INSTRUCTIONS

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INSTRUCTIONS

Each group is assigned a worksheet where they shall receive questions from other groups. The rece
Questions raised by one group cannot be repeated by another group.

Asking the receiving group to solve a particular problem is NOT considered a question for purposes
(a) problems which were part of the reporting group's presentation or
(b) problems solved in class.
Due date for raising questions (post in FB groups): Monday, March 11.
Due date for answering questions (post in FB groups): Friday, March 15.

*Maximum points per group (based on quality of questions raised and questions answered) = +0.3

GROUP 1
TOPIC: Prerequisites of SME Accounting, Financial Statements Presentation
SEC Notice of Adoption-IFRS for SMEs, Sections 1-8 and 10

QUERY FROM GROUP #:

GROUP 1'S ANSWER:

GROUP 2
TOPIC: Financial Instruments and Inventories
Sections 11-12.14 and 13

QUERY FROM GROUP #:

GROUP 2'S ANSWER:

GROUP 3
TOPIC: Long-Term Assets
Sections 16-18 and 27

QUERY FROM GROUP #:

GROUP 3'S ANSWER:

GROUP 4
TOPIC: Liabilities and Equity
Sections 20-22 and 26

QUERY FROM GROUP #:

GROUP 4'S ANSWER:

GROUP 5
TOPIC: Topics in Revenue and Expense Recognition
Sections 23-25 and 28

QUERY FROM GROUP #:

GROUP 5'S ANSWER:

GROUP 6
TOPIC: Income Tax and Topics in Disclosure
SEC Implementing Guidelines-Adoption of IFRS for SMEs, Sections 29, 32-34.11 and 35

QUERY FROM GROUP #:

Paragraph 29.15 outlines when an SME should recognize a deferred tax asset.
Specifically, (c) talks of carryforward of unused tax losses. When exactly does an
SME incur tax losses? In addition, what is the journal entry to recognize the DTA arising
from the aforementioned operating loss carryforward? Lastly, is operating loss
carryback permitted in the Philippine jurisdiction as it is in the US?

Is the valuation allowance also affected by anticipated/certain changes in the tax rate
for future periods?

"Sec 34.5 Agricultural produce harvested from an entitys biological assets shall be
measured at its fair value less costs to sell at the point of harvest. Such measurement
is the cost at that date when applying Section 13 Inventories or another applicable
section of this IFRS." Is there an assumption that FV can always be measured for
Agriculture Produce according to the IFRS for SMEs?

(Sec. 29.19) According to section 29, a valuation allowance must be set up against any DTA to
reflect the highest amount that could be recovered. What instances give rise to such impairment
of the DTA? Also, section 29 mentions that recognition of such valuation allowance may be
charged to either P/L or the OCI. In which cases do we charge to P/L and, likewise, to OCI?

In IFRS for SMEs, Sec. 29.21 states that an entity shall recognize a valuation
allowance against deferred tax assets so that the net carrying amount equals the
highest amount that is more likely than not to be recovered based on current or future
taxable profit. What are the journal entries required for recognizing the initial valuation
allowance and for subsequent adjustments? Should this account also be reported in
the statement of financial position? Also, in recognizing subsequent adjustments to the
valuation allowance, what will be the basis of comparison (i.e. to what amount will you
compare the current amount of the valuation allowance in order to identify
adjustments)?

