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Chapter 14: Inventories b. Weighted Average

- 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒. 𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 =
Inventories 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑩𝒆𝒈. 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚+𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑷𝒖𝒓𝒄. 𝒅𝒖𝒓𝒊𝒏𝒈 𝒑𝒆𝒓𝒊𝒐𝒅
𝑻𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒅+𝑻𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝒊𝒏 𝑩𝒆𝒈.𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
➢ Assets held for sale in the ordinary course of business, in - 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑉𝑎𝑙𝑢𝑒 =
the process of production for such sale or in the form of 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒. 𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 𝑥 𝑈𝑛𝑖𝑡𝑠 𝑜𝑛 ℎ𝑎𝑛𝑑
materials or supplies to be consumed in the production - Weighted Ave. Cost
process or in the rendering of services. Multiplied: Units on hand
Inventory Value
➢ Trading Concern - one that buys and sells goods in the
same form purchased. c. Special Identification
➢ Manufacturing Concern -one that buys goods which are - Specific costs are attributed to identified items
altered or converted into another form before they are in inventories.
made available for sale. - Appropriate for inventories that are segregated
for a specific project and inventories that are
Cost of Inventories
not ordinarily interchangeable.
➢ Cost of purchase - comprises the following directly
Measurement of Inventory
attributable cost.
✓ Purchase price ➢ Shall be measured using Lower of Cost and Net Realizable
✓ Import duties Value or LCNRV
✓ Irrevocable Taxes
✓ Freight ➢ Net Realizable Value - Estimated selling price in the
✓ Handling cost ordinary course of business less the estimated cost of
Deductions include Rebates, Trade discounts, etc. completion and estimated cost of disposal.
➢ Cost of conversion – includes cost directly related to the a. Cost of completion
units of production such as direct labor. Includes ✓ Cost of purchase
systematic allocation of fixed and variable production ✓ Cost of conversion
overhead that is incurred in converting materials into ✓ Other Costs
finished goods. b. Cost of Disposal
✓ Shipping costs
➢ Other cost - Included in the cost of inventories only to the ✓ Discounts
extent that it is incurred in bringing the inventories to ✓ Commissions
their present location and condition. ✓ Other variable selling expenses
➢ Exclusions from cost of inventories ✓ Fixed selling expenses
✓ Abnormal Amount of wasted materials - Cost < NRV, no accounting problem
✓ Storage Cost - NRV < Cost, Inventory is measure at NRV
- Storage cost on goods in process, capitalized
- Storage cost on finished goods, expensed
✓ Administrative overhead Accounting of Inventories
✓ Distribution or Selling Cost
➢ Allowance Method - inventory is recorded at cost and any
Cost Formulas loss on inventory writedown is accounted for separately.
- Known as Loss method
➢ PAS 2, Paragraph 25 provides that the cost of inventories - Loss on inventory writedown is included in the
shall be determined by using either: computation of cost of goods sold.
a. FIFO - Allowance of inventory writedown is presented
- Assumes that goods first purchased are first as a deduction from the inventory.
sold.
- It is in accordance with the ordinary Loss on Inventory writedown xxx
merchandising procedure that goods are sold in Allowance for Inventory writedown xxx
the order they ae purchased.
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Abnormal amount of items mentioned above
is not included in the cost of an asset but rather
should be expensed.
Chapter 15: Property, Plant, and Equipment
Methods of acquisition
PPE
A. Acquisition on cash
➢ Tangible assets that are held for use in production or ✓ Cash prize equivalent at the recognition date
supply of goods and services, for rental to others, or for ✓ Cash paid plus directly attributable cost
administrative purposes, and are expected to be used
during more than one period. B. Acquisition on account – may be subject to cash discount
a. Tangible asset, with physical substance ✓ Invoice price minus discount, regardless if taken or
b. Used in business, production, rental, or not
administrative purposes - Cash discounts are reduction on costs and not
c. More than one year, non current an income
✓ Land improvements
✓ Ship C. Acquisition on installment basis
✓ Aircraft ✓ Cash prize equivalent, not installment price
✓ Motor Vehicle ✓ Cash paid plus directly attributable cost
✓ Furniture and Fixtures - Excess of installment price over cash price is
✓ Office equipment treated as an interest to be amortized over the
✓ Patterns, molds, and dies credit period.
✓ Tools
✓ Bearer Plants D. Issuance of Share capital
✓ Cash value of the consideration received
Initial Measurement ✓ Order of Priority
i. Fair value of the property received
➢ Cost – the amount of cash or cash equivalent paid and the
ii. Fair value of the share capital
fair value of other considerations given to acquire an asset
iii. Par value or stated value of the share
at the time of acquisition or construction.
capital
✓ Elements of Cost
a. Purchase Price
E. Issuance of bonds payable
b. Cost directly attributable to bringing the asset
✓ Measured in the following order
to the location and condition for the intended
i. Fair Value of bond Payable
use.
ii. Fair Value of asset received
Costs that qualify for capitalization:
iii. Face amount of bond payable
1. Cost of site preparation
2. Initial delivery and handling cost
F. Exchange
3. Installation and assembly cost
✓ Fair value plus any cash payment
4. Professional Fee
i. Fair value of the given up
5. Cost of testing whether the asset is
ii. Fair value of asset exchanged
functioning properly
✓ Carrying amount, if it lacks commercial substance
c. Initial estimate of cost of dismantling and
✓ Commercial Substance – the event or transaction
removing the item from which the entity has a
causing the cash flow of an entity to change
present obligation.
significantly by the reason of exchange.
➢ Self-Constructed Asset - determined using the same Subsequent Measurement
principles as for an acquired asset.
➢ Cost of self-constructed PPE includes: ➢ The entity shall apply the accounting policy to an entire
1. Direct cost of materials class of property, plant, and equipment. The entity shall
2. Direct cost of labor choose between cost model or revaluation model.
3. Indirect cost and incremental overhead
specifically identifiable or traceable to the
construction.
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➢ Cost model – PPEs are carried at cost less any ➢ Depreciation methods – shall reflect the pattern in which
accumulated depreciation and any accumulated the future economic benefits from the asset are expected
impairment loss. to be consumed by the entity.
➢ Revaluation Model – carried at revalued carrying amount. a. Straight Line Method – allocated depreciable amount
✓ Revalued carrying amount – fair value at the date equally to the useful years
of revaluation less any subsequent deprecation ✓ Constant charge over the useful life of the asset
and subsequent accumulated impairment loss. ✓ Considers depreciation as a function of time
rather than as a function of usage.
Derecognition
b. Production Method – assumes that depreciation is
➢ Cost of property, plant, and equipment together with the more of a function of use rather than the passage of
related accumulated depreciation shall be removed from time.
the statement of financial position. ✓ Useful life is considered in terms of output it
➢ PAS 16, paragraph 67 states that carrying amount of PPE produces or the number of hours it works.
shall be derecognized when no future economic benefits ✓ Relates depreciation to the estimated
are expected from the use or disposal. production capability of the asset
➢ Gains and Loss that arise from derecognition ✓ Expressed in a rate per unit of output or per
Net disposal proceeds minus Carrying amount hour of use.

