02 - Specialized Industries 2013

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Copyright Arthur S. Cayanan 2013

By Arthur S. Cayanan


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Revenue recognition policies Matching of investing and financing activities

Accounting for real estate for sale and landheld for future development

Classification of accounts receivable

Accounting for investment properties

Profitability ratios

Liquidity ratios IFRIC 15



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Accrual method is applied when completedprojects are sold and there are no uncertaintieswith collection.

Percentage of completion method is used whenthe real estate company has material obligationsunder the sales contract to complete the projectafter the property is sold.

Installment method is used when there areuncertainties with collections. Under this method,gross profit is recognized upon collection.



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Estimate streams of cash flows from the realestate project

Determine the long-term sources of financing

For long-term debt, determine the maturitydates through the notes to financial

statements



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Total debt/ Total assets

Long-term financing/ Total assets

Long-term liabilities/ Total assets



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Real estate for sale inventories

Land for future development - inventories



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Cost model

Fair value model unrealized gains and

losses are reported in the income statement



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Determine revenues and profits generatedfrom each segment

If the real estate company leases some of its

real estate properties, determine the returnon property value.

Return on property value = (Annual rental

income)/ (Market value of the property)



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Quick ratio = (Cash + trading accountsecurities + current AR)/ Current liabilities

Adjusted quick ratio = (Cash + tradingaccount securities)/ Current liabilities



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Developer transfers to the buyer control and

significant risks and rewards of ownership ofthe work in progress in its current state asconstruction progresses.



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Valuation of property, plant and equipmentused in the power distribution (cost vsrevaluation)

Revenues and system losses

Operating Expenses

Maximum Annual Price (MAP)

Electric Power Industry Reform Act (EPIRA) or

R.A. 9136 Financial Ratios



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Pass-through charges Distribution charge or wheeling charge



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System loss charge represents the recovery ofthe cost of power lost due to technical andnon-technical losses which is pegged at 9.5%of purchased power for private distribution

utilities and 14% for electric cooperatives.

The 9.5% cap for MERALCO is based on

Republic Act 7832 or Anti-Pilferage ofElectricity and Theft of Electric TransmissionLines/Materials Act of 1994



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The MAP and the Annual Revenue Requirement(ARR) is approved by the Energy RegulationCommission (ERC). The following are among thefactors considered:

Operating expenses Regulatory depreciation

Regulatory asset base

Working capital allowance

Corporate income tax

Capital expenditures

Weighted average cost of capital (WACC)



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Power distribution companies can also begeneration companies but there is a limit asregards their generation capacity.



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Interest coverage ratios Cash flow adequacy ratios

Profitability ratios

Capital structure and leverage ratios Operations and maintenance

expense/revenues ratio



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EBIT Interest expense

EBITDA Interest expense



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Funds from operations Total debt

Free operating cash flow Total debt

Free operating cash flow is cash provided byoperating activities less capital expenditures, loanrepayment, and customers refund in the case ofMERALCO.



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EBITDA Sales

For MERALCO, sales should only refer todistribution charge



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Long-term debt Total capital

Debt Equity

Total debt Total capital



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Operations and maintenance expense Distribution charge



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By Arthur S. Cayanan


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Introduction Definition of Terms

Control

When is parent allowed not to consolidate?

Accounting for business combination

How is consolidation done?

Some Important Disclosure Requirements

Issues on Consolidated Financial Statements



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Consolidated financial statements - are the financialstatements of a group presented as those of a singleeconomic entity.

Groupis a parent and all its subsidiaries. Parent- is an enterprise that has one or more

subsidiaries. Subsidiary - is an entity, including an unincorporated

entity such as partnership, that is controlled by anotherentity (known as the parent).

Control is the power to govern the financial andoperating policies of an entity so as to obtain benefits

from its activities. Non-controlling interestis the equity in a subsidiary

not attributable, directly or indirectly, to a parent.



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Presumed to exist when a parent owns more than half of the votingpower of an entity

May also exist when the parent owns half or less of the voting powerof an entity when there is:

a. Power over more than half of the voting rights by virtue of anagreement with other investors.

b. Power to govern the financial and operating policies of the entityunder a statue or an agreement.

c. Power to appoint or remove the majority of the members of theboard of directors or equivalent governing body and control

d. Power to cast the majority of votes at meetings of the BOD orequivalent governing body and control of the entity is by that boardor body.

PAS 27 par. 13



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Alpha Co. owns 80% of Beta Co. and 30% of Gamma Co.Beta Co. owns 40% of Gamma Co.

Question:

What percentage of Beta Co. and Gamma Co. is effectivelyowned by Alpha Co.?



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The parent is itself a wholly-owned subsidiaryof another entity and its other owners,including those not otherwise entitled to vote,have been informed about, and do not objectto, the parent not preparing consolidated

financial statements.

The parents debt or equity instruments are nottraded in a public market ( a domestic orforeign stock exchange or an over-the-counter

market)

PAS 27 par. 10



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The parent did not file, or is in the process of filingits financial statements with a securitiescommission or other regulatory organization forthe purpose of issuing any class of instruments in apublic market.

The ultimate or any intermediate parent of theparent produces consolidated financial statementsavailable for public use that comply with

International Financial Reporting Standards

PAS 27 par. 10



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The acquisition method accounts for abusiness combination as the acquisition of

one enterprise by another.

The acquiring enterprise records at its costthe acquired assets less liabilities assumed.



