Big Picture

Week 4-5: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

1. Apply the concepts of investment in associates of SMEs.

2. Apply the concepts of investment property of SMEs.
3. Apply the concepts of property, plant and equipment of SMEs.
4. Apply the concepts intangible assets of SMEs.

INVESTMENT IN ASSOCIATES

Big Picture:
ULO 1: Apply the concepts of Investment in Associates of SMEs.

Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to establish a
common frame of reference on how to use the term.

Associate – is an entity, including an unincorporated entity such as a partnership, over which the investor
has significant influence and that is neither a subsidiary nor an interest in a joint venture.

Significant influence – is the power to participate in the financial and operating policy decisions of the
associate but is not control or joint control over those policies.

a. If an investor holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more of the
voting power of the associate, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case.
b. Conversely, if the investor holds, directly or indirectly (e.g. through subsidiaries), less than 20 per
cent of the voting power of the associate, it is presumed that the investor does not have significant
influence, unless such influence can be clearly demonstrated.
c. A substantial or majority ownership by another investor does not preclude an investor from
having significant influence.

Essential Knowledge
Essential knowledge is the detailed discussion of the topic or concept.

Measurement – Accounting Policy Election

An investor shall account for all of its investments in associates using one of the following:

a. the cost model

b. the equity method
c. the fair value model

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Full PFRS VS PFRS for SMEs:
In full PFRS, the investor has no accounting policy choice. The investment in associates shall be accounted
under equity method. Under PFRS for SMEs, the investor shall account the investment in associates using
any one of the methods provided above – cost, equity, and fair value (accounting policy choice).

Cost Model
An investor shall measure its investments in associates, other than those for which there is a published
price quotation at cost less any accumulated impairment losses.

The investor shall recognize dividends and other distributions received from the investment as income
without regard to whether the distributions are from accumulated profits of the associate arising before
or after the date of acquisition.

An investor shall measure its investments in associates for which there is a published price quotation using
the fair value model.

Equity Method
Under the equity method of accounting, an equity investment is initially recognized at the transaction
price (including transaction costs) and is subsequently adjusted to reflect the investor’s share of the profit
or loss and other comprehensive income of the associate.

a. Distributions and other adjustments to carrying amount. Distributions received from the associate
reduce the carrying amount of the investment. Adjustments to the carrying amount may also be
required as a consequence of changes in the associate’s equity arising from items of other
comprehensive income.

b. Potential voting rights. Although potential voting rights are considered in deciding whether
significant influence exists, an investor shall measure its share of profit or loss of the associate and
its share of changes in the associate’s equity on the basis of present ownership interests. Those
measurements shall not reflect the possible exercise or conversion of potential voting rights.

c. Implicit goodwill and fair value adjustments. On acquisition of the investment in an associate, an
investor shall account for any difference (whether positive or negative) between the cost of
acquisition and the investor’s share of the fair values of the net identifiable assets of the associate.
An investor shall adjust its share of the associate’s profits or losses after acquisition to account for
additional depreciation or amortization of the associate’s depreciable or amortizable assets
(including goodwill) on the basis of the excess of their fair values over their carrying amounts at the
time the investment was acquired.

d. Impairment. If there is an indication that an investment in an associate may be impaired, an investor

shall test the entire carrying amount of the investment for impairment as a single asset. Any goodwill
included as part of the carrying amount of the investment in the associate is not tested separately
for impairment but, rather, as part of the test for impairment of the investment as a whole.

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e. Investor’s transactions with associates. If an associate is accounted for using the equity method, the
investor shall eliminate unrealized profits and losses resulting from upstream (associate to investor)
and downstream (investor to associate) transactions to the extent of the investor’s interest in the
associate. Unrealized losses on such transactions may provide evidence of an impairment of the asset
transferred.

f. Date of associate’s financial statements. In applying the equity method, the investor shall use the
financial statements of the associate as of the same date as the financial statements of the investor
unless it is impracticable to do so. If it is impracticable, the investor shall use the most recent
available financial statements of the associate, with adjustments made for the effects of any
significant transactions or events occurring between the accounting period ends.

g. Associate’s accounting policies. If the associate uses accounting policies that differ from those of the
investor, the investor shall adjust the associate’s financial statements to reflect the investor’s
accounting policies for the purpose of applying the equity method unless it is impracticable to do so.

h. Losses in excess of investment. If an investor’s share of losses of an associate equals or exceeds the
carrying amount of its investment in the associate, the investor shall discontinue recognizing its share
of further losses. After the investor’s interest is reduced to zero, the investor shall recognize
additional losses by a provision only to the extent that the investor has incurred legal or constructive
obligations or has made payments on behalf of the associate. If the associate subsequently reports
profits, the investor shall resume recognizing its share of those profits only after its share of the
profits equals the share of losses not recognized.

i. Discontinuing the equity method. An investor shall cease using the equity method from the date that
significant influence ceases.

i. If the associate becomes a subsidiary or joint venture, the investor shall remeasure its previously
held equity interest to fair value and recognize the resulting gain or loss, if any, in profit or loss.

ii. If an investor loses significant influence over an associate as a result of a full or partial disposal,
it shall derecognize that associate and recognize in profit or loss the difference between, on the
one hand, the sum of the proceeds received plus the fair value of any retained interest and, on
the other hand, the carrying amount of the investment in the associate at the date significant
influence is lost. Thereafter, the investor shall account for any retained interest using the
standard of Basic Financial Instruments and Other Financial Instruments Issues, as appropriate.

iii. If an investor loses significant influence for reasons other than a partial disposal of its
investment, the investor shall regard the carrying amount of the investment at that date as a
new cost basis and shall account for the investment as basic financial instrument and other
financial instrument, as appropriate.

Fair Value Model

When an investment in an associate is recognized initially at fair value model, an investor shall measure
it at the transaction price. Transaction price excludes transaction costs.

At each reporting date, an investor shall measure its investments in associates at fair value, with changes
in fair value recognized in profit or loss, using the fair valuation guidance. An investor using the fair value

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model shall use the cost model for any investment in an associate for which it is impracticable to measure
fair value reliably without undue cost or effort.

PROCEED NOW TO LET’S CHECK (Exercise 9) AND LET’S ANALYZE (Problem 10 and 11)
AND ANSWER IT.

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Big Picture:
ULO 2: Apply the concepts of Investment Property of SMEs.

Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to establish a
common frame of reference on how to use the term.

Investment property - is property (land or a building, or part of a building, or both) held by the owner or
by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or for administrative purposes, or
b. sale in the ordinary course of business.

Essential Knowledge
Essential knowledge is the detailed discussion of the topic or concept.

