ST.

VINCENT’S COLLEGE INCORPORATED

Padre Ramon St., Dipolog City
Philippines

COLLEGE OF ACCOUNTING EDUCATION

CFAS 11 – Conceptual Framework and Accounting Standards

COURSE INFORMATION
Course Number CFAS 11 Course Title Conceptual Framework and Accounting Standards
Course Code AE Instructor Mark D. Calaguian, CPA-MBA, CTT
Course Credit 3 units Email Address [email protected] Consultation Hours By appointment
School Year 2021-2022 Class Schedule To be arranged Room TBA
COURSE DESCRIPTION
This course is a study of the accounting function, its role in society, and the theory that provides the foundation for modern financial accounting. It deals with the
conceptual framework for financial reporting, the Philippine Financial Reporting Standards, the Philippine Accounting Standards, and how these standards affect
financial accounting and reporting for business entities. This course explains the standard-setting process, the authority attached to the standards, and the body authorized
to promulgate them. It is also designed to discuss the recognition, measurement and derecognition principles as well as the pertinent disclosure requirements of the
standards. The discussion focuses on the currently effective pronouncements by Financial Reporting Standards Council, Accounting Standards Council, and Philippine
Interpretations Committee.
COURSE LEARNING OUTCOMES
After completing the course students can:
• Gain appreciation of the financial reporting standards, particularly their development, application and impact to the business environment;
• Demonstrate knowledge, skills and positive attitudes to the concepts and principles of financial reporting for businesses as applied to real life situations;
• Demonstrate knowledge in identifying the appropriate financial reporting standards to apply to specific business transactions and other events; and
• Demonstrate skills in applying the principles of the financial reporting standards through problem solving.
TEACHING STRATEGIES / DELIVERY MODES
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Online teleconferencing lecture/discussion is There will be no classroom meet-ups. Classroom lecture and discussion meet-ups is
conducted only once a week for MWF Classes and conducted only once a week for MWF Classes and
once a week for TThS classes with two (2) hours per However, web content resources are provided at once a week for TThS classes with two (2) hours per
meeting. regular intervals. meeting.
Self-directed learning and/or home assignments are to Assessment and evaluation will be done at regular Self-directed learning and/or home assignments are to
be spent with allocated two (2) hours per week. intervals depending on the promptness of the be spent with allocated two (2) hours per week.
compliance of students to every assessment given.
The remaining two (2) hours per week is to be devoted The remaining two (2) hours per week is to be devoted
in checking the materials submitted/sent by the in checking the materials submitted/sent by the
students and giving feedbacks, discussions, and students and giving feedbacks, discussions, and
clarifications. clarifications.

GRADING SYSTEM
Blended (Asynchronous
Description Online (Hybrid Model Offline (Flex Model)
Model)

Output Reports (Case Studies, Research Paper, FS/BP) 15.0% 15.0% 15.0%
Quizzes/Assignments 35.0% 35.0% 35.0%
Preliminary Term Major Examination 12.5% 12.5% 12.5%
Midterm Major Examination 12.5% 12.5% 12.5%
Semi-Final Major Examination 12.5% 12.5% 12.5%
Final Term Major Examination 12.5% 12.5% 12.5%
Total 100.0% 100.0% 100.0%

COURSE OUTLINE
Preliminary Term Midterm Semi-Final Term Final Term

Week 1 Week 3 Week 5 Week 7

• Overview of Accounting • PAS 7 – Statement of Cash • PAS 32 – Financial Instruments: • PFRS 15 – Revenue Contracts
• Conceptual Framework for Flows Presentation with Customers
Financial Reporting • PAS 2 – Inventories • PFRS 9 – Financial Instruments • PAS 8 – Accounting Policies,
• PAS 41 – Agriculture • PAS 28 – Investments in Changes in Accounting
Week 2 • PAS 16 – Property, Plant and Associates and Joint Ventures Estimates and Errors
• PAS 1 – Presentation of Equipment • PFRS 7 – Financial Instruments: • PAS 34 – Interim Financial
Financial Statements • PAS 23 Borrowing Costs Disclosures Reporting
• PAS 37 – Provisions, Contingent • PFRS 8 – Segment Reporting
Liabilities and Contingent Assets Week 4 Week 6
• PAS 40 – Investment Property • PFRS 16 – Leases
 • PAS 10 – Events after the • PAS 20 – Accounting for • PAS 38 – Intangible Assets Week 8
Reporting Period Government Grants and • PAS 36 – Impairment of Assets • PAS 12 – Income Taxes
• PAS 24 – Related Party Disclosure of Government • PFRS 13 – Fair Value • PAS 19R – Employee Benefits
Disclosures Assistance Measurement • PFRS 2 – Share-Based Payment
• PFRS 6 – Exploration for and • PAS 33 Earnings per share
Preliminary Term Major Examination Evaluation of Mineral Resources Semi-Final Term Major Examination
(1 day) • PFRS 5 – Non-Current Assets (1 day)
Held for Sale and Discontinued
Operations
Final Term Major Examination
Midterm Major Examination (1 day)
(1 day)
 FOREWORD:

This work is not intended to infringe any intellectual property right. It is a

compilation of commentaries made by academicians and other credible authors
from several websites and is made FOR EDUCATIONAL PURPOSES ONLY.
No commercial purpose of some sort is intended by the compiler.

In line with this, all relevant sources and references are cited every end of a
chapter to which their works are contained to give full credit to their intellectual
property rights.
OVERVIEW OF ACCOUNTING
Time Duration and Allotment: Week 1; 1 hour

Abstract:
This study focuses on the accounting function, its role in society, and the theory that provides the foundation for modern financial accounting. It also explains the standard-setting process,
the authority attached to the standards, and the body authorized to promulgate them.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• Define accounting and state its basic purpose;
• Explain the basic concepts applied in accounting;
• State the sectors in the practice of accountancy; and
• Explain the importance of a uniform set of financial reporting standards.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the two (2) exercises presented after the topic content below.

TOPIC CONTENT Important activities in the Accounting Process

• FIRSTLY, Identifying (accountable or non-accountable transactions or events);
Accounting (Ano kaya toh pinasok ko?)….
- is a service activity. Its function is to provide quantitative information, primarily NOTE: Only accountable events are recognized. An accountable event is one
financial in nature, about economic entities, that is intended to be useful in that affects any of the elements of the financial statements (i.e. Assets, Liabilities,
making economic decisions. (Accounting Standards Council) Equity, Income, or Expenses). Non-accountable events are not recognized but
- is the art of recording, classifying, and summarizing in a significant manner and disclosed only in the notes, if they have accounting relevance.
in terms of money, transactions and events which are in part at least of a financial
character and interpreting the results thereof. (American Institute of Certified • SECONDLY, Measuring (in terms of money); and
Public Accountants) • FINALLY, Communicating (which involves…)
- is the process of identifying, measuring, and communicating economic  recording (journalizing)
information to permit informed judgment by users of the information. (American  classifying (posting in general ledger)
Accounting Association)  summarizing (preparation of financial statements)
Basic purpose of accounting (Para san ba toh?) influence economic decisions. Materiality is a matter of professional judgment
- to provide quantitative financial information about a business that is useful in and is based on the size and nature of the item being used.
making economic decisions – through the financial statements.
NOTE: Materiality is a RELATIVITY.
Accounting Concepts – the basic notions or fundamental premises on which the
accounting process is based. Also known as postulates. • COST PRINCIPLE – the value of an asset is determined on the basis of its
acquisition cost.
NOTE: Most accounting concepts are derived from the Conceptual Framework
and the Philippine Financial Reporting Standards (PFRSs). However, some NOTE: This concept is not always maintained. Some PFRSs require the
accounting concepts are implicit, meaning they are not expressly stated in the departure from this concept.

Framework or PFRSs but are generally accepted, also known as Generally • CONSISTENCY concept – the financial statements are prepared on the basis of
Accepted Accounting Principles (GAAP) because of their long-term use in the accounting principles that are applied consistently from one period to the next.
profession.
QUESTION: Does this rule mean na wala na talagang room for any
Underlying Accounting Assumption (as expressly provided by the Conceptual change????
Framework for Financial Reporting)
• GOING CONCERN – the entity is viewed as continuing in operation ANSWER: Not necessarily. Meron din naman mga exceptional cases like:
indefinitely. (Uyyyyy, may “Forever” pala sa accounting?) (1) when the change is required or permitted by the PFRSs; or (2) when the
change results to more relevant and reliable information.
Implicit Accounting Assumptions (includes but not limited to the following)
• ACCOUNTING ENTITY – the entity is separate from the owners, managers and (NOTE: Eto lang dalawa ang exceptions ha? If the instance does not fall any of
employees who constitute the entity. (Parang Berlin Wall lang ang peg?) the foregoing exceptions, then you apply the general rule, that is dapat
• TIME PERIOD – the indefinite life of an entity is subdivided into time periods or CONSISTENT ka.)
accounting periods which are usually of equal length.
• MONETARY UNIT has two aspects: Bookkeeping versus Accounting
 QUANTIFIABILITY – the assets, liabilities, equity, income and Bookkeeping is the process of recording the accounts or transactions of an entity.
expenses should be stated in terms of a unit of measure which is the peso Bookkeeping normally ends with the preparation of the trial balance. Unlike accounting,
(kasi nandito kayo sa Pinas. Of course, kung dun ka nagtratrabaho sa bookkeeping does not require the interpretation of the significance of the processed
amin sa US, eh di dollars ang gamiton mo. Gets????). information. Stated differently, bookkeeping is only a portion of the whole accounting
 STABILITY OF THE PESO – the purchasing power of the peso is stable process.
or constant and that its instability is insignificant and therefore may be
ignored. Four sectors in the practice of accountancy as prescribed by R.A. 9298 also known
• ACCRUAL BASIS OF ACCOUNTING – the effects of transactions and other as the “Philippine Accountancy Act of 2004” (San kaya ako pupulutin pag graduate
events are recognized when they occur (and not as cash is received or paid) and ko?)
they are recorded in the accounting records and reported in the financial 1. Practice of Public Accountancy – you are an INDEPENDENT PARTY and
statements of the periods to which they relate. renders expert financial services to the public such as:
• MATERIALITY – information is material if its omission or misstatement could  auditing
  taxation (Imagine ‘yung kaguluhang hatid kung walang mga Accounting Standards. Pwede mo
 management advisory services kasi maiihalintulad sila sa mga batas na nagproprovide kung ano ang dapat gawin,
particularly sa aspeto ng Accounting. Ika nga ni Kim Chiu: “Sa classroom may
2. Practice in Commerce and Industry – you are an EMPLOYEE of business batas…..bawal lumabas…oh bawal lumabas..” :p)
entities as accounting staff, chief accountant, internal auditor, controller.
Hierarchy of Reporting Standards (In descending order)
NOTE: Controller is the highest accounting officer in a business entity. 1. Philippine Financial Reporting Standards (PFRSs);
2. Management’s judgment (by referring to the applicability of the following in
3. Practice in the Government – you are a GOVERNMENT EMPLOYEE. This descending order)
sector of the accountancy profession encompasses the process of analyzing, i. The requirements in PFRSs dealing with similar and related issues;
classifying, summarizing, and communicating all transactions involving the ii. The Conceptual Framework;
receipt and distribution of government funds and property and interpreting the iii. Pronouncements of other standard-setting bodies; and
results thereof. iv. Accounting literature and accepted industry practices.

