AFAR

1. AFAR QUICKNOTES
Partnership
Corporate Liquidation
Revenue Recognition
Decentralized Operations
Cost Accounting
Business Combination
Separate & Consolidated FS
Joint Arrangements
Foreign Exchange
Derivatives & Hedge Accounting
Government Accounting
Non-Profit Organizations
Special Topics (Insurance & Service Concession)
GATO, Abdul Barri Indol
MSU - Main Campus
09452146094

2. PARTNERSHIPS
FORMATION
OPERATIONS
DISSOLUTION
LIQUIDATION
Valuation
1) Assets
Cash
A/R
Inventory
Land
Depreciable Asset
Non-current Asset
@ Face Value
@ Gross of ADA
@ LCNRV
1) Agreed value
2) Fair value
3) Appraised value
4) Book value
2) Liabilities
- if problem is silent: ignored / not assumed
1) Admission of a new partner
a. Direct purchase from old partners
b. Direct investment by new partner
2) Retirement/Death of a partner
BONUS METHOD (if silent)
TCC TAC
- = B
P1
P2
Pnew
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
ZERO
NET INVESTMENT METHOD
Capital CreditPnew = FV of Assets
- PV of Liabilities
GOODWILL METHOD
- not used anymore
Asset Revaluation? Adjust all
assets needed to be revalued before
admission/retirement of a partner
Partner’s
Interest
=
Beg. Capital
+/- share in P&L
+/- loan balance
+/- share in revaluation
3) Incorporation
Excess of total par OVER total capital
balance of all partners: share premiums
Salaries
Interest*
Bonus**
Remaining***
Net Income Net Loss
Given
priority
**
***
Only given when base computation for bonus is positive
Following order of priority shall be followed
for allocation of remaining balance:
Profit Loss
Agreed sharing
Original capital balance
Equal sharing
Agreed sharing
Profit sharing
Original capital balance
Equal sharing
*Beg. Cap. Bal
Addt’l inv
Withdrawal
Share in NI/NL
End. Cap. Bal
X
X
X
X
X
Permanent
Temporary
- ‘drawings’ account
- consider only if net loss is incurred
Otherwise, ignored..
- always start with total partner’s interest for problem solving
regardless what method (safe payment method or CPP method)
Partner’s interest = Capital balance +/- Loan balance
SAFE PAYMENT METHOD CASH PRIORITY PROGRAM (CPP) METHOD
1) Distribute realized gains/losses
from asset dispositions
2) Distribute share in liquidation expenses
3) Distribute share in maximum possible losses
Maximum
Possible
Losses
Book Value of unsold assets
+ Anticipated liquidation expenses
4) Determine capital balances. If there is a
negative balance, let others partners absorb
deficiency. If in case this is the last payment/
installment, let the deficient partner invest
assets if he is solvent..
Otherwise, let other partners absorb..
P1 P2 P1 P2
Total Interest
/ P&L ratio
Loss Absorption Balance
X
%
XA
X1
X
X
%
XB
X
=
X2
X
Total
If cash to be distributed is in
excess of this amount, partners
will share via P&L %
3) Capital - excess goes to capital of partner
=
Partner’s Interest vs
Actual Payment to
retiring partner
Gain or Loss =
Balance
before
admission
TCC = Total Contributed Capital
TAC = Total Agreed Capital
= the new capital balances
Amount to
be invested
D I S T R I B U T I O N
-
-
X
X
XA = partner with the highest LAB
= also the least vulnerable partner
XB = partner with the lowest LAB
= also the most vulnerable partner
X1 = XA - XB
= difference between who has the highest LAB and
the next highest (or lowest LAB for two partners)
X2 = X1 multiplied by XA’s P&L %
=
1
2
3
}
}
}
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3. CORPORATE LIQUIDATION
1) Assets
2) Liabilities
@ Fair Value or NRV
@ Maturity Value
(Principal + Interest)
ASSETS
Fully Secured Asset
Less: Respective Secured Liability
Partially Secured Asset
Less: Respective Secured Liability
Other Free Assets
Total Free Assets
Less: Unsecured Creditors
with priority
Administrative expenses
Unpaid salaries/wages
Unpaid taxes
Net Free Assets (NFA)
Deficiency
Total Unsecured Creditors (USC)
LIABILITIES
Partially Secured Liability
Less: Respective Security Asset
Unsecured Creditors
without priority
Total Unsecured Creditors (USC
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
-
xx
xx
xx
xx
xx xx
xx
% of recovery =
Net Free Assets
Total Unsecured Creditors
- in computing net gain or loss
ASSETS
LIABILITIES
SUPPLEMENTARY
ITEMS
To be realized
Non-cash assets, beg
Acquired
Interest receivable
Accounts receivable
Realized
PPE - net proceeds
Receivables - collection
Inventory - cost
Not realized
Non-cash assets, end
Paid or Liquidated
Not paid
End balance
To be paid
Beg balance
Assumed
Accrued expenses
Charges
COGS
Accrued expenses
Credits
Sales
Accrued Income
NET INCOME NET LOSS
(balancing figure) (balancing figure)
(Credits > Debits) (Credits < Debits)
Estate equity = SHE, beg +/- Net Income (Loss)
xx
xx
VALUATION
TEMPLATE
T-ACCOUNT
Most likely there
is excess asset
Most likely
naexhaust na
ang asset
Total collection
by unsecured
creditors
=
NRV of Partially Secured Asset
+ (Total USC X % of recovery)

4. REVENUE RECOGNITION
FIVE-STEP MODEL FRAMEWORK
1) Identify Contract
2) Identify Performance Obligations
3) Determine Transaction Price
4) Allocate the transaction price to performance obligations
- use relative stand-alone selling price of each (SASP) as base
5) Recognize revenue
a. Point in time
b. Over time (1 of 3 conditions is met)
- customer simultaneously receives & consumes benefit
- enhances/creates an asset controlled by customer
- has no alternative use & has present right of payment to entity
FRANCHISE
INSTALLMENT SALES
OLD GAAP
Initial Franchise Revenue (IFF)
Less: Direct costs
Gross Profit - IFF
Continuing Franchise Revenue (CFF)
Interest Income
Total Income
Less: Operating Expenses
Net Income
X
X
X
X
X
X
X
X
PFRS 15
Initial Franchise Revenue (IFF)
Downpayment
Note receivable
Less: Direct costs
Gross Profit - IFF
Continuing Franchise Revenue (CFF)
Interest Income
Total Income
Less: Operating Expenses
Net Income
Interest bearing
Non-interest bearing
@ Face Value
@ Present Value
Interest bearing
Non-interest bearing
@ Stated Rate
@ Effective Rate
X
X X
X
X
X
X
X
X
X
Recognition
When?