A property interest that is held by a lessee under an operating lease may be classified and accounted for
as investment property if, and only if, the property would otherwise meet the definition of an investment
property and the lessee can measure the fair value of the property interest without undue cost or effort
on an ongoing basis. This classification alternative is available on a property-by-property basis.

Mixed use property shall be separated between investment property and property, plant and equipment.
However, if the fair value of the investment property component cannot be measured reliably without
undue cost or effort, the entire property shall be accounted for as property, plant and equipment.

Measurement at Initial Recognition

An entity shall measure investment property at its cost at initial recognition. The cost of a purchased
investment property comprises its purchase price and any directly attributable expenditure such as legal
and brokerage fees, property transfer taxes and other transaction costs. If payment is deferred beyond
normal credit terms, the cost is the present value of all future payments.

Subsequent Measurement
Subsequent measurement of Investment property under IFRS for SMEs is driven by circumstance rather
than accounting policy choice.

IFRS for SMEs provides subsequent measurement of investment property at fair value if it can be
measured reliably without undue cost or effort. Any changes in fair value shall be recognized in profit or
loss.

If fair value cannot be measured reliably, the entity shall use the cost less depreciation and amortization
model. Accordingly, the said investment property shall be presented as a separate class of property, plant
and equipment. The residual value of such property is deemed to be zero (nil) as the fair value cannot be
measured reliably without undue cost or effort on an ongoing basis.

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Full PFRS VS PFRS for SMEs:
In full PFRS, the entity has the option to choose either fair value model or cost model. If the entity use the
cost model, the fair value of the property shall be disclosed. Under PFRS for SMEs, the choice of the model
is driven by circumstance rather than accounting policy choice.

Transfer
If a reliable measure of fair value is no longer available without undue cost or effort for an item of
investment property measured using the fair value model, the entity shall thereafter account for that item
as property, plant and equipment until a reliable measure of fair value becomes available.

The carrying amount of the investment property on that date becomes its cost. The standard requires
disclosure of this change. It is a change of circumstances and not a change in accounting policy.

An entity shall transfer a property to, or from, investment property only when the property first meets,
or ceases to meet, the definition of investment property.

PROCEED NOW TO LET’S CHECK (Exercise 10) AND LET’S ANALYZE (Problem 12)
AND ANSWER IT.

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 PROPERTY, PLANT AND EQUIPMENT

Big Picture:
ULO 3: Apply the concepts of Property, Plant and Equipment.

Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to establish a
common frame of reference on how to use the term.

Property, plant and equipment are tangible assets that:

a. are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes, and
b. are expected to be used during more than one period.

Essential Knowledge
Essential knowledge is the detailed discussion of the topic or concept.

Recognition
The entity shall recognize the cost of an item of property, plant and equipment as an asset if, and only if:
a. it is probable that future economic benefits associated with the item will flow to the entity, and
b. the cost of the item can be measured reliably.

Parts of some items of property, plant and equipment may require replacement at regular intervals (e.g.
the roof of a building). An entity shall add to the carrying amount of an item of property, plant and
equipment the cost of replacing part of such an item when that cost is incurred if the replacement part is
expected to provide incremental future benefits to the entity. The carrying amount of those parts that are
replaced is derecognized.

If the major components of an item of property, plant and equipment have significantly different patterns
of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major
components and depreciate each such component separately over its useful life.

A condition of continuing to operate an item of property, plant and equipment (e.g. a bus) may be
performing regular major inspections for faults regardless of whether parts of the item are replaced.
When each major inspection is performed, its cost is recognized in the carrying amount of the item of
property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining
carrying amount of the cost of the previous major inspection (as distinct from physical parts) is
derecognized. This is done regardless of whether the cost of the previous major inspection was identified
in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a
future similar inspection may be used as an indication of what the cost of the existing inspection
component was when the item was acquired or constructed.

Land and buildings are separable assets, and an entity shall account for them separately, even when they
are acquired together.

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Elements of Cost
The cost of an item of property, plant and equipment comprises all of the following:

a. its purchase price, including legal and brokerage fees, import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates.
b. any costs directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management. These can include the costs
of site preparation, initial delivery and handling, installation and assembly, and testing of
functionality.
c. the initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located, the obligation for which an entity incurs either when the item is acquired or as
a consequence of having used the item during a particular period for purposes other than to
produce inventories during that period.

The following costs are not costs of an item of property, plant and equipment, and an entity shall recognize
them as an expense when they are incurred:

a. costs of opening a new facility.

b. costs of introducing a new product or service (including costs of advertising and promotional
activities).
c. costs of conducting business in a new location or with a new class of customer (including costs of
staff training).
d. administration and other general overhead costs.
e. borrowing costs

The income and related expenses of incidental operations during construction or development of an item
of property, plant and equipment are recognized in profit or loss if those operations are not necessary to
bring the item to its intended location and operating condition.

Measurement of Cost
The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date.
If payment is deferred beyond normal credit terms, the cost is the present value of all future payments.

Exchanges of Assets
An item of property, plant or equipment may be acquired in exchange for a non-monetary asset or assets,
or a combination of monetary and non-monetary assets. An entity shall measure the cost of the acquired
asset at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of
neither the asset received nor the asset given up is reliably measurable. In that case, the asset’s cost is
measured at the carrying amount of the asset given up.

Measurement After Initial Recognition

An entity shall measure all items of property, plant and equipment after initial recognition at cost less any
accumulated depreciation and any accumulated impairment losses. An entity shall recognize the costs of
day-to-day servicing of an item of property, plant and equipment in profit or loss in the period in which
the costs are incurred.

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Full PFRS VS PFRS for SMEs:
Full PFRS provides the use of either Cost Model or Revaluation Model as an accounting policy in measuring
the PPE subsequent to its acquisition. PFRS For SMEs requires to use the Cost Model Only in measuring
PPE.

Depreciation
If the major components of an item of property, plant and equipment have significantly different patterns
of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major
components and depreciate each such component separately over its useful life. Other assets shall be
depreciated over their useful lives as a single asset. With some exceptions, such as quarries and sites used
for landfill, land has an unlimited useful life and therefore is not depreciated.

Depreciation Method
An entity shall select a depreciation method that reflects the pattern in which it expects to consume the
asset’s future economic benefits. The possible depreciation methods include the straight-line method, the
diminishing balance method and a method based on usage such as the units of production method.

If there is an indication that there has been a significant change since the last annual reporting date in the
pattern by which an entity expects to consume an asset’s future economic benefits, the entity shall review
its present depreciation method and, if current expectations differ, change the depreciation method to
reflect the new pattern. The entity shall account for the change as a change in an accounting estimate.

Impairment
At each reporting date, an entity shall assess the impairment of assets to determine whether an item or
group of items of property, plant and equipment is impaired and, if so, how to recognize and measure the
impairment loss. Discussion of impairment of assets is presented below (Impairment of Assets).