4. Practice in Education/Academe (the noblest sector, kasi eto pinasok ko eh. NOTE: Both i and ii are mandatory considerations, while iii and iv are optional.
Wag ka na pumalag!!!bleh:p) – involves teaching of accounting, auditing
management advisory services, finance, business law, taxation, and other Accounting Standard Setting Bodies and other relevant organizations:
technically related subjects. 1. Financial Reporting Standards Council (FRSC) – promulgates standards
acceptable in the Philippine setting.
REALIZATION: Pag CPA ka, in demand ka. 2. International Accounting Standards Board (IASB) – develops and promotes
global accounting standards.
Accounting Standards 3. Philippine Interpretations Committee (PIC) – reviews interpretations made by
The Philippine Financial Reporting Standards (PFRSs) represent the generally the IFRIC for approval and adoption by the FRSC.
accepted accounting principles in the Philippines. They are the Standards and 4. International Financial Reporting Interpretations Committee (IFRIC) –
Interpretations adopted by the Financial Reporting Standards Council (FRSC), which prepares interpretations of how specific issues should be accounted where the
comprises: standards do not include specific authoritative guidance, and there is a risk of
 Philippine Financial Reporting Standards; divergent and unacceptable accounting practices.
 Philippine Accounting Standards (PASs); and
 Interpretations NOTE: Our PFRSs are patterned from the international standards, known as
International Financial Reporting Standards (IFRSs) promulgated by the IASB.
The need for reporting standards
For financial statements to be useful, they should be prepared using reporting (Does it mean ba na sadyang manggagaya talaga tayong mga Pinoy? Yes, pero
standards that are generally acceptable. Otherwise, each entity would have to develop its in the right context. As Filipino accountants, we should keep ourselves abreast
own standards. If that is the case, every entity may just present any asset or income it with the international standards so as for us to have a competitive edge to fight
wants and omit any liability or expense it does not want. Such situations will make the in the global arena. Gusto nyo ba na ‘yung mga multinational companies na may
financial statements not comparable and will open the gates of fraudulent reporting. As a branch dito sa Pilipinas ay instead na mga Pinoy accountants and ini-employ,
consequence, decisions made based on these financial statements would be grossly mas pipiliin pa nilang i-hire ang mga foreigner na accountants nila for the sole
incorrect.
 reason na hindi natin alam ang mga accounting standards na sinusunod nila?) 3. On Day 1, a customer buys goods from Entity A and promises to pay the sale
price on Day 30. Entity A recognizes sales revenue on Day 1 rather than on
Changes in reporting standards: Day 30. This is an application of which of the following accounting
Once established, financial reporting standards are continually reviewed, revised or principles?
superseded. Changes to reporting standards are primarily made in response to users’ a. Cost principle c. Consistency
needs. Legal, political, business and social environments also influence changes in b. Accrual basis d. Materiality
reporting standards.
4. When resolving accounting problems not specifically addressed by current
standards, an entity shall be guided by the hierarchy of financial reporting
standards. The correct sequence of the hierarchy of financial reporting
WRAP UP EXERCISES. standards in the Philippines is
I. PASs, PFRSs and Interpretations
II. Conceptual Framework
Exercise 1. TRUE OR FALSE. III. Judgment
IV. Pronouncement of other standard-setting bodies
1. The basic purpose of accounting is to provide information about economic
activities intended to be useful in making economic decisions. a. I, III, II and IV c. I, IV, II, and III
2. Once promulgated, accounting standards are never changed. b. I, II, IV, and III d. I, II, III, and IV
3. The entity’s management is responsible for the selection of appropriate
accounting polices, not the accountant. 5. Which of the following is not among the Four Sectors in the practice of
4. All events and transactions of an entity are recognized in the books of accountancy as enumerated in RA 9298 also known as “Philippine
accounts. Accountancy Act of 2004”?
5. Accounting is only a part of the Bookkeeping. a. Practice of Commerce and Industry
b. Practice in the Government
Exercise 2. MULTIPLE CHOICES. c. Practice in Education/Academe
d. Practice of Private Accountancy
1. Which of the following violates the historical cost concept?
a. Recording purchases of merchandise inventory at the purchase price. Answers to Exercises:
b. Recording a building at the total construction costs. 1. True; 2. False; 3. True; 4. False; 5. False.
1. C; 2.C; 3. B; 4. A; 5. D
c. Measuring inventories at net realizable value.
d. Recording equipment acquired in an installment purchase at the cash price
equivalent.

2. Entity A values its fixed assets at their historical costs and does not restate
them for changes in the purchasing power of the Philippine pesos due to
inflation. Entity A is applying which of the following accounting concepts?
a. Prudence c. Stable monetary unit
b. Accrual basis d. Time period
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Conceptual Framework & Accounting
Textbook: Conceptual Framework & Accounting Textbook: Conceptual Framework & Accounting Standards by Zeus Vernon B. Millan
Standards by Zeus Vernon B. Millan Standards by Zeus Vernon B. Millan
Activities:
Activities: Activities: Topic discussion will be during classroom meetups,
Topic discussion will be through GoogleMeet App., Topic discussion will be through GoogleMeet App., and during which the exercises will be supplied with
during which the exercises will be supplied with during which the exercises will be supplied with answers.
answers. answers. Such teleconferencing will be recorded, the
video of which will be made available to you via Assessment:
Assessment: Messenger Group Chat or Gmail address. Topic quiz will be issued to you and will be answered
Topic quiz will be published at Schoology App. at home, which will be immediately due for
Instructions as to the time allocated for answering and Assessment: submission the following day at the box placed at the
deadline for submission of quiz will be announced via Topic quiz will be published at Schoology App. SVCI guard house. Communication as to the receipt
Messenger Group Chat. Instructions as to the time allocated for answering and the said quiz will be through text messaging.
deadline for submission of quiz will be announced via
Messenger Group Chat.
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Time Duration and Allotment: Week 1; 5 hours

Abstract:
This study focuses on the purpose, status, and scope of the Conceptual Framework for Financial Reporting.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• State the purpose, status, and scope of the Conceptual Framework.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the two (2) exercises presented after the topic content below.

TOPIC CONTENT

CONCEPTUAL FRAMEWORK – a summary of the terms and concepts that underlie the preparation and presentation of financial statements for external users.

What are the purposes of the Conceptual Framework?

1. To assist the standard setters in developing accounting standards;
2. To assist preparers of financial statements in applying accounting standards and in dealing with issues not yet covered by GAAP;
3. To assist users of financial statements in interpreting the information contained in the financial statements;

What is the scope of the Framework?

1. Objective of financial reporting; 5. Recognition and derecognition;
2. Qualitative characteristics of useful financial information; 6. Measurement;
3. Financial statements and the reporting entity; 7. Presentation and disclosure;
4. The elements of the financial statements;

NOTE: The Conceptual Framework is not a PFRS. In case where there is conflict between the requirements of the framework and PFRS, the latter shall prevail.

What is Financial Reporting?

The provision of financial information about an entity to external users that is useful in making economic decisions and for assessing the effectiveness of the entity’s management.
What is the objective of financial reporting?
….to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing
resources to the entity.

NOTE: Observe that the objective of financial reporting shares the same thought with the basic purpose of accounting – i.e., decision making usefulness

How are users classified by the Framework?

The users of financial information are classified into:
1. Primary users – investors, lenders, other creditors
2. Other users - employees, customers, governments, public

QUALITATIVE CHARACTERISTICS - The qualities and attributes that make financial accounting information useful
to the users.

Fundamental Characteristics – these are the characteristics that make information useful to users. They relate more
on the content of the information.

Enhancing Characteristics – these are the characteristics that enhance the usefulness of information. They relate more on the presentation of the information.
Relevance – capacity of the information to influence a decision. It has the following ingredients:
• Predictive value – It can help users increase the likelihood of correctly predicting or forecasting outcome of
events.
• Confirmatory value – If it provides feedback about previous evaluations.
• Materiality – Information is material if its omission or misstatement could influence the economic decision
that the users make on the basis of the financial information about the entity.

Faithful Representation – The financial reports represent economic phenomena or transactions in words and numbers. It has the following ingredients:
• Completeness – All significant and relevant information leading to the preparation of financial statements shall be clearly reported.
• Neutrality - The financial statements should not be prepared so as to favor one party to the detriment of another party.
• Free from Error - There are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied
with no errors in the process.

Verifiability – Means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a
faithful representation.

Comparability - The ability to bring together for the purpose of noting points of likeness and difference. This characteristic include:
• Comparability within an entity (Intra-comparability)
• Comparability across entities (Inter-comparability)

NOTE: To achieve comparability, there must be consistency in accounting method and principles used.

Understandability - Requires that the financial information must be comprehensible or intelligible if it is to be useful.

Timeliness - Having information available to decision makers in time to influence their decisions.
FINANCIAL STATEMENTS AND THE REPORTING ENTITY

Complete Set of Financial Statements

1. Statement of Financial Position;
2. Income Statement;
3. Statement of Comprehensive Income;
4. Statement of Changes in Equity
5. Statement of Cash Flows
6. Notes, comprising a summary of significant accounting policies and other explanatory notes.

ELEMENTS OF FINANCIAL STATEMENTS

1. ASSETS – are present economic resources controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
2. LIABILITIES – are present obligations of the entity to transfer economic resources as a result of past events.
3. EQUITY – the residual interest in the asset of the entity after deducting all of its liabilities.
4. INCOME – increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
5. EXPENSES – decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.

NOTE: The definitions of income and expenses are opposites.

NOTE: Although income and expenses are defined in terms of changes in assets and liabilities, information about income and expenses is just as important as information
about assets and liabilities.
RECOGNITION AND DERECOGNITION

NOTE: Existence uncertainty or low probability of an inflow or outflow of economic

benefits may result in, but does not automatically lead to, the non-recognition of an
asset or liability.

NOTE: An exceptionally high measurement uncertainty can affect the faithful

representation of an item, such as when the asset or liability can only be measured
using cash-flow based measurement techniques and, in addition, one or more of the
following circumstances exists:
a. There is an exceptionally wide range of possible outcomes and each outcome
is exceptionally difficult to estimate;
b. The measure is highly sensitive to small changes in estimates of the
probability of different outcomes
c. The measurement requires exceptionally difficult or exceptionally subjective
allocations of cash flows that do not relate solely to the asset or liability being
measured.
 NOTE: Derecognition is not appropriate if the entity retains substantial control of
a transferred asset. In such case, the entity continues to recognize the transferred
asset and recognizes any proceeds received from the transfer as a liability. If there
is only a partial transfer, the entity derecognizes only that transferred component
and continues to recognize the retained component.

MEASUREMENT

The Conceptual Framework describes the following measurement bases:

1. Historical cost
2. Current value
i. Fair value
ii. Value in use and fulfillment value
iii. Current cost
Historical Cost - The amount of cash or cash equivalent paid or the fair value of the consideration given to acquire an asset at the time of acquisition (past purchase exchange price).

NOTE: The historical cost of an asset is the consideration paid to acquire the asset plus transaction costs. The historical cost of a liability is the consideration received to incur
the liability minus transaction costs.

NOTE: In cases where it is not possible to identify the cost, such as on transactions that are not on market terms, the resulting asset or liability is initially recognized at current
value.

Current Value – reflect changes in value at the measurement date. Unlike historical cost, current value is not derived from the price of the transaction or other event that gave rise to the
asset or liability.

Value in use – the present value of the cash flows, or other economic benefits, which an entity expects to derive from the use of an asset and from its ultimate disposal.

Fulfillment value – the present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfills a liability.

NOTE: Current cost and historical cost are entry values (i.e., they reflect prices in acquiring an asset or incurring a liability, whereas fair value, value in use and fulfillment
value are exit values (i.e., they reflect prices in selling or using an asset or transferring or fulfilling a liability). Unlike historical cost, however, current cost reflects conditions
at the measurement date.

Selecting a measurement basis

In selecting a measurement basis, it is necessary to consider the nature of the information in both the statement of financial position and the statement(s) of financial performance. The
relative importance of each factor to be considered (see boxes above) depends upon the facts and circumstances of individual cases. Consideration of the factors and the cost constraint is
likely to result in the selection of different measurement bases for different assets, liabilities, income and expenses.

NOTE: Sometimes it may be necessary to use more than one measurement basis in order to provide useful information. In most cases, the use of different measurement basis is
applied in such a way that:
a. a single measurement basis is used in the statement of financial position and statement(s) of financial performance; and
b. additional information is disclosed in the notes for a different measurement basis.

PRESENTATION AND DISCLOSURE

Financial information is communicated to users through presentation and disclosure in the financial statements. Effective communication of information in financial statements
makes that information more relevant and contributes to a faithful representation of an entity’s assets, liabilities, equity, income and expenses.
WRAP UP EXERCISES:

Exercise 1. True or False. Exercise 2. Multiple Choices.

1. The Conceptual Framework may be revised from time to time. Revisions in the 1. These are the qualitative characteristics that make information useful to users.
Conceptual Framework automatically result to changes in the Standards. a. Fundamental c. Relevance
2. The Conceptual Framework is concerned with the provision of financial b. Enhancing d. Comparability
information to both external and internal users.
3. The Conceptual Framework defines income and expenses in terms of changes in 2. Which of the following enhances the comparability of information?
assets and liabilities. a. Making unlike things look alike.
4. In case of conflict between the Framework and a Standard, the former prevails. b. Making like things look different.
5. Primary users include employees, customers, government, and the public. c. Using different methods to account for similar transactions from period to
period.
d. Consistent application of accounting policies from period to period.

3. Which of the following does not meet the definition of an asset?

a. Equipment that the entity intends to, and is very certain, to acquire in the
future.
b. Inventories purchased and received but not yet paid.
c. Land received from a donation.
d. A publishing title for a college textbook. The publishing title has no
physical substance, meaning you cannot see or touch it.

