Fair value: the price that would be received to sell an
asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date (see PFRS 13)
Value in use: the present value of the future cash flows
expected to be derived from an asset or cash-generating
unit
Identifying an asset that may be impaired
At the end of each reporting period, an entity is required
to assess whether there is any indication that an asset
may be impaired (i.e. its carrying amount may be higher
than its recoverable amount). PAS 36 has a list of external
and internal indicators of impairment. If there is an
indication than an asset may be impaired, then the
asset’s recoverable amount must be calculated. [PAS
36.9]
The recoverable amounts of the following types of
intangible assets are measured annually whether or not
there is any indication that it may be impaired. In some
cases, the most recent detailed calculation of
recoverable amount made in a preceding period may be
used in the impairment test for that asset in the current
period: [PAS 36.10]
 An intangible asset with an indefinite useful life
 An intangible asset not yet available for use
 Goodwill acquired in a business combination
Indications of impairment [PAS 36.12]
External sources:
 Market value declines
 Negative changes in technology, markets, economy or
laws
 Increases in market interest rates
 Net assets of the company higher than market
capitalization
Internal sources:
 Obsolescence or physical damage
 Asset is idle, part of a restructuring or held for
disposal
 Worse economic performance than expected
 For investments in subsidiaries, joint ventures or
associates, the carrying amount is higher than the
carrying amount of the investee’s assets, or a
dividend exceeds the total comprehensive income of
the investee
These lists are not intended to be exhaustive. [PAS 36.13]
Further, an indication that an asset may be impaired may
indicate that the asset’s useful life, depreciation method,
or residual value may need to be reviewed and adjusted.
[PAS 36.17]
Determining recoverable amount
 If fair value less costs of disposal or value in use is
more than carrying amount, it is not necessary to
calculate the other amount. The asset is not impaired.
[PAS 36.19]
 If fair value less costs of disposal cannot be
determined, then recoverable amount is value in use.
[PAS 36.20]
 For assets to be disposed of, recoverable amount is
fair value less costs of disposal. [PAS 36.21]
Fair value less costs of disposal
 Fair value is determined in accordance with PFRS 13
 Costs of disposal are the direct added costs only (not
existing costs or overhead). [PAS 36.28]
Value in use
The calculation of value in use should reflect the
following elements: [PAS 36.30]
 An estimate of the future cash flows the entity
expects to derive from the asset
 Expectations about possible variations in the amount
or timing of those future cash flows
 The time value of money, represented by the current
market risk-free rate of interest
 The price for bearing the uncertainty inherent in the
asset
 Other factors, such as illiquidity, that market
participants would reflect in pricing the future cash
flows the entity expects to derive from the asset
Cash flow projections should be based on reasonable and
supportable assumptions, the most recent budgets and
forecasts, and extrapolation for periods beyond
budgeted projections. [PAS 36.33] PAS 36 presumes that
budgets and forecasts should not go beyond five years’;
for periods after five years, extrapolate from the earlier
budgets. [PAS 36.35] Management should assess the
reasonableness of its assumptions by examining the
causes of differences between past cash flow projections
and actual cash flows. [PAS 36.34]
Cash flow projections should relate to the asset in its
current condition – future restructurings to which the
entity is not committed and expenditures to improve or
enhance the asset’s performance should not be
anticipated. [PAS 36.44]
Estimates of future cash flows should not include cash
inflows or outflows from financing activities, or income
tax receipts or payments. [PAS 36.50]
Discount rate
In measuring value in use, the discount rate used should
be the pre-tax rate that reflects current market
assessments of the time value of money and the risks
specific to the asset. [PAS 36.55]
The discount rate should not reflect risks for which future
cash flows have been adjusted and should equal the rate
of return that investors would require if they were to
choose an investment that would generate cash flows
equivalent to those expected from the asset. [PAS 36.56]
For impairment of an individual asset or portfolio of
assets, the discount rate is the rate the entity would pay
in a current market transaction to borrow money to buy
that specific asset or portfolio.
If a market-determined asset-specific rate is not
available, a surrogate must be used that reflects the time
value of money over the asset’s life as well as country
risk, currency risk, price risk, and cash flow risk. The
following would normally be considered: [PAS 36.57]
 The entity’s own weighted average cost of capital
 The entity’s incremental borrowing rate
 Other market borrowing rates
Recognition of an impairment loss
 An impairment loss is recognised whenever
recoverable amount is below carrying amount. [PAS
36.59]
 The impairment loss is recognised as an expense
(unless it relates to a revalued asset where the
impairment loss is treated as a revaluation decrease).
[PAS 36.60]
 Adjust depreciation for future periods. [PAS 36.63]
Cash-generating units
Recoverable amount should be determined for the
individual asset, if possible. [PAS 36.66]
If it is not possible to determine the recoverable amount
(fair value less costs of disposal and value in use) for the
individual asset, then determine recoverable amount for
the asset’s cash-generating unit (CGU). [PAS 36.66] The
CGU is the smallest identifiable group of assets that
generates cash inflows that are largely independent of
the cash inflows from the other assets or groups of
assets. [PAS 36.6]
Impairment of goodwill
Goodwill should be tested for impairment annually. [PAS
36.96]
To test for impairment, goodwill must be allocated to
each of the acquirer’s cash-generating units, or groups of
cash-generating units, that are expected to benefit from
the synergies of the combination, irrespective of
whether other assets or liabilities of the acquire are
assigned to those units or groups of units. Each unit or
group of units to which the goodwill also allocated shall:
[PAS 36.80]
 represent the lowest level within the entity at which
the goodwill is monitored for internal management
purposes; and
 not be larger than an operating segment determined
in accordance with PFRS 8.
A cash-generating unit to which goodwill has been
allocated shall be tested for impairment at least annually
by comparing the carrying amount of the unit, including
the goodwill, with the recoverable amount of the unit
[PAS 36.90]
 If the recoverable amount of the unit exceeds the
carrying amount of the unit, the unit and the goodwill
allocated to that unit is not impaired
 If the recoverable amount of the unit exceeds the
recoverable amount of the unit, the entity must
recognise an impairment loss.
The impairment loss is allocated to reduce the carrying
amount of the assets of the unit (group of units) in the
following orders: [PAS 36.104]
 First, reduce the carrying amount of any goodwill
allocated to the cash-generating unit (group of units);
and
 Then, reduce the carrying amounts of the other assets
of the unit (group of units) pro rata on the basis.
The carrying amount of an asset should not be reduced
below the highest of: [PAS 36.105]
 Its fair value less costs of disposal (if measurable)
 Its value in use ( if measurable)
 Zero
If the preceding rule is applied, further allocation of the
impairment loss is made pro rata to the other assets of
the unit (group of units).
Reversal of an impairment loss
 Same approach as for the identification of impaired
assets: assess at each balance sheet date whether
there is an indication that an impairment loss may
have decreased. If so, calculate recoverable amount.