Property, Plant and Equipment Held for Sale

PFRS for SMEs does not address noncurrent asset held for sale. If the company plan to dispose an item of
property, plant and equipment, such fixed assets are not separately presented.

It is worth to note that if the company plan to dispose a property, plant and equipment, it is an indication
of impairment that triggers the assessment of the asset’s recoverable costs to determine whether the
asset is impaired.

Full PFRS VS PFRS for SMEs:

Full PFRS provides that an entity separately presented the noncurrent asset held for sale and shall be
measured at the lower of carrying amount and fair value less cost of disposal. Such property held for sale
should no longer be depreciated. PFRS for SMEs does not address noncurrent held for sale and should not
be presented separately from the PPE.

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Borrowing Costs
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of
funds. Borrowing costs include:

a. interest expense calculated using the effective interest method as described in Section 11 Basic
Financial Instruments.
b. finance charges in respect of finance leases recognized in accordance with Section 20 Leases.
c. exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs.

An entity shall recognize all borrowing costs as an expense in profit or loss in the period in which they are
incurred.

Full PFRS VS PFRS for SMEs:

Full PFRS, borrowing costs that are directly attributable to the purchase or construction of a qualifying
assets shall be capitalized as part of the cost of the asset. PFRS for SMEs recognize borrowing cost as
expense.

Government Grants
A government grant is assistance by government in the form of a transfer of resources to an entity in
return for past or future compliance with specified conditions relating to the operating activities of the
entity.

Government grants exclude those forms of government assistance that cannot reasonably have a value
placed upon them and transactions with government that cannot be distinguished from the normal
trading transactions of the entity.

Recognition and Measurement

An entity shall recognize government grants as follows:

a. A grant that does not impose specified future performance conditions on the recipient is
recognized in income when the grant proceeds are receivable.
b. A grant that imposes specified future performance conditions on the recipient is recognized in
income only when the performance conditions are met.
c. Grants received before the revenue recognition criteria are satisfied are recognized as a liability.

An entity shall measure grants at the fair value of the asset received or receivable.

Full PFRS VS PFRS for SMEs:

In full PFRS, government grant is recognized when there is a reasonable assurance that the entity will
comply with the specified condition. Under PFRS for SMEs, it is recognized when the conditions are
actually satisfied.
In full PFRS, a government grant is recognized as income over the periods necessary to match the grant
will the related costs for which it is intended to compensate. Under PFRS for SMEs, it does not allow an
entity to match the grant with the expense.

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In full PFRS, grants related to asset may be treated either as deferred income or a reduction in the carrying
amount of the asset. Under PFRS for SMEs, the grant is a deferred income until the conditions are actually
satisfied.

Impairment of Assets
An impairment loss occurs when the carrying amount of an asset exceeds its recoverable amount. This
section shall be applied in accounting for the impairment of all assets other than the following, for which
other sections of this IFRS establish impairment requirements:

a. deferred tax assets (see Section 29 Income Tax).

b. assets arising from employee benefits (see Section 28 Employee Benefits).
c. financial assets within the scope of Section 11 Basic Financial Instruments or Section 12 Other
Financial Instruments Issues.
d. investment property measured at fair value (see Section 16 Investment Property).
e. biological assets related to agricultural activity measured at fair value less estimated costs to sell
(see Section 34 Specialized Activities).

General Principles
If, and only if, the recoverable amount of an asset is less than its carrying amount, the entity shall reduce
the carrying amount of the asset to its recoverable amount. That reduction is an impairment loss.

Indicators of Impairment
An entity shall assess at each reporting date whether there is any indication that an asset may be impaired.
If any such indication exists, the entity shall estimate the recoverable amount of the asset. If there is no
indication of impairment, it is not necessary to estimate the recoverable amount.

If it is not possible to estimate the recoverable amount of the individual asset, an entity shall estimate the
recoverable amount of the cash-generating unit to which the asset belongs. This may be the case because
measuring recoverable amount requires forecasting cash flows, and sometimes individual assets do not
generate cash flows by themselves. An asset’s cash-generating unit is the smallest identifiable group of
assets that includes the asset and generates cash inflows that are largely independent of the cash inflows
from other assets or groups of assets.

In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a
minimum, the following indications:

External sources of information

a. During the period, an asset’s market value has declined significantly more than would be expected
as a result of the passage of time or normal use.
b. Significant changes with an adverse effect on the entity have taken place during the period, or will
take place in the near future, in the technological, market, economic or legal environment in
which the entity operates or in the market to which an asset is dedicated.
c. Market interest rates or other market rates of return on investments have increased during the
period, and those increases are likely to affect materially the discount rate used in calculating an
asset’s value in use and decrease the asset’s fair value less costs to sell.

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 d. The carrying amount of the net assets of the entity is more than the estimated fair value of the
entity as a whole (such an estimate may have been made, for example, in relation to the potential
sale of part or all of the entity).

Internal sources of information

e. Evidence is available of obsolescence or physical damage of an asset.
f. Significant changes with an adverse effect on the entity have taken place during the period, or are
expected to take place in the near future, in the extent to which, or manner in which, an asset is
used or is expected to be used. These changes include the asset becoming idle, plans to
discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset
before the previously expected date, and reassessing the useful life of an asset as finite rather
than indefinite.
g. Evidence is available from internal reporting that indicates that the economic performance of an
asset is, or will be, worse than expected. In this context economic performance includes operating
results and cash f lows.

Measuring Recoverable Amount

The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to
sell and its value in use. If it is not possible to estimate the recoverable amount of an individual asset, an
asset should be read as references to an asset’s cash-generating unit.

Fair Value Less Costs to Sell

Fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction
between knowledgeable, willing parties, less the costs of disposal. The best evidence of the fair value less
costs to sell of an asset is a price in a binding sale agreement in an arm’s length transaction or a market
price in an active market. If there is no binding sale agreement or active market for an asset, fair value
less costs to sell is based on the best information available to reflect the amount that an entity could
obtain, at the reporting date, from the disposal of the asset in an arm’s length transaction between
knowledgeable, willing parties, after deducting the costs of disposal. In determining this amount, an entity
considers the outcome of recent transactions for similar assets within the same industry.

Value in Use
Value in use is the present value of the future cash flows expected to be derived from an asset. This
present value calculation involves the following steps:

a. estimating the future cash inflows and outflows to be derived from continuing use of the asset
and from its ultimate disposal, and
b. applying the appropriate discount rate to those future cash flows.