4. Which of the following would least likely to need general purpose financial
statements in making economic decisions?
a. Stockholders c. Management
b. Potential investors d. Lenders

5. Entity A deliberately overstated its liabilities rom P1M to P1.2M. What

qualitative characteristic is violated?
a. Relevance c. Timeliness
b. Faithful representation d. Understandability

Answers to Exercises:
1. False; 2. False; 3. True; 4. False; 5. False.
1. A; 2. D; 3. A; 4. C; 5. B
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Management Accounting, Concepts and
Textbook: Management Accounting, Concepts and Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Balatbat Cabrera.
Applications by: Ma. Elenita Balatbat Cabrera. Applications by: Ma. Elenita Balatbat Cabrera.
References and Sources:
References and Sources: References and Sources: 1. https://www.ifrs.org/-/media/project/conceptual-
1. https://www.ifrs.org/-/media/project/conceptual- 1. https://www.ifrs.org/-/media/project/conceptual- framework/fact-sheet-project-summary-and-
framework/fact-sheet-project-summary-and- framework/fact-sheet-project-summary-and- feedback-statement/conceptual-framework-project-
feedback-statement/conceptual-framework-project- feedback-statement/conceptual-framework-project- summary.pdf
summary.pdf summary.pdf 2. Financial Accounting Volume 1 by Conrado Valix,
2. Financial Accounting Volume 1 by Conrado Valix, 2. Financial Accounting Volume 1 by Conrado Valix, et al.
et al. et al.

Activities: Activities: Activities:

Topic discussion will be through GoogleMeet App., Topic discussion will be through GoogleMeet App., Topic discussion will be during classroom meetups,
during which the exercises will be supplied with during which the exercises will be supplied with and during which the exercises will be supplied with
answers. answers. Such teleconferencing will be recorded, the answers.
video of which will be made available to you via
Assessment: Messenger Group Chat or Gmail address. Assessment:
Topic quiz will be published at Schoology App. Topic quiz will be issued to you and will be answered
Instructions as to the time allocated for answering and Assessment: at home, which will be immediately due for
deadline for submission of quiz will be announced via Topic quiz will be published at Schoology App. submission the following day at the box placed at the
Messenger Group Chat. Instructions as to the time allocated for answering and SVCI guard house. Communication as to the receipt
deadline for submission of quiz will be announced via the said quiz will be through text messaging.
Messenger Group Chat.
PAS 1, PAS 37, PAS 10, PAS 24
Time Duration and Allotment: Week 2; 6 hours

Abstract:
This study focuses on the summary of the accounting standards enumerated above.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• describe the general features of financial statement presentation as well as the components of a complete set of financial statements;
• differentiate the accounting requirements for a provision, a contingent liability and a contingent asset;
• state the accounting requirements for event after the reporting period; and
• state the necessary disclosure requirements for related parties.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the two (2) exercises presented after the topic content below.

TOPIC CONTENT  going concern;

 accrual basis of accounting;
 materiality and aggregation;
PAS 1 – PRESENTATION OF FINANCIAL STATEMENTS  offsetting;
 frequency of reporting;
What it does:  comparative information; and
• It defines complete set of general-purpose financial statements that contains 5  consistency of presentation.
components:
 Statement of financial position; • It sets the minimum requirements for the content of financial statements; their
 Statement of profit or loss and other comprehensive income; identification and structure.
 Statement of changes in equity;
 Statement of cash flows; NOTE: PAS 1 applies to all general purpose financial statements that are
 Notes with summary of significant accounting policies and other prepared and presented in accordance with PFRSs.
explanatory information
General Purpose Financial Statements – those intended to meet the needs of users who
• It describes the general features of financial statements: are not in the position to require an entity to prepare reports tailored to their particular
 fair presentation and compliance with PFRS; information needs.
Purpose of the Financial Statements - to provide information about the financial Exceptions:
position, financial performance and cash flows of an entity that is useful to a wide range i. management intends to liquidate the entity or to cease trading; or
of users in making economic decisions. Financial statements also show the results of ii. management has no realistic alternative but to do so
management’s stewardship of the resources entrusted to it.
3. Accrual basis of accounting
General features of financial statements
An entity shall prepare its financial statements, except for cash flow information, using
1. Fair Presentation and Compliance with PFRSs the accrual basis of accounting.

Fair presentation requires the faithful representation of the effects of transactions, other 4. Materiality and aggregation
events and conditions in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Framework. Each material class of similar items shall be presented separately in the financial
statements. Items of a dissimilar nature or function shall be presented separately unless
NOTE: The application of the PFRSs, with additional disclosure when necessary, they are immaterial. If a line item is not individually material, it is aggregated with other
is presumed to result in financial statements that achieve a fair presentation. items either on the face of those statements or in the notes.

QUERY: Is it always required to comply with the requirements of PFRS in order 5. Offsetting
to achieve fair presentation of the financial statements? NO. Departure from a
PFRS requirement is permitted if the relevant regulatory framework requires or General Rule: Assets and liabilities, and income and expenses, shall not be offset.
allows it, and so long as it will result to more relevant and more faithfully Exceptions:
represented information. Of course, this presupposes that the entity must disclose i. when required or permitted by a Standard or an Interpretation; or
such departure in Notes. ii. if the amount is not material

Compliance with PFRSs. An entity whose financial statements comply with PFRSs NOTE: Measuring assets net of valuation allowances—for example, obsolescence
shall make an explicit and unreserved statement of such compliance in the notes. allowances on inventories and doubtful debts allowances on receivables—is not
offsetting.
2. Going concern
6. Frequency of Reporting (As a rule, at least annually)
When preparing financial statements, management shall make an assessment of an
entity’s ability to continue as a going concern. When management is aware, in making its NOTE: If an entity changes its reporting period to a period longer or shorter than
assessment, of material uncertainties related to events or conditions that may cast one year, it shall disclose the following:
significant doubt upon the entity’s ability to continue as a going concern, those i. the period covered by the financial statements;
uncertainties shall be disclosed. When financial statements are not prepared on a going ii. the reason for using a longer or shorter period; and
concern basis, that fact shall be disclosed, together with the basis on which the financial iii. the fact that amounts presented in the financial statements are not entirely
statements are prepared and the reason why the entity is not regarded as a going concern. comparable.

General Rule: Financial statements shall be prepared on a going concern basis.

 reporting period.
7. Comparative Information
All other assets and liabilities are classified as noncurrent.
General Rule: Comparative information shall be disclosed in respect of the
previous period for all amounts reported in the financial statements. NOTE: Deferred tax assets and liabilities are always presented as noncurrent
Exception: when a Standard or an Interpretation permits or requires otherwise items in a classified statement of financial position, regardless of their expected
dates of reversal.
8. Consistency of Presentation
NOTE: When the entity’s normal operating cycle is not clearly identifiable, its
General Rule: The presentation and classification of items in the financial duration is assumed to be twelve months.
statements shall be retained from one period to the next.
Exceptions: NOTE: An entity classifies its financial liabilities as current when they are due to
(a) it is apparent, following a significant change in the nature of the entity’s be settled within twelve months after the reporting period, even if:
operations or a review of its financial statements, that another (a) the original term was for a period longer than twelve months; and
presentation or classification would be more appropriate – i.e., it will (b) an agreement to refinance, or to reschedule payments, on a long-term
result to a more reliable and more relevant information; or basis is completed after the reporting period and before the financial
(b) a Standard or an Interpretation requires a change in presentation. statements are authorized for issue.

Management’s Responsibility over Financial Statements NOTE: If an entity expects, and has the discretion, to refinance or roll over an
obligation for at least twelve months after the reporting period under an existing
The management is responsible for an entity’s financial statements. loan facility, it classifies the obligation as non-current, even if it would otherwise
be due within a shorter period.
Statement of Financial Position (previously known as Balance Sheet) – shows the
entity’s financial condition (i.e., status of assets, liabilities and equity) as at a certain date. NOTE: When an entity breaches an undertaking under a long-term loan
agreement on or before the balance sheet date with the effect that the liability
Current Assets and Current Liabilities becomes payable on demand, the liability is classified as current, even if the
Current Assets (assets that are:) Current Liabilities (liabilities that are:) lender has agreed, after the reporting period and before the authorization of the
a. expected to be realized in, or is a. expected to be settled in the entity’s financial statements for issue, not to demand payment as a consequence of the
intended for sale or consumption in, normal operating cycle; breach. However, the liability is classified as non-current if the lender agreed by
the entity’s normal operating cycle; b. held primarily for the purpose of the end of the reporting period to provide a period of grace ending at least twelve
b. held primarily for the purpose of being traded; months after the reporting period, within which the entity can rectify the breach
being traded; c. due to be settled within twelve and during which the lender cannot demand immediate repayment.
c. is expected to be realized within months after the reporting period;
twelve months after the balance or Statement of Profit or Loss and Other Comprehensive Income
sheet date; or d. the entity does not have an
d. cash or a cash equivalent, unless it unconditional right to defer General Rule: All items of income and expense recognized in a period shall be
is restricted from being exchanged settlement of the liability for at least included in profit or loss.
or used to settle a liability for at twelve months after the balance Exceptions: Unless a Standard or an Interpretation requires otherwise.
least twelve months after the sheet date
Presentation of Income and Expenses (either): • estimated liabilities on pending lawsuits;
a. A single statement of profit or loss and other comprehensive income; or • provisions for decommissioning costs of an item of PPE;
b. Two statements – (1) Statement of Profit or Loss; and (2) Statement of • obligations caused by an entity’s policy to make refunds to customers;
Comprehensive Income • obligations arising from guarantees;
• provisions on onerous contracts;
Total Comprehensive Income – the change in equity during a period resulting from • provisions for restructuring costs.
transactions and other events, other than those changes resulting from transactions with
owners in their capacity as owners. When to recognize a provision? (all the following must be met:)
Methods of Presenting Expenses 1. There must be a present obligation as a result of a past event;
1. Nature of Expense Method 2. The outflow of economic benefits to satisfy the obligation must be probable (i.e.
2. Function of Expense Method (Cost of Sales Method) more than 50% probable)
3. The amount of economic benefits required to satisfy the obligation must
Statement of Changes in Equity (shows the following:) be reliably estimated.
• effects of changes in accounting policies and corrections of errors;
• total comprehensive income for the period; and QUERY: What if there is one of them that is not met? Then you should either:
• for each component of equity, a reconciliation between the carrying amount at  Disclose a contingent liability, or
the beginning and the end of the period, showing separately changes resulting  Do nothing if the outflow of economic benefits is remote.
from:
 profit or loss; To summarize (in a diagram):
 other comprehensive income; and
 transactions with owners

Statement of Cash Flows (See PAS 7 Module)

PAS 37 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT

ASSETS

Provision – a liability of uncertain timing or amount. The liability may be a legal

obligation or a constructive obligation. A legal obligation is one that arises from
legislation, a contract or other legal act. A constructive obligation arises from the entity’s
actions, through which it has indicated to others that it will accept certain responsibilities,
and as a result has created an expectation that it will discharge those responsibilities.

Examples of provisions:
• warranty obligations;
• provisions for environmental damages;
 NOTE: If you are unsure whether to recognize a provision in a particular situation Provisions in Specific Circumstances
or not, just ask yourself a simple question: “Can the obligation be avoided by
some future actions?” 1. Future operating losses.