Depreciation c. Diminishing Balance or Accelerated Method –

provides higher depreciation in the earlier years and
➢ Depreciation – systematic allocation of the depreciable
lower depreciation in the later years of useful life of
amount of an asset over its useful life
the asset.
Matter of cost allocation in recognition of the
✓ Result in decreasing depreciation charge
exhaustion of the useful life of a PPE
over the useful life
✓ Accelerated methods include
➢ Depreciation period
i. Sum of years’ digit method
✓ begins when PPE is available for use
ii. Double declining balance method
✓ Ceases when PPE is derecognized
✓ Does not cease when item becomes idle temporarily Chapter 16: Government Grant

➢ Factors of depreciation ➢ Assistance by government in the form of transfer of

a. Depreciable amount – cost less residual value resources to an entity in return for part or future
✓ Each part of PPE that has a significant cost in compliance with certain conditions relating to the
relation to the total of the PPE shall be operating activities of the entity.
depreciated separately. ➢ Government Grant shall be recognized when:
b. Residual value – estimated net amount currently a. The entity will comply with the future conditions of
obtainable if the asset is at the end of the useful life. the grant.
✓ Shall be reviewed each financial year end and if b. The grant will be received.
expectation differs from previous estimate.
Accounting for Government Grant
Change shall be accounted for as a change in
A. Grant with specific expenses
accounting estimate.
✓ Shall be recognized as an income over the period of
c. Useful life – either the period over which the asset is the related expense.
expected to be available for use by the entity, or the B. Grant as a compensation for losses with no related future
number of production or similar units expected to be cost
obtained from the asset by the entity ✓ Shall be recognized as income on the period in which it
✓ Factors in determining the useful life: becomes receivable.
i. Expected usage of asset C. Grant related to depreciable assets requiring future
ii. Expected physical wear or tear conditions
iii. Technical or commercial obsolescence ✓ Shall be recognized as an income over the periods and
iv. Legal limit for the use of the asset such in proportion to the depreciation of the related asset.
as the expiry date of the related lease.
D. Grant related to nondepreciable assets requiring future
conditions
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✓ Shall be recognized as an income over the periods i. Name of the government agency that gave the grant
which bears the cost of meeting the conditions. ii. Date of sanction of the grant
iii. Date when cash was received in case of monetary
grant.