Recognizing and Measuring an Impairment Loss for a Cash-Generating Unit

An impairment loss shall be recognized for a cash-generating unit if, and only if, the recoverable amount
of the unit is less than the carrying amount of the unit. The impairment loss shall be allocated to reduce
the carrying amount of the assets of the unit in the following order:

a. first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit, and
b. then, to the other assets of the unit pro rata on the basis of the carrying amount of each asset in
the cash-generating unit.

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PROCEED NOW TO LET’S CHECK (Exercise 11) and LET’S ANALYZE (Problem 13 to 22) AND
ANSWER IT.

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 INTANGIBLE ASSETS OTHER THAN GOODWILL

Big Picture:
ULO 4: Apply the concepts of Intangible Assets.

Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to establish a
common frame of reference on how to use the term.

An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is
identifiable when:
a. it is separable, i.e. capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract, asset or
liability, or
b. it arises from contractual or other legal rights, regardless of whether those rights are transferable
or separable from the entity or from other rights and obligations.

Essential Knowledge
Essential knowledge is the detailed discussion of the topic or concept.

General Principle for Recognizing Intangible Assets

An entity shall apply the recognition criteria in determining whether to recognize an intangible asset.
Therefore, the entity shall recognize an intangible asset as an asset if, and only if:

a. it is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity;
b. the cost or value of the asset can be measured reliably; and
c. the asset does not result from expenditure incurred internally on an intangible item.

An entity shall assess the probability of expected future economic benefits using reasonable and
supportable assumptions that represent management’s best estimate of the economic conditions that
will exist over the useful life of the asset.

Initial Measurement
An entity shall measure an intangible asset initially at cost.

Separate acquisition
The cost of a separately acquired intangible asset comprises:

a. its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates, and
b. any directly attributable cost of preparing the asset for its intended use.

Acquisition as Part of a Business Combination

If an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value
at the acquisition date.

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Acquisition by Way of a Government Grant
If an intangible asset is acquired by way of a government grant, the cost of that intangible asset is its fair
value at the date the grant is received or receivable.

Exchange of Assets
An intangible asset may be acquired in exchange for a non-monetary asset or assets, or a combination of
monetary and non-monetary assets. An entity shall measure the cost of such an intangible asset at fair
value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the
asset received nor the asset given up is reliably measurable. In that case, the asset’s cost is measured at
the carrying amount of the asset given up.

Internally Generated Intangible Assets

An entity shall recognize expenditure incurred internally on an intangible item, including all expenditure
for both research and development activities, as an expense when it is incurred unless it forms part of the
cost of another asset that meets the recognition criteria.

Full PFRS VS PFRS for SMEs:

In full PFRS, research costs are expensed while development costs may be capitalized when criteria are
met i.e. technological feasibility has been already been established. PFRS for SMEs, all research and
development costs are recognized as expense when incurred.

An entity shall recognize expenditure on the following items as an expense and shall not recognize such
expenditure as intangible assets:

a. internally generated brands, logos, publishing titles, customer lists and items similar in substance.
b. start-up activities (i.e. start-up costs), which include establishment costs such as legal and
secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or
business (i.e. pre-opening costs) and expenditure for starting new operations or launching new
products or processes (i.e. pre-operating costs).
c. training activities.
d. advertising and promotional activities.
e. relocating or reorganizing part or all of an entity.
f. internally generated goodwill.

Past Expenses Not to be Recognized as an Asset

Expenditure on an intangible item that was initially recognized as an expense shall not be recognized at a
later date as part of the cost of an asset.

Measurement After Recognition

An entity shall measure intangible assets at cost less any accumulated amortization and any accumulated
impairment losses.

Full PFRS VS PFRS for SMEs:

In full PFRS, intangible assets are measured subsequently using either the cost model or revaluation
model. PFRS for SMEs requires cost model only.

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Amortization Over Useful Life
All intangible assets shall be considered to have a finite useful life. The useful life of an intangible asset
that arises from contractual or other legal rights shall not exceed the period of the contractual or other
legal rights, but may be shorter depending on the period over which the entity expects to use the asset.
If the contractual or other legal rights are conveyed for a limited term that can be renewed, the useful life
of the intangible asset shall include the renewal period(s) only if there is evidence to support renewal by
the entity without significant cost.

If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall be
presumed to be ten years.

Full PFRS VS PFRS for SMEs:

In full PFRS, the useful life of an intangible asset is either finite or infinite. PFRS for SMEs considers useful
life to be finite. If the useful life cannot be estimated reliably, it is assumed to be 10 years.

Amortization Period and Amortization Method

An entity shall allocate the depreciable amount of an intangible asset on a systematic basis over its useful
life. The amortization charge for each period shall be recognized as an expense, unless another section of
this IFRS requires the cost to be recognized as part of the cost of an asset such as inventories or property,
plant and equipment.

Amortization begins when the intangible asset is available for use, i.e. when it is in the location and
condition necessary for it to be usable in the manner intended by management. Amortization ceases when
the asset is derecognized. The entity shall choose an amortization method that reflects the pattern in
which it expects to consume the asset’s future economic benefits. If the entity cannot determine that
pattern reliably, it shall use the straight-line method.

Residual Value
An entity shall assume that the residual value of an intangible asset is zero unless:

a. there is a commitment by a third party to purchase the asset at the end of its useful life, or
b. there is an active market for the asset and:
i. residual value can be determined by reference to that market, and
ii. it is probable that such a market will exist at the end of the asset’s useful life.

Review of Amortization Period and Amortization Method

Factors such as a change in how an intangible asset is used, technological advancement, and changes in
market prices may indicate that the residual value or useful life of an intangible asset has changed since
the most recent annual reporting date. If such indicators are present, an entity shall review its previous
estimates and, if current expectations differ, amend the residual value, amortization method or useful
life. The entity shall account for the change in residual value, amortization method or useful life as a
change in an accounting estimate.

Recoverability of the Carrying Amount – Impairment Losses

To determine whether an intangible asset is impaired, an entity shall apply impairment of asset as
discussed previously.

16
Full PFRS VS PFRS for SMEs:
In full PFRS, intangible assets with finite life are tested for impairment when there is an indication that the
asset may be impaired. For intangible assets with infinite life, it is tested for impairment annually and
whether there is an indication that the asset may be impaired. PFRS for SMEs provides testing for
impairment of an intangible assets when there is an indication that the asset may be impaired.

Retirement and Disposals

An entity shall derecognize an intangible asset, and shall recognize a gain or loss in profit or loss:

a. on disposal, or
b. when no future economic benefits are expected from its use or disposal.

PROCEED NOW TO LET’S CHECK (Exercise 12) and LET’S ANALYZE (Problem 23 to 24) AND
ANSWER IT.