If yes, then you should NOT book a provision. For example, if a government NOTE: No provision is recognized for future operating losses. Why? Because
introduced new tax legislation, does the tax consulting company need to spend cash there is no past event. The future operating losses can be avoided by some future
for training of its employees and thus recognize a provision for that training? No, it actions, for example – by selling a business. However, you should test your assets
does not have to. Tax consulting company can avoid the training and decide to stop for impairment under PAS 36 Impairment of Assets.
its activities (OK, that’s a bit far-fetched and unlikely, but you get the point).
2. Onerous contracts – a contract in which unavoidable costs of fulfilling exceed
If you cannot avoid the obligation by some future action, then you have to the benefits from the contract. In other words, it is a loss contract that cannot be
recognize a provision. For example, when you promised a free warranty service for avoided.
defective products at the point of sale, then you have a present obligation. If your
past statistics show that you needed to spend some cash for warranty repairs, then NOTE: You should make a provision in the amount lower of:
you need to make a provision. • Unavoidable costs of fulfilling the contract; and
• Penalty for not meeting your obligations from the contract
How to measure a provision?
3. Restructuring – a plan of management to change the scope of business
The amount of the provision should be measured at the best estimate of the expenditures or a manner of conducting a business.
required to satisfy the obligation at the end of the reporting period.
NOTE: You should recognize a provision for restructuring only when the general
As you can see, here’s some judgement and estimates involved. Management should criteria for recognizing provisions are met.
really incorporate all available information in their estimates and they must not forget
about: In the case of restructuring, an obligation to restructure arises only if:
• There is a detailed formal plan for restructuring with relevant information
• Risks and uncertainties (like inflation), in it (about business, location, employees, time schedule and expenditures)
• Time value of money (discounting when the settlement is expected in the long- • A valid expectation related to restructuring has been raised in the affected
term future) parties.
• Some probable future events, etc.
Contingent Liability (is either:)
There are 2 basic methods of measuring a provision: • A possible obligation (not present) from past event that will be confirmed by
some future event; or
1. Expected value method: You would use this method when you have a range of • A present obligation from past event, but either:
possible outcomes or you measure the provision for large amount of items. In this  The outflow of economic benefits to satisfy this obligation is not
case, you need to weight each outcome by its probability (for example, warranty probable (less than 50%), or
repair costs for 10 000 products).  The amount of obligation cannot be reliably measured (this is very rare, in
2. The most likely outcome: This method is suitable in the case of a single fact).
obligation or just 1 item (for example, provision for loss in the court case).
 NOTE: If you identify you have a contingent liability, you do NOT recognize it – Examples of Adjusting events:
no journal entry. You should only make appropriate disclosures in the notes to • Settlement after the reporting period of a court case that confirms that the entity
the financial statements. has a present obligation at the end of the reporting period;
• Receipt of information after the reporting period indicating that an asset was
Contingent Asset – is a possible asset that arises from past events, and whose existence impaired at the end of the reporting period;
will be confirmed only by the occurrence or non-occurrence of one or more uncertain • Determination after the reporting period of the cost of asset purchased, or the
future events not wholly within the control of the entity. proceeds from asset sold, before the end of the reporting period;
• Determination after the reporting period of the amount of profit-sharing or bonus
NOTE: Similarly as with contingent liabilities, you should not book anything in payments, if the entity had a present legal or constructive obligation at the end of
relation to contingent assets, but you make appropriate disclosures. reporting period to make such payments;
• Discovery of fraud or errors that indicate that the financial statements are
Contingent Probable Possible Remote incorrect.
 Liability Recognize and
Disclose only
Disclose Ignore Non-adjusting Events – those events after the reporting period that indicates
(Contingent Liability)
(Provision) conditions arising after the end of the reporting period.
 Asset Disclose only
Ignore Ignore
(Contingent Asset) ACCOUNTING TREATMENT: Do not adjust financial statements for non-
adjusting events. The following disclosure shall be made:
• The nature of the event, and
PAS 10 – EVENTS AFTER THE REPORTING PERIOD • An estimate of its financial effect or a statement that such an estimate
cannot be made.
Event after the reporting period – a favorable or unfavorable event that occurs
between: NOTE: If an entity declares dividends to shareholders after the end
• The end of the reporting period; and of the reporting period, the entity shall not account for those
• The date that the financial statements are authorized for issue.
dividends as for a liability at the reporting date.
Adjusting Events - are those that arose after the end of the reporting period, but provide
further evidence of conditions that existed at the end of the reporting period. Examples of Non-Adjusting events:
• Changes in fair value, foreign exchange rates, interest rates or market prices after
ACCOUNTING TREATMENT: Financial statements should be adjusted for the reporting period;
adjusting events. • Casualty losses occurring after the reporting period but before the financial
statements were authorized for issue;
NOTE: If a management indicates after the end of the reporting period that it • Litigation arising solely from events occurring after the reporting period;
intends to liquidate the business or cease trading or there is no other realistic • Major ordinary share transactions and potential ordinary share transactions after
alternative, then the financial statements should NOT be prepared under going the reporting period;
concern basis. • Major business combination after the reporting period;
• Announcing, or commencing the implementation of, a major restructuring after
the reporting period;
 • Announcing a plan to discontinue an operation after the reporting period; parent;
• Changes in tax rate enacted after the reporting period; 7. A person who has control, significant influence or joint control over the reporting
• Declaration of dividends after the reporting period entity;
8. Close family member of the person referred to in (6) and (7);
Presentation and Disclosure 9. Post-employment benefit plan of the employees of either the reporting entity or
an entity related to the reporting entity
An entity shall present and disclose information that enables users of the financial
statements to evaluate the effects of events after reporting period: The following are not related parties:
1. Two entities simply because they have one director or key management
personnel in common;
2. Two joint venturers simply because they are co-venturers in a a joint venture;
3. Financers, trade unions, public utilities, and government agencies that do not
control, jointly or significantly influence the reporting entity, simply by virtue of
their normal dealings with the entity, even though they may place some
restrictions on the entity or participate in its decision-makings;
4. A customer, supplier, or other business that the entity does significant
transactions with, simply of economic dependence.

Key management personnel – those persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or indirectly,
including any director (whether executive or otherwise) of that entity.

Close family member – is one who may be expected to influence, or be influenced by,
that person in their dealings with the entity, and include: (a) that person’s children and
spouse or domestic partner; (b) children of that person’s spouse or domestic partner; and
(c) dependents of that person or that person’s spouse or domestic partner
PAS 24 – RELATED PARTY DISCLOSURES
Disclosures required by PAS 24
Related parties – one party has the ability to affect the financial and operating decisions 1. Relationships between parents and subsidiaries:
of the other party through control, significant influence, or joint control. • Name of a parent of an entity,
• The ultimate controlling party,
Examples of related parties: • Next most senior parent that produces financial statements for public use
1. Parent and its subsidiary; (if neither of 2 above do so).
2. Fellow subsidiaries with a common parent;
3. Investor and its associate; and the associate’s subsidiary This must be disclosed even if there are no related party transactions.
4. Venturer and the joint venture; and the joint venture’s subsidiary;
5. A joint venture and an associate of a common investor; 2. Management compensation, both total and by the categories:
6. Key management personnel of the reporting entity or of the reporting entity’s • Short-term employee benefits,
 • Post-employment benefits, WRAP UP EXERCISES:
• Other long-term benefits,
• Termination benefits,
• Share-based payment benefits Exercise 1. True or False.

3. Related party transactions 1. The application of PFRSs, with additional disclosure when necessary, is
presumed to result in financial statements that achieve a fair presentation.
These represent any transfer of resources, services or obligations between 2. According to PAS 1, assets and liabilities or income and expenses are offset,
related parties regardless of whether a price is charged. unless separate presentation is required or permitted by a PFRS.
3. A contingent liability, as a rule, must be recognized in the Statement of
An entity should disclose: Financial Position.
• Nature of the relationship and 4. A contingent asset that is only possible shall be disclosed in the Notes to
• Information about transactions and outstanding balances Financial Statements.
5. Non-adjusting events are those events after the reporting period that provide
The disclosures are presented separately for each category of related parties and evidence of conditions that existed at the end of the reporting period.
include (IAS 24.18): 6. According to PAS 10, non-adjusting events after the reporting period require
• Amount of transactions; adjustments of amounts in the financial statements.
• Amount of outstanding balances, together with: 7. According to PAS 24, a parent and its subsidiary are related parties.
 their terms and conditions (are they secured? What consideration 8. A cousin of a director of company, who is not dependent to such director, is
is to be provided in settlement?), and considered as a related party of the company.
 guarantees. 9. In case of departure from a requirement of a PFRS, such departure, even if it
results to a more relevant and more faithfully represented information, may
• Provisions for doubtful debts related to the amount of open balances; and not be disclosed in the notes.
• The expense during the period for bad or doubtful debts due from related 10. If there is objective evidence that an entity will cease to continue as a going
parties. concern, such fact must be disclosed in the Notes.

Exercise 2. Multiple Choices.

1. Entity A’s financial statements in the current period is comparable with Entity
A’s financial statement in the previous period. This type of comparability is
called
a. Inter-comparability c. Extra-comparability
b. Intra-comparability d. Intro-comparability

2. Who is responsible for the preparation and fair presentation of an entity’s

financial statements in accordance with the PFRSs?
a. Accountant c. Auditor
b. Management d. Government regulatory body
3. Which of the following is a current asset? c. Sale of inventories after the reporting period that gives evidence to their
a. Deferred tax asset expected to reverse within 3 months from the reporting net realizable value at the end of reporting period
date d. Issuance of shares of stocks after the reporting period
b. Property, plant and equipment
c. Non-trade note receivable due in 13 months 9. Mr. Y and Ms. Z share joint control over Ventures, Inc. Which of the
d. Accounts receivable following are related parties?
a. Mr. Y and Ms. Z
4. Which of the following is a current liability? b. Ventures, Inc. and Mr. Y
a. Deferred tax liability c. Ventures, Inc. and PAS 24
b. An obligation for which the entity has an unconditional right to defer d. None of these
c. A long-term obligation that becomes payable on demand because of a
breach of loan agreement but the lender agrees before the balance sheet 10. Entity A is the parent company of Entity B. Which of the following is
date to provide a grace period for the entity to rectify the breach required to be disclosed in the group’s (Entity A and B’s) consolidated
d. An obligation for which the entity has a conditional right to defer financial statements?
a. The related party relationship between Entity A and Entity B
5. According to PAS 37, provisions are measured at b. The related party transactions during the period
a. the entity’s best estimate of the settlement amount c. The outstanding balances in (c)
b. the expected value of the settlement amount d. All of these
c. the mid-point amount of a range of estimates
d. any of these, whichever is most appropriate

6. According to PAS 37, a provision does not arise from

a. Restructuring
b. Future operating losses
c. Product warranties Answers to Exercises:
d. Constructive obligation 1. True; 2. False; 3. False; 4. False; 5. False; 6. False; 7. True; 8. False; 9. False; 10. True.
1. B; 2. B; 3. D; 4. D; 5. D; 6. B; 7. D; 8. C; 9. B 10. A.
7. Which of the following events after the reporting period are treated as
adjusting events?
a. A significant decline in the fair value of investments in stocks
b. A litigation arising from an accident that occurred after the reporting
period
c. Declaration of dividends after the reporting period
d. Discovery of prior-period fraud or errors

8. Which of the following is an example of an adjusting event?

a. Major business combination after the reporting period
b. A building is totally razed by fire after the reporting period
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Conceptual Framework & Accounting
Textbook: Conceptual Framework & Accounting Textbook: Conceptual Framework & Accounting Standards by Zeus Vernon B. Millan
Standards by Zeus Vernon B. Millan Standards by Zeus Vernon B. Millan
References and Sources:
References and Sources: References and Sources: 1. https://www.pkf.com/media/10033179/ias-37-
1. https://www.pkf.com/media/10033179/ias-37- 1. https://www.pkf.com/media/10033179/ias-37- provisions-contingent-liabilities-and-contingent-
provisions-contingent-liabilities-and-contingent- provisions-contingent-liabilities-and-contingent- assets-summary.pdf
assets-summary.pdf assets-summary.pdf 2. https://www.ifrsbox.com/ias-37-provisions-
2. https://www.ifrsbox.com/ias-37-provisions- 2. https://www.ifrsbox.com/ias-37-provisions- contingent-liabilities-contingent-assets/
contingent-liabilities-contingent-assets/ contingent-liabilities-contingent-assets/ 3. https://www.ifrsbox.com/ias-10-events-after-the-
3. https://www.ifrsbox.com/ias-10-events-after-the- 3. https://www.ifrsbox.com/ias-10-events-after-the- reporting-period/
reporting-period/ reporting-period/ 4. https://www.ifrsbox.com/ifrs/ias-24/
4. https://www.ifrsbox.com/ifrs/ias-24/ 4. https://www.ifrsbox.com/ifrs/ias-24/
Activities:
Activities: Topic discussion will be during classroom meetups,
Topic discussion will be through GoogleMeet App., Activities: and during which the exercises will be supplied with
during which the exercises will be supplied with Topic discussion will be through GoogleMeet App., answers.
answers. during which the exercises will be supplied with
answers. Such teleconferencing will be recorded, the Assessment:
Assessment: video of which will be made available to you via Topic quiz will be issued to you and will be answered
Topic quiz will be published at Schoology App. Messenger Group Chat or Gmail address. at home, which will be immediately due for
Instructions as to the time allocated for answering and submission the following day at the box placed at the
deadline for submission of quiz will be announced via Assessment: SVCI guard house. Communication as to the receipt
Messenger Group Chat. Topic quiz will be published at Schoology App. the said quiz will be through text messaging.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Preliminary Term Major Examination
Time Duration and Allotment: 1 day

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Assessment:

Schoology App Schoology App Preliminary Term Major Examination will be issued to
you and will be answered at home, which will be
Assessment: immediately due for submission the following day at
Assessment: Preliminary Term Major Examination will be the box placed at the SVCI guard house.
Preliminary Term Major Examination will be published at Schoology App. Instructions as to the Communication as to the receipt the said quiz will be
published at Schoology App. Instructions as to the time allocated for answering and deadline for through text messaging.
time allocated for answering and deadline for submission of assessment will be announced via
submission of assessment will be announced via Messenger Group Chat.
Messenger Group Chat.
PAS 7, PAS 2, PAS 41, PAS 16, and PAS 23
Time Duration and Allotment: Week 3; 6 hours

Abstract:
This study focuses on the summary of the accounting standards enumerated above.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• Differentiate the classification of cash flows.
• Apply the cost formulas in the proper valuation of inventories;
• Differentiate from each other biological assets, agricultural produce, bearer plants, and inventory;
• Apply the principles of PAS 16 in basic computations of a PPE’s cost, depreciation, carrying amount, and revaluation surplus as well as the gain or loss on its disposal; and
• State the core principle under PAS 23 and compute for capitalizable borrowing costs.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the two (2) exercises presented after the topic content below.