How?
1) substantial performance
2) refund period has expired
3) no substantial future
services are required
Collectibility of the note
Reasonably
assured
Not
reasonably
assured
Full accrual
Installment
Cost recovery
- if silent
- principal collections X GP %
SALE OR RETURN
Recognize revenue when:
(all are met)
(1 of 3 conditions is met)
There is historical data present
Item was acknowledged by customer
Period of return has lapsed
If not met, recognize unearned
franchise revenue
Except these: (recognize revenue)
downpayment is non-refundable
downpayment represents fair
measure of services performed
Principal
Collections
Collections from Installment A/R
FV of Trade-in merchandise
GPR Gross Profit*
Sales
or Deferred Gross Profit, before adj
Installment A/R, beg
If there is trade-in: consider over or under-
allowance for trade-in allowance granted
GP = Installment Sales+ under-allowance
- over-allowance - Cost of IS
IS
IS
Realized GP
Principal
Collections
Based on sales
Based on cost
x GPR
x GPR
1 + GPR
REPOSSESSED MERCHANDISE
TRADE-IN
Gain/Loss on Repossession
FV of Repossessed Merch*
Less: Unrecovered A/R Cost**
Gain/Loss on Repossession
X
X
X
Balance of
repossessed A/R
X Cost Ratio %
1) Appraised Value; or
2) Estimated SP - Reconditioning costs
- Normal Profit - Selling costs
Under-allowance
Over-allowance
FV of Trade-in* > Trade-in allowance
FV of Trade-in* < Trade-in allowance
IS
Total Realized GP
Realized GP
IS
+ Realized GP
Reg
PFRS 15
=
=
=
*
**
* 1) Appraised Value; or
2) Estimated SP - Reconditioning costs
- Normal Profit - Selling costs
*
Installment A/R balance
FV of Trade-in
from Installment A/R
Cash Installments
Interest accrued?
Unless stated in the problem that
“Installment is applied first against the interest” OR
Receivable is NON-INTEREST BEARING
Collection = Principal Installment
= Balance - Collections
Collection must exclude interest due
- sale made in the ordinary course of business
not necessarily with a right to return
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5. CONSTRUCTION CONTRACTS
Construction Revenue
Fixed Price
Variations
Incentive Payments (early completion)
Penalties (for delays)
Construction Costs
Directly
Indirectly
Reimbursable costs
Attributable costs
X
X
X
X
X
X
X
X
X
X
PROFIT LOSS
- immediately
recognized
Point in time Over time
- upon completion - check criteria for over
time recognition (1 of 3)
Reliably
measurable
Not reliably
measurable
Percentage of
Completion (POC)
Zero Profit
Method (ZPM)
‘Cost to cost method’ ‘Cost recovery method’
Template in solving most problems
Y1 Y2 Y3
1) Contract Revenue
2) Costs incurred to date (CITD)*
3) Estimated costs to complete (ECTC)
4) Total estimated costs (2+3)
5) Total estimated gross profit (1-4)
6) % completion**
GP to date
GP, previous yr
GP, this yr
X
X
X
X
X
%
X
-
X
X
X
X
X
X
%
X
X
X
X
X
X
X
X
%
X
X
X
Y1 Y2 Y3
Costs incurred to date
Gross Profit to date
Construction in Progress (CIP)
Less: Progress Billings (PB) to date
Due from (+) or Due to (-) ***
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
*
**
Cost in securing contract: include only if successful
Prepayments & Materials in store
Exclude in CITD; Include in ECTC
(regardless if with or w/o alternative)
% completion =
CITD
CITD + ECTC
OR
Construction in Progress
Contract Revenue
*** Due from (+)
Due to (-)
Current Asset
Current Liabilities
T-Accounts
Construction in Progress Progress Billings Accounts Receivable
Actual costs
incurred to date
(CITD)
GP to date
Only true when
there is no loss
GL to date
Beg bal
Addt’l billings
End bal
Collections
Billings to
date
End bal
Also
CIP =
Under
POC
Under
ZPM
CITD + GP to date
OR
Revenue to date
Only true when
there is no loss
CITD
End bal
- normally POC method is used
}
i.