17
Self-Help: You can also refer to the following sources to help you further
understand the lesson.

International Financial Reporting Standard for Small and Medium-Sized Entities (IFRS for SMEs)

Let’s Check

Exercise 9 –
1. Which of the following statements best describes the term significant influence?
a. The holding of a significant proportion of the share capital in another entity.
b. The contractually agreed sharing of control over an economic entity.
c. The power to participate in the financial and operating policy decision of an entity.
d. The mutual sharing of the risks and rewards of a combined entity.

2. If an associate has outstanding cumulative preference shares, held by outside interests, the investor
computes its share of profits or losses
a. After adjusting for preference dividends which were actually paid during the year.
b. Without regard for preference dividends.
c. After adjusting for the preference dividend only when declared.
d. After adjusting for the preference dividends, whether or not the dividends have been declared.

3. How goodwill arising on the acquisition of an associate dealt with in the financial statements?
a. It is amortized.
b. Its impairment tested individually.
c. It is written off against profit or loss.
d. It is not recognized separately within the carrying amount of the investment.

4. Investments in associates must be tested for impairment when the entity uses
a. The cost model, equity method, or fair value model.
b. The cost model or the equity method.
c. The cost model or the fair value model.
d. The equity method or the fair value model.

5. An SME shall account for investments in associate after initial recognition using
a. Either cost or fair value model and using same policy for all investments in associates.
b. Either cost model or fair value model and the model can be elected on an investment by
investment basis.
c. Any of the cost model, equity method, or fair value model and using the same accounting policy
for all investment in associates.
d. Any of the cost model, equity method, or fair value model and the model can be elected on an
investment by investment basis.

Exercise 10 –
1. A land is held by a subsidiary to earn rentals under an operating lease from the parent. The parent
manufactures products in the rented building. The fair value of the building can be measured reliably
without undue cost or effort on an ongoing basis. What is the accounting treatment of the building?

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 a. Accounted for as property, plant and equipment by the subsidiary and an investment property by
the group.
b. Accounted for as property, plant and equipment by both subsidiary and the group.
c. Accounted for as investment property by both the subsidiary and the group.
d. Accounted for as an investment property by the subsidiary and property, plant and equipment by
the group.

2. An SME shall measure the investment property after initial recognition

a. At fair value or using the cost-depreciation-impairment model and same accounting policy for all
investment property.
b. At fair value or using the cost-depreciation-impairment model elected item by item.
c. At fair value.
d. At fair value, for property whose fair value can be measured reliably without undue cost or effort
on an ongoing basis and the cost-depreciation-impairment model for all other investment
property.

3. Which statement is correct if the property is partly investment and partly owner-occupied?
I. If the investment and owner-occupied portions could be sold or leased out separately, the portions
shall be accounted for separately as investment property and owner-occupied property.
II. If the investment and owner-occupied portions could not be sold or leased out separately, the
property is investment property if only an insignificant portion is held for manufacturing or
administrative purposes.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. If owner-occupied property is transferred to investment property that is to be carried at fair value, the
difference between the carrying amount of the property and its fair value shall be
a. Included in profit or loss.
b. Included in retained earnings.
c. Included in equity.
d. Accounted for as revaluation of property, plant and equipment.

5. When an investment property under construction is completed and to be carried at fair value, the
difference between the carrying amount and fair value shall be
a. Included in profit or loss.
b. Included in retained earnings.
c. Included in equity.
d. Accounted for as revaluation of property, plant and equipment.

Exercise 11
1. Costs that are expense immediately include all of the following, except
a. Cost incurred while an item capable of operating in a manner intended by management has yet to
be brough into use, or is operated at less than full capacity.
b. Initial operating cost.
c. Cost of relocating or reorganizing part or all of an entity’s operation.
d. Professional fee arising directly from the acquisition of an item of property, plant and equipment.

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2. An SME must measure property, plant and equipment after initial recognition at
a. Cost.
b. Cost less any accumulated depreciation less any accumulated impairment losses.
c. Cost less any accumulated depreciation.
d. Cost plus the cost of day-to-day servicing.

3. Major spare parts and standby equipment which are expected to be used over a period of more than
one year shall be classified as
a. Property, plant and equipment.
b. Inventory.
c. Noncurrent investment.
d. Expense.

4. Which of the following is correct concerning recognition of property, plant and equipment?
Statement 1: Most spare parts and servicing equipment are usually carried as inventory and recognized
as expense when consumed.
Statement 2: If the spare parts and servicing equipment can be used only in connection with an item
of property, plant and equipment and their use is expected to be irregular, they are accounted for as
property, plant and equipment and are depreciated over their useful life or useful life of the related
asset, whichever is shorter.
a. I only.
b. II only.
c. Both I and II
d. Neither I nor II.

5. Which of the following terms best describes the removal of an asset from an entity’s statement of
financial position?
a. Derecognition
b. Impairment
c. Write-off
d. Depreciation

6. An entity imported machinery to install in its new factory premises before year-end. However, due to
circumstances beyond its control, the machinery was delayed by a few months but reached the factory
premises before year-end. While this was happening, the entity learned from the bank that it was being
charged interest on the loan it had taken to fund the cost of the plant. What is the proper treatment
of freight and interest expense?
a. Both expenses are capitalized.
b. Interest may be capitalized if the entity is not SME; freight is expensed.
c. Freight can be capitalized but interest cannot be capitalized unless the entity is SME.
d. Freight can be capitalized but interest cannot be capitalized under these circumstances whether
the entity is an SME or not.

7. The cost of an item of property, plant and equipment comprises its purchase price, import duties and
nonrefundable purchase taxes, and
a. The implied interest on the debt to finance the purchase.
b. The fair value of any noncash asset surrendered to acquire the asset.

20
 c. The estimated residual value of the asset.
d. All directly attributable costs necessary to bring the asset to the location and condition for its
intended use.

8. An entity purchased a plant asset under a deferred payment contract. The agreement was to pay
P100,000 at the time of purchase and P20,000 at the end of each of the next five years. The plant asset
is measured initially at
a. The present value of a P20,000 ordinary annuity for five years.
b. P200,000.
c. P200,000 plus imputed interest.
d. P200,000 less imputed interest.

9. A forgivable loan from a government or the benefit of a government loan at NIL, or below market
interest rate is accounted for as
a. Government grant only.
b. Government assistance only.
c. Both government grant and government assistance.
d. Neither government grant nor government assistance.

10.Borrowing costs do not include

a. Interest incurred on bank overdraft.
b. Incremental administrative fees incurred in connection with raising loans.
c. Finance charges in respect of finance leases.
d. Dividends declared to equity holders.

11.An SME must recognize a government grant that imposes specified future performance conditions
a. In income when the grant proceeds are receivable.
b. In income over the periods necessary to match it with the related cost for which it is intended to
compensate on a systematic basis.
c. In income only when the performance conditions are met.
d. None of the above.