TOPIC CONTENT Classification of cash flows

1. Operating activities
2. Investing activities
PAS 7 – STATEMENT OF CASH FLOWS 3. Financing activities

Statement of Cash Flows – provides information about the sources and utilization of Operating Activities (principal revenue-producing activities) – include cash flows on
cash and cash equivalents during the period. When used in conjunction with the rest of items of income and expenses, or those that enter into the determination of profit or loss.
the financial statements, the statement of cash flows helps users assess:
a. the ability of the entity to generate cash and cash equivalents; NOTE: This part is probably the most important, because it shows the ability of
b. the timing and certainty of the generation of cash flows; and the company to generate cash by its own activities, rather than by external
c. the needs of the entity to utilize those cash flows. financing or making investments.

NOTE: Only transactions that affected cash and cash equivalents are reported Examples of cash flows from operating activities:
in the statement of cash flows. • Cash receipts from the sale of goods, rendering of services, or other forms of
income;
• Cash payments for purchases of goods and services;
 • Cash payments for operating expenses; and • cash payments by a lessee for the reduction of the outstanding liability relating to
• Cash receipts and payments from contracts held for dealing or for trading a lease.
purposes.
NOTE: Only cash flows on non-operating or non-trade liabilities are included
Two Methods of reporting cash flows from operating activities as financing activities.
1. Direct Method – shows each major class of gross cash receipts and gross cash
payments. Interests and Dividends
2. Indirect Method – profit or loss is adjusted for the effects of non-cash items and
changes in operating assets and liabilities Cash flows Option 1 Option 2
1. Interest income received Operating activity Investing activity
NOTE: Direct method provides more understandable information not disclosed 2. Interest expense paid Operating activity Financing activity
under indirect method. However, in reality, indirect method is far more preferred 3. Dividend income received Operating activity Investing activity
because it’s easier to get the information based on your accounting records. (in 4. Dividend paid to owners Financing activity Operating activity
most cases).

Investing Activities – the acquisition and disposal of long-term assets and other PAS 2 – INVENTORIES
investments not included in cash equivalents.
Inventories:
Examples of cash flows from investing activities: • held for sale in the ordinary course of business (finished goods);
• cash receipts and cash payments in the acquisition and disposal of property, plant • in the process of production for such sale (work in process); or
and equipment, investment property, intangible assets, and other noncurrent • in the form of materials or supplies to be consumed in the production process on
assets; in the rendering of services (raw materials and manufacturing supplies)
• cash receipts and cash payments in the acquisition and sale of equity or debt
instruments of other entities (other than those that are classified as cash Measurement of Inventories (Lower of Cost and Net Realizable Value (LCNRV))
equivalents or held for trading)
• cash receipts and cash payments on derivative assets and liabilities (other than Cost – comprises the following:
those that are held for trading or classified as financing activities);  purchase price
• loans to other parties and collections thereof (other than those loans made by a  conversion cost (to convert raw materials into finished goods) = Direct Labor +
financial institution) Manufacturing Overhead
 Other costs (necessary in bringing the inventories to their present location and
Financing Activities – those that affect the entity’s equity capital and borrowing condition)
structure.
Cost Formulas (in order of applicability):
Examples of cash flows from financing activities: 1. Specific Identification;
• cash receipts from issuing shares or other equity instruments and cash payments 2. First In, First Out (FIFO); and
to redeem them; 3. Weighted Average
• cash receipts from issuing notes, loans, bonds, and mortgage payable and other
short-term or long-term borrowings, and their repayments;
Specific Identification – used for inventories that are not ordinarily interchangeable and NOTE: In case of a write-down and subsequently the NRV increases, the
those that are segregated for specific projects. Under this formula, specific costs are previous write-down is reversed. However, the amount of reversal shall not
attributed to identified items of inventory. Accordingly: exceed the original write-down.
 Cost of sales = actual costs of the specific items sold;
 Ending inventory = actual costs of the specific items on hand.
PAS 41 – AGRICULTURE
First-In, First-Out (FIFO) – it is assumed that inventories that were purchased or
produced first are sold first, and therefore unsold inventories at the end of the period are Agricultural Activity – the management by an entity of the biological transformation
those most recently purchased or produced. Accordingly: and harvest of biological assets for sale or for conversion into agricultural produce or into
 Cost of sales = costs from earlier purchases; additional biological assets.
 Ending inventory = costs from the most recent purchases.
Common features of agricultural activities:
Weighted Average (as a matter of company policy) – cost of sales and ending inventory 1. Capability of change (biological transformation);
are determined based on the weighted average cost of beginning inventory and all 2. Management of change;
inventories purchased or produced during the period. 3. Measurement of change

Forms of average: QUERY: Is managing animal-related recreational activities agricultural

1. Periodic Average (Total Goods Available for Sale in pesos ÷ Total goods activity? No. Managing recreational activities – for example, game parks and
available for sale in units); zoos – is not agricultural activity, as there is no management of the
2. Perpetual/Moving Average (adjusted for each additional purchase or purchase transformation of the biological assets but simply control of the number of
returns is made). animals.

Net Realizable Value (an entity-specific value) – the estimated selling price in the QUERY: Is the natural breeding of animals in zoos and game parks
ordinary course of business less the estimated costs of completion and the estimated costs agricultural activity? No. The natural breeding that takes place is not a managed
necessary to make the sale. activity and is incidental to the main activity of providing a recreational facility.
A managed breeding programme carried out to produce animals for sale would
NOTE: Measuring inventories at LCNRV is in line with the basic accounting be considered agricultural activity.
concept that an asset shall not be carried at an amount that exceeds its
recoverable amount (Conservatism/Prudence Principle). Biological asset – a living animal or plant.

If: NOTE: Living animals, whether consumable or bearer, are classified as

• Cost > NRV; then, cost of the inventories shall be written down to its NRV and biological assets if they relate to agriculture activity. However, living plants are
the difference shall be recorded as an expense; classified as biological assets only if they are consumable. Bearer plants are
classified as PPE.
• Cost < NRV; then, no adjustment is necessary.
Bearer plant - a living plant that:
NOTE: Write-downs of inventories are usually carried out on an item by item • is used in the production or supply of agricultural produce;
basis. • is expected to bear produce for more than one period; and
 • has a remote likelihood of being sold as agricultural produce, except for PAS 16 – PROPERTY, PLANT AND EQUIPMENT
incidental scrap sales.
Property, Plant and Equipment (PPE)
NOTE: Plants that are to be harvested as agricultural produce are not bearer • Tangible assets;
plants. • held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes; and
NOTE: Annual crops and similar plants that die once their produce has been • are expected to be used during more than one period.
harvested are considered consumable plants, and therefore classified as
biological assets. Recognition (when)
1. It is probable that future economic benefits associated with the item will flow to
Agricultural produce – the harvested produce of the entity’s biological assets (in their the entity; and
natural state and not yet processed). 2. The cost of the item can be measured reliably.

NOTE: PAS 41 applies to agricultural produce ONLY at the point of harvest. NOTE: This recognition principle shall be applied to all costs at the time they
After harvest, PAS 2 – Inventories or other applicable standard is applied. are incurred, both incurred initially to acquire or construct an item of property,
plant and equipment and incurred subsequently after recognition to add to,
NOTE: Biological assets and agricultural produce are accounted for under PAS replace part of or service it.
41 ONLY when they relate to agricultural activity.
NOTE: Some items of property, plant and equipment might be necessary to
Measurement acquire for safety or environmental reasons. Although they do not directly
increase the future economic benefits, they might be inevitable to obtain future
• Biological assets (initially and subsequently) - @ fair value less costs to sell. economic benefits from other assets and therefore, should be recognized as an
Any change in FVLCTS will be recognized in profit or loss. asset.

NOTE: If the fair value cannot be reliably determined, the biological asset shall Initial Measurement - At Cost which includes:
be measured initially at cost and subsequently at cost less accumulated • its purchase price including import duties, non-refundable purchase taxes, after
depreciation and accumulated impairment losses until such time when its fair deducting trade discounts and rebates;
value can be reliably determined. • any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
• Agricultural produce (ONLY at the point of harvest) - @ fair value less cost to management;
sell • the initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located.
Government Grants
Only government grants that are related to biological assets measured at fair value less
costs to sell are accounted for under PAS 41. Those that are related to biological assets
measured at cost less accumulated depreciation and accumulated impairment losses are
accounted for under PAS 20.
 NOTE: Such accounting policy shall be applied to an entire class of PPE.

Cost Model – the PPE is carried at its cost less any accumulated depreciation and any
accumulated impairment losses.

Revaluation Model – the PPE is carried at its fair value at the date of the revaluation
less any subsequent accumulated depreciation and subsequent accumulated impairment
losses.

NOTE: An entity shall revalue its assets with sufficient regularity so that the
carrying amount does not differ materially from its fair value at the end of the
reporting period. If an item of property, plant and equipment is revalued, the
entire class of property, plant and equipment to which that asset belongs shall
be revalued.

NOTE: The change of asset’s carrying amount as a result of revaluation shall be

NOTE: The cost of an item of property, plant and equipment is the cash price treated in the following way:
equivalent at the recognition date.
Change in
NOTE: If payment is deferred beyond normal credit terms, the difference Carrying Where?
between the cash price equivalent and the total payment is recognized Amount
as interest over the period of credit (unless such interest is capitalized in Increase Other comprehensive income Profit or Loss, if reverses
accordance with PAS 23). (heading “Revaluation previous revaluation
Surplus”) decrease of the same value
NOTE: If an asset is acquired in exchange for another non-monetary asset, the Decrease Profit or Loss Other comprehensive
cost will be measured using the following order of priority: income if reduces previously
1. Fair value of the asset given up; recognized revaluation
2. Fair value of the asset received surplus (heading
3. Carrying amount of the asset given up “Revaluation surplus”)

If the exchange lacks commercial substance, the PPE acquired is measured at Subsequent accounting for revaluation surplus
the carrying amount of the asset given up. a. If the revalued asset is non-depreciable, the whole of the revaluation surplus is
transferred directly to retained earnings when the asset is derecognized.
Subsequent Measurement (by way of an accounting policy, either): b. If the revalued asset is depreciable, a portion of the revaluation surplus may be
• Cost Model; or transferred directly to retained earnings as the asset is used.
• Revaluation Model
NOTE: Transfers from revaluation surplus to retained earnings are not made
through profit or loss.
Depreciation - the systematic allocation of the depreciable amount of an asset over its Derecognition (when):
useful life. • Upon disposal; or
• No future economic benefits are expected from the asset’s use or disposal.
When dealing with the depreciation please do have 3 basic things in mind:
• Depreciable amount: Depreciable amount is simply HOW MUCH you are going NOTE: The gain (not classified as revenue!) or loss arising from the
to depreciate. It is the cost of an asset, or other amount substituted for cost, less derecognition of an item of property, plant and equipment shall be
its residual value. included in profit or loss when the item is derecognized. The gain or loss
• Depreciation period: Depreciation period is simply HOW LONG you are going from the derecognition is calculated as the net disposal proceeds
to depreciate and it is basically asset’s useful life. Useful life is the period over (usually income from sale of item) less the carrying amount of the item.
which an asset is expected to be available for use by an entity; or the number of
production or similar units expected to be obtained from the asset by an entity.
PAS 23 – BORROWING COSTS
NOTE: Useful life and asset’s residual value (input to depreciable amount) shall
be reviewed at least at the end of each financial year. If there is a change in the Borrowing costs (interest or finance costs) – costs incurred by an entity in connection
expectations comparing to previous estimates, then change shall be accounted with the borrowing of funds.
for as a change in an accounting estimate in line with PAS 8 (no restatement of
previous periods). NOTE: Borrowing costs are finance charges that are directly attributable to the
acquisition, construction or production of a qualifying asset that form part of the
NOTE: Depreciation starts when the asset is available for use, in the manner cost of that asset, i.e. such costs are capitalized. All other borrowing costs are
intended by management. Depreciation stops when the asset is: recognized as an expense.
(a) derecognized;
(b) classified as held for sale under PFRS 5; or Qualifying Asset - an asset that necessarily takes a substantial period of time to get ready
(c) fully depreciated. for its intended use or sale.

• Depreciation method: This is simply HOW, IN WHAT MANNER you are going NOTE: PAS 23 does not say it must necessarily be an item of a property, plant
to depreciate. The depreciation method used shall reflect the pattern in which the and equipment under PAS 16. It can also include some inventories or intangibles,
asset’s future economic benefits are expected to be consumed by the entity. too! But what is a “substantial period of time”? Well, that’s not defined in PAS
23, so here you need to apply some judgment. Normally, if an asset takes more
NOTE: Selected method shall be reviewed at least at the end of each financial than 1 year to be ready, then it would be qualifying.
year. If there is a change in the expected pattern of asset’s usage, then the
depreciation method shall be changed and be accounted for as a change in an The following are not qualifying assets:
accounting estimate. a. Financial assets;
b. Inventories that are routinely produced over a short period of time or are mass-
Examples of depreciation method: produced on a repetitive basis;
1. Straight-line method; c. Assets that are ready for their intended use or sale when acquired;
2. Diminishing balance method; d. Assets measured at fair value.
3. Unit of production method.
Borrowing costs eligible for Capitalization.