6. DECENTRALIZED OPERATIONS
HOME OFFICE & BRANCH ACCOUNTING (HO-BA)
SALES AGENCY
CONSIGNMENT
Accounting issue: Working Fund balance per books
- unchanging balance regardless of transactions
Accounting issue: Freight-in (pro-rate)
Units sold
Units returned
Units on hand
Cost of Goods Sold
Ending Inventory
Operating Expense
Template in solving most problems
@ Billed Price @ Cost Mark-up
Inventory, beg
Shipments to Branch
Outside Purchases
TGAS
Inventory, end
COGS
From HO
From others
From HO
From others
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
-
X
-
X
X
-
X
Inter-branch transfers
Issue: FREIGHT to be shouldered by
the last receiver of goods
= LOWER
Actual freight incurred
Direct freight from HO
to last receiver
When HO bills above cost
the goods shipped to branch
Billed = Cost for outside purchases
‘Allowance for Inventory
Over-valuation’
- =
True COGS to be
presented in the
combined statement
of HO & Branch
COGS presented by
branch in its own FS
BRANCH OPERATIONS
COMBINED OPERATIONS
Combined Sales
Less: COGS, HO
COGS, Branch (true)
Combined GP
Less: Combined Operating Expenses
Combined Net Income
X
X
X
X
X
X
X
When given in a problem,
it is most likely the
unadjusted. This is this
*Be mindful for shipments in transit
(if not yet included to the count,
include such)
*
*
*
*
-

7. COST ACCOUNTING
INTRODUCTION
JOB ORDER COSTING
JUST-IN-TIME & BACK-FLUSH COSTING
Income Statement overview (Manufacturing)
Direct Materials, beg.
Direct Materials purchases
Total DM available for use
Less: Direct Materials, end.
Direct Materials, used
Direct Labor
Factory Overhead-applied
Total Manufacturing Cost (TMC)
Work in Process, beg.
Cost of Goods put in process
Less: Work in Process, end.
Cost of Goods Manufactured (COGM)
Finished Goods, beg.
Total Goods Available for Sale (TGAS)
Less: Finished Goods, end.
Cost of Goods Sold normal
Under(over) applied Factory Overhead
Cost of Goods Sold actual
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Costing Systems
Actual
Normal
Standard
DM DL FOH
A
A
S
A
A
S
A
S
S
Material or
Significant
Immaterial or
Insignificant
- closed to COGS
- allocated according to
their ending balances
COGS
FG
WIP
shortened version of traditional accounting for
cost by combining T-accounts for some accounts
Trigger Points - point of recording transactions
T-Accounts
Materials in Process (MIP) Cost of Goods Sold
Three TPs Two TPs One TP
Beg. Bal
Materials purchased
Conversion Cost
End. Bal
COGM
*number of t-accounts depends on the number of TPs
(If One TP)
Materials purchased
Conversion Cost
End. Bal
- for heterogenous products
- to accounts costs per ‘job’
MATERIALS
a. Spoiled Materials
b. Defective Materials
c. Scrap Materials
CHARGED TO SPECIFIC JOB CHARGED TO ALL PRODUCTION
Customer failure Production failure
UC orig
UNIT COST (UC) = UNIT COST (UC) =
UC orig
*Exclude allowance for spoilage
*Include allowance for spoilage
Reduce WIP
when sold B. Recovered from factory supplies
A. Recognize miscellaneous income
- reduce FOH-control when sold
LABOR
1) Direct Labor - charged to WIP
2) Other Labor
a. Indirect Labor - charged to FOH-control
b. Idle time - charged to FOH-control
c. Make-up Pay - earned pay did not reach minimum rate
- charged to FOH-control
d. Overtime premium - OT hours X OT premium
- charged to FOH-control
e. Shift premium - charged to FOH-control
FOH applied VS FOH control (actual)
OVERHEAD
Issue: allocation of overhead from Service departments to Producing departments
1) Direct Method 2) Step Method 3) Algebraic Method
S1
S2
P1
P2
Which service department gets
to allocate first its overhead?
1) department that provides
the greatest services; or
2) department that has the
higher total overhead cost
DM + DL = Prime Costs
DDL + FOH applied = Conversion Costs
materials are purchased
once order is received
- JIT system uses a back-flush costing
Purchase
Production
Completion
Sale
Finished Goods
Beg. Bal
COGM
End. Bal
COGS
A - Actual
S - Standard
1
2
2
3
1) Direct Materials - charged to WIP
2) Indirect Materials - charged to FOH-control
3) Other Materials
FOH-control: actual incurred overhead
FOH-applied: overhead “budgeted” for production
- SP defective
+ Rework Cost **Spoiled materials & rework of defective
materials are charged to FOH-control
Base for allocation:
depends per department
(labor hours,
machine hours, etc)
S1
S2
P1
P2
1
2
S1
S2
P1
P2
Use algebraic equations. Develop equations on
how service departments allocate (%) then
solve using substitution/elimination methods..