12.An SME shall capitalize all of the following as cost of property, plant and equipment, except
a. Transport cost.
b. Loan raising cost.
c. Installation cost.
d. Nonrefundable purchase tax.

13.Government assistance includes all of the following, except

a. Free technical advice.
b. Provision of guarantee.
c. Government procurement policy that is responsible for a portion of the entity’s sales.
d. Improved irrigation water system for the benefit of an entire local community.

14.In the case of grant related to an asset, which of the following is true?
a. Record the grant at a nominal value in the first year and write it off in the subsequent year
regardless whether the entity is an SME or not.

21
 b. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of the
asset regardless whether the entity is an SME or not.
c. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of the
asset if the entity is not an SME.
d. Record the grant as either deferred income or income depending whether there is a condition
attached to the grant or not.

15.The carrying amount of an item of property, plant and equipment shall be derecognized
I. On disposal.
II. When no future economic benefits are expected from the use or disposal of the asset.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

Exercise 12
1. Which of the following statements is true in relation to the amortization of the intangible assets of an
SME?
I. All intangible assets, including goodwill, are amortized over the useful life.
II. All intangible assets with indefinite useful life are not amortized but tested for impairment annua
and whenever there is an indication that the intangible asset may be impaired.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

2. Under PFRS for SMEs, the cost of an intangible asset at initial recognition is measured at fair value
when
a. It is internally generated.
b. It is acquired as part of a business combination.
c. It is acquired by way of government grant.
d. If it acquired as part of a business combination or acquired by way of government grant.

3. An SME acquired a trademark that as a remaining legal life of five years but is renewable every ten
years at little cost. The useful life of the trade is
a. Five years.
b. Presumed to be 10 years, if the entity is unable to make a reliable estimate of the useful life.
c. Fifteen years.
d. Indefinite.

4. Which of the following costs should be capitalized in the year incurred if the entity is an SME?
a. Research and development cost.
b. Cost of internally developed goodwill.
c. Organization cost.
d. Filing fee for a patent.

5. Which of the following intangible assets that could not be sold separately?

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 a. Patent
b. Copyright
c. Goodwill
d. Trademark

6. Which of the following may not be classified a “qualifying asset”?

a. A power generation plant that normally takes two years to construct.
b. An expensive private jet that can be purchased from a local vendor.
c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.

7. Estimates of future cash flows normally would cover projections over a maximum of
a. Five years.
b. Ten years.
c. Fifteen years.
d. Twenty years.

8. Which is incorrect concerning separate acquisition of an intangible asset?

a. If an intangible asset is acquired separately, the. cost of the intangible asset can usually be
measured reliably.
b. The cost of the intangible asset comprises its purchase price and any directly attributable
expenditures on preparing the asset for its intended use.
c. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to the
cash price equivalent.
d. The cost of an intangible asset include initial operating losses.

9. For an SME, the cost of an internally generated assets that should be expensed include all of the
following, except:
a. Cost of materials and services used in generating the intangible assets.
b. Compensation costs of personnel directly engaged in generating the asset.
c. Fees to register a legal right.
d. Expenditures on training staff to operate the asset.

10.The amortization method used shall reflect the pattern in which the asset’s economic benefits are
consumed by the entity. If such pattern cannot be determined reliably, what is the amortization
method used?
a. Straight line
b. Production output
c. Diminishing balance method
d. Ratio of current year’s sales to the total expected sales

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Let’s Analyze

Problem 10
On January 1, 2021, Amia Corporation paid P40 million for 2.5 million shares of Lee Corporation’s ordinary
shares. The investment represents a 25% interest in the net assets of Lee Corporation and gave Amia
Corporation the ability to exercise significant influence over Lee Corporation’s operations. The book value
of Lee Corporation’s net assets was P150 million. The fair market value of Lee Corporation’s depreciable
assets exceeded their book value by P25 million. These assets had an average remaining useful life of 10
years. The remainder of the excess of the. cost of the investment over the book value of net assets
purchased was attributable to goodwill.

On December 15, 2021, Amia Corporation received dividends of P1.80 per share. Lee Corporation
reported net income of P25 million for the year ended December 31, 2021. The market value of Lee
Corporation’s ordinary share at December 31, 2021 was P29.25 per share.

Questions: Compute the following under the three models – cost, equity, and fair value.
1. Income from investment at December 31, 2021.
2. Carrying value of the investment at December 31, 2021

Note: Under cost model, it is assumed that the fair value is not given.

Problem 11
At the beginning of 2014, Kathleen Corporation purchased 40% of the ordinary shares outstanding of
Puerto Incorporated for P15,000,000 when the net assets of Puerto Incorporated amounted to
P30,000,000. At acquisition date, the carrying amounts of the identifiable assets and liabilities of Puerto
Incorporated were equal to their fair value, except for the following:

a. Equipment whose fair value was P7,000,000 greater than its carrying amount.
b. Inventory whose fair value was P2,500,000 greater than its carrying amount.

The equipment has a remaining life of 4 years and the inventory was all sold during 2013.

Puerto Incorporated has two classes of shares: Ordinary shares (par value, P100), 300,000 shares
outstanding; 15% cumulative preference shares (par value, P50), 100,000 shares outstanding.

The investee reported the following net income (inclusive of enter-company transactions) and payment
of cash dividend:
2014 2015
Net Income 20,000,000 35,000,000
Dividend payment 5,000,000 8,000,000

The following were the inter-company transactions between the investor and the associates:

a. In 2014, the Puerto Incorporated sold inventory to Kathleen Corporation for P750,000. The cost of
the inventory was P500,000. 50% of these inventory was still unsold at the end of 2013 and the
remainder were sold in 2015.

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b. On July 1, 2015, Kathleen Corporation sold an equipment for P900,000 to Puerto Incorporated. The
carrying amount of the equipment is P500,000 at the time of sale. The remaining life of the equipment
is 5 years and Puerto Incorporated uses the straight-line method of depreciating the equipment.

On January 1, 2016, Kathleen Corporation sold 70,000 shares of Puerto Incorporated at P260 per share.
The company incurred broker’s fee of P200,000. The sale resulted to loss of significant influence of
Kathleen Corporation over the operation of Puerto Incorporated. Kathleen designate the investment at
fair value through profit or loss on this date.

During 2014, Puerto Incorporated earned P25,000,000 net income and P10,000,000 cash dividend.

