BALIUAG UNIVERSITY

CPA Review Program

Theory of Accounts (FAR & AFAR)

Module 11: Leases, Income Taxes & Employee Benefits LVC

I. Leases (IFRS 16)

 Scope
 IFRS 16 applies to all leases, including subleases, except for:
a. leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources
b. leases of biological assets held by a lessee (IAS 41)
c. service concession arrangements (IFRIC 12)
d. licences of intellectual property granted by a lessor (IFRS 15)
e. rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents
and copyrights (IAS 38)
 A lessee can elect to apply IFRS 16 to leases of intangible assets, other than those items listed above.
 Classification of lease
1. Finance Lease, in general
2. Operating Lease - for the following two types of leases:
a. A lease term of 12 months or less and containing no purchase options
b. The leased asset has a low value
 Identifying a lease
 A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of
time in exchange for consideration.
 Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain
substantially all the economic benefits from that use.
 Where a supplier has a substantive right of substitution throughout the period of use, a customer does not have
a right to use an identified asset. A supplier’s right of substitution is only considered substantive if the supplier
has both the practical ability to substitute alternative assets throughout the period of use and they would
economically benefit from substitution.
 A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. a floor of a building). A
capacity or other portion of an asset that is not physically distinct (e.g. a capacity portion of a fibre optic cable) is
not an identified asset, unless it represents substantially all the capacity such that the customer obtains
substantially all the economic benefits from using the asset.
 Separating components of a contract
 For a contract that contains a lease component and non-lease components, lessees shall allocate the
consideration payable on the basis of the relative stand-alone prices, which shall be estimated if observable
prices are not readily available.
 As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components
from lease components and instead account for all components as a lease.
 Accounting by lessees (Finance Lease)
 Upon lease commencement a lessee recognizes:
a. A right-of-use asset
b. A lease liability
 The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct costs incurred
by the lessee. Adjustments may also be required for lease incentives, payments at or prior to commencement
and restoration obligations or similar items.
 After lease commencement, a lessee shall measure the right-of-use asset using a cost model, unless:
a. The right-of-use asset is an investment property and the lessee fair values its investment property (IAS 40)
b. The right-of-use asset relates to a class of PPE to which the lessee applies revaluation model (IAS 16).
 The lease liability is initially measured at the present value of the lease payments payable over the lease term,
discounted at the (order of priority)
a. Rate implicit in the lease (can be readily determined)
b. Lessee’s incremental borrowing rate
 At the commencement date, the lease payments included in the measurement of the lease liability comprise the
following payments for the right to use the underlying asset during the lease term that are not paid at the
commencement date:
a. Fixed payments, less any lease incentives
b. Variable lease payments that depend on an index or a rate
c. Amounts expected to be payable by the lessee under residual value guarantees.
d. The exercise price of a purchase option if the lessee is reasonably certain to exercise that option

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e. Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to
terminate the lease.
 Variable lease payments that are not included in the measurement of the lease liability are recognized in profit or
loss in the period in which the event or condition that triggers payment occurs, unless the costs are included in
the carrying amount of another asset under another Standard.
 The lease liability is subsequently remeasured to reflect changes in:
a. The lease term (using a revised discount rate)
b. The assessment of a purchase option (using a revised discount rate)
c. The amounts expected to be payable under residual value guarantees (using an unchanged discount rate); or
d. Future lease payments resulting from a change in an index or a rate used to determine those payments (using
an unchanged discount rate).
 The remeasurements are treated as adjustments to the right-of-use asset.
 Lease modifications may also prompt remeasurement of the lease liability unless they are to be treated as
separate leases.
 Accounting by lessors
 Lessors shall classify each lease as an operating lease or a finance lease.
 A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership
of an underlying asset.
 Examples of situations that would normally lead to a lease being classified as a finance lease are:
a. The lease transfers ownership of the asset to the lessee by the end of the lease term.
b. The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair
value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain
that the option will be exercised.
c. The lease term is for the major part of the economic life of the asset, even if title is not transferred.
d. At the inception of the lease, the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset.
e. The leased assets are of a specialized nature such that only the lessee can use them without major
modifications being made.
 Upon lease commencement, a lessor shall recognize assets held under a finance lease as a receivable at an
amount equal to the net investment in the lease.
 A lessor recognizes finance income over the lease term of a finance lease, based on a pattern reflecting a
constant periodic rate of return on the net investment.
 At the commencement date, a manufacturer or dealer lessor recognizes selling profit or loss in accordance with
its policy for outright sales to which IFRS 15 applies.
 A lessor recognizes operating lease payments as income on a straight-line basis or, if more representative of the
pattern in which benefit from use of the underlying asset is diminished, another systematic basis.
 Sale and leaseback transactions
 To determine whether the transfer of an asset is accounted for as a sale an entity applies the requirements of
IFRS 15 for determining when a performance obligation is satisfied.
 If an asset transfer satisfies IFRS 15’s requirements to be accounted for as a sale the seller measures the right-of-
use asset at the proportion of the previous carrying amount that relates to the right of use retained. Accordingly,
the seller only recognizes the amount of gain or loss that relates to the rights transferred to the buyer.
 If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not
market rates, the sales proceeds are adjusted to fair value, either:
 Any below-market terms shall be accounted for as a prepayment of lease payments
 Any above-market terms shall be accounted for as additional financing provided by the buyer-lessor to the
seller-lessee.
 Operating Lease
 Lease payments under an operating lease shall be recognized as an expense on a straight-line basis over the lease
term unless another systematic basis is more representative of the time pattern of the user’s benefit.
 Summary of lease related payments:
Payments Accounting Treatment
Periodic rent Recognized as expense/income on a straight-line basis (Recognize uniform amount
payment even if unequal rental payments)
Contingent rent Additional rental payment based other factors other than passage of time. Recognized
as expense/income for the period as earned/incurred. (i.e. % of sales, price index,
market rate)
Lease bonus Deferred rent to be amortized over lease term
Security deposit Liability by lessor/Receivable by lessee (refundable upon lease expiration)
First month’s rent Recognized as expense/income for the 1st month of rental period.
Last month’s rent Deferred rent