:

8. JOINT & BY-PRODUCTS
Allocating Joint Costs
1) Benefits-received approaches
A. Physical Measure or Output method
2) Relative Market value approaches
A. Sales Value at split-off method
B. Net Realizable Value method
C. Approximated NRV at split-off method
Allocation base
Unit output
Relative sales value @ split-off
Sales Value - all necessary costs
to prepare & dispose the products
Final Sales Price - incremental
separate costs
Accounting for By-products
1) Sales method
2) Production method
A. Additional Sales revenue; or
B. Other Income
A. NRV method - as reduction to the cost of main products
B. Reversal method - by working back to get allocated cost to
by-product (squeeze COGS = Sales - Gross Profit)
Direct Materials
Direct Labor
Overhead
Multi-variances (DM & DL)
AP
SP
SP
x
x
x
AQ
AQ
SQ
MPV
MQV
AR
SR
SR
x
x
x
AH
AH
SH
LRV
LEV
Actual Costs
Actual Input @ Std Price/Rate
Actual Input (AI) @ SIC
Actual Output (AO) @ SOC
MPV/LRV
MMV/LMV
MYV/LYV
SIC =
SOC =
Total Standard Costs
Standard Inputs
Total Standard Costs
Standard Production
- for multiple inputs to one product
1) 2-way
Con
Vo
AFOH
BASH
SHSR
2) 3-way
AFOH
BAAH
BASH
SHSR
S
Va
Vo
3) 4-way
Variable component Fixed Component
AVOH
AH x SVR
SH x SVR
AFxOH
BFxOH
SFxOH
Var Sp
Var Eff
Fx Sp
Vo
BASH =
BAAH =
BFxOH =
SFxOH =
BFxOH + (SH x SVR)
BFxOH + (AH x SVR)
NH x SFxR
SH x SFxR
SH = Actual units x SH/unit
STANDARD COSTING
Joint products: products with joint costs
By-products: “scrapped” products after producing the main product

9. PROCESS COSTING
- production of a single product (homogenous)
- use of ‘cost of production report’
- costs are accumulated by process/department
Physical Flow of Units in a Department Sample Product Flow
in Departments
UNITS TO ACCOUNT FOR UNITS ACCOUNTED FOR
Beginning Units in Process
+
Units started in process or
Units received from previous dept
+
Increase in units due
to addition of materials
=
Units completed &
transferred-out (C-TO)
+
Ending Units in Process
Cabinet Components
Cutting Dept 1
Staining Dept 2
Writing Dept 3
Resting Dept 4
Combining Dept 5
Packaging Dept 6
Finished Goods Inventory
Procedure to answer most problems
1) Account for the physical flow of units into and out of departments
2) Calculate Equivalent Units of Production (EUP) for DM, DL and FOH
(or DL + FOH as one as conversion costs if not explicitly separated)
3) Determine the unit costs for DM, DL and FOH
(or DL + FOH as one as conversion costs)
UC DM = DM costs
EUP for DM
Conversion costs
EUP for CC
FIFO method
Average method
- include beginning units in process
- exclude beginning units in process in EUP computation
Costs from preceding dept
Units received from prec dept
LOST or SPOILED UNITS?
- discovered at
Beginning
End
Specific
completion %
- adjust UC PD =
Costs from preceding dept
Transferred-in units - Normal Lost units
Normal - charged to WIP
Abnormal - charged to FOH-c
- UC PD
- allocate all costs of normal lost units to
cost of completed & transferred-out (C-TO) units
WIP, end (%) Inspection pt (%)
WIP, end (%) Inspection pt (%)
>
<
allocate
using their
EUP
Cost of C-TO units
Cost of WIP, end
Allocate to the
cost of C-TO only
UC CC = UC PD =
4) Compute for the following costs
a. Beginning inventory
b. Ending inventory
c. Cost of of completed/transferred units
PD = UC PD X EUPBI
DM = UC DM X EUPDM in BI
CC = UC CC X EUPDM in BI
PD = UC PD X EUPEI
DM = UC DM X EUPDM in EI
CC = UC CC X EUPDM in EI
NLU =
UC PD X EUPNLU allocated to EI
UC DM X EUPDM in NLU allocated to EI
UC CC X EUPCC in NLU allocated to EI
PD = (UC PD X Units completed) + Prior BI Costs PD
DM = (UC DM X Units completed) + Prior BI Costs DM
CC = (UC CC X Units completed) + Prior BI Costs CC
NLU =
UC PD X EUPNLU allocated to C-TO units
UC DM X EUP DM in NLU allocated to C-TO units
UC CC X EUPCC in NLU allocated to C-TO units
c. Cost of abnormal lost units
PD = UC PD X EUP ALU
DM = UC DM X EUP DM in ALU
CC = UC CC X EUP CC in ALU
EUP DM EUP CC
Beg. Units X %*
Completed units** X 100%
End. Units X %*
Lost / Spoiled Units
OR
*% completion for:
Beg. Inventory: % left to be done
End. Inventory: % already done
**Completed units (work back physical flow)
= BI units + Units started - EI units
X
X
X
X
X
- diretso completed units, EI units & lost/spoiled units
Notes:
For lost/spoiled units, give EUP to them also regardless normal or not
Consider what method is being used:
FIFO method
Average method
- exclude cost for DM, DL or FOH incurred
in the beginning units in process
- include cost for DM, DL or FOH incurred
in the beginning units in process
- current month costs only
- cumulative costs incurred (prior + current)
FIFO method
Average method
(Completed Units X UC PD+DM+CC )
NLU =
UC PD X EUP NLU allocated to C-TO units
UC DM X EUP DM in NLU allocated to C-TO units
UC CC X EUPCC in NLU allocated to C-TO units
+
+
+
+
+
+
+
+
+
+
+
the good units
+
+
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:

10. BUSINESS COMBINATION
As to structure
As to method
1) Vertical - integration of suppliers
2) Horizontal - integration of competitors
3) Circular - diversification
4) Conglomerate - combination
1) Acquisition of net assets - always 100%
a. Merger A + B = A or B
b. Consolidation A + B = C
2) Acquisition of stocks - walang madissolve na company
% of ownership PREFERRED SHARES ORDINARY SHARES
< 20%
20% - 50%
> 50% - 100%
FV-P&L
or
FV-OCI
FV-P&L / FV-OCI
Investment in Associate
Investment in Subsidiary
As to accounting method used
1) Pooling of Interests - those under common control
2) Purchase method - those under SMEs
3) Acquisition method - those required to use full PFRS
PURCHASE METHOD ACQUISITION METHOD
DACs?
Indirect
costs?
Stock issue
costs?
Non-controlling
interest?