[PAS 36.110]
 No reversal for unwinding of discount. [PAS 36.116]
 The increased carrying amount due to reversal should
not be more than what the depreciated historical cost
would have been if the impairment had not been
recognised. [PAS 36.117]
 Reversal of an impairment loss is recognised in the
profit of loss unless it relates to a revalued asset [PAS
36.119]
 Adjust depreciation for future periods. [PAS 36.121]
Reversal of an impairment loss for goodwill is
prohibited. [PAS 36.124]
Disclosure
Disclosure by class of assets: [PAS 36.126]
 Impairment losses recognised in profit or loss
 Impairment losses reversed in profit or loss
 Which line item(s) of the statement of comprehensive
income
 Impairment losses on revalued assets recognised in
other comprehensive income
 Impairment losses on revalued assets reversed in
other comprehensive income
Disclosure by reportable segment: [PAS 36.129]
 Impairment losses recognised
 Impairment losses reversed
Other disclosures:
If an individual impairment loss (reversal) is material
disclose: [PAS 36.130]
 Events and circumstances resulting in the impairment
loss
 Amount of the loss or reversal
 Individual asset: nature and segment to which it
relates
 Cash generating unit: description, amount of
impairment loss (reversal) by class of assets and
segment
 If recoverable amount is fair value less costs of
disposal, the level of the fair value hierarchy (from
PFRS 13) within which the fair value measurement is
categorised, the valuation techniques used to
measure fair value less costs of disposal and the key
assumptions used in the measurement of fair value
measurements categorised within ‘Level 2’ and ‘Level
3’ of the fair value hierarchy
 If recoverable amount has been determined on the
basis of value in use, or on the basis of fair value less
costs of disposal using a present value technique,
disclose the discount rate
If impairment losses recognised (reversed) are material
in aggregate to the financial statements as a whole,
disclose: [PAS 36.131]
 Main classes of assets affected
 Main events and circumstances
Disclose detailed information about the estimates used
to measure recoverable amounts of cash generating
units containing goodwill or intangible assets with
indefinite useful life. [PAS 36.134-35]
- End of FAR.2611 -
 DISCUSSION PROBLEMS
1. An entity shall classify a non-current asset or disposal
group as “held for sale” when
a. The carrying amount of the asset or disposal group
will be recovered through a sale transaction.
b. The carrying amount of the asset or disposal group
will be recovered through continuing use.
c. The noncurrent asset or disposal group is to be
abandoned.
d. The noncurrent asset or disposal group is idle or
retired from active use.
2. To be classified as non-current asset held for sale
a. The asset must be available for immediate sale in
its present condition subject only to terms that are
usual and customary for sales of such assets.
b. The sale of the asset must be highly probable.
c. Both a and b.
d. Neither a nor b.
3. In accordance with PFRS 5, for a sale of the asset to
be highly probable:
I. Management is committed to a plan to sell
II. An active program to locate a buyer is initiated
III. The asset is being actively marketed for sale at a
sales price reasonable in relation to its fair value
IV. The sale is expected to qualify for recognition as a
completed sale within one year from the date of
classification (subject to limited exceptions)
V. Actions required to complete the plan indicate that
it is unlikely that plan will be significantly changed
or withdrawn
a. I, II, III, IV and V
b. I, III, IV and V only
c. I, IV and V only
d. I and IV only
4. The directors of The Rangimoe Company decided at a
board meeting on February 28 that a major machine
tool should be sold. Trade magazines reported recent
transactions in non-current assets of a similar age at
P500,000, but the board decided that the asking price
should be P750,000. The board also decided that as a
program of repairs to the tool needed to be carried
out, an agent should not be contracted with for the
sale of the item until the repairs were completed,
which was on May 31.
On July 31 the board agreed to reduce the asking price
to P500,000. A deal was agreed with a buyer on
August 31 and completion of the sale took place on
November 30.
In accordance with PFRS Non-current assets held for
sale and discontinued operations, the asset should be
classified as held for sale on
a. February 28
b. May 31
c. July 31
d. August 31
5. Which statement is incorrect regarding measurement
of non-current asset held for sale?
a. Immediately before the initial classification of the
asset as held for sale, the carrying amount of the
asset will be measured in accordance with
applicable PFRSs.
b. Non-current asset classified as held for sale is
measured at the lower of its carrying amount and
fair value less costs to sell.
c. An impairment loss is recognized in the profit or
loss for any initial and subsequent write-down of
the asset to fair value less costs to sell.
d. Non-current asset classified as held for sale shall
continue to be depreciated.
Use the following information for the next two questions
The Delap Company accounts for non-current assets
using the cost model. On 25 April 2018 Delap classified a
non-current asset as held for sale in accordance with
PFRS5. At that date the asset’s carrying amount was
P32,000, its fair value was estimated at P22,000 and the
costs to sell at P3,200. On 15 May 2018 the asset was
sold for net proceeds of P17,400.
In Delap’s statement of comprehensive income for the
year ended 30 June 2018:
6. What amount should be included as an impairment
loss?
a. P13,600 c. P10,000
b. P13,200 d. Nil
7. What amount should be included as loss on disposal?
a. P14,600 c. P4,600
b. P13,200 d. P1,400
8. Which statement is incorrect regarding impairment of
assets classified as ‘held-for-sale’ in accordance with
PFRS 5?
a. Impairment must be considered both at the time of
classification as held for sale and subsequently.
b. Immediately prior to classifying an asset as held for
sale, any impairment loss is recognized in profit or
loss unless the asset had been measured at
revalued amount under PAS 16 or PAS 38, in which
case the impairment is treated as a revaluation
decrease.
c. After classification as held for sale, impairment loss
is the difference between the adjusted carrying
amounts of the asset and fair value less costs to
sell.
d. Any impairment loss that arises by using the
measurement principles in PFRS 5 must be
recognized in profit or loss, even for assets
previously carried at revalued amounts.
9. Classification as ‘asset held-for-sale’ will most likely
result in an immediate charge to profit or loss for which
of the following non-current assets?
a. Biological assets
b. Intangible assets
c. Investment property measured using the cost
model
d. Property, plant and equipment using the
revaluation model
Use the following information for the next two questions. 15. Any gain on the subsequent increase in the fair value
less cost to sell of a noncurrent asset classified as held
The Verba Company accounts for non-current assets for sale should be treated as follows:
using the revaluation model. On 30 June 2018, Verba a. The gain should be recognized in full.
classified a freehold property as held for sale in b. The gain should not be recognized.
accordance with PFRS5. At that date the property’s c. The gain should be recognized but not in excess of
carrying amount was P290,000 and the balance on the the cumulative impairment loss.
revaluation reserve was P20,000. At that date its fair d. The gain should be recognized but only in retained
value was estimated at P330,000 and the costs to sell at earnings.
P20,000. At 31 December 2018 the property’s fair value
was estimated at P325,000 and the costs to sell at 16. If Joy Corporation sold the plant on March 1, 2019 for
P25,000. a net proceeds of P351,000, what amount should be
10. The asset should be carried in Verba’s statement of included as gain on disposal in the entity’s statement
financial position at 31 December 2018 at of comprehensive income for the year ended 31
a. P325,000 c. P300,000 December 2019?
b. P310,000 d. P290,000 a. P19,000 c. P11,000
b. P12,000 d. P 1,000
11. What amount should be included as an impairment
loss in Verba’s profit or loss for the year ended 31 17. An entity has an asset that was classified as held for
December 2018? sale. However, the criteria for it remain as held for sale
a. P30,000 c. P5,000 no longer apply. The asset should be measured at
b. P10,000 d. Nil a. The lower of its carrying amount and its
recoverable amount
Use the following information for the next three b. The higher of its carrying amount and its
questions. recoverable amount
c. The lower of its carrying amount on the basis that
The Verba Company accounts for non-current assets it had never been classified as held for sale and its
using the revaluation model. On 30 June 2018, Verba recoverable amount
classified two items of non-current assets as held for sale d. The higher of its carrying amount on the basis that
in accordance with PFRS5. The following information it had never been classified as held for sale and its
relates to these assets: recoverable amount
Asset 1 Asset 2
18. If Joy Corporation had not sold the plant as of
Carrying amount before December 31, 2019 and the recoverable amount at
classification as held for sale P400,000 P300,000 that date is P315,000 the plant should be carried in
Revaluation surplus before Joy’s statement of financial position at 31 December
classification as held for sale 60,000 30,000 2019 at
Fair value, 30 June 201 450,000 260,000 a. P370,000 c. P315,000
Estimated costs to sell 20,000 12,000 b. P350,000 d. P315,000

12. The total expense to be recognized in profit or loss
related to these assets is
a. P42,000 c. P22,000
b. P32,000 d. Nil
13. The net amount to be recognized in other
comprehensive income related to these assets is
a. P50,000 c. P10,000
b. P20,000 d. (P10,000)
14. The balance of revaluation surplus as of 30 June 2018
after classification of the assets as held for sale is
a. P110,000 c. P70,000
b. P 90,000 d. P50,000
Use the following information for the next five questions.
