofan Intangible Asset a. On disposal b. No more FEB = Gain/Loss from derecognition determined as the difference between net disposal proceeds and carrying amount Goodwill - Standalone can't be bought nor sod - Ares when eamings exceed normal earrings from a good relationship of the enity and the customer Changes daily or continually changing. Recognition of Goodwill ‘2, Developedinternal Goodwill Not recorded Increase in Goodwill on subsequent periods after acqusion/impaimment. ». Purchased Goodwill ~ Arises when business is purchased Scanned with CamScanner‘Measurement of Goodwill ‘A.Residual Approach ~The excess ofthe Purchase Price and Net Assets (without ‘good. lstraion: Purchase Price wm Net Assets (wio goodwill) (x) Goodwill 1% B. Direct Approach - Measured on the bass of future earnings. = To value the anticipated excess earings, the essential component Goodwil = Requires the f: 2. Normal rate of return b. Fair Value of net assets (tangbie and itengibie) Estimated fture normal earnings 4. Probable duration of any “excess earings” atributable to goodwil -lustraion: Net Assets (wio goodwil) NAW Normal rate of return RR ‘Avg. eamings preceding the sale AE ‘Avg. excess earings AEE Method 1 — Purchase of “Avg. excess earings” ‘Avg. eamings x ‘Normal earings{NA"RR) (ox) AEE mm ‘Goodwil(AEE'years given) xx “Method 2 —Captazaon of avg. excess earings” AEE 9x Divided by Capitalization Rate 2 Goodwill 1% ‘Method 3 - Captazation of “avg, earnings” AE 70 Divided by Capitalization Rate 7 Net Assats(w! good) mx NAW (ox) Goodwil wm “Method 4 Present Velue Method AEE 0% Nuttpied by the Ordinary PV a Goodwi ox Impairment of Goodwill ~Can'tbe amortized. - Tested fr impairment atleast annually and when there's an indication atthe end of each. Negative Goodwill = The Purchase price is less then the Fair Valve of net assets. - Gain on Bargain Purchase -Enty Purchase price 200 Net Assets at Fair Value (box) Negative goodwil (000) Asset 0 Asset nx Asset co lab 0 lab 0x Cash mx Gain on Bargin Purchase xxx Patent Legal life is 20 yrs., not renewable Can be extended beyond legal ie by a new patent for improvements and changes. Cost of Patent 2. Acquired Purchase price = impor duties ~ Nonrefundable purchase taxes Any direct attributable forthe preparation for use. b. Internally generated Livensing ~ Other legal fees in securing patent rights Related Research and Development Cost 2. Before technical feasibity - Expense ». After technical feasbilty ~ Capitalized as patent or development cost ~ Capitalized development cost isan intangible asset, whichis ‘amortized over the useful fe ofthe patent. Cost of Litigation a. If successful ~ Expensed b.lfnot = The remaining patent cost and legal fees incurred are written offas loss. “Amortization of Patent a. Inlerally developed ~ Over legal or use if, whichever i shorter. . Acquired - Remaining egal or use life, shorter. «. Competitive patents accuired fr protection - Remaining life of the od patent 4. Tooxiend the le of od patent = lf there's extension - Related patent + remaining old patent costs, amortized over the extended ile, = Here's no extension - Amortized on own if, of patent stil amortized over its remaining life. ‘Trademark a. Purchased Purchase price + directly attributable costs: ».Ineraly Generated - Expenditures required to establish it. Impairment of Trademark = Cant be amortized due to indefinite Iferenewable), but tested for impairment a least annually orf there's an indication. Copyright 2. Assigned ‘Al expenses incurred in the production ofthe work including those required to establish or obtain the right ». Purchased Cash paid + directly atributable costs ‘Amortization of Copyright ‘a, Amontzed over useful if, i possible: b. Write off cost agains the revenue of the first printing Scanned with CamScannerFranchise = Contrac-based intangible asset. 