Capitalized Expensed
Expensed outright
1) Share Premium - related issuance
2) Retained Earnings
Charged against
Partial Full or Partial
ACQUISITION METHOD
1) Determine the acquirer
2) Determine the acquisition date (measurement date)
- net assets of subsidiary can be adjusted within
1 yr from acquisition date (resulting goodwill or
gain will also be adjusted)
3) Recognize and measure identifiable assets & liabilities
@ FAIR VALUE
- any pre-existing goodwill of subsidiary is ignored
5) Measure and recognize goodwill or gain on acquisition
a. Full or Fair Value
b. Partial or Proportionate
Fair Value is given
If not given, use implied FV
Purchase Price* - Control Premium + Control Discount
% ownership acquired
X NCI %
NCI =
NCI = FV of Net Assets X NCI %
* FV of previously held interest
FV of additional consideration
X Old %
Purchase Price
+ Non-controlling interest (NCI)
Total
- FV of Net Assets
Goodwill (Gain)
X
X
X
X
X
Goodwill impairment? Allocate based on:
Goodwill sharing between parent & NCI
% of ownership
Total Parent NCI
FV of Subsidiary
FV of Net Assets
Goodwill (Gain)
X
X
X
X
X
X
X
X
X
NOTE: FV of NCI >= Proportionate NCI share
Goodwill (Gain) sharing?
Full Partial
Goodwill
Gain
Parent & NCI Parent
Parent Parent
Same goes with goodwill impairment
4) Determine non-controlling interest (NCI)
SEPARATE FS
Issue: accounting for Investment in Subsidiary
a) Cost model
b) FV model
c) Equity method
Cost Equity FV
Transaction costs
Share in net income
Share in OCI / OCL
Dividends
Impairment
Changes in FV
-
-
P&L
P&L
-
Capitalized
P&L
OCI/OCL
Deduction
P&L
-
FV-P&L: expensed
FV-OCI: capitalized
-
-
P&L
-
OCI and P&L
PAS 27
PFRS 3
Addt’l consideration
Addt’l %
+
:

11. CONSOLIDATED FS
Parent FS + Subsidiary FS +/- Eliminating entries = CONSOLIDATED FS
PFRS 10
- subsequent to date of acquisition
- parent & subsidiary is considered one reporting entity
- basis: there is control when there is
- same reporting date (parent & subsidiaries)
- uniform accounting policy
- name of consolidated FS under parent
Power to govern
Exposure to variable returns
Rights to variable returns
Ability to exercise power
CONSOLIDATION PROCEDURE
1) Combine like
assets, liabilities, equity items
income, expenses and cash flow items
2) Eliminate investment in subsidiary account against
SHE of subsidiary @ book value @ date of acquisition
3) Record FV of Net Assets, Goodwill (Gain) & NCI
4) Eliminate in full the inter-company accounts
@ BV @ BV
DIVIDENDS FROM SUBSIDIARY
SALE OF INVENTORIES
SALE OF LAND
SALE OF DEPRECIABLE ASSETS
- eliminate from the reported net income of parent, if already included
Effects if not eliminated
Sales & COGS are overstated
by Inter-company Sales
Beginning Inventory is overstated
by Unrealized Profit - BI (if unsold)
Ending Inventory is overstated
by Unrealized Profit - EI
A/R & A/P are overstated
by Inter-company Sales
Eliminating Entries
Sales X
Purchases (COGS) X
RE, beg* X
NCI (upstream) X
Beg. Inventory X
COGS X
End. Inventory X
A/P X
A/R X
* If FV or Cost method
Use Investment in
Subsidiary
(equity method)
Effects if not eliminated
Year of Sale
Subsequent to
Year of Sale
(If unsold)
Subsequent to
Year of Sale and
Year of Sale to
Outside Party
Consolidated Gain = SP - Cost
- if sold to outside parties
Land is overstated by Unrealized Gain
Net Income is overstated by Unrealized Gain
Land is overstated by Unrealized Gain
RE, beg is overstated by Unrealized Gain
NCI is overstated by Unrealized Gain
Upstream or
Downstream
Upstream or
Downstream
Upstream or
Downstream
Upstream or
Downstream
Land (blue check)
RE, beg is overstated by Unrealized Gain
NCI is overstated by Unrealized Gain
Net Income is understated by Unrealized Gain
Eliminating Entries
Gain X
Land X
RE, beg* X
NCI (upstream) X
Land X
RE, beg* X
NCI (upstream) X
Gain X
Effects if not eliminated
Year of Sale
Subsequent to
Year of Sale
(If unsold)
Depreciation is overstated by Unrealized Gain
Net Income is overstated by Unrealized Gain
B/S Date
Depreciation is overstated
by Amortization of Gain
Accumulated Depreciation is overstated
by Amortization of Gain
Depreciation is overstated
by Amortization of Gain
Accumulated Depreciation is overstated
by Amortization of Gain
Depreciation is overstated by Unrealized Gain
RE, beg & NCI is overstated by Unrealized Gain
Eliminating Entries
Depreciation Exp X
Gain X
Accum Depreciation X
Accum Depreciation X
Depreciation Exp X
RE, beg* X
NCI (upstream) X
Depreciation Exp X
Accum Depreciation X
Accum Depreciation X
Depreciation Exp X
CHANGE OF % OWNERSHIP
Proceeds
+ FV (retained %)
+ NCI @ Carrying Amount
Total
- BV of Net Assets
- Goodwill
G/L on Deconsolidation 1) There is loss of control - P&L
2) No loss of control - Equity
Parent
Subsidiary
Downstream Upstream
* If FV or Cost method
Use Investment in
Subsidiary
(equity method)
* If FV or Cost method
Use Investment in
Subsidiary
(equity method)
X
X
X
X
X
X
X
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12. TEMPLATE FORMULAS
NET INCOME
PARENT
NET INCOME
NCI
1) Net Income - Parent
2) Dividend received from subsidiary
(Dividend declared by subsidiary X % acquired)
Separate Income - Parent
3) Net Income - Subsidiary
4) Amortization of Asset Under/Over-valuation