On December 1, 2018, Joy Corporation decided to dispose
of an item of plant that is carried in its records at a cost
of P450,000, with accumulated depreciation of P80,000.
Depreciation on the plant since it was originally acquired
has been charged at P5,000 per month. The company
undertook all the necessary actions to be able to classify
the asset as held for sale. It is estimated that it could sell
the plant for its fair value, P350,000, incurring P10,000
selling costs in the process.
On December 31, 2018, the plant had not been sold but,
due to a shortage of this type of plant, there had been an
increase in the fair value to P360,000 while expected costs
to sell remain at P10,000.
19. In the period which the criteria are no longer met, any
required adjustment to the carrying amount of a non-
current asset that ceases to be classified as held for
sale shall be included in
a. Profit or loss from continuing operations.
b. Profit or loss from discontinued operations.
c. Other comprehensive income.
d. Retained earnings.
20. A chain of bicycle shops holds bicycles for short-term
hire and for sale. The bicycles available for hire are
used for two or three years and then sold by the shops
as second-hand models. All shop sell both new and
second-hand bicycles.
The entity sold a new bicycle for P5,000 (cost P4,000)
and a second-hand bicycle for P1,000 (carrying
amount P500).
Which statement is correct?
a. The bicycles for hire are reported in the statement
of financial position as property, plant and
equipment.
b. The entity shall reclassify the bicycles for hire as
non-current assets held for sale when they cease
to be rented and become held for sale.
c. The difference between the net disposal proceeds
and the carrying amount of the second-hand
bicycles is recognized as other income in profit or
loss.
d. All of the above.
21. What is a ‘disposal group’ as defined in PFRS 5?
a. A group of assets to be disposed of, by sale or
otherwise, together as a group in a single
transaction, and liabilities directly associated with
those assets that will be transferred in the
transaction.
b. Operations and cash flows that can be clearly
distinguished, operationally and for financial
reporting purposes, from the rest of the entity.
c. The smallest identifiable group of assets that
generates cash inflows from other assets or groups
of assets.
d. Assets other than goodwill that contribute to the
future cash flows of both the cash-generating unit
under review and other cash-generating units.
22. Which statement is incorrect regarding a ‘disposal
group’ classified as held for sale in accordance with
PFRS 5?
a. The measurement basis required for non-current
assets classified as held for sale is applied to the
group as a whole, and any resulting impairment
loss reduces the carrying amount of the non-
current assets in the disposal group in the order of
allocation required by PAS 36.
b. Assets and liabilities included within a disposal
group classified as held for sale, must be presented
separately on the face of the statement of financial
position.
c. An entity shall not reclassify or re-present amounts
presented for the assets and liabilities of disposal
groups classified as held for sale in the statements
of financial position for prior periods to reflect the
classification in the statement of financial position
for the latest period presented.
d. All the statements are correct.
DO-IT-YOURSELF (DIY) DRILL
1. The measurement provisions of PFRS5 apply to which
of the following assets?
a. Deferred tax assets
b. Biological assets
c. Investment properties that are accounted for an
accordance with the fair value model
d. Property, plant and equipment that are accounted
for in accordance with the revaluation model
2. Which statement is incorrect regarding ‘held for sale’
classification in accordance with PFRS 5?
a. The assets need to be disposed of through sale.
Therefore, operations that are expected to be
wound down or abandoned would not meet the
definition.
b. An entity that is committed to a sale involving loss
of control of a subsidiary that qualifies for held-for-
sale classification under PFRS 5 classifies all of the
assets and liabilities of that subsidiary as held for
sale, even if the entity will retain a non-controlling
interest in its former subsidiary after the sale.
c. The classification, presentation, and measurement
requirements of PFRS 5 also apply to a non-current
asset (or disposal group) that is classified as held
for distribution to owners.
d. All the statements are correct.
23. Excel Corp. plans to dispose of a group of net assets
that form a disposal group. The net assets at
December 31, 2018, are
Carrying amount
Goodwill P6,000,000
Property, plant and equipment 18,000,000
Inventory 10,000,000
Financial assets at fair value 7,000,000
Financial liabilities ( 4,000,000)
Under applicable PFRSs, property, plant, and equipment
would be stated at P16 million and inventory at P9
million. The fair value less cost to sell of the disposal
group is P25 million. Assuming that the disposal group
qualifies as held for sale, what is the amount to be
presented in the statement of financial position as assets
classified as held for sale?
a. P37,000,000 c. P29,000,000
b. P34,000,000 d. P25,000,000
24. PFRS 5 requires the following disclosures about assets
(or disposal groups) that are held for sale:
I. Description of the non-current asset or disposal
group
II. Description of facts and circumstances of the sale
(disposal) and the expected timing
III. Impairment losses and reversals, if any, and
where in the statement of comprehensive income
they are recognized
IV. If applicable, the reportable segment in which the
non-current asset (or disposal group) is presented
in accordance with PFRS 8.
a. I, II and III only c. II, III and IV only
b. I, II and IV only d. I, II, III and IV
- Now do the DIY drill
3. An entity acquires a subsidiary exclusively with a view
of selling it. The subsidiary meets the criteria to be
classified as held for sale. At the balance sheet date,
the subsidiary has not yet been sold, and six months
have passed since acquisition. How will the subsidiary
be valued in the balance sheet at the date of the first
financial statements after acquisition?
a. At fair value
b. At the lower of its cost and fair value less cost to
sell
c. At carrying amount
d. In accordance with applicable PFRS
4. The Phoenix Company accounts for non-current assets
using the revaluation model. On 30 June 2018 Phoenix
classified a non-current asset as held for sale in
accordance with PFRS5. At that date the property’s
carrying amount was P300,000 and the balance on the
revaluation reserve was P30,000. Fair value was
estimated at P280,000 and the costs to sell at P20,000.
The value in use is not determinable. The asset is still
unsold at 31 December 2018. What amount should be
included in the entity’s statement of profit or loss for
the year ended 31 December 2018?
a. P40,000 c. P10,000
b. P20,000 d. Nil
5. On January 1, 2018, CDO Corporation determined to to sell the machine within 1 year. As of April 1, 2018,
sell a group of assets within its shoe manufacturing the machine had an estimated selling price of
division, as it believed it was cheaper to buy the parts P100,000 and a remaining useful life of 2 years. It is
from China. The assets that it wanted to sell had the estimated that selling costs associated with the
following carrying amounts: disposal of the machine will be P10,000. On December
31, 2018, the estimated selling price of the machine
Factory P22,000,000 had increased to P150,000, with estimated selling
Accumulated depreciation (12,000,000) costs increasing to P16,000. The gain on reversal of
Raw materials 3,800,000 impairment loss on December 31, 2018 is
Spare parts 2,200,000 a. P160,000 c. P44,000
b. P50,000 d. P 0
The management of CDO calculated the fair value less
costs to sell of the disposal group to be P14,400,000. 8. Sentosa Corporation plans to dispose of some assets
The assets were sold on February 15, 2018 for together as a group. Details of the disposal group at
P15,400,000, with selling costs amounting to December 31, 2018 are given below:
P700,000.
Before income taxes, how much should be recognized Carrying Value as
as gain (loss) on sale of the disposal group? amount at remeasured
a. P300,000 c. P1,000,000 12/31/18 immediately
b. (P600,000) d. (P1,300,000) before before
classification classification
6. The Angelbert Company accounts for non-current as held for as held for
assets using the revaluation model. On 30 June 2017 sale sale
Angelbert classified a freehold property as held for sale Goodwill P3,900,000 P3,900,000
in accordance with PFRS5. At that date the property’s PPE (carried at revalued
carrying amount was P290,000 and the balance on the amounts) 11,960,000 11,960,000
revaluation reserve was P20,000. At that date its fair PPE (carried at cost) 14,820,000 14,820,000
value was estimated at P330,000 and the costs to sell AFS financial assets 6,240,000 5,720,000
at P20,000. At 31 December 2017 the property’s fair Inventory 4,680,000 3,900,000
value was estimated at P325,000 and the costs to sell Total P41,600,000 P38,740,000
at P25,000.