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A difference between the cost of an acquiredenterprise and the sum of the fair values oftangible and identifiable intangible assets lessliabilities assumed shall be recorded as

goodwill.

The reported income of an acquiring enterpriseshall include the operations of the acquired

enterprise after acquisition, based on the costto the acquiring enterprise.



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On December 31, Year 1, Parent Corporationacquired 90% of Subsidiary Company commonstock for PHP270,000. At that time, the book

value of Subsidiary Companys common stockwas PHP300,000.

Required:

Prepare the separate balance sheets of ParentCorporation and Subsidiary Companyimmediately after the acquisition.



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PARENT CORPORATION AND SUBSIDIARY

Separate Balance Sheets (Prior to Business Combination)

December 31, Year 1

Assets Parent SubsidiaryCash 500,000 50,000

Accounts receivable 300,000100,000

Inventories 500,000 200,000

Plant assets,net of depreciation 1,500,000 500,000

Total assets 2,800,000 850,000

Liabilities and Stockholders EquityAccounts payable 250,000 100,000

Long term liabilities 750,000450,000

Common stock, P10 par 1,000,000 100,000

Additional paid in capital 500,000 50,000

Retained earnings 300,000 150,000

Total liabilities and

stockholders' equity 2,800,000850,000 Copyright Arthur S. Cayanan 2013


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PARENT CORPORATION AND SUBSIDIARYSeparate Balance Sheets (After Business Combination)

December 31, Year 1

Assets Parent Subsidiary

Cash 230,000 50,000Accounts receivable 300,000 100,000Inventories 500,000 200,000Investment in Subsidiary Co.Common

270,000

Plant assets,net of

depreciation

1,500,000 500,000

Total assets 2,800,000 850,000

Liabilities andStockholders' Equity

Accounts payable 250,000 100,000Long term liabilities 750,000 450,000Common stock, P10 par 1,000,000 100,000Additional paid in capital 500,000 50,000Retained earnings 300,000 150,000

Total liabilities and stockholders'

equity

2,800,000 850,000



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PARENT CORPORATION AND SUBSIDIARY COMPANYConsolidation - Line by Line

December 31, Year 1

Parent Subsidiary Consolidated

Cash 230,000 50,000 280,000Accounts receivable 300,000 100,000 400,000Inventories 500,000 200,000 700,000Plant assets, net ofdepreciation

1,500,000 500,000 2,000,000

Accounts payable 250,000 100,000 350,000

Long term liabilities 750,000 450,000 1,200,000



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PARENT CORPO RATION AND SUBSIDIARYConsolidated Balance Sheet

Decem ber 31, Year 1

Assets

Cash 280,000Accounts receivable 400,000Inventories 700,000Plant assets, net ofdepreciation

2,000,000

Total assets 3,380,000

Liabilities andStockholders' Equity

Accounts payable 350,000Long term liabilities 1,200,000

Minority interest in net assets of subsidiary 30,000Common stock, P10 par 1,000,000

Additional paid in capital 500,000Retained earnings 300,000

Total liabilities and stockholders'equity

3,380,000



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If the parent company and the subsidiary areconsidered as one economic entity, then theseinter-company account receivables and payablesmust be eliminated.

IllustrationOn December 31, Yr. 2, Subsidiary Co. borrowed

P100,000 from Parent Corp.

Question:

How will this transaction be reflected in theconsolidated financial statements?



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For inter-company sale of merchandise, profitshould only be recognized when the merchandiseis finally sold to third parties. Any profit relatedwith the unsold merchandise must be eliminated.

The reason for this is that if the parent company andits subsidiary are considered as one economicentity, then inter-company sale of merchandise is

just like a mere transfer of the merchandise fromone division to another.



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In Year 3, Parent Corporation bought P300,000worth of merchandise from Subsidiary Company.Fifty thousand of this amount remained unsold asof the end of the year. This sale had a cost of

P210,000 to Subsidiary Company.

Required:

Determine the effects on gross profit and cost of

sales.



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Nature and extent of any significant restrictions onthe ability of subsidiaries to transfer funds to theparent in the form of cash dividends or to repayloans or advances (PAS 27 par. 41d)

A schedule that shows the effects of any changes ina parent ownerships interest in a subsidiary thatdo not result in a loss of control on the equity

attributable to owners of the parent (PAS 27 par. 41e)



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If control of a subsidiary is lost, the parent shaledisclose the gain or loss, if any, recognized inaccordance with par. 34, and: (i) the portion of thatgain or loss attributable to recognizing any

investment retained in the former subsidiary at itsfair value at the date when control is lost (ii) theline item(s) in the statement of comprehensiveincome in which the gain or loss is recognized (ifnot presented separately in the statement of

comprehensive income) (PAS 27 par 41f)



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The fact that the financial statements are separate financialstatements and that the exemption from consolidation hasbeen used.

A list of significant investments in subsidiaries andproportion of ownership.

A description of the method used to account for significantsubsidiaries

PAS 27 par. 42



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List of companies included in the consolidatedfinancial statements and the percentage ofownership.

Subsidiaries not consolidated and the reasonsfor not consolidating.

Breakdown of the loans, e.g parents loans andsubsidiaries loans.

Goodwill

Separate financial statements of the parentand the subsidiaries



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Nature and amounts of related partytransactions

Segment information

Nature and amounts of guarantees tosubsidiaries

Commitments and other contingentliabilities

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02 - Specialized Industries 2013

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