The following are the market value of Puerto Incorporated shares at year-end:

2014 - P 156.00
2015 - P 162.00
2016 - P 163.50

Questions: Compute the following under the three models – cost, equity, and fair value
1. What is the carrying value of Kathleen Corporation’s investment to Puerto Incorporated at
December 31, 2014?
2. How much is the total investment income of Kathleen Corporation at December 31, 2014?
3. What is the carrying value of Kathleen Corporation’s investment to Puerto Incorporated at
December 31, 2015?
4. How much is the total investment income of Kathleen Corporation at December 31, 2015?
5. What is the carrying value of Kathleen Corporation’s investment to Puerto Incorporated at
December 31, 2016?
6. How much is the total investment income of Kathleen Corporation at December 31, 2016?

Problem 12
Edelyn, Inc. completed the construction of a building at the beginning of 2018 for a total cost of P100
million. The building is estimated to be economically useful for 25 years. The building was constructed
for the purpose of earning rentals under operating leases. The tenants began occupying the building after
its completion. The fair value of the property can be measured reliably without under cost or effort. An
independent valuation expert was used by the company to estimate the fair value of the building on an
annual basis. According to the expert, the fair values of the building at the end of 2018, 2019, and 2020
were P105 million, P120 million, and P118 million, respectively.

Questions:
1. How much should be recognized in profit or loss in 2018 as a result of the completion of the building
at the end of 2018?
2. Compute the depreciation expense in 2019.
3. How much should be recognized in profit or loss in 2019 as a result of the fair value changes?
4. How much should be recognized in profit or loss in 2010 as a result of the fair value changes?
5. How much is the carrying value of the investment property at the end of 2018? 2019? 2020?

25
 Assume that the fair value cannot be measured reliably
6. How much should be recognized in profit or loss in 2018 as a result of the completion of the building
at the end of 2018?
7. Compute the depreciation expense in 2019.
8. How much should be recognized in profit or loss in 2019 as a result of the fair value changes?
9. How much should be recognized in profit or loss in 2010 as a result of the fair value changes?
10. How much is the carrying value of the investment property at the end of 2018? 2019? 2020?

Problem 13
The Eduardo Company, an SME, started in business on January 1, 2019, by acquiring three machines
having a costs of P52,400, 40,000, and P44,000, respectively. Since that date, the company has computed
depreciation at 20% on the balance of the asset account at the end of each year, which amount has been
credited directly to the asset account. All purchases since January 2019, have been debited to the
machinery account and the cash received from sales has been credited to the account.

The following transactions took place

a. On September 30, 2019, a machine was purchased on an installment basis. The list price was P60,000,
but 12 payments of P6,000 each were made by the company. Only the monthly payments were
recorded in the machinery account starting with September 30, 2019. Freight and installation charges
of P2,000 were paid and entered in the machinery account on October 10, 2019.
b. On June 30, 2020, a machine was purchased for P80,000, 2/10, n/30, and recorded at P80,000 when
paid for on July 7, 2020.
c. On June 30, 2021, the machine acquired for P52,400 was traded for a larger one having a list price of
P93,000. Allowance of P43,000 was received on the old machine, the balance of the list price being
paid in cash and charged to the machinery account.
d. On January 1, 2022, the machine which cost P44,000 was sold for P25,000, but because the cost of
removal and crating was P1,250, the machinery account was credited with only P23,750.
e. On October 1, 2023, the machine purchased for P40,000 was sold for cash and the cash received
amounting to P8,000 was credited to the account.
f. The useful life of the machinery is 5 years.

Required:
1. Show the per book balance of machinery before any adjustments from 2019 to 2023.
2. Compute the correct balance of the machinery (gross) from 2019 to 2023.
3. Compute the correct accumulated depreciation of the machinery from 2019 to 2023.

Problem 14
Waffle Corporation, an SME, bought land and built a warehouse during 2021. It debited the following
related costs to an account Land and Building:

Land purchase P 220,000

Demolition of old building 30,000
Legal fees for land acquisition 15,000
Interest on loan for the construction of warehouse
(based on the average costs incurred) 29,000
Building construction 530,000
Assessment by city for sewer connection 12,000

26
 Landscaping 35,000
Equipment purchased for excavation 188,000
Fixed overhead charged to building 150,000
Insurance on building during construction 10,000
Profit on construction 120,000
Compensation for injury to construction worker 30,000
Modification to building as ordered by building inspectors 75,000
Property taxes on land paid in 2021 25,000

The following credits were made to the account:

Salvage from demolished old building P 7,000

Sale of excavation equipment 140,000

In addition, your discovered that compensation for the worker’s injury was necessary since it was not
covered by a particular insurance policy purchased by the company. Accident insurance that would have
covered the injury would have cost an additional P3,500. The modifications ordered by the building
inspectors resulted from poor planning by the company.

Required:
1. Compute the following:
a. Land
b. Building
c. Equipment
2. Prepare the necessary entries to correct the account.

Problem 15
During 2021, the controller of the Letecia Company, an SME, asked you to prepare correcting journal
entries for the following three situations:

1. Machine 1 was purchased for P400,000 on January 1, 2019. It had an estimated residual value of
P50,000 and an estimated service life of 10 years. It has been depreciated under the double-declining
balance method for 2 years. Now, at the beginning of the third year, Letecia Company has decided to
change to the straight-line method.
2. Machine 2 was purchased for P500,000 on January 1, 2016. Straight-line depreciation has been
recorded for 5 years, and the accumulated depreciation account has a balance of P250,000. The
estimated residual value remains at P50,000, but the service life is now estimated to be 1 year longer
than estimated originally.
3. Machine 3 was purchased for P200,000 on January 1, 2020. 150% declining balance depreciation has
been recorded for 1 year. The estimated residual value of the machine is P20,000 and the estimated
service life is 5 years. For two years, including the current year, the company recorded a depreciation
of P54,000 and P37,800 for 2020 and 2021, respectively.

Required:
1. Compute the following:
a. Carrying value of Machine 1, Machine 2, and Machine 3 at December 31, 2021.
b. Depreciation for 2021.
2. Prepare the necessary adjusting entries to correct the account.

27
Problem 16
On January 1, 2021, Blessy Corporation, an SME, purchased a tract of land (site number 101) with a
building for P1,200,000. Additionally, Blessy paid a real state broker’s commission of P72,000, legal fees
of P12,000 and title guarantee insurance of P36,000. the closing statement indicated that the land value
was P1,000,000 and the building value was P200,000. Shortly after acquisition, the building was razed at
a cost of P150,000.

Blessy entered into a P6,000,000 fixed price contract with Guma Builders, Inc. on March 1, 2021 for the
construction of an office building on the land site 101. The building was completed and occupied on
September 30, 2022. Additional construction costs were incurred as follows:

Plans, specifications and blueprints P 24,000

Architect’s fees for design and supervision 190,000

The building is estimated to have a forty-year life from date of completion and will be depreciated using
the 150%-declining balance method.