The fair value less costs to sell of the disposal group is
If the asset was sold for a net proceeds of P285,000 P33,800,000 while the value in use is P34,600,000.
in 2018, what amount should be included as loss on
disposal in the entity’s statement of comprehensive In the books of accounts, the carrying amount of the
income for the year ended 31 December 2018? ledger account PPE (carried at cost) after allocation of
a. P5,000 c. P25,000 impairment loss is
b. P15,000 d. P35,000 a. P14.209 million c. P13.780 million
b. P14.679 million d. P14.244 million
7. On April 1, 2018, Brandoni Company has a piece of
machinery with a cost of P1,000,000 and accumulated - Done -
depreciation of P750,000. On April 1, Brandoni decided

LECTURE NOTES
SUMMARY OF PFRS 5 NON-CURRENT ASSETS HELD An entity that is committed to a sale involving loss of
FOR SALE AND DISCONTINUED OPERATIONS control of a subsidiary that qualifies for held-for-sale
classification under PFRS 5 classifies all of the assets and
Key provisions relating to assets held for sale
liabilities of that subsidiary as held for sale, even if the
entity will retain a non-controlling interest in its former
Held-for-sale classification
subsidiary after the sale. [PFRS 5.8A]
In general, the following conditions must be met for an
asset (or ‘disposal group’) to be classified as held for Held for distribution to owners classification
sale: [PFRS 5.6-8]
 Management is committed to a plan to sell The classification, presentation and measurement
 The asset is available for immediate sale requirements of PFRS 5 also apply to a non-current asset
 An active programme to locate a buyer is initiated (or disposal group) that is classified as held for
distribution to owners. [PFRS 5.5A and IFRIC 17] The
 The sale is highly probable, within 12 months of
entity must be committed to the distribution, the assets
classification as held for sale (subject to limited
must be available for immediate distribution and the
exceptions)
distribution must be highly probable. [PFRS 5.12A]
 The asset is being actively marketed for sale at a sales
price reasonable in relation to its fair value
Disposal group concept
 Actions required to complete that plan indicate that it
is unlikely that plan will be significantly changed or
A ‘disposal group’ is a group of assets, possibly with some
withdrawn
associated liabilities, which an entity intends to dispose of
in a single transaction. The measurement basis required
The assets need to be disposed of through sale.
for non-current assets classified as held for sale is applied
Therefore, operations that are expected to be wound
to the group as a whole, and any resulting impairment
down or abandoned would not meet the definition (but
loss reduces the carrying amount of the non-current
may be classified as discontinued once abandoned).
assets in the disposal group in the order of allocation
required by PAS 36. [PFRS 5.4]
Measurement Year2 Year1
ASSETS
The following principles apply: Current assets
AAA X X
 At the time of classification as held for sale. BBB X X
Immediately before the initial classification of the asset X X
as held for sale, the carrying amount of the asset will
be measured in accordance with applicable PFRSs. Non-current assets classified
Resulting adjustments and also recognized in as held for sale X -
accordance with applicable PFRSs. [PFRS 5.18] X X
Non-current assets
 After classification as held for sale. Non-current assets CCC X X
or disposal groups that are classified as held for sale DDD X X
are measured at the lower of carrying amount and fair X X
value less costs to sell (fair value less costs to Total assets X X
distribute in the case of assets classified as held for LIABILITIES AND EQUITY
distribution to owners). [PFRS 5.15-15A] Current liabilities
EEE X X
 Impairment. Impairment must be considered both at
FFF X X
the time of classification as held for sale and
X X
subsequently:

- At the time of classification as held for sale. Liabilities directly associated

Immediately prior to classifying an asset or disposal with non-current assets
group as held for sale, impairment is measured and classified as held for sale X -
recognised in accordance with the applicable PFRSs. X X
Any impairment loss is recognised in profit or loss Non-current liabilities
unless the asset has been measured at revalued GGG X X
amount under PAS 16 or PAS 38, in which case the HHH X X
impairment is treated as a revaluation decrease. X X
- After classification as held for sale. Calculate any
impairment loss based on the difference between the
adjusted carrying amounts of the asset/disposal Total liabilities X X
group and fair value less costs to sell. Any Equity attributable to equity
impairment loss that arises by using the holders of the parent
measurement principles in PFRS 5 BC.47 and BC.48, III X X
which indicate the inconsistency with PAS 36. JJJ X X

 Assets carried at fair value prior to initial classification.

Amounts recognised directly
For such assets, the requirement to deduct costs to
in equity relating to
sell from fair value may result in an immediate charge
non-current assets held
to profit or loss.
for sale X -
X X
 Subsequent increases in fair value. A gain for any
subsequent increase in fair value less costs to sell of Minority X X
an asset can be recognised in the profit or loss to the Total equity X X
extent that it is not in excess of the cumulative Total liabilities and equity X X
impairment loss that has been recognised in
accordance with PFRS 5 or previously in accordance Disclosures
with PAS 36. [PFRS 5.25]
PFRS 5 requires the following disclosures about assets (or
The measurement provisions of PFRS 5 do not apply to
deferred tax assets, assets arising from employee disposal groups) that are held for sale: [PFRS 5.41]
benefits, financial assets within the scope of PFRS 9, non-  Description of the non-current asset or disposal group
current assets measured at fair value in accordance with  Description of facts and circumstances of the sale
PAS 41, and contractual rights under insurance contracts. (disposal) and the expected timing
[PFRS 5.5]  Impairment losses and reversals, if any, and where in
the statement of comprehensive income they are
Presentation
recognised
Assets classified as held for sale, and the assets and  If applicable, the reportable segment in which the non-
liabilities included within a disposal group classified as current asset (or disposal group) is presented in
held for sale, must be presented separately on the face of accordance with PFRS 8
the statement of financial position. [PFRS 5.38]
Disclosures in other PFRSs do not apply to assets held for
sale unless those other PFRSs require specific disclosures
in respect of such assets, or in respect of certain
measurement disclosures where assets and liabilities are
outside the scope of the measurement requirements of
PFRS 5. [PFRS 5.5B]
 DISCUSSION PROBLEMS
1. Which statement is incorrect regarding government
grants in accordance with PAS 20?
a. Government grants are assistance by government
in the form of transfers of resources to an entity in
return for past or future compliance with certain
conditions relating to the operating activities of the
entity.
b. All government grants are government assistance.
c. All government assistance are government grants.
d. All the statements are correct.
2. Government grants include
a. Government assistance, which cannot reasonably
have a value placed upon them.
b. Transactions with government, which cannot be
distinguished from the normal trading transactions
of the entity.
c. Both a and b.
d. Neither a nor b.
3. Governments grants include
a. Free technical or marketing advice.
b. Provision of guarantees.
c. Government procurement policy that is responsible
for a portion of an entity’s sales.
d. None of the above.
4. A government grant is recognized only when there is
reasonable assurance that:
a. The entity will comply with any conditions attached
to the grant.
b. The grant will be received.
c. Both a and b.
d. Neither a nor b.
5. Government grants shall be recognized in profit or loss
on a systematic basis over the periods in which the
entity recognizes as expenses the related costs for
which the grants are intended to compensate. Which
of the following is an inappropriate application of this
principle?
a. Grants in recognition of specific expenses are
recognized in profit or loss in the same period as
the relevant expenses.
b. Grants related to depreciable assets are usually
recognized in profit or loss over the periods and in
the proportions in which depreciation expense on
those assets is recognized.
c. Grants related to non-depreciable assets may also
require the fulfilment of certain obligations and
would then be recognized in profit or loss over the
periods that bear the cost of meeting the
obligations.
d. Grants received as part of a package of financial or
fiscal aids to which a number of conditions are
attached are not recognized.
