Conceptual Framework and Temporary Differences

Accounting Standards
- Those that have future tax consequences.
Reviewer
a. Taxable Temporary Differences – arise,
for example, when financial income is
greater than taxable income or the
 Accounting Profit and Taxable Profit, carrying amount of an asset is greater
Accounting for Preferred Taxes, than its tax base; result to deferred tax
Accounting for Current Taxes, liabilities
Property, plant and equipment - b. Deductible Temporary Differences –
arise in case of the opposites of the
Recognition, Measurement,
foregoing; result to deferred tax assets
Subsequent Measurement and
Derecognition
Deferred Taxes
- If the increase in deferred tax liability
Accounting Profit vs. Taxable Profit
exceeds the increase in deferred tax
assets, the difference is deferred tax
expense. If it is the opposite, the
difference is deferred tax income or
benefit.
- A deferred tax asset is recognized only
to the extent that it is realizable.
- Deferred taxes are measured using
 The varying treatments of economic enacted or substantially enacted tax
activities between the PFRSs and tax laws rates that are applicable to the periods of
result to permanent and temporary their expected reversals.
differences: - Deferred tax assets and liabilities are
not discounted.
- Deferred tax assets and liabilities are
Permanent Differences
presented as non-current.
- Those that do not have future tax
consequences.  Property, Plant, and Equipment
- Ex: interest income on government
bonds and treasury bills; interest income
on bank deposits; dividend income; fines, Characteristics of PPE
surcharges, and penalties arising from
violation of law; life insurance premium a. Tangible assets – items of PPE have
on employees where the entity is the physical substance
irrevocable beneficiary b. Used in normal operations – items of PPE
are used in the production or supply of
goods or services, for rental, or for
administrative purposes
c. Long-term in nature – items of PPE are capable of operating in the manner
expected to be used from more than a intended by the management.
year 3. Present value of decommissioning and
restoration costs to the extent that they
are recognized as obligation
Examples of Items of PPE
- Land used in business
Examples of Directly Attributable Costs
- Land held for future plant site
- Building used in business - Costs of employee benefits arising
- Equipment used in the production of directly from the construction or
goods acquisition of PPE;
- Equipment for environmental and safety - Costs of site preparation;
reasons - Initial delivery and handling costs (e.g.,
- Equipment held for rentals freight costs);
- Major spare parts and long-lived stand- - Installation and assembly costs;
by equipment - Testing costs, net of disposal proceeds of
- Furniture and fixture samples generated during testing; and
- Bearer plants - Professional fees.

Recognition Cessation of Capitalizing Costs to PPE

 The cost of an item of property, plant and  Recognition of costs in the carrying amount
equipment shall be recognized as an asset of an item of PPE ceases when the item is in
only if: the location and condition necessary for it to
a. it is probable that future economic be capable of operating in the manner
benefits associated with the item will intended by management.
flow to the entity; and
b. the cost of the item can be measured
reliably. Measurement of Cost

 The cost of an item of PPE is the cash

price equivalent to the recognition date. If
Initial Measurement
payment is deferred beyond normal credit
 An item of PPE is initially measured at its terms, the difference between the cash price
cost. equivalent and the total payment is
recognized as interest over the period of
 Elements of Cost credit unless such interest is capitalized in
1. Purchase price, including non-refundable accordance with PAS 23 Borrowing Costs.
purchase taxes, after deducting trade
discounts and rebates.
2. Costs directly are attributable to Acquisition Through Exchange
bringing the asset to the location and
 If the exchange has commercial substance,
condition necessary for it to be
the asset received from the exchange is
 measured using the following order of comes earlier.
priority:
a. Fair value of asset Given up
b. Fair value of asset Received Selection of Depreciation Method
c. Carrying amount of asset Given up
 There are various methods of depreciation.
The entity shall select the method that
 If the exchange lacks commercial
most closely reflects the expected pattern
substance, the asset received from the
of consumption of the future economic
exchange is measured at (c) above.
benefits embodied in the asset.
 However, a depreciation method that is
based on revenue that is generated by an
Subsequent Measurement
activity that includes the use of an asset is
 Subsequent to initial recognition, an entity not appropriate.
shall choose either:
(a) the cost model or
(b) the revaluation model The Straight-line Method of Depreciation
as its accounting policy and shall apply
 Straight line method – depreciation is
that policy to an entire class of PPE.
recognized evenly over the life of the asset
by dividing the depreciable amount by the
estimated useful life.
Cost Model

 After recognition, an item of PPE is Depreciation = (Historical cost – Residual

measured at its cost less any accumulated value) ÷ Estimated useful life
depreciation and any accumulated
impairment losses.
Changes in Depreciation Method, Useful Life,
and Residual Value
Depreciation
 A change in depreciation method, useful life,
 Depreciation is the systematic allocation or residual value is a change in accounting
of the depreciable amount of an asset over estimate accounted for prospectively.
its estimated useful life.  Prospective accounting means the change
 When computing for depreciation, each affects only the current period and/or future
part of an item of PPE with a cost that is periods. The change does not affect past
significant in relation to the total cost of periods.
the item shall be depreciated separately.
 Depreciation begins when the asset is
available for use, i.e., when it is in the Revaluation Model
location and condition necessary for it to be
 After recognition as an asset, an item of
capable of operating in the manner intended
PPE whose fair value can be measured
by management.
reliably shall be carried at a revalued
 Depreciation ceases when the asset is amount, being its fair value at the date of
derecognized or when it is classified as the revaluation less any subsequent
“held for sale” under PFRS 5, whichever accumulated depreciation and subsequent
 accumulated impairment losses.
a. If the revalued asset is non-
depreciable, the revaluation
Revaluation Surplus surplus accumulated in equity is
transferred directly to retained
Fair value* xx
earnings when the asset is
Less: Carrying amount (xx)
derecognized.
Revaluation surplus – gross of tax xx
b. If the revalued asset is depreciable,
a portion of the revaluation
- The fair value is determined using an
surplus may be transferred
appropriate valuation technique, taking into
periodically to retained earnings as
account the principles set forth under PFRS 13.
the asset is being used.