8, Government to private entity = The latter is permitted to use public property in performing its services b. Between privato entities Acquires the right to use the trademark, patent, and process, ofthe franchisor. Franchise Cost - Lump sum payment forthe acquisition ofthe franchise plus rectly atrbutable costs forthe use. ~ Lump sum payment = Ital Franchise Fee = Initial Cost - Periodic Payment tothe Franchisor = Periodic Franchise Fee ‘Amortization of Franchise ‘a. Definite period Useful life or definite period, shorter. Tested for impairment when there's an indication. Indefinite period - Tested for impairment atleast annually and when there's an indication, Lease Right - Intl recognized as right of use asset forthe least terms, ‘and lease Kai forthe obligation to make lease payments, Leasehold Improvements. - Depreciated over lease term or useful life of improvement, shorter. = Residal Value is ignored. - Renewal option is ignored unless highly probable or certain, extensions considered in determining the extended lease tem. Broadcasting License With indefinite Useful Life Renewable every 10 1s. Not amortized but tested for impairment atleast annually oF when there's an nication, With definite useful life - Amortized over the useful fe and immediately tested for impairment. Airline Right May be renewed every 5 yrs, (Indefinite useful fe) Customer List 2. Internally Generated = Not recognized as intangible asset b, Acquired - Amortized over use! fe and impaired when there's an indication Organization Cost Cost incurred in forming an organization, a. Legal Fees ». Incorporation Fees, «. Share Issuance Cost - Startup costs (incudes legal and secretarial cost) are expensed as incurred. Share Issuance Cost shouldbe debited to Share Premiums, ‘excess willbe debited to Share Issuance Cost Website Development Cost ~ Expensed as incurred. Research and Development Costs - fingistinguishable, ncured in research phase only Research - Original and planned investigation undertaken withthe prospect of gaining scientific or technical knowledge and understanding - Expensed when incured Development - Applicaton of research findings or other knowedge. May or may not be recognized as intangible asset = Strict Criteria: 2. There's a technical feasblty ofthe completion ofthe asset. ». Intention to complet the asset. €. Abily to use o Sl the asset. 4. How the asset wll generate probable FEB. «.Avalalty of resources or funding 1 complete the development. { Ablty to reiably measure the expenditures diecty attributable to the asset during development. ‘American Standard Research and development costs which have an alternative future use, can be capitalized. Internally Developed Computer Software Costs Incurred «2. Before technica feasibility - Expensed b. After technical feasibly = Capitalieed To produce the software from the masters and packaging the software forsale = Inventory ‘Amortization and Impairment of Computer Software - Shall reflect the pater in which the FEB are expect to be consumed. Otherwise, staightine, Also tested fr impairment ‘when there's an indication, Classification of Computer Software a. As arule, computer software = intangible Asset ». Purchased for resale = Inventory . Purchased as an integral part of a computer controlled ‘mactine ool that cat operate without that specie software PPE, ifnot integral itis an intangible asset. Scanned with CamScannerABILITIES DEFERRED REVENUE ‘GIFT CERTIFICATES PAYABLE BONUS REFUNDABLE DEPOSITS > Liabilities are present obligation of an entity to transfer economic resources as a result of past events v Essential characteristics of liabilities: Present obligation ‘+ Transfer of economic resource Past event > Present Obligation * Legal obligation * Constructive obligation > Transfer of economic resource © Pay cash, delivery of goods, render services. + There is a liability when the entity declares cash dividend. © No liability in the declaration of share dividend > Past event ‘+ The past event that leads to a legal or constructive obligation is called an obligating event. > EXAMPLE OF LIABILITIES: ‘+ Accounts payable to suppliers * Amounts withheld from employees for taxes and contributions to $55 © Accruals for salaries, interest, rent, taxes, product warranties & profit sharing bonus + Cash dividend payable & Property dividend payable * Deposits and advances from customers. * Debt obligations for borrowed funds ~ notes, mortgages and bonds payable © Income tax payable © Unearned revenue (collected but not yet earned) > MEASUREMENT OF CURRENT LIABILITIES © Liabilities are initially measured at PRESENT VALUE * Current liabilities and noncurrent interest-bearing note are measured at FACE AMOUNT > CURRENT LIABILITIES ‘+The entity expects to settle the liability within the entity’s operating cycle, ‘©The entity holds the liability primarily for the purpose of trading. ‘+The liability is due to be settles within 112 months after the reporting period. © The entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. Trade payables and accruals from employees and other operating costs are classified as current liabilities