SMEs PART TWO

Inventories

Inventories

These are assets held for sale in the ordinary course of business, in the process of production for such sale, of in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Inventories

Cost of purchase Cost of conversion Other costs

COST FORMULAS

COST FORMULAS

Standard cost Retail method Most recent purchase price

Disclosures of inventories

Disclosures of inventories

The accounting policies adopted in measuring inventories, including the cost formula used. The total carrying amount of inventories and the carrying amount in classification appropriate to the entity. The amount of inventories recognized as an expense during the period. Impairment losses recognized and reversed in profit or loss. The total carrying amount of inventories pledged as security for liabilities.

FINANCIAL INSTRUMENTS

FINANCIAL INSTRUMENTS

A contract that gives rise to a financial asset of one entity and a financial liability or equity of another entity.

Basic Financial Instruments

Cash Demand and Fixed Term deposits or bank accounts Trade accounts and notes receivable and payable Accounts payable in foreign currency Loans from bank and other third parties Bonds and similar debt instrument

Basic Financial Instruments

Commercial papers or commercial bills Investments in nonputtable ordinary shares Investments in nonconvertible and nonputtable preference shares Commitment to receive a loan if the commitment cannot be net settled in cash Loans to or from subsidiaries or associates that are due on demand

Commercial paper

Unsecured and short-term debt instrument issued by a large corporation.

Puttable instrument

A financial instrument that gives the holder the right to sell the instrument back to the issuer for cash upon exercise of the put or is automatically redeemed or purchased by the issuer on the occurrence of an uncertain future event or upon the death of the holder

Conditions for basic financial instrument

1. Returns to the holder are a fixed amount, a fixed rate of return or a variable return that throughout the life of the instrument is equal to a single reference quoted or observable rate, such as the London Interbank Offered Rate (LIBOR) or Euro Interbank Offered Rate (EURIBOR).

Conditions for basic financial instrument

2. There is no contractual provision that could by its terms, result in the holder losing the principal amount or any interest.

Conditions for basic financial instrument

3. Contractual provisions that permit the issuerdebtor to prepay the debt instrument or permit the holder-creditor to put it back to the issuerdebtor before maturity are not contingent on future events.

Conditions for basic financial instrument

4. There are no conditional returns or repayment provisions contingent on future events.

Outside the scope of PFRS for SMEs

Investments in subsidiaries, associates and joint ventures. Financial instruments that meet the definition of an entitys own equity. Leases Employers rights and obligations under employee benefit plans.

Initial measurement
Illustration An SME purchased nonputtable listed ordinary shares for P500,000 cash. The entity paid P10,000 broker transaction fees.

Initial measurement
Entry:
Investment in ordinary shares
Transaction cost Cash

500,000
10,000 510,000

FINANCIAL INSTRUMENTS
Subsequent measurement: a. Basic debt instruments are measured at amortized cost using the effective interest method.

FINANCIAL INSTRUMENTS
Subsequent measurement: b. Commitments to receive a loan are measured at cost less impairment.

FINANCIAL INSTRUMENTS
Subsequent measurement: c. Investments in nonputtable ordinary shares and investments in nonconvertible and nonputtable preference shares are measured at fair value through profit or loss if the shares are publicly traded. Otherwise, such investments are measured at cost less impairment.

Impairment of asset measured at amortized cost

The impairment loss is the difference between the carrying amount of the asset and the present value of the estimated cash flows discounted at the original effective interest rate.

Impairment of asset measured at cost less impairment

The impairment loss is the difference between the carrying amount of the asset and the best estimate of the amount that would be received if the asset were sold.

NOT BASIC FINANCIAL INSTRUMENTS

Asset-backed securities, such collateralized mortgage obligations, repurchase agreements and securitized packages of receivables Derivative contracts Hedging instruments Commitments to make a loan if the commitment be net settled in cash

Asset-backed security

Security whose value and income payments are derived from and collateralized or supported by a specified pool of underlying assets.

Derivative contracts

The options, rights, warrants, forward contracts, futures contracts and interest rate swaps that are net settled in cash

Hedging instrument

The derivative whose fair value or cash flows would be expected to offset the changes in fair value or cash flows of the hedged item

NOT BASIC FINANCIAL INSTRUMENTS

Initial measurement Not basic financial instruments are measured at FAIR VALUE, THROUGH PROFIT OR LOSS

NOT BASIC FINANCIAL INSTRUMENTS

Subsequent measurement:

Equity instruments that are not publicly traded and whose fair value cannot otherwise be measured reliably Contracts linked to such instruments that, if exercised, will result in delivery of such instruments

INVESTMENT IN ASSOCIATES

An associate is an entity over which the investor has significant influence but is neither a subsidiary nor a joint venture of the investor

Significant influence

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

INVESTMENT IN ASSOCIATES
Measurement: Cost model Equity method Fair value model

Cost model

The investment in associate is initially measured at transaction price including transaction cost

Equity method

The investment is adjusted to reflect the investors share in profit or loss and other comprehensive income of the associate

Fair value model

The investment is measured at fair value with changes in fair value recognized in profit or loss

Financial statement presentation

Disclosures a. The accounting policy for the investments in associates b. The carrying amount of investments in associates c. The fair value of investments accounted for using the equity method for which there is a published price quotation.

INVESTMENT PROPERTY

Use in the production or supply of goods or services or for administrative purposes, or Sale in the ordinary course of its business

INVESTMENT PROPERTY
EXAMPLES A building that is rented out to independent parties under an operating lease A tract of land acquired as a long-term investment

INVESTMENT PROPERTY
EXAMPLES A building that is rented out under an operating lease and the entity provides cleaning, security and maintenance services A tract of land held for an undetermined future use

INVESTMENT PROPERTY
Initial recognition

The cost of purchased investment property comprises its purchase price and any directly attributable expenditure such as legal and brokerage fees, property transfer taxes and other transaction cost.

Transfer

The SME shall transfer property to or from investment property only when the property meets or ceases to meet the definition of investment peoperty.

PROPERTY, PLANT AND EQUIPMENT

Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and Expected to be used during more than one period

PROPERTY, PLANT AND EQUIPMENT

Initial measurement Purchase price, including legal and brokerage fees, import duties, and nonrefundable purchase taxes. Any directly attributable cost to bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management

PROPERTY, PLANT AND EQUIPMENT

Initial measurement Initial estimate of dismantling cost and restoration cost for which the entity has a present obligation

PROPERTY, PLANT AND EQUIPMENT

Subsequent measurement Shall measure after initial recognition at cost less accumulated depreciation and any accumulated impairment losses.

GOVERNMENT GRANTS

Assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relation to the operating activities of the entity

BORROWING COSTS

Interest expense calculated using the effective interest method Finance charges in respect of finance leases recognized Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs

IMPAIRMENT OF ASSET

Occurs when the carrying amount of an asset exceeds its recoverable amount Recognized immediately in profit or loss

INTANGIBLE ASSET

It is separable, meaning it is 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

INTANGIBLE ASSET

It arises from contractual or other legal rights, regardless of whether those rigs are transferable or separable from the entity or from other rights and obligations