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Tuesday, November 29, 2016

Discussions in Contracts by Atty. Johnson Ong (2012 Edition)

By: Atty. Johnson A. H. Ong, CPA, MBA
      PRTC Reviewer in Business Law

PRTC lecturer Atty. Ong

Track 1
Track 2
Track 3
Track 4
Track 5
Drill No. 01

*Author's Note: These materials are intended solely for review and academic use specifically published to help aspiring CPA Reviewees and accountancy students prepare for the Philippine Certified Public Accountant (CPA) Board Examinations. Copying and distributing such materials are considered violations of the copyright law and may result to legal proceedings.

Friday, July 15, 2016

Accounting for Leases

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Definition of terms

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

An operating lease is a lease other than a finance lease.

A non-cancellable lease is a lease that is cancellable only:
a. upon the occurrence of some remote contingency;
b. with the permission of the lessor;
if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or
d. upon payment by the lessee of such an additional amount that, at inception of the lease, continuation of the lease is reasonably certain.

The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provision of the lease. As at this date:
a. a lease is classified as either an operating or a finance lease; and
b. in the case of a finance lease, the amounts to be recognized at the commencement of the lease term are determined.

The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initial recognition of the lease (i.e., the recognition of the assets, liabilities, income or expenses resulting from the lease, as appropriate.).

The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.

Minimum lease payments are the payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:
a. for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or
b. for a lessor, any residual value guaranteed to the lessor by:
i. .the lessee;
ii. a party related to the lessee; or
iii. a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.

However, if the lessee has an option to purchase the asset at a price that is expected to be sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, the minimum lease payments comprise the minimum payments payable over the lease term to the expected date of exercise of this purchase option and the payment required to exercise it.

Thursday, July 7, 2016

Audit of Equity: Internal Control Measures and Substantive Procedures

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Internal Control Measures for Equity/Shareholder's Equity

1. Internal control measures regarding the issuance of share certificates and proper accounting for transfers and registration of shares should be established. One of these measures is the appointment of a share and transfer agent or an independent registrar.
2. Share certificates should be serially prenumbered by the printer and that the authority for signing and issuing the certificates be designated by the board of directors.
3. As individual certificates are issued, corresponding records of the certificates should be prepared containing the name and address of the shareholders and the number of shares issued to each.
4. Cancelled certificates should be mutilated and any necessary documentary stamps should be attached to the cancelled certificates.
5. Entries for the share issuances and transfers should be made by a person who does not have authority to sign and issue certificates.

Substantive Audit Procedures

Existence: Recorded equity accounts exist
1. Obtain schedules of shareholder's equity accounts and reconcile to the general ledger balances.
2. Review authorization and terms of share issues.
3. Confirm shares outstanding with registrar on share and transfer agent.
4. Inspect share certificate book.
5. Inspect certificates of shares sheld in treasury.

Completeness: All equity accounts are recorded
6. In addition to the above mentioned procedures, perform analytical review procedures.

Rights and obligations: the entity has the authority to execute the shareholder's equity transactions
7. Review articles of incorporation and by laws.
8. Make inquiries of legal counsel.

Valuation and allocation: Shareholder's equity balances are shown at appropriate amounts
9. Vouch share capital entries, dividend entries and entries to retained earnings.

Presentation and disclosure: Shareholder's equity accounts are properly presented and adequately disclosed in the financial statements.
10. Review financial statements and perform analytical procedures to determine whether accounts are classified and disclosed int he financial statements in accordance with GAAP.
11. Review minutes of board of directors' and shareholders' meetings for share options and dividend restrictions.

Copyright @philcpareview

Friday, June 17, 2016

Accounting for Share-Based Payment

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A share-based payment is a transaction in which the entity receives or acquires goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity's shares or other equity instruments of the entity.

Types of share-based payment transactions

(a) equity-settled share-based payment transactions, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options)
(b) cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity's shares or other equity instruments of the entity, and
(c) cash or equity settled share-based payment transactions, in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transactions in cash (or other assets) or by issuing equity instruments.

Recognition and Measurement

The issuance of shares or rights to shares requires an increase in a component of equity. PFRS 2 requires the offsetting debit entry to be expensed when the payment for goods or services are consumed. For example, the issuance of shares or rights to shares to purchase inventory would be presented as an increase in inventory and would be expensed only once the inventory is sold or impaired.

The issuance of fully-vested shares, or rights to shares, is presumed to relate to past service, requiring the full amount of the grant date fair value to be expensed immediately. The issuance of shares to employees with, say, a three-year vesting period is considered to relate to services over the vesting period. Therefore, the fair value of the share-based payment, determined at the grant date, should be expensed over the vesting period.

As a general principle, the total expense related to equity-settled share-based payments will equal the multiple of the total instruments that vest and the grant-date fair value of those instruments. In short, there is truing up to reflect what happens during the vesting period. However, if the equity-settled share-based payment has a market related performance feature, the expense would still be recognized if all other vesting features are met.

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