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Payments Accounting Treatment
Leasehold Depreciated over lease term or useful life whichever is shorter. Residual value ignored.
improvement
Initial direct cost Added to the carrying amount of leased asset and recognized as expense over the
lease term by the lessor. (Directly attributable to negotiating and arranging the lease)
Executory costs Lessor normally bears the executory costs as expense. If passed on to lessee, lessee
recognized such payment as expense. (i.e. depreciation of leased asset, maintenance,
insurance and real property taxes)
 Direct Finance Lease – Lessee
 Present Value Computation of Minimum Lease Payments
Particular PV Computation
Periodic rental payment Use PV of ordinary annuity or annuity in advance
Bargain purchase option Use PV of 1
Guaranteed residual value Use PV of 1
Unguaranteed residual value Excluded from PV of minimum lease payments
Executory costs Excluded from PV of minimum lease payments
Contingent rent Excluded from PV of minimum lease payments
Initial direct cost Part of leased asset but not part of lease liability (Valued at cost)
Computation of the PV of lease liability
PV of Gross rentals P xx
Add: PV of Residual value or bargain purchase option xx
Lease liability P xx
Note: Residual value is added only if the leased asset will revert to the lessor. Unguaranteed residual value is
ignored.
Computation of the leased asset
Lease liability as computed above P xx
Add: Initial direct cost xx
Capitalized leased asset P xx
 Depreciation of Leased Asset
Particular Depreciable Amount Life
Ownership not transferred to lessee Amount capitalized as leased Shorter between useful life
(Unguaranteed residual value) asset (residual value ignored) and lease term
Ownership not transferred to lessee Amount capitalized as leased Shorter between useful life
(Guaranteed residual value) asset minus Residual value and lease term
Transfer of title to lessee or with bargain Amount capitalized as leased Useful life
purchase option to be exercised asset minus residual value
 Finance Lease – Lessor (Direct Finance Lease)
Lessor Income Recognized
Financing business Interest income
Computation of periodic rentals
Net investment in the lease* xx
Less: Present value of residual value (guaranteed/unguaranteed) xx
PV of periodic rentals P xx
Divided by PV factor of ordinary annuity/annuity due ÷ xx
Periodic rental P xx
Note: Residual value is ignored if the ownership of leased asset will be transferred to lessee.
*Computation of Net Investment in the Lease
Cost of leased asset P xx
Add: Initial direct cost incurred by lessor xx
Net investment in the lease P xx
Note: Net investment in the lease is the amount credited to lease asset.
 Finance Lease – Lessor (Sales Type Lease)
Lessor Income Recognized
Manufacturer or dealer Manufacturer/dealer’s profit/loss (gross profit) and interest income
Computation of the PV of lease receivable and sales
PV of Gross rentals P xxx

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Add: PV of Residual value or bargain purchase option xxx
Lease receivable/Sales P xxx
Note: Residual value is added only if the leased asset will revert to the lessor. For sales computation unguaranteed
residual value is ignored.
Computation of Cost of Goods Sold
Cost of leased asset P xxx
Add: Initial direct cost (if any) xxx
Cost of Goods sold P xxx
Note: PV of unguaranteed residual value is deducted from cost of goods sold.