NOTE: Borrowing costs are capitalized if they are avoidable, meaning they
would not have been incurred if the expenditure on the qualifying asset had not
been made.

NOTE: In case there is suspension of capitalization, borrowing costs during this

period shall be expensed.

To summarize the main requirement of the standard (A decision tree):

NOTE: The amount of borrowing costs that an entity capitalizes during a period
in relation to general borrowings shall not exceed the amount of borrowing costs
it incurred during that period.

Commencement, Suspension and Cessation of capitalization

 Down payment Note payable
WRAP UP EXERCISES: a. Investing activities None
b. Investing activities Financing activities
c. Financing activities None
Exercise 1. True or False. d. None None
1. Cash flows relating to income and expenses are normally classified as
investing activities in the statement of cash flows. 3. Which of the following is not included as part of the cost of an inventory?
2. According to PAS 7, the indirect method of presenting cash flows relating a. Purchase cost, net of trade discount
to operating activities shows each major class of gross cash receipts and b. Direct labor cost
gross cash payments. c. Freight in
3. Storage costs of part-finished goods may be included in the cost of d. Selling cost
inventory, but not storage costs of finished goods.
4. Reversals of inventory write-downs may exceed the amount of the original 4. Entity A is a distributor of oil. Entity A’s inventories are ordinarily
write-down previously recognized. interchangeable. Entity A maintains a specific level of inventory such that
5. Biological assets are initially and subsequently measured at fair value. the latest purchases are the ones dispatched first to the sales outlets.
6. Agricultural produce is initially and subsequently measured at fair value Consequently, the latest purchases are sold first. Which of the following
less costs to sell. cost formulas shall be used by Entity A?
7. Under PAS 16, a PPE shall be subsequently measured at cost less any a. Specific Identification c. Weighted Average
accumulated depreciation and any accumulated impairment losses. b. First-in, First-out (FIFO) d. b or c
8. Animals in zoos and recreational parks shall be accounted under PAS 16.
9. Building that is ready for its intended use upon purchase is considered a 5. Which of the following is a biological asset that is accounted for under
qualifying asset. PAS 41?
10. Borrowing costs that do not directly relate to the acquisition, construction, a. Plants used for beautification
or production of a qualifying asset are expensed as incurred. b. Bearer plant
c. Dead animals used for display
Exercise 2. Multiple Choices. d. Dairy cattle used to produce milk

1. Which of the following is presented in the activities section of the 6. Which of the following is an agricultural activity?
Statement of Cash Flows? a. Poaching c. deforestation
a. Purchase of a treasury bill three months before its maturity date. b. Hunting in the forest d. fish farming
b. Exchange differences from translating foreign currency
denominated cash flows. 7. Which of the following does not form part of the initial cost of an item of
c. Acquisition of equipment through issuance of note payable. PPE?
d. Bank overdrafts that can be offset. a. Purchase price, net of trade discounts and rebates
b. Freight costs
2. Entity A acquires equipment by paying a 10% down payment and issuing a c. Installation and testing costs
note payable for the balance. How should Entity A report the transaction in d. Advertising and promotional costs
the statement of cash flows?
8. The depreciation method prescribed by PAS 16 is
a. Straight-line c. units of production
b. Diminishing balance d. none

9. Which of the following is a qualifying asset?

a. Biological asset measured at fair value less costs to sell
b. A multi-million dollar executive jet plane that is ready for its
intended use upon purchase
c. A second-hand heavy machinery that takes 2 years to refurbish and
customize for its intended use
d. A long-term note receivable (financial asset)

10. In which of the following instances is the capitalization of borrowing costs

under PAS 23 would most likely be suspended?
a. Construction is temporarily stopped for the curing of concrete
b. Active development is stopped to give time for the engineers to
reevaluate a design flaw
c. The construction of a bridge is disrupted by troubled waters
d. The construction of a building is discontinued because it is
condemned by the government. The resumption of development is
uncertain.

Answers to Exercises:
1. False; 2. False; 3.True; 4. False; 5. False; 6. False; 7. False; 8. True; 9. False; 10. True.
1. B; 2. A; 3. D; 4. D; 5. D; 6. D; 7. D; 8. D; 9. C; 10. D.
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Conceptual Framework & Accounting
Textbook: Conceptual Framework & Accounting Textbook: Conceptual Framework & Accounting Standards by Zeus Vernon B. Millan
Standards by Zeus Vernon B. Millan Standards by Zeus Vernon B. Millan
References and Sources:
References and Sources: References and Sources: 1. https://www.ifrsbox.com/ias-16-property-plant-
1. https://www.ifrsbox.com/ias-16-property-plant- 1. https://www.ifrsbox.com/ias-16-property-plant- and-equipment/
and-equipment/ and-equipment/ 2. https://www.pkf.com/media/10031775/ias-23-
2. https://www.pkf.com/media/10031775/ias-23- 2. https://www.pkf.com/media/10031775/ias-23- borrowing-costs-summary.pdf
borrowing-costs-summary.pdf borrowing-costs-summary.pdf 3. https://www.ifrsbox.com/capitalize-borrowing-
3. https://www.ifrsbox.com/capitalize-borrowing- 3. https://www.ifrsbox.com/capitalize-borrowing- costs-ias-23/
costs-ias-23/ costs-ias-23/

Activities:
Activities: Activities: Topic discussion will be during classroom meetups,
Topic discussion will be through GoogleMeet App., Topic discussion will be through GoogleMeet App., and during which the exercises will be supplied with
during which the exercises will be supplied with during which the exercises will be supplied with answers.
answers. answers. Such teleconferencing will be recorded, the
video of which will be made available to you via Assessment:
Assessment: Messenger Group Chat or Gmail address. Topic quiz will be issued to you and will be answered
Topic quiz will be published at Schoology App. at home, which will be immediately due for
Instructions as to the time allocated for answering and Assessment: submission the following day at the box placed at the
deadline for submission of quiz will be announced via Topic quiz will be published at Schoology App. SVCI guard house. Communication as to the receipt
Messenger Group Chat. Instructions as to the time allocated for answering and the said quiz will be through text messaging.
deadline for submission of quiz will be announced via
Messenger Group Chat.
PAS 40, PAS 20, PFRS 6, PFRS 5
Time Duration and Allotment: Week 4; 6 hours

Abstract:
This study focuses on the summary of the accounting standards enumerated above.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• properly account investment properties;
• properly account government grants and explain their presentation in the financial statements.
• discuss the accounting for exploration and evaluation expenditures.
• describe the criteria for held for sale classification and its accounting.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the two (2) exercises presented after the topic content below.

TOPIC CONTENT apply PAS 16; and the standard PAS 2 Inventories fits when you use them for the
sale in ordinary course of business.

PAS 40 – INVESTMENT PROPERTY Owner-occupied property – held (by the owner or by the lessee under a finance lease)
for use in the production or supply of goods or services or for administrative purposes.
Investment property – land or a building or part of a building or both held by the owner Owner-occupied property is classified as PPE.
or by the lessee under a finance lease to earn rentals or for capital appreciation or both.
Examples of Investment Property:
NOTE: Here, the strong impact in on purpose. If you hold a building or a land
for any of the following purposes, then it cannot be classified as investment • Land held as an investment for long-term capital appreciation,
property: • Land held for future undetermined use (i.e. you don’t know yet what you’ll use it
• For production or supply of goods or services, for).
• For administrative purposes, or
• For sale in ordinary course of business. NOTE: However, if you buy a land and you intend to build some production hall
for your own purposes sometime in the future, then this land is NOT an
If you’re using your building or land for the first 2 purposes, then you should investment property.
 • A building owned by the entity (or a right-of-use asset relating to a building held Inter-company rentals
by the entity) and leased out under one or more operating leases.
Property leased to, and occupied by, its parent or subsidiary does not qualify as
NOTE: This includes a building that is still vacant, but you plan to lease it out. investment property in consolidated financial statements because the property is owner-
occupied from the perspective of the group. Such property will be investment property in
NOTE: Property that is leased out to another entity under a finance lease is not the separate financial statements of the lessor.
an investment property.
When to recognize investment property
NOTE: Property occupied by employees (whether or not the employees pay rent
at market rates) is not an investment property The rules for recognition of investment property are essentially the same as stated in IAS
16 for property, plant and equipment, i.e. you recognize an investment property as an
• Any property that you actually construct or develop for future use as investment asset only if 2 conditions are met:
property. 1. It is probable that future economic benefits associated with the item will flow to
the entity; and
NOTE: Be careful here again, because when you construct a building for some 2. The cost of the item can be measured reliably.
third party, this is NOT an investment property, but you should apply PAS 11
Construction contracts, or PFRS 15 Revenue from Contracts with Customers. Initial Measurement (@ Cost)

Partly investment property and partly owner-occupied The cost of investment property includes:
• Its purchase price and
Some properties comprise a portion that is held to earn rentals or for capital appreciation • Any directly attributable expenditure, such as legal fees or professional fees,
and another portion that is held for use in the production or supply of goods or services or property taxes, etc.
for administrative purposes.
NOTE: You should NOT include:
If these portions could be sold separately (or leased out separately under a finance lease),  Start-up expenses. However, if these start-up expenses are directly
an entity accounts for the portions separately. attributable to the item of investment property, then you can include
them. But do NOT include any general start-up expenses;
If the portions could not be sold separately, the property is investment property only if an  Operating losses that you incur before planned occupancy level is
insignificant portion is held for use in the production or supply of goods or services or for achieved; and
administrative purposes.  Abnormal waste of material, labor or other resources incurred at
construction.
Provision of ancillary services to occupants
NOTE: When payment for investment property is deferred, then you need to
In some cases, an entity provides ancillary services to the occupants of a property it discount it to its present value in order to set the cash price equivalent. The
holds. An entity treats such a property as investment property if the services are difference between the cash price equivalent and the total payments is recognized
insignificant to the arrangement as a whole. An example is when the owner of an office as interest expense over the credit period, unless it qualifies for capitalization
building provides security and maintenance services to the lessees who occupy the under PAS 23.
building. In other cases, the services provided are significant.
 NOTE: If an investment property is acquired in exchange for another non-
monetary asset, the cost of the investment property will be measured using the
following order of priority:
1. Fair value of the asset given up;
2. Fair value of the asset received
3. Carrying amount of the asset given up

If the exchange lacks commercial substance, the investment property acquired is

measured at the carrying amount of the asset given up.

Subsequent Measurement (by way of an accounting policy and, as a general rule, be

applied to all investment properties)
• Cost Model; or
• Fair value Model

Cost Model (same as PAS 16)

(NOTE: IAS 16 and IAS 40 are the international counterparts of PAS 16 and PAS 40)
Fair value Model - Under this model, an investment property is carried at fair value at
the reporting date. The fair value is determined in line with the standard PFRS 13 – Fair Revaluation model versus Fair value model
Value Measurement. A gain or loss from re-measurement to fair value shall be
recognized in profit or loss. Revaluation model
You can apply this model for any assets used for more than 1 year in the production
NOTE: Sometimes, the fair value cannot be reliably measurable after initial process, for rental to others or for administrative purposes, including your buildings or
recognition. This can happen in absolutely rare circumstances (e.g. active machinery. Under this model, you should revalue your assets regularly to their fair
marked ceased existing) and in this case, PAS 40 prescribes: value and depreciate revalued amount over remaining useful life. When you revalue
• To measure your investment property at cost, if it’s not yet completed your assets, the change is recognized in other comprehensive income (with some
and is under construction; or exceptions). Here, the important thing is that you can use revaluation model also for
• To measure your investment property using cost model, if it’s completed. machinery (unlike fair value model) and also, you charge depreciation (not under fair
value model).
NOTE: Fair value model (PAS 40) is different from Revaluation model (PAS
16). Fair value model
You can apply this model only for buildings and lands held either to earn rentals or for
capital appreciation (or both). Under this model, you should value your assets at their
fair value after initial recognition, with the fair value changes recognized in profit or
loss. Here, you cannot apply fair value model to your machinery (unlike revaluation
model), and also, you do NOT charge any depreciation.
 QUERY: Can you actually switch from cost model to fair value model or vice Derecognition
versa from fair value model to cost model? The answer is YES, but only if the • upon disposal
change results in the financial statements providing more relevant and more • when the investment property is permanently withdrawn from use and
reliable information about the company’s financial position, results and other no future economic benefits are expected.
events.
NOTE: The difference between the carrying amount and the net disposal
What does it mean in practice? Switching from cost model to fair value model proceeds, if any, is recognized as gain or loss in profit or loss.
would probably meet the condition and therefore, you can do it whenever you’re
sure that you’ll be able to determine the fair value regularly and the fair value
model fits better. However, the opposite change – switch from fair value model to PAS 20 – ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE
cost model – is highly unlikely to result in more reliable presentation. Therefore, OF GOVERNMENT ASSISTANCE
you should not really do it, and if – rarely and for good reasons.