Under: [(U-VA/remaining life) X n/12]
Over: [(O-VA/remaining life) X n/12]
5) Gain on Acquisition (only on yr of business combination)
6) Goodwill Impairment
INTER-COMPANY TRANSACTIONS
7) Inventories
Unrealized Profit from EI: (Buyer EI X GPR of Seller)
Realized Profit from BI: (Buyer BI X GPR of Seller)
8) Depreciable Asset
Unrealized Gain
Unrealized Loss
Realized Loss
Realized Gain
EI X GPR = Unrealized Profit in 2021 Inventory, end
Realized Profit in 2022 Inventory, beg
Year of
Sale
Yearly
amortize
Proceeds - Book Value
UG or UL
Remaining Life
X
n
12
9) Land
Unrealized Gain
Unrealized Loss
Realized Loss
Realized Gain
Year of
Sale
3rd party
sale
Proceeds - Book Value
G/L on sale
SHARE IN NET INCOME
XX
XX
XX
XX
XX
-
XX
XX
-
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX XX
+ =
- for share of NCI, only consider upstream transactions
NCI, beginning
Net Income - NCI
Dividend Share (Div. paid X NCI %)
NCI, ending
FV of Net Assets (subsidiary)
Over-valuation
Under-valuation
SHE, beginning (subsidiary)
Net Income, subsidiary
Dividend, subsidiary
SHE, ending (subsidiary)
Parent
Retained Earnings
Conso Net Income
Dividend Declared
Consolidated RE
Ordinary Shares - Parent
Share Premium - Parent
Consolidated RE
NCI, ending
Consolidated SHE
1) Balance Sheet items
2) Income Statement items
Sales - Parent
Sales - Subsidiary
Inter-company sales (up or down)
Consolidated Sales
COGS - Parent
COGS - Subsidiary
Inter-company sales (up or down)
Unrealized Profit - EI
Realized Profit - BI
Amortization of over or under-valuation
Consolidated COGS
Total A/R or A/P
Inter-company A/R or A/P
Consolidated A/R or A/P
Consolidated Sales
Consolidated COGS
Consolidated GP
GP - Parent
GP - Subsidiary
Unrealized Profit - EI
Realized Profit - BI
Amortization of over or under-valuation
Consolidated GP
OpEx - Parent
OpEx - Subsidiary
Realized Loss
Realized Gain
Amortization of over
or under-valuation
Consolidated OpEx
thru depreciation of
depreciable assets
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
X(X)
XX
XX
XX
XX
XX
XX
(X)X
XX
XX
XX
XX
XX
(X)X
XX
Asset
Depreciation
Asset
Depreciation
Net Income
Net Income
XX
XX
CONSO NET
INCOME
XX
XX
XX
Consolidated GP
Consolidated OpEx
Consolidated NI
XX
XX
XX
}
}
}
}

13. JOINT ARRANGEMENTS
Characteristics
- arrangement of which two or more parties have joint control
Parties are bound by a contractual agreement
Contractual arrangement gives two or more of those parties: joint control
Joint Control
There is a contract
There is unanimous consent
Relevant activities are done
JOINT OPERATIONS JOINT VENTURE
- parties have the right to the assets and obligations
for the liabilities relating to the arrangement
- parties have the right to the net assets of the arrangement
PFRS 11
JOINT OPERATIONS
Recording of transactions
1) separate books (normal journalizing)
2) without separate books
- each joint operator shall record his own investments,
withdrawals, share in income & expenses
Merchandise Contributions Merchandise Withdrawals
Purchases
Freight-in
Sales returns & allowances
Sales discounts
Other Expenses
Sales
Other Income
Purchase returns & allowances
Purchase discounts
Any unsold merchandise
NET INCOME NET LOSS
(balancing figure) (balancing figure)
(Credits > Debits) (Credits < Debits)
PAS 28
Recording of transactions
1) separate books (normal journalizing)
- use Equity method
INVESTMENT IN JOINT VENTURE
Initial Investment
Share in Profit
Share in OCI
Sales discounts
Additional Investments
Share in Loss
Share in OCL
Dividends
Withdrawals
Impairment
End Balance
I

14. FOREIGN EXCHANGE
TERMINOLOGIES
FOREX TRANSLATION (FS)
FOREX TRANSACTIONS
PAS 21
- what exchange rates to use for FS presentation
- how to report gains or losses
Foreign currency - currency in which the FS are presented
Functional currency - currency of the primary economic environment
in which entity operates
Presentation currency - currency in which the FS are presented
Spot rate - exchange rate NOW
Closing rate - spot rate at the reporting date
RECOGNITION
EXCHANGE DIFFERENCES
Initial Recognition
- all transactions shall be translated to functional currency
at the date of transaction
Subsequent Reporting
- at the end of each reporting period, ff should be translated:
Monetary items*
Non-monetary items
a. Measured at historical cost
b. Measured at fair value
@ Closing rate
@ Exchange rate, Date of transaction
@ Exchange rate, Date when FV was determined
* includes
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Lease receivables
Loans Receivable
Financial Asset @ Amortized Cost
- all exchange rate differences shall be recognized in P&L, except:
Exchange rate G/L on non-monetary items
Exchange rate G/L on a monetary item that forms part of a reporting
entity’s net investment in a foreign operation shall be recognized:
- in the separate entity’s FS: P&L
- in the consolidated FS:
initially in OCI;
subsequently reclassified to P&L upon disposal
Functional Currency Presentation Currency
NON HYPER-INFLATIONARY ECONOMY
HYPER-INFLATIONARY ECONOMY
- when an entity’s functional currency is NOT the currency of
hyper-inflationary economy, entity should translate:
Assets & Liabilities
(including goodwill)
Equity
Share Capital
Share Premium
Retained Earnings