even if settles more than 12 months after the reporting period. Scanned with CamScanner> EXAMPLES OF CURRENT LIABILITIES: * Financial liabilities held for trading * Bank overdraft * Dividends payable * Income taxes * Nontrade payables * Current portion of noncurrent liabilities + Unearned revenue © Current tax liability > NONCURRENT LIABILITIES: + Noncurrent portion of long-term debt * Finance lease liability © Deferred tax liability + Long-term obligation to officers * Long-term deferred revenue dividends, maintaining specified level of ‘working capital and so forth, > BREACH OF COVENANTS Liability becomes payable on demand Liability is classified as current even if the lender has agreed after the reporting period and before the statements are authorized for issue, not to demand payment. Classified as current because at the end of the reporting period, the entity does not have an unconditional right to defer settlement for at least 12 months after that date. ability is classified as noncurrent if the lender has agreed on or before the reporting period t0 provide a grace period ending at least 12 months after > Aliabily is due to be settled within 12 months that date after the reporting period Is classified as * Grace period ~ period within which the Seige EAA entity can rectify the breach * The original term was for a period longer than 12 months + Refinancing is completed after the > PRESENTATION OF CURRENT LIABILITIES reporting period but before the ‘+ Trade and other payables financial statements are authorized for © Current provisions issue. * Short-term borrowing ‘© Current portion of long-term debt Current tax liability > Refinancing Is completed on or before the reporting period, it is considered as an adjusting event and therefore the obligation is classified as noncurrent. > TRADE AND OTHER PAYABLES © Accounts payable Notes payable Accrued interest on note payable Dividers payable ‘+ Accrued expenses > If the entity has the discretion to refinance an obligation for at least 12 months after the reporting period, the obligation is classified as noncurrent. » COVENANTS ‘© Restrictions on the borrower as to undertaking further borrowings, paying Scanned with CamScanner> ESTIMATED LIABILITIES ‘© Obligation which exist at the end of reporting period although their amount is not definite. ‘© Date is not definite and exact payee cannot be identified > EXAMPLES OF ESTIMATED LIABILITIES * Estimated liability for premium ‘Award points Warranties Gift certificates Bonus > DEFERRED REVENUE OR UNEARNED REVENUE # Is income already received but not yet ‘earned > EXAMPLES OF CURRENT DEFERRED REVENUE © Unearned interest income © Unearned rental income © Unearned subscription revenue > EXAMPLES OF NONseCURRENT DEFERRED REVENUE © Unearned revenue from longterm service contract ‘© Long-term leasehold advances > EXAMPLE JOURNAL ENTRIES FOR DEFERRED REVENUE cash mx Unearned service revenue x + Uneamed service revenue x Service contract revenue x > GIFT CERTIFICATE PAYABLE '* When certificates are sold Cash 1 Gift certificates payable ‘© When gift certificates are redeemed Gift certificates payable x Sales wm * Expiration of 6c Gift certificates payablexx Forfeited gift certificates xx > The Philippine Department of Trade and Industry ruled that the gift certificates no longer have an expiration period. > BONUS COMPUTATION © To motivate officers and employees by directly relating their well-being to the success of the entity > Bonus as a percent of income before bonus B= Income x % Bonus Bonus as a certain percent of income after bonus but before tax (ABET) v B = % Bonus (Income - Bonus) > Bonus as a certain percent of income after bonus and after tax (ABAT) .% Bonus (Income ~ Bonus - Tax) '= % Tax (Income ~ Bonus) Scanned with CamScannerv se v v Bonus as a percent of income after tax but before bonus (ATBB) B= % Bonus (Income ~ Tax) T= % Bonus (Income ~ Bonus) REFUNDABLE DEPOSITS. © Consist of cash or property received from customers but which are refundable after compliance with certain conditions. EXAMPLE JOURNAL ENTRIES OF REFUNDABLE Deposits, © cash a Container’s deposit ~ Container’s depos {as current liability If the customer returns the containers, the deposit is simply refunded. However, if the customer fails to return the containers, the deposit is considered the sale price of the containers The excess of the deposit over the cost of the containers is considered as GAIN account is usually classified Scanned with CamScanner