Paragraph 29.15 outlines when an SME should recognize a deferred tax asset. Specifically, (c) talks of
carryforward of unused tax losses. When exactly does an SME incur tax losses? In addition, what is the
journal entry to recognize the DTA arising from the aforementioned operating loss carryforward? Lastly, is
operating loss carryback permitted in the Philippine jurisdiction as it is in the US? Thank you for that
question Gerard. A. What is a tax loss? An SME incurs a tax loss occurs when total tax deductible expenses
are greater than total revenues under tax reporting rules, effectively reducing their tax payments. Hence, it
is possible for a firm who incurs a profit to report a tax loss in the same period by reducing reportable
revenues or increasing reportable (tax deductible) expenses. B. JE for DTA from NOLCO? The value of the
DTA from NOLCO is derived simply by multiplying the tax rate to the unused Net Operating Loss
Carryforward. (Ex. Unused NOLCO = 100k, Tax Rate =35%; DTA= 100k x 35% = 35k; JE: Dr. DTA 35k; Cr. Int
Exp 35k) Note, this benefit may only be carried forward three years after the loss has been incurred. C.
What
is operating
loss carryback? Permitted in PH? An Operating Loss Carryback is similar to the concept of
GROUP
6'S ANSWER:
NOLCO taught to us in BA 127. However, instead of being carried forward as a tax refund/rebate in future
years, it is carried back as a tax refund for the previous years. Any remaining unused net operating loss can
be carried over to future years and applied against taxable income for those years. To illustrate, suppose my
NOL for this year is $100T. The year is 2013. My first year of operations is 2010. I may opt to apply my 2013
NOL to 2010 to receive a refund for 2010s taxes. The journal entry for that is: Dr. Income Tax Refund
Receivable xxx Cr. Benefit Due to Loss Carryback xxx (NOTE: The former account is a current asset in the
balance sheet while the latter is an income statement revenue line item.) If I wasnt able to use up the
$100T NOL for 2010s taxes, I may carry it over to 2011s taxes. Similarly, if the whole amount still isnt used
up in 2011, I may now apply it to 2012s taxes. If it is extremely large, it can carried over to future years, i.e.
2014, 2015, etc. until it is used up. Please bear in mind that this is applied under US GAAP. This is not
No,
changes
tax
rates are accounted for prospectively and not retroactively, which means that the
applicable
in in
the
Philippines.
valuation allowance already set up is not affected by the changes in tax rate.Valuation allowance is not
affected by future changes in the tax rate because as paragraph 29.6 states "an entity shall measure a
current tax liability (asset) at the amount it expects to pay (recover) using tax rate and law that have been
ENACTED OR SUBSTANTIVELY ENACTED by the reporting period. In which case, the standard is strict that
rates to be applied must be certain enough and usually valuation allowance affected by management's
expectation of future earnings and not by changes in future tax rates.
Both the Full IFRS and IFRS for SMEs state that agricultural produce shall be measured at FV Less Cost to Sell
at the point of harvest. The main difference between the two is that the IFRS for SMEs do not provide an
explanation as to why FV Less Cost to Sell is used.In spite of this, the group believes that FV can always be
measured for agricultural produce. Why? First, in the absence of any statement, we may refer to the Full
IFRS for guidance. Since both standards measure agricultural produce in the same way, we may refer to the
justification provided under the Full IFRS. Second, a firm is generally interested in recording an agricultural
produce as inventory because it intends to sell the said product. Therefore, if a firm believes that a product
may be sold, it must have done its due diligence in knowing whether or not a market exists. As such, we
may assume that the FV of an agricultural produce can always be measured because there are willing
buyers.

(Sec. 29.19) According to section 29, a valuation allowance must be set up against any DTA to reflect the
highest amount that could be recovered. What instances give rise to such impairment of the DTA? Also,
section 29 mentions that recognition of such valuation allowance may be charged to either P/L or the OCI. In
which cases do we charge to P/L and, likewise, to OCI?
A. What instances give rise to Impairment of DTA?
Management's decision to use a valuation allowance is based on all available (both positive and negative)
evidence. Similar to how other assets are impaired (ADA for Receivables, Allowance for Impairment for PPE),
a contra-asset account is set up. The benefit of future deductible amounts can only be realized by the
company if future taxable income is (at the minimum) equal to the deferred deduction. Given this, if the
company more likely than not expects to realize several years of losses in the future, it may be a sign that
the DTA may be impaired and a valuation allowance must be set up. Note that the valuation allowance is
reevaluated at the end of each reporting period and can be adjusted upwards or downwards depending on
the circumstances.

Other examples of scenarios wherein DTA may be impaired and a valuation allowance must be established:
1. Company has a history of net operating loss carryforwards expiring unused. 2. Pattern of losses in most
recent prior years 3. Losses expected in future years 4. Unsettled circumstances that, if unfavorably
resolved, would adversely affect future operations and profit levels on a continuing basis 5. A carryforward
period so breif that it would limit realization of tax benefits if a significant deductible temporary difference is
expected to reverse in a single year.
Adjustment of the Valuation Allowance can occur in P/L or OCI, depending on the asset that gives rise to the
adjustment. For instance, if the DTA adjustment results from a regular balance sheet item, the adjustment is
made to P/L, however, if the DTA adjustment arises from actuarial gains/losses, such adjustment is reflected
in OCI.

Initial Recognition of Valuation Allowance Recording of a valuation allowance is based on

management's discretion and when the entity is "more likely than not (more than 50% probability)" to
realize the DTA" (Journal entry: Dr. Int Exp Cr. Valuation Allowance) (Valuation allowance appears on the SoFP
and effectively reduces the DTA)Subsequent adjustments effectively increase or decrease the valuation
allowance depending on management's discretion after assessing both positive and negative factors.
Increase in valuation allowance:
Dr. Int Exp
Cr. Valuation Allowance

Decrease:
Dr. Valuation Allowance
Cr. Int Exp