Transfer from and to investment property (only when there’s a change in use or Government assistance - an action by the government designed to provide an economic
asset’s purpose) benefit specific to an entity or range of entities qualifying under certain criteria.
Government assistance for the purpose of this Standard does not include benefits
If the entity uses the cost model, transfers between investment property, PPE and provided only indirectly through action affecting general trading conditions, such as the
inventories are accounted for at the carrying amount of the asset transferred. No gain or provision of infrastructure in development areas or the imposition of trading constraints
loss arises because the asset’s measurement remains the same before and after the on competitors.
transfer.
Government grants – assistance by the government in the form of transfers of resources
For a transfer from investment property carried at fair value to owner-occupied property to an entity in return for past or future compliance with certain conditions relating to the
or inventories the property’s deemed cost for subsequent accounting in accordance with operating activities of the entity. They exclude those forms of government assistance
IAS 16 Property, plant and equipment or IAS 2 Inventories shall be its fair value at the which cannot reasonably have a value placed upon them and transactions with
date of change in use. government which cannot be distinguished from the normal trading transactions of the
entity.
If an owner-occupied property becomes an investment property that will be carried at fair
value, an entity shall apply IAS 16 Property, plant and equipment up to the date of The following are forms of government assistance but are not government grants:
change in use. The entity shall treat any difference at that date between the carrying • tax benefits
amount of the property in accordance with IAS 16 Property, plant and equipment and its • free technical or marketing advice
fair value in the same way as a revaluation in accordance with IAS 16 Property, plant and • provision of guarantees
equipment. • government procurement policy that is responsible for a portion of the entity’s
sales.
For a transfer from inventories to investment property that will be carried at fair value,
any difference between the fair value of the property at that date and its previous carrying NOTE: The above government assistance, if significant, are only disclosed.
amount shall be recognized in profit or loss.
 NOTE: PAS 20 deals with almost all types of government grants, A government grant that becomes receivable:
with the following exclusions: • As compensation for expenses or losses already incurred or for the purpose of
• Government assistance in the form of tax reliefs (tax breaks, giving immediate financial support to the entity with no future related costs, shall
tax holidays, etc.), be recognized in profit or loss of the period in which it becomes receivable.
• Grants related to agriculture under PAS 41; • For the purpose of giving immediate financial support to an entity rather than as
an incentive to undertake specific expenditures may warrant recognizing a grant
• Grants in the financial statements that reflect the effect of
in profit or loss of the period in which the entity qualifies to receive it, with
changing prices; and disclosure to ensure that its effect is clearly understood.
• Government acting as a part-owner of the entity. • As compensation for expenses or losses incurred in a previous period, is
recognized in profit or loss of the period in which it becomes receivable, with
Recognition (if there is a reasonable assurance that:) disclosure to ensure that its effect is clearly understood.
a. the attached conditions will be complied with; and
b. the grants will be received. Presentation
Types of government grants according to attached condition Grant related to assets
1. Grants related to assets – whose primary condition is that the recipient entity If an entity receives the grant for acquisition of some assets, there are 2 options to present
should acquire or construct long-term assets. such grant in the financial statements:
2. Grants related to income – grants other than those related to assets. • To present it as deferred income; or
• To deduct the grant from the carrying amount of an asset acquired.
Accounting for government grants
Grant related to income
NOTE: You should never credit the receipt of any grant directly in equity. This Here, you need to differentiate between the grants for past costs (already incurred) or
capital approach is not permitted in PFRS. the grants for current or future costs. If the grant is provided to reimburse costs
incurred in the past, then it is recognized immediately in profit or loss. If the grant is
Instead, PFRS prescribe so-called “income approach” – to recognize grants as provided to reimburse costs incurred or to be incurred at the present time or in the
income over the relevant periods to match them with the related expenditures or future, then the grant is recognized in profit or loss in the periods when the costs are
costs they should compensate. incurred.
Therefore: From the presentation point of view, there are 2 options:
1. To present the grant income as a separate line item as “other income”, or
• Grants in recognition of specific expenses are recognized in profit or loss in the 2. To deduct the grant income from the related expense.
same period as the relevant expenses.
• 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.
• Grants related to non-depreciable assets may also require the fulfillment of
certain obligations and would then be recognized in profit or loss over the
periods that bear the cost of meeting the obligations.
 Disclosure

PFRS 6 – EXPLORATION FOR AND EVALUATION OF MINERAL

RESOURCES.

Scope

• An entity applies PFRS 6 to exploration and evaluation expenditures that it

Repayment of grants incurs.
• An entity does not apply PFRS 6 to expenditures incurred:
A government grant that becomes repayable shall be accounted for as a change in  Before the exploration for and evaluation of mineral resources, such as
accounting estimate (see PAS 8 Accounting Policies, Changes in Accounting Estimates expenditures incurred before the entity has obtained the legal rights to
and Errors). explore a specific area;
 After the technical feasibility and commercial viability of extracting a
Repayment of a grant related: mineral resource are demonstrable.
a. to income shall be applied first against any unamortized deferred credit
recognized in respect of the grant. To the extent that the repayment exceeds any NOTE: In other words, the standard applies to expenditures incurred after the
such deferred credit, or when no deferred credit exists, the repayment shall be entity has obtained legal rights to explore in a specific area but before the
recognized immediately in profit or loss. existence of mineral reserves is in fact established and the technical feasibility
b. to an asset shall be recognized by increasing the carrying amount of the asset or and commercial viability of extracting mineral resources are demonstrable.
reducing the deferred income balance by the amount repayable. The cumulative
additional depreciation that would have been recognized in profit or loss to date NOTE: Expenditures incurred after technical feasibility and commercial
in the absence of the grant shall be recognized immediately in profit or loss. viability are demonstrable are called development costs.

Initial Measurement

At recognition, exploration and evaluation assets are measured at cost.

Elements of costs of exploration and evaluation assets the entity has decided to discontinue such activities in the specific area
• Sufficient data exists to indicate that, although a development in the specific area
An entity determines an accounting policy specifying which expenditures are recognized is likely to proceed, the carrying amount of the exploration and evaluation asset
as exploration and evaluation assets is unlikely to be recovered in full from successful development or by sale.

The following are examples of expenditures that might be included in the initial NOTE: An entity determines an accounting policy for allocating exploration and
measurement of exploration and evaluation assets: evaluation assets to cash-generating units or groups of cash-generating units for
• Acquisition of rights to explore the purpose of assessing such assets for impairment.
• Topographical, geological, geochemical and geophysical studies
• Exploratory drilling Disclosure Requirements
• Trenching An entity discloses information that identifies and explains the amounts recognized in its
• Sampling financial statements arising from the exploration for and evaluation of mineral resources.
• Activities in relation to evaluating the technical feasibility and commercial
viability of extracting a mineral resource. An entity discloses:
• Its accounting policies for exploration and evaluation expenditures and
Subsequent Measurement evaluation assets
After recognition, an entity applies either the cost model or the revaluation model to the • The amounts of assets, liabilities, income and expense and operating and
exploration and evaluation assets. Refer to PAS 16 Property, Plant and Equipment and investing cash flows arising from the exploration for and evaluation of mineral
PAS 38 Intangible Assets for guidance. resources.

Presentation Exploration and evaluation assets are disclosed as a separate class of assets in the
An entity classifies exploration and evaluation assets as tangible or intangible according disclosures required by PAS 16 Property, Plant and Equipment or PAS 38 Intangible
to the nature of the assets acquired and applies the classification consistently. Assets.

Changes in accounting policies

An entity may change its accounting policies for exploration and evaluation expenditures PFRS 5 – NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED
if the change makes the financial statements more relevant and no less reliable to the OPERATIONS
economic decision-making needs of users, or more reliable and no less relevant to those
needs. This Standard does not apply to:
a. Deferred tax assets (PAS 12 Income Taxes).
Impairment (indications) b. Assets arising from employee benefits (PAS 19 Employee Benefits).
• The period for which the entity has the right to explore in the specific area has c. Financial assets within the scope of PAS 39 Financial Instruments: Recognition
expired during the period or will expire in the near future, and is not expected to and Measurement.
be renewed d. Non-current assets that are accounted for in accordance with the fair value
• Substantive expenditure on further exploration for and evaluation of mineral model in PAS 40 Investment Property.
resources in the specific area is neither budgeted nor planned e. Non-current assets that are measured at fair value less costs to sell in accordance
• Exploration for and evaluation of mineral resources in the specific area have not with PAS 41 Agriculture.
led to the discovery of commercially viable quantities of mineral resources and f. Contractual rights under insurance contracts as defined in PFRS 4 Insurance
 Contracts. disposal group as discontinued operations at the date on which it ceases to be
used.
NOTE: When you classify any of the above types of assets as assets held for sale,
you continue measuring them under the same accounting policies as before NOTE: An entity shall not account for a non-current asset that has been
classification (e.g. financial instrument held for sale will still be measured under temporarily taken out of use as if it had been abandoned.
PFRS 9, not PFRS 5).
Measurement
Non-Current Asset Held for Sale – a noncurrent asset whose carrying amount will be An entity shall measure, initially and subsequently, a non-current asset (or disposal
recovered principally through a sale transaction rather than through continuing use. group) classified as held for sale at the lower of its carrying amount and fair value less
costs to sell.
Conditions for classification as held for sale

1. 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 asset; and
2. Its sale must be highly probable, as evidenced by the existence of all of the
following:
a. management must be committed to a plan to sell the asset;
b. an active program to locate a buyer must have been initiated;
c. the asset (or disposal group) must be actively marketed for sale at a price
that is reasonable in relation to its current fair value;
d. the sale is expected to be completed within 1 year from the date of Changes in fair value less costs to sell
classification; Subsequent changes in fair value less costs to sell are recognized in profit or loss as
impairment loss or gains on reversal of impairment.
NOTE: Events or circumstances may extend the period to complete the sale
beyond one year. An extension of the period required to complete a sale does not NOTE: However, a gain on reversal of impairment is recognized only to the
preclude an asset (or disposal group) from being classified as held for sale if the extent of cumulative impairment losses that have previously been recognized.
delay is caused by events or circumstances beyond the entity’s control and there
is sufficient evidence that the entity remains committed to its plan to sell the asset Depreciation and amortization
(or disposal group). Held for sale assets are not depreciated or amortized while they are classified as held for
sale. However, interest and other related expense attributable to financial instruments
e. significant changes to the plan are unlikely included in a disposal group are continued to be recognized.