Frequency of Revaluation
Derecognition
 For items with significant and volatile
 The carrying amount of an item or PPE shall
changes in fair value, annual revaluation
be derecognized:
is necessary. For items with insignificant
changes in fair value, revaluation may be
a. on disposal; or
made every 3 or 5 years.
b. when no future economic benefits
are expected from its use or disposal
Revaluation Applied to All Assets in a Class

 If an item of PPE is revalued, the entire  Accounting Policies, Changes in

class of PPE to which that asset belongs
Accounting Estimates and Errors
shall be revalued.
 The items within a class of PPE are
revalued simultaneously to avoid selective
PFRSs
revaluation of assets and the reporting of
amounts in the financial statements that are a  Philippine Financial Reporting Standards
mixture of costs and values as at different (PFRSs) are Standards and Interpretations
dates. adopted by the Financial Reporting
Standards Council (FRSC). They comprise
the following:
Subsequent Accounting For Revaluation
Surplus - Philippine Financial Reporting
 Revaluation is initially recognized in Standards (PFRSs)
other comprehensive income unless the - Philippine Accounting Standards
revaluation represents impairment loss or (PASs); and
reversal of impairment loss, in which case - Interpretations
it is recognized in profit or loss.

 Subsequently, the revaluation surplus is

accounted for as follows:
 4. Change in financial reporting framework
Accounting Policies
such as from PFRS for SMEs to full
PFRSs.
 “are the specific principles, bases,
5. Initial adoption of the revaluation model
conventions, rules and practices applied
for property plant and equipment, and
by an entity in preparing and presenting
intangible assets.
financial statements” (PAS 8.5)
6. Change from the cost model to the fair
 Are the relevant PFRSs adopted by an
value model of measuring investment
entity in preparing and presenting its
property.
financial statements

Errors
 Errors include the effects of:

1. Mathematical mistakes
2. Mistakes in applying accounting
policies
3. Oversights or misinterpretations of facts;
and
4. Fraud

 Financial Reporting in Hyperinflation

 When it is difficult to distinguish a change The Stable Monetary Assumption

in accounting policy from a change in
accounting estimate, the change is treated  Under the stable monetary assumption, the
as a change in an accounting estimate. purchasing power of money is assumed to
 An entity shall change an accounting be stable. Therefore, inflation is ignored.
policy only if the change:  The exception to this concept is
- is required by a PFRS; or hyperinflation.
- results to a more relevant and reliable
information about an entity’s
financial position, performance, and Price Level Changes
cash flows
 General price level changes and the
purchasing power of money have an
Examples Changes in Accounting Policy inverse relationship.
- if the general price level increases, this
1. Change from the FIFO cost formula for means that the purchasing power of money has
inventories to the Average cost formula. decreased - a condition known as inflation.
2. Change in the method of recognizing - if the general price level decreases, this
revenue from long-term construction means that the purchasing power of money has
contracts. increased - a condition as deflation.
3. Change to a new policy resulting from the
requirement of a new PFRS.
  Presentation of information as a
Hyperinflation
supplement to unrestated financial
statements is not permitted.
 occurs when inflation is “very high”.
 Separate presentation of the financial
 PAS 29 does not establish an absolute rate
statements before restatement is
at which hyperinflation is deemed to arise.
discouraged.
This is matter of judgement.

 Earning Per Share

Indicators of Hyperinflation

1. The general population prefers to keep its Earning Per Share

wealth in non-monetary assets or in a
relatively stable foreign currency. Amounts  Is a computation made for ordinary shares.
of local currency held are immediately It is a form of profitability ratio which
invested to maintain purchasing power; provides a measure of how much profit
2. The general population regards monetary (loss) each ordinary share has earned
amounts not in terms of the local currency (incurred) during the period.
but in terms of a relatively stable foreign
currency. Prices may be quoted in that
Ordinary Share
currency;
3. Sales and purchases on credit take place at
 Is "an equity instrument that is 0
prices that compensate for the expected loss
subordinate to all other classes of equity
of purchasing power during the credit period,
instruments"
even if the period is short;
 Participate in profit for the period after all
4. Interest rates, wages and prices are linked
other classes of shares (e.g., preference
to a price index; and
shares) have participated.
5. The cumulative inflation rate over three
years is approaching, or exceeds, 100%.
Types of EPS

In summary, there are two main types of earnings

Core Principle
per share:
1. Basic earnings per share
 The financial statements of an entity whose
2. Diluted earnings per share
functional currency is the currency of a
hyper inflationary economy shall be stated
in terms of the measuring unit current at Types of Shareholders
the end of the reporting period.
 The comparative information for the  Ordinary shareholders buy a share in a
previous period shall also be stated in terms company to earn dividends and for capital
of the measuring unit current at the end growth. These dividends fluctuate annually
of the reporting period. depending on profits and available cash
reserves etc.
 Preference shareholders have more rights
than ordinary shareholders. Not only do
they have preference on liquidation, but
 they also have a fixed amount paid out
each year in dividends

Basic Earnings Per Share

 Basic earnings per share is calculated by

dividing earnings attributable to the
ordinary shareholders by the weighted
average number of ordinary shares in issue
during the year