To finance the construction cost, Perina borrowed P6,000,000 on March 1, 2021. The loan is payable in
ten annual installments of P600,000 plus interest at the rate of 14%. Blessy used part of the loan proceeds
for working capital requirements. Blessy’s average amounts of accumulated building construction
expenditures were as follows:

For the period March 1 to December 31, 2021 P1,800,000

For the period January 1 to September 31, 2022 4,600,000

Questions: Based on the above and the result of your audit, determine the following:
1. Cost of land site number 101
2. Cost of office building
3. Depreciation of office building for 2022

Problem 17
An equipment was acquired on January 1, 2017 for P5,000,000 by an SME and is expected to have a 10-
year useful life. Straight-line depreciation is used.

On January 1, 2019, the asset is appraised at a gross replacement cost of P5,625,000.

On January 1, 2022, the asset is appraised at sound value of P2,000,000.

Required:
1. Prepare the necessary entries to record the above transactions.
2. Compute the following:
a. The carrying value of the equipment at the end of 2019 and 2022.
b. Depreciation of the equipment at the end of 2019 and 2022.

Problem 18
Presented below is the information related to equipment owned by Edgar Company, an SME, at December
31, 2021:

28
 Cost 9,000,000
Accumulated depreciation to date 1,000,000
Expected future net cash flows (discounted) 7,000,000
Fair value 4,800,000

Assume that Edgar will continue to use this asset in the future. As of December 31, 2021, the equipment
was a remaining useful life of 4 years.

Requirement:
1. Record the impairment of the equipment, if any, at December 31, 2021.
2. How much is the depreciation of the equipment on 2022?
3. Assume that the fair value of the equipment at December 31, 2022 is P5,100,000, prepare the
entry to record the effect of the transaction.

Problem 19
On January 1, 2021, an SME acquired a building for P50,000,000. On December 31, 2021, management
assessed that the useful life of the building is 50 years from the date of acquisition with residual value of
P10,000,000. The fair value of the building on same date is P60,000,000. On December 31, 2023, SME
reassessed that the useful life of the building is 40 years from January 1, 2023 with residual value of
P5,000,000. The fair values of the building on December 31, 2023 is P45,000,000

Required:
1. What is the carrying amount of the building on December 31, 2021?
2. What is the depreciation for 2023?
3. What is the impairment loss for 2023?
4. What is the carrying amount of the building on December 31, 2023 after recognition of
impairment loss?

Problem 20
On January 1, 2021, the Philippine government agreed to provide Ian Corporation with a P3,000,000
three-year noninterest bearing note. There are no future performance conditions attached to the grant.
The prevailing rate of interest for the loan of this type is 10%.

Required:
1. What is the grant income for 2021?
2. What is the interest expense for 2021?

Problem 21
At the beginning of current year, an SME acquired, free of charge, a nontransferable nine-year taxi license
by way of government grant when the fair value of the taxi license was P900,000. In accordance with the
terms of the license, the entity must operate at least 10 taxis in a deprived neighborhood of the city during
that nine-year period. Failure to do so will result in the taxi license being revoked immediately. What
amount of income from the government grant should be recognized for the current year?

Problem 22
Mary Grace Company has two cash generating units. On December 31, 2020, the assets of one cash
generating unit at carrying amount are:

29
Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Accumulated depreciation 2,600,000
Patent 850,000
Goodwill 100,000

The accounts receivable is regarded as collectible and the inventory’s fair value less cost to sell is equal to
the carrying amount.

On December 31, 2020, Mary Grace Company undertook impairment testing of the cash generating unit
and determined the value in use of the unit at P4,050,000.

Required:
1. What is the impairment loss of the cash generating unit on December 31, 2020?
2. What is the amount of inventory on December 31, 2020?
3. What is the amount of Accounts Receivable on December 31, 2020?
4. What is the amount of Patents on December 31, 2020?
5. What is the amount of Plant and Equipment, net at December 31, 2020?

Problem 23
An SME incurred the following expenditures in establishing a taxi business in a local city during 2021:

May 1 General start-up cost P 25,000

June 30 Legal costs directly attributable to the acquisition of
the taxi license 40,000
July 1 Payment to the taxi licensing authority for the taxi
license, including P10,000 refundable purchase taxes 120,000
July 1 Printing business cards of the drivers 5,000
Aug. 31 Payment for an advertisement to be published monthly
for the next 12 months in the local daily newspaper 60,000

The economic life of the taxi license is 5 years from the date of acquisition on June 30, 2021 with NIL
salvage value. The taxi drivers own the vehicles which they operate under SME’s taxi license.

Required: Compute the following -

1. Carrying value of the intangible asset at December 31, 2021.
2. Amortization of the intangible asset at December 31, 2021.

Problem 24
On January 1, 2021, an SME acquired a trademark for a line of products in a separate acquisition from a
competitor for P1,000,000. The SME expected to continue marketing the line of products using the
trademark indefinitely.

An analysis of market competition and environmental trend provides evidence that the line of
trademarked products may generate net cash flows for the acquiring entity for an indefinite period.
Management is unable to estimate the useful life of the trademark.

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In 2023, a competitor unexpectedly revealed a technological breakthrough that is expected to result in a
product, that when launched by the competitor, will extinguish demand for SME’s patented product line.
Demand for SME’s patented product line is expected to remain strong until December 2023 when the
competitor is expected to launch a new product.

On December 31, 2023, SME assessed the recoverable amount of the trademark at P400,000. SME intends
to continue manufacturing the patented products until December 31, 2025.

Required: Compute the following –

1. Carrying amount of the trademark at December 31, 2021.
2. Carrying amount of the trademark at December 31, 2023.
3. Amortization at December 31, 2021.
4. Amortization at December 31, 2022.
5. Impairment, if any, at December 31, 2022.

In a Nutshell
Discuss why SMEs consider the life of the intangible as finite?

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Q&A LIST

Do you have any question for clarification?

Questions/Issues Answers

1. 1.
2. 2.

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 3. 3.
4. 4.
5. 5.

KEYWORDS INDEX

Accounting Policy Election Exchange of Assets Intangible Assets

Borrowing Costs Fair Value Model Investment in Associates
Presumed Life of
Cost Model Finite Life Intangibles
Property, plant and
Depreciation Government Grants equipment
Unrealized Holding Gain
Equity Model Impairment of Assets or Loss

Course Schedule

This section calendars all the activities and exercises, including readings and lectures, and time for making
assignments and doing other requirements.

Activity Date Where to Submit

Orientation BlackBoard LMS
Let’s Check As announced by the teacher BlackBoard LMS
Let’s Analyze As announced by the teacher BlackBoard LMS
Q&A Anytime BlackBoard LMS
1st Formative Assessment BlackBoard LMS

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