- Beginning balance
- Net Income
- Dividends
@ Closing rate
@ Exchange rate, Date of transaction
@ Exchange rate, Date of transaction (if not given)
@ Exchange rate, Date of transaction
- item by item
- average rate if not practicable
@ Exchange rate, Date of Declaration
CUMULATIVE TRANSLATION ADJUSTMENT
= Net Assets, end @ Translated Amounts - Net Assets, beg @ closing rate
= initially in OCI but reclassified to P&L upon disposal
- when an entity’s functional currency IS the currency of
hyper-inflationary economy, the approach slightly changes:
1) The entity’s current year FS are restated first
to reflect the hyperinflation
2) Translate FS using non-hyperinflation translation guide
:

15. DERIVATIVES & HEDGE ACCOUNTING
- used for hedging; also called hedging instruments
- financial instrument that derives its value from the
movement in commodity prices, forex rate and interest
rate of an underlying asset / financial instrument
- requires no initial investment or a little net investment
- settled at a future date
DERIVATIVES
Forward Contracts
Futures Contracts
Options
Interest Rate Swaps
FORWARD CONTRACTS
- contract to purchase or sell a particular commodity
at a designated future date at a predetermined price
- private or over-the-counter contract between two
parties where banks are the typical counter-parties
FUTURES CONTRACTS
OPTIONS
- contract to purchase or sell a particular commodity
at a designated future date at a predetermined price
- standard contract traded in a future exchange
market where one party will never know who is on
the other side of the contract
CALL OPTION PUT OPTION
- gives the holder the right
to buy / purchase an asset
- gives the holder the
right to sell an asset
INTEREST RATE SWAP
- contract whereby two parties agree to exchange cash flows or
future interest payments based on a contract of loan
- contract of loan is the primary financial instrument while
IRS agreement is the derivative financial instrument
HEDGING: designating one or more hedging instruments so that their
change in fair value is an offset, in whole or in part, to the change in
fair value or cash flows of a hedged item
Types
Fair value hedge - protection against
risk from changes in fair value
Cash flow hedge - protection against
risk from changes in cash flows
Hedge of a net investment in a foreign
operation - involves an underlying
variable which is the foreign currency
HEDGE ACCOUNTING
- all derivatives are measured at Fair Value
- change in FV requires recognition of a G/L that is
accounted for depending on how the derivative is used:
1) No hedging designation
Changes in FV
2) Fair Value hedge
3) Cash Flow Hedge
4) Hedge of a net investment in foreign operation
P&L
Changes in FV
G/L on hedged item
attributable to hedged risk
P&L
P&L
Effective Portion of G/L
on hedging instrument
Ineffective Portion of G/L
on hedging instrument
OCI
P&L
Effective Portion of G/L
on hedging instrument
Ineffective Portion of G/L
on hedging instrument
OCI
P&L
Examples
Hedged Items
A single asset or liability
Firm Commitment
Highly Probable Forecast Transaction
Net Investment in a foreign operation
-
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16. GOVERNMENT ACCOUNTING Presidential Decree
(PD) # 1445
1) National Government
- COA, DBM, Bureau of Treasury
- State Universities & Colleges (SUCs)
- Other Government Agencies
2) Local Government
Provinces, cities, municipalities, barangays
3) GOCCs
Chart of Account to be used
Government accounting policies to be followed
Accounting books, registries, forms & reports required
Components of General Purpose FS
Statement of Financial Position (SFP)
- difference with regular SFP:
Assets = Liabilities + Accumulated Surplus (Deficit)
Statement of Financial Performance (SFPer)
Statement of Cash Flows (SCF)
Statement of Changes in Net Assets/Equity (SCNA/E)
Statement of Comparison of Budget & Actual Amounts (SCBAA)
Notes to Financial Statements
In accordance with GAM
Accrual basis is used
For budgeting: CASH basis
Double-entry bookkeeping
Responsibility accounting
- same concept under MAS
- manager having direct
responsibility for his
department performance
Fund cluster accounting
- use of different funds
for different uses
Budget Cycle PLEA
1) Preparation
2) Legislation
3) Execution & Operation
4) Accountability
Budgets from Agencies DBM President Congress
Budget Call & Hearings
(Use of zero-based budgeting like in MAS)
Congress DBM President Congress
President’s Budget
General
Appropriation Bill
General
Appropriation Act
- release of revenue allotment
- liquidation reports and the audit by COA
BOOKS OF ACCOUNTS
1) Journals
- General Journal
- Cash Receipts Journal
- Cash Disbursements Journal
- Check Disbursements Journal
2) Ledgers
- General Ledger
- Subsidiary Ledger
REGISTRIES
1) RROR (Registry of Revenue &
Other Receipts)
2) RAPAL (Registry of Appropriations
& Allotments)
3) RBUD (Registry of Budget,
Utilization & Disbursements)
4) RAOD (Registry of Allotments,
Obligations & Disbursements)
CATEGORIES OF DISBURSEMENTS
1) Personnel Services (PS)
- employee compensation
2) Maintenance & Other
Operating Expenses (MOOE)
3) Capital Outlay (CO)
- buildings, etc.
4) Financial Expenses (FE)
- interest payments, etc.