Use the following information for the next four questions
Bren Inc. received a grant of P60 million to compensate it
for costs it incurred in planting trees over a period of five
years. Bren Inc. will incur costs in this manner: Year 1 –
P2 million; Year 2 – P4 million; Year 3 – P6 million; Year
4 – P8 million; Year 5 – P10 million.
6. Based on the provisions of PAS 20, how much should
be recognized as income from government grant at the
end of year 1?
a. P60,000 c. P12,000
b. P 4,000 d. P 2,000
7. These are government grants whose primary condition
is that an entity qualifying for them should purchase,
construct or otherwise acquire long-term assets.
a. Grants related to assets
b. Grants related to income
c. Grants related to liabilities
d. Grants related to expenses
8. The grant received by Bren Inc. is a grant related to
a. Assets c. Both a and b.
b. Income d. Neither a nor b.
9. In the case of grants related to income, which of these
accounting treatments is prescribed by PAS 20?
a. Credit the grant to “general reserve” under
shareholders’ equity.
b. Present the grant in the statement of
comprehensive income as “other income” or as a
separate line item, or deduct it from the related
expense.
c. Credit the grant to “retained earnings” on the
balance sheet.
d. Credit the grant to sales or other revenue from
operations in the statement of comprehensive
income.
Under the following information for the next four
questions:
Nadine Company received a P1,800,000 subsidy from the
government to purchase manufacturing equipment on
January 2, 2018. The equipment has a cost of P3,000,000,
a useful life a six years, and no salvage value. Nadine
depreciates the equipment on a straight-line basis.
10. If Nadine chooses to account for the grant as deferred
income, the grant income to be recognized in 2018 is
a. Nil c. P500,000
b. P300,000 d. P1,800,000
11. In the case of grants related to an asset, which of
these accounting treatments (balance sheet
presentation) is prescribed by PAS 20?
a. Record the grant at a nominal value in the first year
and write it off in the subsequent year.
b. Either set up the grant as deferred income or
deduct in arriving at the carrying amount of the
asset.
c. Record the grant a fair value in the first year and
take it to income in the subsequent year.
d. Take is to the statement of comprehensive income
and disclose it as an extraordinary gain.
12. If Nadine chooses to account for the grant as an
adjustment to the asset, the carrying amount of the
asset on the December 31, 2018 statement of financial
position is
a. P1,200,000 c. P2,200,000
b. P1,000,000 d. P2,500,000
13. Which of the following is true regarding the
alternative ways to apply the income approach to
accounting of resources acquired through government
grants?
a. Expenses will be higher and net income lower is the
grant is recorded as deferred income.
b. Expenses will be higher and net income lower if the
grant is accounted for an adjustment to the asset.
c. Depreciation expense will be higher if the grant is
recorded as an adjustment to the asset, but net
income will be the same under the two alternatives.
d. Depreciation expense will be higher if the grant is
recorded as deferred income, but net income will
be the same under the two alternatives.
Use the following information for the next three
questions.
On January 1, 2017, Citimart Inc. was granted land in a
village, located near the slums outside the city limits, by
a local government authority. The condition attached to
this grants was the company should clean up this land
and by roads by employing laborers from the village in
which the land is located. The government has fixed the
minimum wage payable to the workers. The entire
operation will take three years and is initially estimated to
cost P160 million. The fair value of this land on the date
of grant was P140 million and is expected to increase by
at least 20% annually because of the improvements to be
done by the company.
In relation to the attached condition, the company
incurred costs of P80 million in 2017 and P70 million in
2018. On December 31, 2018, the company estimated
that it will incur additional cost of P30 million in 2019.
14. Non-monetary government grants are measured at
a. Fair value
b. Nominal amount
c. Either a or b
d. Neither a nor b
15. How much should be recognized as income from
government grant for the year ended December 31,
2017?
a. P160,000,000 c. P80,000,000
b. P120,000,000 d. P70,000,000
16. How much should be recognized as income from
government grant for the year ended December 31,
2018?
a. P120,000,000 c. P80,000,000
b. P150,000,000 d. P70,000,000
17. Lively Inc. received a consolidated grant of P120
million, three-fourths of the grant is to be utilized to
purchase a college building for students from
underdeveloped or developing countries. The balance
of the grant is for subsidizing the tuition costs of those
students is for four years from the date of grant.
The college building, which costs P100 million, will be
depreciated using the straight-line method over 10
years. Assuming that the tuition subsidy will be offered
evenly over the period of 4 years, the amount that
should be recognized as income at the end of year 1
is
a. P12.0 million c. P16.5 million
b. P10.0 million d. P17.5 million
18. Which statement is incorrect regarding a government
loan at a below-market rate of interest?
a. The benefit of a government loan at a below-
market rate of interest is treated as a government
grant.
b. The benefit of the below-market rate of interest
shall be measured as the difference between the
initial carrying value of the difference between the
initial carrying value of the loan determined in
accordance with PFRS 9 and the proceeds received.
c. The entity shall consider the conditions and
obligations that have been, or must be, met when
identifying the costs for which the benefit of the
loan is intended to compensate.
d. The benefit is accounted for in accordance with
PFRS 9.
19. Puff Company is engaged in the operation of public
highways and skyways in the Philippines. On
November 8, 2017, a catastrophe devastated some of
the company’s operated highways and skyways. The
company suffered P5.6 billion loss due to catastrophe.
On January 1, 2018, the Philippine government
decided to compensate the company for the incurred
loss. The government loaned P5 billion at 5% per
annum with maturity period of 5 years. The present
value of cash flows at January 1, 2018 using the
current market rate for similar type of loan after
considering credit risks attached was P4.2 billion. The
conditions stipulated on the loan agreement provide
that the proceeds will be used for reconstruction of the
skyways and highways.
On January 1, 2018, how much should the company
recognize as government grants?
a. Nil c. P4 billion
b. P5 billion d. P0.8 billion
20. A government grant that becomes receivable as
compensation for expenses or losses incurred in a
previous period
a. Shall be recognized in profit or loss of the period in
which it is received.
b. Shall be recognized in retained earnings in the
period in which it becomes receivable.
c. Shall be credited directly to equity in the period in
which it becomes receivable.
d. Shall be recognized in profit or loss of the period in
which it becomes receivable.
21. Which statement is incorrect regarding a grant that
becomes repayable?
a. Repayment of a grant related to an asset shall be
recognized by increasing the carrying amount of
the asset or reducing the deferred income balance
by the amount repayable.
b. The cumulative additional depreciation that would
have been recognized in profit or loss to date in the
absence of the grant shall be recognized
immediately in profit or loss.
c. Repayment of a grant related to income shall be
applied first against any unamortized deferred
credit recognized in respect of the grant.
d. To the extent that the repayment exceeds any
deferred credit, or when no deferred credit exists,
the repayment shall be recognized immediately in
retained earnings.
22. PAS 20 requires the following disclosures
I. The accounting policy adopted for government
grants, including the methods of presentation
adopted in the financial statements.
II. The nature and extent of government grants
recognized in the financial statements and an
indication of other forms of government assistance
from which the entity has directly benefited.
III. Unfulfilled conditions and other contingencies
attaching to government assistance that has been
recognized.
a. I, II and III c. I and III only
b. I and II only d. II and III only
23. Which statement is incorrect regarding government
grants covered by PAS 41?
a. An unconditional government grant related to a
biological asset measured at its fair value less costs
to sell shall be recognized in profit or loss when,
and only when, the government grant becomes
receivable.
b. If a government grant related to a biological asset
measured at its fair value less costs to sell is
conditional, including when a government grant
requires an entity not to engage in specified
agricultural activity, an entity shall recognize the
government grant in profit or loss when, and only
when, the conditions attaching to the government
grant are met.
c. If a government grant relates to a biological asset
measured at its cost less any accumulated
depreciation and any accumulated impairment
losses, PAS 20 is applied.
d. None of the above.