II. Income Taxes (IAS 12)

 Current Tax
 Current tax for the current and prior periods is recognized as a liability to the extent that it has not yet been
settled, and as an asset to the extent that the amounts already paid exceed the amount due. The benefit of a tax
loss which can be carried back to recover current tax of a prior period is recognized as an asset.
 Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from) taxation
authorities, using the rates/laws that have been enacted or substantively enacted by the balance sheet date.
 Permanent and temporary difference
 Permanent difference are items included in either accounting income or taxable income but not in both.
 Permanent differences pertain to nontaxable revenue and nondeductible expenses. Examples are:
 Interest income on deposits (subject to final tax)
 Dividends income (subject to final tax)
 Life insurance premium (expense for financial reporting but not deductible for tax purposes)
 Tax penalties, surcharges and fines (nondeductible)
 Temporary differences include timing difference. Items of expenses and revenues are included in both accounting
income and tax income, but at different periods.
a. Taxable temporary difference creates deferred tax liability
b. Deductible temporary difference creates deferred tax asset
 Tax bases
 The tax base of an item is crucial in determining the amount of any temporary difference, and effectively repre-
sents the amount at which the asset or liability would be recorded in a tax-based balance sheet. IAS 12 provides
the following guidance on determining tax bases:
 Assets. The tax base of an asset is the amount that will be deductible against taxable economic benefits from
recovering the carrying amount of the asset. Where recovery of an asset will have no tax consequences, the tax
base is equal to the carrying amount.
 Revenue received in advance. The tax base of the recognized liability is its carrying amount, less revenue that
will not be taxable in future periods.
 Other liabilities. The tax base of a liability is its carrying amount, less any amount that will be deductible for tax
purposes in respect of that liability in future periods.
 Unrecognized items. If items have a tax base but are not recognized in the statement of financial position, the
carrying amount is nil.
 Tax bases not immediately apparent. If the tax base of an item is not immediately apparent, the tax base
should effectively be determined in such as manner to ensure the future tax consequences of recovery or set-
tlement of the item is recognized as a deferred tax amount.
 Consolidated financial statements. In consolidated financial statements, the carrying amounts in the consoli-
dated financial statements are used, and the tax bases determined by reference to any consolidated tax return
(or otherwise from the tax returns of each entity in the group).
 Deferred tax liability and deferred tax asset
Deferred tax Situation Temporary differences
Deferred tax  Accounting income is higher than  Revenue and gains included in accounting income for
liability taxable income current period but taxable in the future.
 Carrying amount of asset is higher  Expenses and losses deducted from taxable income but
than its tax base deductible for accounting purposes in the future.
 Carrying amount of liability is
lower than tax base
Deferred tax  Taxable income is higher than  Revenue and gains included in taxable income for
asset accounting income current period but included in accounting income in the
 Tax base of assets is higher than its future.
carrying amount  Expenses and losses deducted from accounting income
 Tax base of liabilities is lower than but deductible for tax purposes in the future.
carrying amount of liability.
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 Calculation of deferred taxes
 Deferred tax assets and deferred tax liabilities can be calculated using the following formulae:
Temporary difference = Carrying amount – Tax base
Deferred tax asset/liability = Temporary difference x Tax rate
Deferred tax expense = Increase in deferred tax liability – Increase in deferred tax asset
Tax expense = Current tax expense + Deferred tax expense
 The following formula can be used in the calculation of deferred taxes arising from unused tax losses or unused
tax credits:
Deferred tax asset = Unused tax loss or unused tax credits x Tax rate
 Presentation
 Deferred taxes shall be classified as noncurrent asset or liability, as the case may be. Deferred taxes shall not be
discounted.
 Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if the entity
has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by the
same taxing authority on the same entity or different entities that intend to realize the asset and settle the
liability at the same time.
 Recognition of deferred tax liabilities
 The general principle in IAS 12 is that a deferred tax liability is recognized for all taxable temporary differences.
There are three exceptions to the requirement to recognize a deferred tax liability, as follows:
 Liabilities arising from initial recognition of goodwill
 Liabilities arising from the initial recognition of an asset/liability other than in a business combination which,
at the time of the transaction, does not affect either the accounting or the taxable profit.
 Liabilities arising from temporary differences associated with investments in subsidiaries, branches, and asso-
ciates, and interests in joint arrangements, but only to the extent that the entity is able to control the timing
of the reversal of the differences and it is probable that the reversal will not occur in the foreseeable future.
 Recognition of deferred tax assets
 A deferred tax asset is recognized for deductible temporary differences, unused tax losses and unused tax credits
to the extent that it is probable that taxable profit will be available against which the deductible temporary differ-
ences can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability other
than in a business combination which, at the time of the transaction, does not affect accounting profit or taxable
profit.
 Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, branches and
associates, and interests in joint arrangements, are only recognized to the extent that it is probable that the
temporary difference will reverse in the foreseeable future and that taxable profit will be available against which
the temporary difference will be utilized.
 The carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced to the
extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all
of that deferred tax asset to be utilized.
 A deferred tax asset is recognized for an unused tax loss carry forward or unused tax credit if, and only if, it is con-
sidered probable that there will be sufficient future taxable profit against which the loss or credit carry forward
can be utilized.

III. Employee Benefits (IAS 19)

 Classification of employee benefits
1. Short-term employee benefits
2. Termination benefits
3. Other long-term employee benefits
4. Post-employment benefits
 Short-term employee benefits
 Short-term employee benefits include:
a. Wages, salaries and social security contributions
b. Paid annual leave and paid sick leave
c. Profit-sharing and bonuses
d. Non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for
current employees.
 Recognition and measurement
 When an employee has rendered service to an entity during an accounting period, the entity shall recognize
the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.
 Accounting treatment:

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a. As a liability (accrued expense), after deducting any amount already paid. If the amount already paid
exceeds the undiscounted amount of the benefits, an entity shall recognize that excess as an asset (prepaid
expense) (to the extent that the prepayment will lead to a reduction in future payments or a cash refund).
b. As an expense, unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset
(i.e. example, IAS 2 IAS 16).
 Short-term paid absences
 An entity shall recognize the expected cost of short-term employee benefits in the form of paid absences as
follows:
a. Accumulating paid absences
 Accumulating paid absences are those that are carried forward and can be used in future periods if
the current period’s entitlement is not used in full.
 Accumulating paid absences may be either be:
i. Vesting – Employees are entitled to a cash payment for unused entitlement on leaving the entity.
ii. Non-vesting – When employees are not entitled to a cash payment for unused entitlement on
leaving the entity.
b. Non-accumulating paid absences
 Do not carry forward; they lapse if the current period’s entitlement is not used in full and do not entitle
employees to a cash payment for unused entitlement on leaving the entity.
 An entity recognizes no liability or expense until the time of the absence, because employee service
does not increase the amount of the benefit.
 Profit-sharing and bonus plans
 An entity shall recognize the expected cost of profit-sharing and bonus payments when, and only when:
a. The entity has a present legal or constructive obligation to make such payments as a result of past events
b. A reliable estimate of the obligation can be made.
 Under some profit-sharing plans, employees receive a share of the profit only if they remain with the entity for
a specified period.
 Such plans create a constructive obligation as employees render service that increases the amount to be paid
if they remain in service until the end of the specified period.
 The measurement of such constructive obligations reflects the possibility that some employees may leave
without receiving profit-sharing payment.
 Termination benefits
 A termination benefit liability is recognized at the earlier of the following dates:
a. When the entity can no longer withdraw the offer of those benefits
b. When the entity recognizes costs for a restructuring under IAS 37 which involves the payment of termination
benefits.
 Termination benefits are measured in accordance with the nature of employee benefit, i.e. as an enhancement of
other post-employment benefits, or otherwise as a short-term employee benefit or other long-term employee
benefit.
 Other long-term benefits
 IAS 19 prescribes a modified application of the post-employment benefit model described for other long-term
employee benefits.
 The recognition and measurement of a surplus or deficit in another long-term employee benefit plan is consistent
with the requirements outlined in IAS 19.
 Service cost, net interest and remeasurements are all recognized in profit or loss (unless recognized in the cost of
an asset under another IFRS), i.e. when compared to accounting for defined benefit plans, the effects of remea-
surements are not recognized in other comprehensive income.
 Post-employment benefits
 Post-employment benefits are formal or informal arrangements.
 Post-employment benefits include items such as the following:
 Retirement benefits (e.g. pensions and lump sum payments on retirement)
 Other post-employment benefits, such as post-employment life insurance and post-employment medical
care.
 Classification of post-employment benefit plans
1. Defined contribution plans (i.e. SSS, GSIS)
2. Defined benefit plans (i.e. R.A. 7641)
3. Multi-employer plans

 Accounting for defined contribution plans

 Recognition and measurement
When an employee has rendered service to an entity during a period, the entity shall recognize the contribution
payable to a defined contribution plan in exchange for that service:

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1. As a liability (accrued expense), after deducting any contribution already paid. If the contribution already
paid exceeds the contribution due for service before the end of the reporting period, an entity shall recognize
that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a
reduction in future payments or a cash refund.
2. As an expense, unless another IFRS requires or permits the inclusion of the contribution in the cost of an
asset.
 When contributions to a defined contribution plan are not expected to be settled wholly before twelve months
after the end of the annual reporting period in which the employees render the related service, they shall be
discounted using the discount rate.
 An entity shall disclose the amount recognized as an expense for defined contribution plans.
 Accounting for defined benefit plans
 Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity,
and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from
which the employee benefits are paid.
 The entity is, in substance, underwriting the actuarial and investment risks associated with the plan.
Consequently, the expense recognized for a defined benefit plan is not necessarily the amount of the
contribution due for the period.
 Steps in accounting by an entity for defined benefit plans
1. Determining the deficit or surplus. This involves:
i. Using an actuarial technique, the projected unit credit method, to make a reliable estimate of the ultimate
cost to the entity of the benefit that employees have earned in return for their service in the current and
prior periods.
ii. Discounting that benefit in order to determine the present value of the defined benefit obligation and the
current service cost.
iii. Deducting the fair value of any plan assets from the present value of the defined benefit obligation.
2. Determining the amount of the net defined benefit liability (asset) as the amount of the deficit or surplus
determined in adjusted for any effect of limiting a net defined benefit asset to the asset ceiling.
3. Determining amounts to be recognized in profit or loss.
4. Determining the remeasurements of the net defined benefit liability (asset), to be recognized in other
comprehensive income.
 Summary of defined benefit costs
Employee Benefit Expense in P/L Remeasurements in OCI
a. Service cost (past and current) a. Actuarial gains and losses
b. Settlement gain/loss b. Return on plan assets, excluding amounts included in net interest.
c. Net interest (interest expense net of c. Any change in the effect of the asset ceiling, excluding amounts
interest income included in net interest.
 Present value of defined benefit obligations and current service cost
 Measurement of present value
a. Apply an actuarial valuation method
b. Attribute benefit to periods of service
c. Make actuarial assumptions
 Actuarial valuation method
- An entity shall use the projected unit credit method to determine the present value of its defined
benefit obligations and the related current service cost and, where applicable, past service cost.
- The projected unit credit method (sometimes known as the accrued benefit method pro-rated on
service or as the benefit/years of service method) sees each period of service as giving rise to an
additional unit of benefit entitlement and measures each unit separately to build up the final obligation.
- This Standard encourages, but does not require, an entity to involve a qualified actuary in the
measurement of all material post-employment benefit obligations.
 Other considerations in accounting for defined benefit plan
 Past service cost is the change in the present value of the defined benefit obligation resulting from a plan
amendment or curtailment.
 Gains and losses on settlement is the difference between the present value of the defined benefit
obligation being settled and the settlement price, including any plan assets transferred and any
payments made directly by the entity in connection with the settlement.
 The fair value of any plan assets is deducted from the present value of the defined benefit obligation in
determining the deficit or surplus.
 Remeasurements of the net defined benefit liability (asset) recognized in other comprehensive income
shall not be reclassified to profit or loss in a subsequent period. However, the entity may transfer those
amounts recognized in other comprehensive income within equity.
 Net interest on the net defined benefit liability (asset) shall be determined by multiplying the net
defined benefit liability (asset) by the discount rate, both as determined at the start of the annual
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reporting period, taking account of any changes in the net defined benefit liability (asset) during the
period as a result of contribution and benefit payments.
 Computations Related to Plan Assets and Benefit Obligation
Fair value of plan assets (FVPA) xx PBO, beg. xx
Projected benefit obligation (PBO) (xx) Current service cost xx
Prepaid/(Accrued) benefit costs xx Past service cost xx
FVPA, beg. xx Interest expense xx
Contribution to the plan xx Actuarial loss/(gain) xx
Actual return/(loss) on plan asset xx Benefits paid* (xx)
Benefits paid* (xx) PBO, end. xx
FVPA, end. xx
*Benefits paid = Settlement price on defined benefit *Benefits paid = PV of defined benefit obligation
obligation settled
 Computations Related to Defined Benefit Costs (P/L and OCI)
Computations Related to Defined Benefit Costs (P/L and OCI)
Current service cost xx Remeasurement gain/loss – plan assets xx
Past service cost xx Actuarial gain/loss xx
Interest expense on PBO xx Net remeasurement gain/loss – OCI xx
Interest income on FVPA (xx) Actual return/loss on plan assets xx
Settlement loss/(gain) xx Interest income of FVPA (xx)
Employee benefit expense xx Remeasurement gain/(loss)-plan assets xx
Interest expense = PBO, beg. x Discount rate PBO – actual xx
Interest income = FVPA, beg. x Discount rate PBO – estimated (xx)
Actuarial (gain)/loss‡ xx
PV of defined benefit obligation settled xx Employee benefit expense xx
Settlement price on benefit obligation (xx) Net remeasurement loss/(gain) – OCI xx
Settlement gain/(loss) xx Total/Net defined benefit costs xx
 Asset ceiling
 IAS 16 provides that the surplus in a defined benefit plan must not exceed the asset ceiling determined by using
the discount rate in the measurement of the defined benefit obligation.
 Interest expense on effects of asset ceiling is included in the computation of employee benefit expense