OTHER GOVERNMENT ACCOUNTING PRINCIPLES
1) Imprest Fund system is used
2) For inventories, use weighted average method
under perpetual system
3) For PPE, depreciate over useful life
(2 to 50 yrs & residual value: minimum P15,000)
COVERAGE
GOVERNMENT ACCOUNTING MANUAL (GAM)
GENERAL PURPOSE FS
GOVERNMENT BUDGET
PRINCIPLES NOTABLE JOURNAL ENTRIES
1) Receipt of Budget Allocation
2) Return of Unused Allocation
3) Constructive Receipt of TRA
(Tax Remittance Advice from BIR for taxes)
4) Constructive Remittance of TRA
Cash - Modified Disbursement System (MDS) X
Subsidy from National Government X
Subsidy from National Government. X
Cash - Modified Disbursement System (MDS) X
Cash - TRA X
Subsidy from National Government X
Due to BIR X
Cash - TRA X

17. NON-PROFIT ORGANIZATIONS
CHARACTERISTICS EXAMPLES
CLASSIFICATION
FINANCIAL STATEMENTS REQUIRED
ACCOUNTING
Nature of NPO is of public service
No profit motives
Financed by citizenry
There is stewardship of resources
Hospitals
Schools & Universities (private)
Voluntary Health & Welfare Orgs
Others
1) Government NPOs - uses GAM
2) Non-government NPOs - uses standards SFAS 116 & 117
Statement of Financial Position
- reports total assets but net asset is sub-classified into:
Permanently restricted
Temporarily restricted - restriction may expire
Unrestricted
Statement of Functional Expenses
Statement of Cash Flows (SCF)
1) Operating - those unrestricted
2) Financing - those temporary & permanently restricted
3) Investing- acquisition/disposal of PPE & Investments
Notes to Financial Statements
Statement of Activities
- income statement equivalent for NPOs
- reports changes in the 3 classes of net assets
- uses accrual basis
1) Functional presentation
a. Program expenses - those incurred in line with the NPO’s “mission”
b. Supporting expenses
Management & General expenses
Fund-raising expenses (i.e telethon)
Member development
2) Natural presentation - itemized listing of expenses
Computation of Operating Revenues
1) Hospitals 2) Schools / Universities
Gross Patient Service rendered
(Include premiums like
capitation/subscriber fees)
Less: Charity Care
Gross Patient Service Revenue
Less: Contractual Adjustments
Discounts to hospital employees
(or courtesy allowances)
Net Patient Service Revenue
X
X
X
X
X
X
X
Tuition Fees
Less: Refunds
Gross Revenue
Less: Scholarships
Net Tuition Fee Revenue
* Ignore tuition remissions
to faculty members’ families
X
X
X
X
X
Valuation of Contributions Revenue
- unconditional transfers of cash or other asset to NPOs in a voluntary,
non-reciprocal transfer by another entity acting other than as owner
- imposed with a condition: no revenue yet
1) Cash: FACE VALUE
2) Non-cash
a. In kind: FV of item
b. Service: FV of service
recognized only if
service gives rise to a financial asset; and
it is a specialized service by a professional
Journal Entries
Inventories x
Salaries expense x
Rent expense x
Contribution Revenue x
Cash x
Other Operating Revenue x
(Cafeteria proceeds or
fees from parking lots
Goods:
Services:
Free rent:
SFAS 116 & 117
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18. SERVICE CONCESSION AGREEMENTS
- arrangement whereby government contracts with a private operator
to develop, operate and maintain grantor’s infrastructure assets
- grantor controls or regulates what services the operator must provide
using the assets to whom and to what price
- grantor also controls any significant residual interest in the assets
at the end of the term of the arrangement
OTHER NAMES
Build, Operate, Transfer (BOT) Contracts
Public-Private Partnership (PPP)
PARTIES
GRANTOR
OPERATOR
STANDARDS USED METHODS USED
Borrowing costs?
Government
Private company
PPSAS 32
- government accounting
for such arrangements
No specific
1
2
1
2
IFRIC 12
IFRIC 12
Grant of Right to Operator Model (GORTOM)
Financial Liability Model (FLM)
Intangible Asset Model
Financial Asset Model
- grantor gives ‘right to charge’ thus intangible asset
- accounted under PAS 38 (Intangible Assets)
- i.e charging toll fees
- grantor gives ‘right to receive’ thus receivable
- accounted under PFRS 9 (Financial Asset: Debt Securities)
* If operator is also the one constructing for
the arrangement, also account construction
under PFRS 15 (Construction Contracts)
CAPITALIZED
EXPENSED
@ Amortized Cost
@ FV-P&L
@ FV-OCI
@ Cost model
@ Revaluation model
Private company
OR
OR
OR
OR
if silent
EXAMPLE
1) Government grants right to construct expressway to operator
Who incurs costs to build? Operator
How will operator recover costs?
Grantor gives
operator
Right to charge toll fees
Right to be reimbursed
INTANGIBLE ASSET MODEL
FINANCIAL ASSET MODEL
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19. INSURANCE CONTRACTS
EXAMPLES
Life insurance & prepaid funeral plans
Life-contingent annuities & pensions
Reinsurance contracts
Disability & medical cover
Surety, fidelity, performance and aid bonds
Credit insurance
Product warranties
Title insurance
Travel assistance
Catastrophe bonds
Insurance swaps & other contracts
Insurance against theft or damage to property
Insurance against product, professional, civil or legal liability
PARTIES
Direct Insurance Reinsurance Retrocession
Policyholder
(insured)
Insurance
(insurance company)
Cedent
(reinsurer)
Retrocessionaire
How to recognize revenue for premiums received?
- accrual basis
- recognize earned & unearned portion
* Be mindful of the date. For instance, issuance of the insurance policy is on
April 1, 2021 for 24 semi-monthly payments in a year. If paid in advance:
Earned portion:17 months (April 1-15 is presumed not covered)
Unearned portion: 7 months (24 months-17months)
PFRS 4
January 2023 onwards: PFRS 17
When to recognize insurance settlement liability?
- recognize liability when obligating event happens
(i.e upon death of insured)