DO-IT-YOURSELF (DIY) DRILL
1. PAS 20 applies to
a. Accounting for government grants
b. Disclosure of government grants
c. Disclosure of other forms of government assistance
d. All of the above
2. PAS 20 applies to
a. The special problems arising in accounting for
government grants in financial statements
reflecting the effects of changing prices or in
supplementary information of a similar nature.
b. Government assistance that is provided for an
entity in the form of benefits that are available in
determining taxable profit or tax loss, or are
determined or limited on the basis of income tax
liability.
c. Government participation in the ownership of the
entity.
d. Biological asset measured at its cost less any
accumulated depreciation and any accumulated
impairment losses.
24. A public limited company, Eks Dairy Products,
produces milk on its farms. The company has had
problems during 2018. Contaminated milk was sold to
customers. As a result, milk consumption was gone
down. The government decided to compensate
farmers for potential loss in revenue from sale of milk.
This fact was published in the national press on
December 1, 2018. Eks received an official letter on
December 15, 2018, stating that P1 million would be
paid to it on April 3, 2019.
The entity should recognize income from grant for
a. P1 million on December 1, 2018
b. P1 million on December 15, 2018
c. P1 million on April 3, 2019
d. Nil
25. A grant may require an entity to farm in a particular
location for five years and require the entity to return
all of the grant if it farms for a period shorter than five
years. In this case, PAS 41 requires that the grant
a. Is not recognized in profit or loss until the five years
have passed.
b. Is not recognized in equity until the five years have
passed.
c. Is recognized in profit or loss as time passes.
d. Is recognized in equity as time passes.
26. In accordance with PAS 41, an entity shall disclose the
following in relation to government grants related to
agricultural activity:
a. The nature and extent of government grants
recognized in the financial statements.
b. Unfulfilled conditions and other contingencies
attaching to government grants.
c. Significant decreases expected in the level of
government grants.
d. All of the above.
- Now do the DIY drill -
3. Which statement is incorrect regarding government
assistance for purposes of PAS 20?
a. Government assistance is action by government
designed to provide an economic benefit specific to
an entity or range of entities qualifying under
certain criteria.
b. Government assistance in the form of transfers of
resources to an entity in return for past or future
compliance with certain conditions relating to the
operating activities of the entity are called
government grants.
c. Not all government assistance are government
grants.
d. Government assistance include benefits provided
only indirectly through action affecting general
trading conditions, such as the provision of
infrastructure in development areas or the
imposition of trading constraints on competitors.
4. Government assistance include
a. Provision of infrastructure by improvement to the
general transport and communication network.
b. Supply of improved facilities such as irrigation or
water reticulation which is available on a ongoing
indeterminate basis for the benefit of an entire local
community.
c. Both a and b.
d. Neither a nor b.
5. On January 1, 2018, Carmona Company received a
grant of P50 million from the British government in
order to defray safety and environmental costs within
the area where the enterprise is located. The safety
and environmental costs are expected to be incurred
over four years, respectively. P4 million, P8 million,
P12 million and P16 million. How much income from
the government grant should be recognized in 2018?
a. P50,000,000 c. P12,500,000
b. P 5,000,000 d. P 0 calculated on a straight line basis?
6. On July 1, 2017, Corregidor Company is granted a
large tract of land in the Cordillera region by the
Philippine government. The fair value of the land is
P10 million. Corregidor Company is required by the
grant to construct chemical research facility and
employ only personnel residing in the Cordillera
region. The estimated cost of the facility is P50 million
with useful life of 20 years. The facility was completed
in early 2018. Corregidor Company should recognize
in 2018 an income from government grant at
a. P10,000,000 c. P2,500,000
b. P 500,000 d. P 0 million. How much should be recognized as income
LECTURE NOTES
SUMMARY OF PAS 20 ACCOUNTING FOR
GOVERNMENT GRANTS AND DISCLOSURE OF
GOVERNMENT ASSISTANCE
Objective
The objective of PAS 20 is to prescribe the accounting for,
and disclosure of, government grants and other forms of
government assistance.
Scope
PAS 20 applies to all government grants and other forms
of government assistance. [PAS 20.1] However, it does
not cover government assistance that is provided in the
form of benefits in determining taxable income. It does
not cover government grants covered by PAS 41, either.
[PAS 20.2] The benefit of a government loan at a below
market rate of interest is treated as a government grant.
[PAS 20.10A]
Accounting for grants
 A government grant is recognised only when there is
reasonable assurance that (a) the entity will comply
with any conditions attached to the grant and (b) the
grant will be received. [PAS 20.7]
 The grant is recognised as income over the period
necessary to match them with the related costs, for
which they are intended to compensate, on a
systematic basis. [PAS 20.12]
 Non-monetary grants, such as land or other resources,
are usually accounted for at fair value, although
recording both the asset and the grant at a nominal
amount is also permitted. [PAS 20.23]
 Even if there are no conditions attached to the
assistance specifically relating to the operating
activities of the entity (other than the requirements to
operate in certain regions or industry sectors), such
grants should not be credited to equity. [SIC-10]
 A grant receivable as compensation for costs already
incurred or for immediate financial support, with no
future related costs, should be recognised as income
in the period in which it is receivable. [PAS 20.20]
7. On January 1, 2017, Amman Company received a
grant of P50 million from a foreign government for the
construction of a laboratory and research facility with
an estimated cost of P60 million and useful life of 25
years. The facility was completed in early 2018.
Company policy is to treat the grant as a reduction in
the cost of the asset. What should be the depreciation
expense in respect of this facility for the year ended
31 December 2018, assuming that depreciation is
a. Nil c. P2,000,000
b. P2,400,000 d. P 400,000
8. Bataan Inc. was granted a parcel of land by a local
government authority. The condition attached to this
grant was that Bataan Inc. should clean up this land
and lay roads by employing laborers from the village
in which the land is located. The entire operation will
take three years and is estimated to cost P100 million.
This amount will be spent in this way: P20 million each
in the first and second years and P60 million in the
third year. The fair value of this land is currently P120
from government grant at the end of the first year?
a. P20,000,000 c. P40,000,000
b. P24,000,000 d. P 0
- Done -
 A grant relating to assets may be presented in one of
two ways: [PAS 20.24]
- As deferred income, or
- By deducting the grant from the asset’s carrying
amount.
 A grant relating to income may be reported separately
as ‘other income’ or deducted from the related
expense. [PAS 20.29]
Grant that becomes repayable
 Treated as a change in estimate.
 Where the original grant related to income, the
repayment should be applied first against any related
unamortized deferred credit, and any excess should be
dealt with as an expense.
 Where the original grant related to an asset, the
repayment should be treated as increasing the
carrying amount of the asset or reducing the deferred
income balance. The cumulative depreciation which
would have been charged had the grant not been
received should be charged as an expense.
Disclosure of government grants
The following must be disclosed: [PAS 20.39]
 Accounting policy adopted for grants, including
method of balance sheet presentation
 Nature and extent of grants recognised in the financial
statements
 Unfulfilled conditions and contingencies attaching to
recognised grants
Government assistance
Government grants do not include government assistance
whose value cannot be reasonably measured, such as
technical or marketing advice. [PAS 20.34] Disclosure of
the benefits is required. [PAS 20.39(b)]
- End of FAR.2613 -
 DISCUSSION PROBLEMS
1. Borrowing costs are interest and other costs that an
entity incurs in connection with the borrowing of
funds. Borrowing cost does not include
a. Interest expense calculated using the effective
interest method as described in PFRS 9.
b. Finance charges in respect of finance leases
recognized in accordance with PAS 17.
c. Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as
an adjustment to interest costs.
d. Actual or imputed cost of equity, including
preferred capital not classified as a liability.
2. Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying
asset shall be recognized as
a. Part of the cost of asset.
b. Expense in the period incurred.
c. Either a or b.
d. Neither a nor b.