IV. Accounting and Reporting by Retirement Benefit Plans (IAS 26)

 Objective of IAS 26
 The objective of IAS 26 is to specify measurement and disclosure principles for the reports of retirement benefit
plans.
 All plans should include in their reports a statement of changes in net assets available for benefits, a summary of
significant accounting policies and a description of the plan and the effect of any changes in the plan during the
period.
 Defined contribution plans
 The report of a defined contribution plan should contain a statement of net assets available for benefits and a
description of the funding policy.
 Defined benefit plans
 The report of a defined benefit plan should contain either:
a. a statement that shows the net assets available for benefits, the actuarial present value of promised retire-
ment benefits (distinguishing between vested benefits and non-vested benefits) and the resulting excess
or deficit; or
b. a statement of net assets available for benefits, including either a note disclosing the actuarial present
value of promised retirement benefits (distinguishing between vested benefits and non-vested benefits) or
a reference to this information in an accompanying actuarial report.
 Other considerations
 If an actuarial valuation has not been prepared at the date of the report of a defined benefit plan, the most
recent valuation should be used as a base and the date of the valuation disclosed.
 The actuarial present value of promised retirement benefits should be based on the benefits promised under the
terms of the plan on service rendered to date, using either current salary levels or projected salary levels, with
disclosure of the basis used. The effect of any changes in actuarial assumptions that have had a significant effect
on the actuarial present value of promised retirement benefits should also be disclosed.
 Retirement benefit plan investments should be carried at fair value. For marketable securities, fair value means
market value. If fair values cannot be estimated for certain retirement benefit plan investments, disclosure should be
made of the reason why fair value is not used.
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Multiple Choice Questions