Presentation of government grant

Chapter 17: Borrowing Cost
➢ Government grant related to asset shall be presented in
➢ PAS 23, paragraph 5, Borrowing costs are interest and
the statement of financial position in either of two ways:
other costs that an entity incurs in connection with
a. Deferred Approach. By setting the grant as a deferred
borrowing of funds.
income
➢ It is the interest cost incurred as a result of borrowing
b. Deduction from asset Approach. By deducting the
from banks and other financial institutions.
grant arriving at he carrying amount of the asset
➢ Specific Borrowing – intended specifically in acquiring
➢ Government Grant related to income
qualifying assets, capitalized as a cost of the qualifying
a. The grant is presented in the income statement,
asset
either separately or under the general heading “other
➢ General borrowing – intended partly in acquiring a
income”
qualifying asset and partly for general or working capital
b. The grant is deducted from the related expense.
purposes.
Government Assistance

➢ Government assistance is an action by the government Qualifying Assets

designed to provide an economic benefit specific to an
➢ Qualifying assets – an asset that necessarily takes a
entity or range of entities qualifying under certain criteria.
substantial period of time to get ready for the intended
➢ NO VALUE can reasonably be placed upon it. Examples
use or sale.
are:
➢ Examples of Qualifying assets:
✓ Free technical and marketing advice
✓ Manufacturing plants
✓ Provision of guarantee
✓ Power generation facilities
✓ Government procurement policy that is responsible
✓ Intangiable assets
for the portion of the entity’s sale.
✓ Investment property
➢ Indirect benefits NO INCLUDED in the government
➢ Excluded from capitalization:
assistance, considering that it is for general benefits:
i. Assets measured at fair value
✓ Infrastructure in development areas such as
ii. Inventory that is manufactured in a large
improvement to the general transport and
quantity on a repetitive basis
communication network
iii. Assets that are ready for intended use or
✓ Imposition of trading constraints on competitors
sale when acquired.
✓ Improved facilities such as irrigation for the benefit of
the local community Accounting for Borrowing Costs

Disclosure about government grant ➢ PAS 23, Paragraph 8 mandates the following rules on
borrowing cost:
➢ Required disclosure
1. If the borrowing cost is directly attributable to the
i. The accounting policy adopted for government grant,
acquisition, construction, or production of a
including method of presentation adopted in the
qualifying asset, the borrowing cost is required to be
financial statement.
capitalized.
ii. The nature and extent of the government grant
2. All other borrowing costs shall be expensed as
recognized in the financial statement and an
incurred.
indication of other forms of government assistance
from which the entity has directly benefited. Financing of assets
iii. Unfulfilled conditions and other contingencies
A. Assets financed by specific borrowing
attached to government assistance that has been
✓ PAS 23, paragraph 12, provides that if the funds are
recognized.
specifically borrowed for the purpose of acquiring a
➢ Information that are not required to be disclosed
qualifying asset, the amount of capitalizable borrowing
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cost is the actual borrowing cost incurred during the i. The amount of borrowing cost capitalized during the
period less any investment income from the period.
temporary investment of the borrowing. ii. The capitalization rate used to determine the amount
*Actual borrowing cost incurred of borrowing costs eligible for capitalization.
Less: Investment Income .
Capitalized Borrowing Cost Segregation od assets that are “qualifying assets”
from other assets in the statement of financial
B. Assets financed by general borrowing position is not required to be disclosed.
✓ PAS 23, paragraph 14, provides that if the funds are
borrowed generally and used for acquiring a qualifying
asset, the amount of the capitalizable borrowing cost
is equal to the average carrying expenditures on the
asset during the period multiplied by a capitalization
rate or average interest rate.
✓ Any investment income from the general borrowing is
not deducted from the capitalizable borrowing cost.
✓ Capitalizable cost shall not excess the actual interest
incurred.
✓ Excess of actual borrowing cost is charged to interest
expense

* Annual Borrowing Cost

Divided by: Total general outstanding during the period
Capitalization rate or Average interest rate

* Average carrying amount

Multiplied: capitalization Rate
Capitalized Borrowing cost

C. Assets financed by both specific and general borrowing

✓ Average expenditures are considered partly arising
from specific borrowing and partly from general
borrowing.
✓ The average expenditure is taken first from specific
borrowing and the balance from the general
borrowing.

Commencement of capitalization

➢ Shall commence when the following three conditions are

present:
1. When the entity incurs expenditure for the asset
2. When the entity incurs borrowing cost
3. When the entity undertakes activities that are
necessary to prepare the asset for the intended use.

Cessation of capitalization

➢ Shall cease when substantially all the activities necessary

to prepare the qualifying asset for the intended use or
sale is complete.
➢ Assets are ready to use when the physical construction od
the asset is complete even though the routine
administrative work is still continue.

Disclosure related to borrowing cost