3. A qualifying asset is an asset that necessarily takes a
substantial period of time to get ready for its intended
use or sale. This may include
a. Financial assets
b. Inventories that are manufactured, or otherwise
produced, over a short period of time.
c. Assets that are ready for their intended use or sale
when acquired.
d. Intangible assets
4. The borrowing costs that are directly attributable to
the acquisition, construction or production of a
qualifying asset are
a. Those borrowing costs that would have been
avoided if the expenditure on the qualifying asset
had not been made.
b. Those borrowing costs incurred during the period
less any investment income on the temporary
investment of the borrowings.
c. Those borrowing costs computed by applying a
capitalization rate to the expenditures on that
asset.
d. The lower of b and c.
5. The commencement date for capitalization of
borrowing costs is the date when the entity first meets
which of the following conditions:
I. It incurs expenditures for the asset
II. It incurs borrowing costs
III. It undertakes activities that are necessary to
prepare the asset for its intended use or sale
a. I, II and III c. I and III only
b. I and II only d. II only
6. Expenditures on a qualifying asset include only those
expenditures that have resulted in
a. Payments of cash
b. Transfers of other assets
c. Assumption of interest-bearing liabilities
d. Any of the above
7. Capitalization of borrowing costs should cease
a. When expenditures are being incurred, borrowing
costs are being incurred and activities that are
necessary to prepare the asset for its intended use
or sale are in progress.
b. When substantially all of the activities necessary to
prepare the asset for its intended use or sale are
complete.
c. During periods in which active development is
interrupted.
d. When the asset is brought into use.
8. Which of the following indicates that substantially all
of the activities are not yet complete?
a. Routine administrative work continues.
b. Minor modifications, such as the decoration of a
property to the purchaser’s or user’s specification,
are all that are outstanding.
c. Either a or b.
d. Neither a nor b.
9. On 1 January 2018 The Divine Company took out a
12% P10 million loan to finance the construction of a
building. The key dates are as follows:
January 1 – Loan interest relating to the project
starts to be incurred
February 1 – Technical site planning commences
March 1 – Expenditures on the project start to be
incurred
April 1 – Construction work commences
November 1 – Substantially all of the activities
necessary to prepare the asset for
its intended use are complete
December 1 – Building brought into use
What amount of interest should Divine capitalize for
the current year?
a. P1,000,000 c. P800,000
b. P 900,000 d. P700,000
10. On 1 January 2018 Imp Company borrowed P6 million
at an annual interest rate of 10% to finance the costs
of building an electricity generating plant. Construction
commenced on 1 January 2018 and cost P6 million.
Not all the cash borrowed was used immediately, so
interest income of P80,000 was generated by
temporarily investing some of the borrowed funds
prior to use. The project was completed on 30
November 2018. What is the carrying amount of the
plant at 30 November 2018?
a. P6,000,000 c. P6,520,000
b. P6,470,000 d. P6,420,000
11. Which statement is incorrect regarding capitalization
of ‘general’ borrowing costs?
a. The entity shall determine the amount of borrowing
costs eligible for capitalization by applying a
capitalization rate to the expenditures on that
asset.
b. The capitalization rate shall be the weighted
average of the borrowing costs applicable to the
borrowings of the entity that are outstanding
during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying
asset.
c. The amount of borrowing costs that an entity
capitalizes during a period shall not exceed the
amount of borrowing costs incurred during that
period.
d. The entity shall determine the amount of borrowing
costs eligible for capitalization as the actual
borrowing costs incurred during the period less any
investment income on the temporary investment of
those borrowings.
12. Maragondon Company had the following borrowings
during 2018. The borrowings were made for general Use the following information for the next two questons.
purposes but the proceeds were used in part to finance
the construction of a new building: Lodi Department Stores, Inc., constructs its own stores.
Principal Interest
12% bank loan P10,000,000 P1,200,000 Additional information follows:
15% long-term loan 20,000,000 3,000,000
P30,000,000 P4,200,000 Total contruction expenditures:
January 2, 2017 P 600,000
The construction began on January 1, 2018 and was May 1, 2017 600,000
completed on December 31, 2018. Expenditures on November 1, 2017 500,000
the building were made as follows: March 1, 2018 700,000
January 1 P8,000,000 September 1, 2018 400,000
June 30 8,000,000 December 31, 2018 500,000
December 31 4,000,000 P3,300,000
Outstanding company debt:
The capitalizable borrowing cost is Mortgage related directly to new store;
a. P1,680,000 c. P4,200,000 interest rate, 12%; term, 5 years
b. P1,400,000 d. P1,620,000 from beginning of construction P1,000,000

13. During 2018, Grant Industries, Inc. constructed a new General liability:
manufacturing facility at a cost of P12,000,000. The Bonds issued just prior to construction
weighted average accumulated expenditures for 2018 of store; interest rate, 10% for
were calculated to be P5,400,000. The company had 10 years P 500,000
the following debt outstanding at December 31, 2018: Bonds issued just prior to construction;
 10 percent, five-year note to finance construction interest rate, 8%, mature in 5 years P1,000,000
of the manufacturing facility, dated January 1, Estimated cost of equity capital 14%
2018, P3,600,000.
 12 percent, 20-year bonds issued at par on April 14. The capitalizable borrowing cost for 2017 is
30, 2014, P8,400,000. a. P138, 850 c. P122,850
 8 percent, six-year note payable, dated March 1, b. P127,250 d. P250,000
2017, P1,800,000. 15. The capitalizable borrowing cost for 2018 is
a. P255,330 c. P253,938
Determine the amount of interest to be capitalized by b. P254,321 d. P250,000
Grant Industries for 2018.
a. P360,000 c. P557,280
b. P563,220 d. P591,840 “SUGGESTED” SOLUTION for question #14:

LECTURE NOTES: 1/2 (P600,000 x 12/12) P 600,000

5/1 (P600,000 x 8/12) 400,000
Specific and general borrowings 11/1 (P500,000 x 2/12) 83,333
Weighted aveg. exp. (WAE) 1,083,333
Weighted average expenditures (WAE) Pxx Specific borrowing [P600T+(P400Tx8/12)] ( 866,667)
Specific borrowing ( xx) General borrowing 216,666
General borrowing xx x Cap. Rate 8.7%
x Capitalization rate – general % Avoidable BC – General 18,850
Interest on WAE – General (a) Pxx Avoidable BC – Specific (P1M x .12) 120,000
Total avoidable BC P 138,850
Actual borrowing costs – General (b) Pxx
“ALTERNATIVE” SOLUTION for question #14:
Avoidable BC – General (lower of a and b) Pxx
Avoidable BC – Specific (Actual) xx Weighted aveg. exp. P1,083,333
Total avoidable BC Pxx Specific borrowing ( 1,000,000)
General borrowing 83,333
x Cap. Rate 8.7%
Avoidable BC – General 7,250
Avoidable BC – Specific (P1M x .12) 120,000
Total avoidable BC P 127,250

“ANOTHER ALTERNATIVE” SOLUTION for question #14:

Weighted aveg. exp. P1,083,333

Specific borrowing [P600T+(P400Tx8/12)] ( 866,667)
General borrowing 216,666
x Cap. Rate 8.7%
General 18,850
Specific (P866,667 x .12) 104,000
Interest on WAE P 122,850
 ALTERNATIVE COMPUTATION TO THE “ANOTHER
ALTERNATIVE” SOLUTION for question #14: *Ship 340 was completed and ready for use in October
2017 and will be placed in service May 1, 2018.