1. Defined by IFRS 16 as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a
period of time in exchange for consideration.
A. Lease B. Rent C. Operating lease D. Finance lease
2. Defined by IFRS 16 as a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying
asset.
A. Lease B. Rent C. Operating lease D. Finance lease
3. Defined by IFRS 16 as the earlier of the date of a lease agreement and the date of commitment by the parties to the
principal terms and conditions of the lease.
A. Commencement date of the lease C. Contract date of the lease
B. Inception date of the lease D. Term of the lease
4. Defined by IFRS 16 as payments made by a lessee to a lessor for the right to use an underlying asset during the lease term,
excluding variable lease payments.
A. Optional lease payments B. Fixed payments C. Initial direct costs D. Lease incentives
5. Defined by IFRS 16 as Payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption
by a lessor of costs of a lessee.
A. Contingent rents B. Fixed payments C. Initial direct costs D. Lease incentives
6. Defined by IFRS 16 as the sum of the lease payments receivable by a lessor under a finance lease and any unguaranteed
residual value accruing to the lessor.
A. Net investment in the lease B. Lease payments C. Gross investment in the lease D. Fixed payments
7. Defined by IFRS 16 as the rate of interest that causes the present value of the lease payments; and the unguaranteed
residual value to equal the sum of the fair value of the underlying asset and any initial direct costs of the lessor.
A. Effective interest rate in the lease C. Interest rate implicit in the lease
B. Market interest rate D. Lessee’s incremental borrowing rate
8. Defined by IFRS 16 as the transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a
third party, and the lease (‘head lease’) between the head lessor and lessee remains in effect.
A. Right-of-use asset B. Lease modification C. Short-term lease D. Sublease
9. A lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another
systematic basis for:
I. Short-term leases
II. Leases for which the underlying asset is of low value
III. Leases with unguaranteed residual value
A. I only B. I and II C. I, II and III D. II and III
10. At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a
lease if the contract conveys the
A. Right to use an identified asset for a period of time in exchange for consideration.
B. Right to control the use of an identified asset for a period of time in exchange for consideration.
C. Right to control the use of an identified asset.
D. Right to purchase an asset at the end of the lease term.
11. Which of the following statement regarding separating the components of a contract of lease is incorrect?
A. For a contract that contains a lease component and additional lease and non-lease components, lessees shall allocate
the consideration payable on the basis of the relative stand-alone prices.
B. A lessee may elect, by class of underlying asset, not to separate non-lease components from lease components and
instead account for all components as a lease.
C. Lessors shall allocate consideration in accordance with IFRS 16.
D. None of the foregoing
12. The cost of the right-of-use asset does not include
A. The amount of the initial measurement of the lease liability
B. Any lease payments made at or before the commencement date, less any lease incentives received
C. Any initial direct costs incurred by the lessor.
D. An estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset.
13. After lease commencement, a lessee shall measure the right-of-use asset
A. Using cost model regardless of the classification of the right-of-use asset
B. Using cost model unless it is an investment property at fair value or it belongs to a class of PPE to which the lessee
applies revaluation model.
C. Using revaluation model unless it is an investment property at fair value.
D. Always at fair value.
14. The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted
using
A. Incremental borrowing rate or rate implicit in the lease whichever is lower.
B. Incremental borrowing rate if determinable, otherwise using rate implicit in the lease.
C. Rate implicit in the lease if determinable, otherwise using incremental borrowing rate.

