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Advanced Financial Accounting (AFAR)

Part 2 of 6 - Partnerships, Combinations & Government Accounting

🤝Partnership Accounting

Formation

Capital Contributions:

  • Cash: At face value
  • Non-cash assets: At fair value (agreed value)
  • Liabilities assumed: Deducted from capital

Profit & Loss Distribution

MethodDescription
EquallyDivided equally among partners
Fixed RatioBased on agreed percentages
Capital RatioBased on capital balances (beginning, ending, average)
Interest on Capital% interest on capital, then divide balance
Salaries + InterestSalaries first, interest, then divide remainder

Dissolution & Liquidation

Simple Liquidation

All assets converted to cash at once

  1. Pay liquidation expenses
  2. Pay outside creditors
  3. Pay partners' loans
  4. Distribute remaining to partners

Installment Liquidation

Cash distributed as it becomes available

  • Schedule of Safe Payments
  • Cash Priority Program
  • Assume maximum loss

Deficiency (Negative Capital)

When a partner has a deficiency:

  1. Partner should contribute to cover deficiency
  2. If unable, deficiency is absorbed by solvent partners (P&L ratio)
  3. Solvent partners have right of contribution

🏢Business Combinations (PFRS 3)

Acquisition Method

  1. Step 1: Identify the acquirer (entity that obtains control)
  2. Step 2: Determine the acquisition date
  3. Step 3: Recognize and measure identifiable assets & liabilities at FV
  4. Step 4: Recognize and measure goodwill or bargain purchase gain

Goodwill Calculation

Goodwill = Consideration Transferred + NCI + Previously Held Interest - FV of Net Assets

NCI Measurement Options:

  • Fair Value (Full Goodwill)
  • Proportionate share of FV of net assets (Partial Goodwill)

Bargain Purchase (Negative Goodwill)

When FV of net assets exceeds consideration:

  • Reassess identification and measurement
  • If still excess, recognize as gain in profit or loss

📑Consolidation (PFRS 10)

Control Criteria

An investor controls an investee when:

  • Power over the investee
  • Exposure to variable returns
  • Ability to use power to affect returns

Consolidation Procedures

  1. 1. Combine like items (assets, liabilities, equity, income, expenses)
  2. 2. Eliminate parent's investment and subsidiary's equity
  3. 3. Eliminate intercompany transactions and balances
  4. 4. Recognize goodwill (or bargain purchase gain)
  5. 5. Recognize Non-Controlling Interest (NCI)

Intercompany Eliminations

Intercompany Sales: Eliminate sales and COGS; defer unrealized profit in inventory

Intercompany Loans: Eliminate receivable/payable and interest income/expense

Fixed Asset Transfers: Eliminate gain and adjust depreciation

🏛️Government Accounting (PPSAS)

Philippine Public Sector Accounting Standards

Government accounting uses accrual basis under PPSAS (based on IPSAS).

Financial Statements:

  • Statement of Financial Position
  • Statement of Financial Performance
  • Statement of Changes in Net Assets/Equity
  • Statement of Cash Flows
  • Statement of Comparison of Budget and Actual

Revenue Recognition

  • Exchange: Like PFRS 15 (5-step)
  • Non-Exchange: When conditions satisfied
  • Taxes recognized when taxable event occurs

Property, Plant & Equipment

  • Infrastructure assets
  • Heritage assets
  • Depreciation applies (straight-line)

Key Reminders

Partnership

  • Assets @ agreed/FV on formation
  • P&L ratio default: equally
  • Liquidation: creditors first

Consolidation

  • Control = Power + Returns + Link
  • Full consolidation (line by line)
  • Eliminate intercompany transactions
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