Date Amount Rate Fraction Capitalized
Interest Construction costs for 2018, and the dates the
1/2 600,000 12.0% 12/12 72,000 expenditures were made, were as follows:
5/1 400,000 12.0% 8/12 32,000
200,000 8.7% 8/12 11,600 Ship Date Costs
11/1 500,000 8.7% 2/12 7,250 341 April 1 P1,200,000
1,700,000 122,850 342 May 1 1,600,000
343 July 1 2,200,000
“SUGGESTED” SOLUTION for question #15: 344 September 1 810,000
345 November 1 360,000
1/1 (P1,838,850 x 12/12) P1,838,850
3/1 (P700,000 x 10/12) 583,333 Oceanwide had the following general liabilities at
9/1 (P400,000 x 4/12) 133,333 December 31, 2018:
12/31 (P500,000 x 0/12) -
Weighted aveg. exp. (WAE) 2,555,516 12%, 5-year note (maturity date-2020) P2,000,000
Specific borrowing (1,000,000) 10%, 10-year bonds (maturity date-2023) 8,000,000
General borrowing 1,555,516
x Cap. Rate 8.7% On January 1, 2018, Oceanwide borrowed P2,000,000
Interest on WAE – General P 135,330 specifically for the construction of ship 343. The loan was
Actual BC – General P 130,000 for 3 years with interest at 13%.
Avoidable BC – General P 130,000
Avoidable BC – Specific (P1M x .12) 120,000 Capitalized interest on Ship No. 343 for 2018
Total avoidable BC P 250,000 a. P178,750 c. P231,000
b. P228,150 d. P319,485
16. Oceanwide Enterprises, Inc., is involved in building and
operating cruise ships. Each ship is identified as a 17. Which of the following is not a disclosure requirement
separate discrete job in the accounting records. At the under PAS 23?
end of 2017, Oceanwide correctly reported P5,400,000 a. Accounting policy adopted for borrowing costs
as Construction in Progress on the following jobs. b. Amount of borrowing costs capitalized during the
period
Accumulated Costs c. Capitalization rate used to determine the amount of
Completion Date (including 2017 interest) borrowing costs eligible for capitalization
Ship (end of month) December 31, 2017 d. Segregation of assets that are “qualifying assets”
340 October 31, 2017* P2,300,000 from other assets on the balance sheet or as a
341 June 30, 2018 1,150,000 disclosure in the footnotes to the financial
342 September 30, 2018 1,200,000 statements
343 January 31, 2019 750,000
- Now do the DIY drill –

DO-IT-YOURSELF (DIY) DRILL

1. PAS 23 does not apply to
a. Actual or imputed cost of equity, including preferred
capital not classified as a liability.
b. Borrowing costs directly attributable to the
acquisition, construction or production of a qualifying
asset measured at fair value.
c. Borrowing costs directly attributable to the
acquisition, construction or production of inventories
that are manufactured, or otherwise produced, in
large quantities on a repetitive basis.
d. All of the above.
4. On January 1, 2018, Richmond, Inc. signed a fixed-price
2. A qualifying asset is an asset that necessarily takes a
substantial period of time to get ready for its intended
use or sale. Which of the following may not be
considered as a “qualifying asset” under PAS 23?
a. A power generation plant that normally takes two
years to construct
b. A toll bridge that usually takes more than a year to
build
c. A ship that normally takes one to two years to
complete
d. An expensive private jet that can be purchased from
a local vendor
3. Which of the following borrowing costs qualify for
capitalization?
a. Borrowing costs incurred while land is under
development during the period in which activities
related to the development are being undertaken.
b. Borrowing costs incurred while land acquired for
building purposes is held without any associated
development activity.
c. Borrowing costs during an extended period in which
the entity suspends the activities necessary to
prepare an asset for its intended use or sale.
d. None of the above.
contract to have Builders Associates construct a major
plant facility at a cost of P4,000,000. It was estimated
that it would take three years to complete the project.
Also on January 1, 2018, to finance the construction
cost, Richmond borrowed P4,000,000 payable in 10
annual instalment of P400,000, plus made deposit and
progress payments totalling P1,500,000 under the
contract. The excess borrowed funds were invested in
short-term securities, from which Richmond realized
investment income of P250,000. What amount should
Richmond report as capitalized interest at December 31,
2018?
a. P 71,500 c. P165,000
b. P190,000 d. P440,000
5. On 1 January 2018 The Pyongyang Company took out a
loan of P26 million in order to finance the renovation of
a building. The renovation work started on the same
date. The loan carried interest at 10%. Work on the
building was substantially complete on 31 October 2018.
The loan was repaid on 31 December 2018 and
P180,000 investment income was earned in the period
to 31 October on those parts of the loan not yet used
for the renovation.
8. Aries Company started construction on a building on
According to PAS23 Borrowing costs, what is the total
amount of borrowing costs to be included in the cost of
the building?
a. P2,600,000 c. P2,166,667
b. P2,420,000 d. P1,986,667
6. Brin Company started construction of a new office
building on January 1, 2018, and moved into the
finished building on July 1, 2019. Of the building’s
P5,000,000 total cost, P4,000,000 was incurred in 2018
evenly throughout the year. Brin’s incremental
borrowing rate was 12 percent throughout 2018, and
the total amount of interest incurred by Brin during 2018
was P204,000. What amount should Brin report as
capitalized interest at December 31, 2018?
a. P204,000 c. P300,000
b. P240,000 d. P480,000
7. Page Company borrowed P400,000 on a 10 percent note
payable to finance a new warehouse, Page is
LECTURE NOTES
SUMMARY OF PAS 23 BORROWING COSTS
Key definitions
Borrowing cost may include:
 Interest expense calculated by the effective interest
method under PAS 39,
 Finance charges in respect of finance leases
recognised in accordance with PAS 17 leases, and
 Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.
This standard does not deal with the actual or imputed
cost of equity, including any preferred capital not
classified as a liability pursuant to PAS 32.
Scope
Two types of assets that would otherwise be qualifying
assets are excluded from the scope of PAS 23:
 Qualifying assets measured at fair value, such as
biological assets accounted for under PAS 41
Agriculture
 Inventories that are manufactured, or otherwise
produced, in large quantities on a repetitive basis and
that take a substantial period to get ready for sale (for
example, maturing whisky)
Accounting treatment
 Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying
asset form part of the cost of that asset and, therefore,
should be capitalised.
 Other borrowing costs are recognised as an expense.
constructing for its own use. The only other debt on
Page’s books is a P600,000, 12 percent mortgage
payable on an office building. At the end of the current
year, average accumulated expenditures on the new
warehouse totalled P475,000. Page should capitalize
interest for the current year in the amount of
a. P52,250 c. P47,500
b. P49,000 d. P40,000
January 1 of this year and completed construction on
December 31 of the same year. Aries had only two
interest notes outstanding during the year, and both of
these notes were outstanding for all 12 months of the
year. The following information is available:
Average accumulated expenditures P250,000
Ending balance in construction in
progress before capitalization
of interest 360,000
6 percent note incurred specifically for
the project 150,000
9 percent long-term note 500,000
What amount of interest should Aries capitalize for the
current year?
a. P27,900 c. P18,000
b. P22,500 d. P15,000
- Done -
Measurement
 Where funds are borrowed specifically, costs eligible
for capitalisation are the actual costs incurred less any
income earned on the temporary investment of such
borrowings.
 Where funds are part of a general pool, the eligible
amount is determined by applying a capitalisation rate
to the expenditure on that asset. The capitalisation
rate will be the weighted average of the borrowing
costs applicable to the general pool.
Capitalization period
 Capitalisation should commence when expenditures
are being incurred, borrowing costs are being incurred
and activities that are necessary to prepare the asset
for its intended use or sale are in progress (may
include some activities prior to commencement of
physical production).
 Capitalisation should be suspended during periods in
which active development is interrupted. [IAS 23.30]
 Capitalisation should cease when substantially all of
the activities necessary to prepare the asset for its
intended use or sale are complete. If only minor
modifications are outstanding, this indicates that
substantially all of the activities are complete.
 Where construction is completed in stages, which can
be used while construction of the other parts
continues, capitalisation of attributable borrowing
costs should cease when substantially all of the
activities necessary to prepare that part for its
intended use or sale are complete.
Disclosure
 Amount of borrowing cost is capitalised during the
period
 Capitalisation rate used