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D. Incremental borrowing rate or rate implicit in the lease whichever is higher.
15. Lessors shall classify each lease as
A. Operating lease B. Finance lease C. Either A or B D. Neither A nor B
16. At the commencement date, the lease payments included in the measurement of the lease liability comprise the following
payments for the right to use the underlying asset, except.
A. Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the
commencement date.
B. Amounts expected to be payable by the lessee under residual value guarantees.
C. Fixed payment, plus any lease incentives receivable
D. Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate
the lease.
17. Which of the following lease income will be recognized by the lessor under finance lease?
Interest income Gross profit
A. Sales type lease Yes Yes
B. Direct finance lease Yes Yes
C. Sales type lease No Yes
D. Direct finance lease No Yes
18. Under direct finance lease, when the fair value of the leased asset is lower than the residual value at the time the asset is
returned, loss on finance lease
A. Shall be recognized when the residual value is either guaranteed or unguaranteed.
B. Not recognized whether residual value is guaranteed or unguaranteed.
C. Shall be recognized when the residual value is guaranteed.
D. Shall be recognized when the residual value is unguaranteed.
19. Under sales type lease, net investment in the lease is equals to the
A. Present value of the gross rentals plus present value of the guaranteed residual value.
B. Present value of the gross rentals plus present value of the residual value, whether guaranteed or unguaranteed.
C. Present value of the gross rentals plus present value of the unguaranteed residual value.
D. Present value of the gross rentals and present value of residual value is ignored.
20. Defined by IAS 12 as the amounts of income taxes recoverable in future periods in respect of deductible temporary
differences, the carryforward of unused tax losses and the carryforward of unused tax credits.
A. Tax expense B. Current tax C. Deferred tax liabilities D. Deferred tax assets
21. Defined by IAS 12 as the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a
period.
A. Tax expense B. Current tax C. Deferred tax liabilities D. Deferred tax assets
22. Defined by IAS 12 as the amounts of income taxes payable in future periods in respect of taxable temporary differences.
A. Tax expense B. Current tax C. Deferred tax liabilities D. Deferred tax assets
23. Defined by IAS 12 as temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of
future periods when the carrying amount of the asset or liability is recovered or settled.
A. Taxable temporary differences C. Current tax
B. Deductible temporary differences D. Tax base
24. Deferred tax expense is equal to
A. Increase in deferred tax liability less increase in deferred tax asset
B. Increase in deferred tax liability plus increase in deferred tax asset.
C. Increase in deferred tax liability
D. Increase in deferred tax asset
25. Deferred tax liability is recognized for all
A. Permanent difference C. Taxable temporary difference
A. Temporary difference D. Deductible temporary difference
26. Which of the following differences would result in future taxable amounts?
A. Expenses or losses that are deductible after they are recognized in accounting income.
B. Revenues or gains that are taxable before they are recognized in accounting income.
C. Expenses or losses that are deductible before they are recognized in accounting income.
D. Revenues or gains that are recognized in accounting income but are never included in taxable income.
27. A temporary difference which would result in deferred tax liability?
A. Interest revenue on bonds investment.
B. Accrual of warranty expense
C. Excess tax depreciation over accounting depreciation
D. Subscription received in advance
28. A temporary difference which would result in a deferred tax asset?
A. Tax, penalty or surcharges
B. Dividend received on equity securities
C. Excess tax depreciation over accounting depreciation
D. Rent received in advance included in taxable income but deferred for accounting purposes.
29. A temporary difference which would result in a deferred tax liability?
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A. Accrual of estimated litigation loss
B. Provision for uncollectible accounts
C. Unearned subscription revenue taxable when collected
D. An installment sales included in accounting income at point of sale and taxable when collected
30. Classification of deferred tax shall be
Deferred tax liability Deferred tax asset
A. Current Current
B. Noncurrent Noncurrent
C. Noncurrent Current
D. Current Noncurrent
31. Which of the following describes deferred tax asset?
A. Tax base of assets is higher than its carrying amount.
B. Accounting income is higher than taxable income
C. Expenses and losses deducted from taxable income but deductible for accounting purposes in the future.
D. Revenue and gains included in accounting income for current period but taxable in the future.
32. For deferred tax accounting, which of the following will have a carrying amount of zero?
A. Revenue received in advance
B. Case when tax bases not immediately apparent
C. Unrecognized items with tax base
D. All of the foregoing
33. Which of the following would not require recognition of a deferred tax liability?
A. Liabilities arising from initial recognition of goodwill.
B. Liabilities arising from temporary differences associated with investments in subsidiaries, branches, and associates,
and interests in joint arrangements.
C. Liabilities arising from the initial recognition of an asset/liability other than in a business combination which, at the
time of the transaction, does not affect either the accounting or the taxable profit.
D. All of the foregoing
34. A deferred tax asset is recognized for the following instances, except?
A. Deductible temporary differences C. Taxable temporary differences
B. Unused tax losses D. Unused tax credits
35. Tax expense to be recognized for the current period includes
A. Current tax expense C. Current tax plus deferred tax expense
B. Deferred tax expense D. Current tax expense minus deferred tax expense
36. Which of the following guidance on measuring deferred taxes is incorrect?
A. Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets or settles its liabili-
ties, the measurement of deferred taxes is consistent with the way in which an asset is recovered or liability
settled.
B. Where deferred taxes arise from revalued non-depreciable assets, deferred taxes reflect the tax consequences of
selling the asset.
C. Deferred taxes arising from investment property measured at fair value reflect the rebuttable presumption that
the investment property will not be recovered through sale.
D. If dividends are paid to shareholders, and this causes income taxes to be payable at a higher or lower rate, or the
entity pays additional taxes or receives a refund, deferred taxes are measured using the tax rate applicable to undis-
tributed profits.
37. Discounting of tax expense is allowed for
A. Current tax expense B. Deferred tax expense C. Both A and B D. None of the foregoing
38. Deferred tax assets and deferred tax liabilities may be offset in the statement of financial position if
A. They qualify to be recognized as current assets and current liabilities, respectively.
B. The entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by
the same taxing authority.
C. The entity expects that the temporary difference will reverse within a period of 12 months or less.
D. The entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by
different taxing authority.
39. Defined by IAS 19 as all forms of consideration given by an entity in exchange for service rendered by employees or for
the termination of employment.
A. Employee benefits B. Post-employment benefits C. Short-term employee benefits D. Termination benefits
40. Defined by IAS 19 as employee benefits provided in exchange for the termination of an employee’s employment as a
result of an entity’s decision to terminate an employee’s employment before the normal retirement date; or an
employee’s decision to accept an offer of benefits in exchange for the termination of employment.
A. Employee benefits B. Post-employment benefits C. Short-term employee benefits D. Termination benefits
41. Defined by IAS 19 as assets which comprise those assets held by a long-term employee benefit fund and qualifying
insurance policies.
A. Assets ceiling B. Deficit or surplus C. Plan assets D. Net defined benefit assets

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42. Defined by IAS 19 as the present value of any economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.
C. Present value of a defined benefit obligation C. Fair value of a defined benefit obligation
D. Assets ceiling D. Deficit or surplus
43. Defined by IAS 19 as post-employment benefit plans under which an entity pays fixed contributions into a separate entity
(a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient
assets to pay all employee benefits relating to employee service in the current and prior periods.
A. Defined benefit plans B. Defined contribution plans C. Multi-employer plans D. Retirement benefit plans
44. Defined by IAS 19 as post-employment benefit plans that pool the assets contributed by various entities that are not
under common control; and use those assets to provide benefits to employees of more than one entity, on the basis that
contribution and benefit levels are determined without regard to the identity of the entity that employs the employees.
A. Defined benefit plans B. Defined contribution plans C. Multi-employer plans D. Retirement benefit plans
45. Defined by IAS 26 as benefits, the rights to which, under the conditions of a retirement benefit plan, are not conditional
on continued employment.
A. Retirement benefits B. Defined benefits C. Funding D. Vested benefits
46. Defined by IAS 26 as arrangements whereby an entity provides benefits for employees on or after termination of service
(either in the form of an annual income or as a lump sum) when such benefits, or the contributions towards them, can be
determined or estimated in advance of retirement from the provisions of a document or from the entity’s practices.
A. Funding B. Defined benefits C. Retirement benefits D. Vested benefits
47. Which of the following employee benefits is outside the scope of IAS 19?
A. Short-term employee benefits C. Share-based payment benefits
B. Post-employment benefits D. Termination benefits
48. Short-term employee benefits include
A. Wages and salaries C. Non-monetary benefits
B. Profit-sharing and bonuses D. All of the foregoing
49. Accumulating paid absences (Choose the incorrect one).
A. An entity recognizes no liability or expense until the time of the absence, because employee service does not increase
the amount of the benefit.
B. Accumulating paid absences are those that are carried forward and can be used in future periods if the current
period’s entitlement is not used in full.
C. Accumulating paid absences may be either be vesting or non-vesting.
D. An entity shall measure the expected cost of accumulating paid absences as the additional amount that the entity
expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period.
50. Under defined contribution plans, actuarial risk and investment risk fall, in substance, on the
A. Entity B. Employee C. Either A or B D. Neither A nor B
51. Under defined contribution plans, if the contribution already paid exceeds the contribution due for service before the end
of the reporting period, an entity shall recognize that excess as _____________ to the extent that the prepayment will
lead to, for example, a reduction in future payments or a cash refund.
A. Prepaid expense B. Loss – profit and loss C. Accrued expense D. Loss – OCI
52. Defined benefit plans (Choose the incorrect one.)
A. The entity is, in substance, underwriting the actuarial and investment risks associated with the plan.
B. Consequently, the expense recognized for a defined benefit plan is not necessarily the amount of the contribution
due for the period.
C. Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity, and
sometimes its employees, into an entity, or fund.
D. None of the foregoing.
53. The actuarial technique to determine the present value of its defined benefit obligations and the related current service
cost and, where applicable, past service cost.
A. Corridor method B. Projected unit credit C. Expected value D. Regression method
54. Amounts under post-employment benefits to be recognized in profit or loss, except
A. Current service cost
B. Net interest on the net defined benefit liability (asset)
C. Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit
liability (asset).
D. Past service cost
55. Amounts under post-employment benefits to be recognized in other comprehensive income
A. Gain or loss on settlement B. Actuarial gains and losses C. Both A and B D. Neither A nor B
56. When an entity has a surplus in a defined benefit plan, it shall measure the net defined benefit asset at
A. The surplus in the defined benefit plan
B. The asset ceiling, determined using the discount rate in post-employment benefits.
C. Lower between A and B.
D. Higher between A and B
57. Which of the following statements is incorrect regarding actuary as used in defined benefit plan?

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A. The projected unit credit method sees each period of service as giving rise to an additional unit of benefit entitlement
and measures each unit separately to build up the final obligation.
B. An entity shall determine its mortality assumptions by reference to its best estimate of the mortality of plan members
both during and after employment.
C. The rate used to discount post-employment benefit obligations (both funded and unfunded) shall be determined by
reference to market yields at the end of the reporting period on high quality corporate bonds.
D. IAS 19 requires an entity to involve a qualified actuary in the measurement of all material post-employment benefit
obligations.
58. If an employee’s service in later years will lead to a materially higher level of benefit than in earlier years, an entity shall
attribute benefit
A. On a straight-line basis B. Using plan benefit formula C. Lower between A & B D. Higher between A & B
59. The change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment.
A. Current service cost C. Gains/losses on settlement
B. Past service cost D. Fair value of plan assets
60. The difference between the present value of the defined benefit obligation being settled, as determined on the date of
settlement; and the settlement price, including any plan assets transferred and any payments made directly by the entity
in connection with the settlement.
A. Current service cost B. Past service cost C. Gains and losses on settlement D. Fair value of plan assets
61. It is deducted from the present value of the defined benefit obligation in determining the deficit or surplus.
A. Current service cost B. Past service cost C. Gains and losses on settlement D. Fair value of plan assets
62. The components of defined benefits cost do not include
A. Service cost
B. net interest on the net defined benefit liability (asset)
C. Remeasurements of the net defined benefit liability (asset))
D. Annual contribution to the fund
63. Remeasurements of the net defined benefit liability (asset) recognized in other comprehensive income
A. Shall be reclassified to profit or loss in a subsequent period
B. The entity may transfer those amounts recognized in other comprehensive income within equity
C. May be transferred to asset or liability account.
D. None of the foregoing.
64. This shall be determined by multiplying the net defined benefit liability (asset) by the discount rate
A. Net interest B. Net asset C. Gains and losses on settlement D. Remeasurements
65. For long-term benefits, the following are recognized in profit or loss, except
A. Net interest B. Service cost C. Remeasurements D. None of the foregoing
66. Under IAS 26, if an actuarial valuation has not been prepared at the date of the report of a defined benefit plan:
A. Actuarial valuation should be used as a base and the date of the valuation disclosed.
B. Fair market valuation should be used and the actuarial valuation disclosed.
C. The most recent valuation should be used as a base and the date of the valuation disclosed.
D. All the choices are correct.
67. Retirement benefit plan investments should be carried at
A. Present value B. Fair value C. Future value D. Net realizable value

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“Never be lazy, but work hard and serve the Lord enthusiastically. Rejoice in our confident hope. Be
patient in trouble, and keep on praying.” Romans 12:11-12

“Strive not to be a success, but rather to be of value.” Albert Einstein

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