QUERY: What if the entity decides to abandon the asset, can it qualify to the Changes to a plan of sale
held for sale classification? NO. An entity shall not classify as held for sale a The asset shall no longer be classified as held for sale and will be measured at the lower
non-current asset (or disposal group) that is to be abandoned. This is because its of the asset’s:
carrying amount will be recovered principally through continuing use. However, • carrying amount before it was classified as held for sale, adjusted for any
if the disposal group to be abandoned meets the criteria of a discontinued depreciation, amortization or revaluations that would have been recognized had
operation, as defined, the entity shall present the results and cash flows of the the asset (or disposal group) not been classified as held for sale; and
 • recoverable amount at the date of the subsequent decision not to sell or
distribute, which is the higher between: WRAP UP EXERCISES:
 the asset’s fair value less cost of disposal; and
 its value in use (the present value of estimated future cash flows
expected to arise from the continuing use of an asset and from its Exercise 1. True or False.
disposal at the end of its useful life). 1. According to PAS 40, transfers to or from investment property shall be
made only when there is a change in use.
Discontinued operations – a component of an entity that either has been disposed of or 2. When the entity applies the fair value model to account for its investment
is classified as held for sale and: property subsequent to initial recognition, changes in fair values are
a. represents a separate major line of business or geographical area of operations; recognized in other comprehensive income rather than a direct adjustment
b. is part of a single coordinated plan to dispose of a separate major line of business to equity.
or geographical area of operations; or 3. According to PAS 20, government grants are presented in the financial
c. is a subsidiary acquired exclusively with a view to re-sale. statements using a net presentation only.
4. PAS 20 prescribes the Capital approach in the accounting for government
Component of an entity – operations and cash flows that can be clearly distinguished, grants.
operationally and for financial reporting purposes, from the rest of the entity. 5. According to PFRS 6, expenditures on exploration for and evaluation of
mineral resources are recognized as assets or expenses depending on the
NOTE: However, a gain on reversal of impairment is recognized only to the entity’s accounting policy.
extent of cumulative impairment losses that have previously been recognized. 6. PFRS 6 applies to expenditures incurred before the entity has obtained
legal rights to explore in a specific area.
Presentation of discontinued operations 7. According to PFRS 5, held for sale classification is permitted when the
The results of discontinued operations are presented in the statement of profit or loss and noncurrent asset or disposal group is available for immediate sale in its
other comprehensive income as a single amount comprising the total of the following: present condition and the sale is probable.
a. post-tax profit or loss of discontinued operations; and 8. According to PFRS 5, assets held for sale are measured at fair value.
b. post-tax gain or loss recognized on the measurement to fair value less costs to
sell or on the disposal of the assets or disposal group(s) constituting the Exercise 2. Multiple Choices.
discontinued operation.
1. Entity A uses the fair value model to account for its investment property.
The results of discontinued operations are presented after “profit or loss from continuing At the beginning of the year, the fair value of the investment property is
operations.” P100,000. By the end of the year, the fair value of the investment property
increases to P120,000. Which of the following statements is correct?
Presentation in the Statement of Financial Position a. Entity A recognizes a gain of P20,000 in profit or loss
Held for sale assets are presented in the statement of financial position as current assets. b. Entity A recognizes a gain of P20,000 in other comprehensive
The assets and liabilities of a disposal group are presented separately. income
c. Entity A recognizes depreciation on the investment property.
NOTE: Offsetting is not allowed. d. Entity A discloses only the fair value change in the investment
property.
 ‘
2. Which of the following assets may be classified as investment property? 7. Non-current assets are presented as current asset in the statement of
a. Land held for long-term capital appreciation rather than for short- financial position
term sale in the ordinary course of business.
b. Land held for a currently undetermined future use. a. Only when they are expected to be sold within 12 months from the
c. A building owned by the entity (or held by the entity under a lease) end of the reporting period
and leased out under one or more operating leases. b. Only if they are actually sold after the reporting period but before
d. Property that is leased to another entity under a finance lease the date of authorization of the financial statements for issue
c. Only when they qualify as held for sale assets under PFRS 5
3. Non-monetary grants are measured at d. Never presented as current items
a. The fair value of the non-monetary asset.
b. Nominal amount. 8. The results of discontinued operations are presented separately in the
c. The amount of cash received or receivable statement of profit or loss and other comprehensive income
d. A or B a. As a single amount gross of tax
b. As a single amount net of tax
4. Which of the following principles applies most to the accounting for c. As part of the regular line items
government grants? d. A or B.
a. Accrual basis
b. Cash basis
c. Materiality
d. Prudence

5. According to PFRS 6, an entity may change its accounting policies for

exploration and evaluation expenditures if
a. The change makes the financial statements more relevant and more
reliable. Answers to Exercises:
b. The PFRSs do not prohibit the change. 1. True; 2. False; 3. False; 4. False; 5. True; 6. False; 7. False; 8. False.
c. The change makes the financial statements more relevant and no 1. A; 2. D; 3. D; 4. A; 5. C; 6. C; 7. C; 8. B.
less reliable, or more reliable and no less relevant.
d. A or B.

6. According to PFRS 6, how are exploration and evaluation assets measured?

Initial subsequent
a. Cost cost model
b. Cost fair value model
c. Cost cost model or revaluation model
d. Fair value fair value through profit or loss
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Conceptual Framework & Accounting
Textbook: Conceptual Framework & Accounting Textbook: Conceptual Framework & Accounting Standards by Zeus Vernon B. Millan
Standards by Zeus Vernon B. Millan Standards by Zeus Vernon B. Millan
References and Sources:
References and Sources: References and Sources: 1. https://www.pkf.com/media/10031777/ias-40-
1. https://www.pkf.com/media/10031777/ias-40- 1. https://www.pkf.com/media/10031777/ias-40- investment-property-summary.pdf
investment-property-summary.pdf investment-property-summary.pdf 2. https://www.ifrsbox.com/ias-40-investment-
2. https://www.ifrsbox.com/ias-40-investment- 2. https://www.ifrsbox.com/ias-40-investment- property/
property/ property/ 3. https://www.pkf.com/media/10031778/ias-20-
3. https://www.pkf.com/media/10031778/ias-20- 3. https://www.pkf.com/media/10031778/ias-20- accounting-for-government-grants-and-disclosure-
accounting-for-government-grants-and-disclosure- accounting-for-government-grants-and-disclosure- of-government-assistance-summary.pdf
of-government-assistance-summary.pdf of-government-assistance-summary.pdf

Activities: Activities: Activities:

Topic discussion will be through GoogleMeet App., Topic discussion will be through GoogleMeet App., Topic discussion will be during classroom meetups,
during which the exercises will be supplied with during which the exercises will be supplied with and during which the exercises will be supplied with
answers. answers. Such teleconferencing will be recorded, the answers.
video of which will be made available to you via
Assessment: Messenger Group Chat or Gmail address. Assessment:
Topic quiz will be published at Schoology App. Topic quiz will be issued to you and will be answered
Instructions as to the time allocated for answering and Assessment: at home, which will be immediately due for
deadline for submission of quiz will be announced via Topic quiz will be published at Schoology App. submission the following day at the box placed at the
Messenger Group Chat. Instructions as to the time allocated for answering and SVCI guard house. Communication as to the receipt
deadline for submission of quiz will be announced via the said quiz will be through text messaging.
Messenger Group Chat.
Midterm Major Examination
Time Duration and Allotment: 1 day

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Assessment:

Schoology App Schoology App Midterm Major Examination will be issued to you and
will be answered at home, which will be immediately
Assessment: Assessment: due for submission the following day at the box placed
Midterm Major Examination will be published at Midterm Major Examination will be published at at the SVCI guard house. Communication as to the
Schoology App. Instructions as to the time allocated Schoology App. Instructions as to the time allocated receipt the said quiz will be through text messaging.
for answering and deadline for submission of for answering and deadline for submission of
assessment will be announced via Messenger Group assessment will be announced via Messenger Group
Chat. Chat.
PAS 32, PFRS 9, PAS 28, PFRS 7
Time Duration and Allotment: Week 5; 6 hours

Abstract:
This study focuses on the summary of the accounting standards enumerated above.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• state the different types of financial instruments;
• state and discuss the classifications of financial assets and financial liabilities and their initial and subsequent measurements;
• describe and account investments in associates and joint ventures;
• state the necessary disclosures under PFRS 7.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the exercise presented after the topic content below.

TOPIC CONTENT c. a contractual right:

i. to receive cash or another financial asset from another entity; or
ii. to exchange financial assets or financial liabilities with another entity under
PAS 32 – FINANCIAL INSTRUMENTS: PRESENTATION conditions that are potentially favorable to the entity; or
d. a contract that will or may be settled in the entity’s own equity instruments.
Financial Instruments – any contract that gives rise to a financial asset of one entity and
a financial liability or equity instrument of another entity. Examples of financial assets:
a. cash and cash equivalents;
Three main types of financial instruments (from the definition above): b. receivables;
a. Financial asset c. investments in equity or debt instruments of other entities;
b. Financial liability d. sinking fund
c. Equity instrument
NOTE: The following are not financial assets:
Financial Asset – any asset that is: a. physical assets, such as inventories, biological assets, PPE and investment
a. cash; property;
b. an equity instrument of another entity; b. intangible assets;
 c. prepaid expenses and advances to suppliers; Is there a contractual obligation to deliver cash or another financial asset to
d. the entity’s own equity instrument another entity? Or alternatively, to exchange financial assets or financial
liabilities under potentially unfavorable conditions? If YES, then the instrument
Financial Liability - any liability that is: is a financial liability. If NOT, then the instrument is an equity instrument.
a. a contractual obligation:
i. to deliver cash or another financial asset to another entity; or QUERY: What if there is an obligation to deliver own equity instruments and
ii. to exchange financial assets or financial liabilities with another entity under not cash or another financial asset?
conditions that are potentially unfavorable to the entity; or
b. a contract that will or may be settled in the entity’s own equity instruments and is PAS 32 provides that an equity instrument is:
not classified as the entity’s own equity instrument. a. A non-derivative that includes no contractual obligation to deliver
a variable number of own equity instruments, or
Examples of financial liabilities: b. A derivative that will be settled only by the issuer exchanging a fixed
a. payables amount of cash or another financial asset for a fixed amount of its
b. lease liabilities own equity instruments.
c. held for trading liabilities and derivative liabilities
d. redeemable preference shares issued To make it simple, two most important things to watch out are:
e. security deposits and other returnable deposits c. Are equity instruments own or issued by somebody else?
d. Is the amount to deliver or exchange fixed or variable?
NOTE: The following are not financial liabilities:
a. unearned revenues and warranty obligations To illustrate:
b. taxes, SSS, Philhealth, and Pag-Ibig payables
c. constructive obligations a. You sell an option to deliver 100 shares of San Miguel Corporation to
your friend. This is a financial liability, because the shares are NOT
Equity Instrument - any contract that evidences a residual interest in the assets of an YOUR OWN shares. They are shares of somebody else (SMC in this
entity after deducting all of its liabilities. case).

Presentation b. You sell an option to deliver your own shares in total value of
P1,000.00 to your friend. This is a financial liability, too, because
The rule provided by the standard is to classify the financial instruments on initial although the shares are yours, their number is variable. Why?
recognition as a financial liability, a financial asset or an equity instrument in accordance Because, the exact number of shares will depend on the current price
with: of the share at the delivery.
a. The substance of the contract, and
b. The definitions of a financial asset, financial liability and an equity instrument. c. You sell an option to deliver 100 pieces of your own shares to your
friend. This is an equity instrument, because the shares are yours and
NOTE: It is not such a big deal to classify financial assets, but sometimes there their amount is fixed – 100.
are challenges to distinguish between financial liabilities and equity instruments.
The main question to respond when classifying an instrument as either a
financial liability or an equity instrument is:
In a summary: Basis of classification

Financial asset/Financial Liability Equity instrument Financial assets, except those that are designated, are classified on the basis of both:
 Variable number for a fixed amount.  Fixed number for a fixed amount. a. Business Model Test – What is the objective of holding financial assets?
 Fixed number for a variable amount. Collecting the contractual cash flows? Selling?

NOTE: If you acquire your own shares (known as “Treasury shares”), you need NOTE: Business model refers to how an entity manages its financial assets in
to deduct them from equity and NOT recognize them as financial assets. order to generate cash flows.

Compound Financial Instrument (from the issuer’s standpoint) – a financial instrument b. Contractual cash flows’ characteristics test – Are the cash flows from the
that contains both a liability and an equity component. financial assets on the specified dates solely payments of principal and interest on
the principal outstanding? Or, is there something else?
NOTE: These components are classified and accounted for separately. In order
to do this, first, allocate the value of the liability component from the fair value of Classification at Amortized Cost (both must be met):
the whole instrument. The remainder will be allocated to the equity component. a. Business model test is met, i.e. you hold the financial assets only to collect
contractual cash flows (not to sell them), and
Offsetting a financial asset and a financial liability b. Contractual cash flows’ characteristics test is met, i.e. the cash flows from the
asset are only the payments of principal and interest.
PAS 32 sets the following rules when you must offset a financial asset with a financial
liability: Classification at Fair Value through Other Comprehensive Income (both must be
a. When you have a legally enforceable right to set off the recognized amounts, and met):
b. When you intend to settle on a net basis, or realize the asset and the liability a. the financial asset is held within a business model whose objective is achieved by
simultaneously. both collecting contractual cash flows and selling financial assets; and
b. the contractual terms of the financial asset give rise on specified dates to cash
NOTE: Both the conditions above must be met before offsetting is permitted. flows that are solely payments of principal and interest on the principal amount
outstanding.

PFRS 9 – FINANCIAL INSTRUMENTS NOTE: You can voluntarily choose to measure some equity instruments at
FVOCI. This is an irrevocable election at initial recognition.
When to recognize a financial instrument? When the entity becomes a party to the
contractual provisions of the instrument Classification at Fair Value through Profit or Loss (Ex: Held for trading)
All other financial assets fall in this category.
Classification of Financial Assets
a. Financial assets at Amortized Cost NOTE: Moreover, regardless of the above 2 categories, you may decide to
b. Financial assets at Fair Value through Profit or Loss (FVPL) designate the financial asset at fair value through profit or loss at its initial
c. Financial asset at Fair Value through Other Comprehensive Income (FVOCI) recognition.
To summarize the classification of financial assets: • FVTPL – then at fair value, with changes of fair value recognized in profit or
loss.
• FVOCI – then at fair value, with changes of fair value recognized in other
comprehensive income.

NOTE: Gains and losses on financial assets that are mandatorily measured at
FVOCI (those that meet the 2 conditions for classification) are recognized in
OCI (except for impairment gains or losses and foreign exchange gains or
losses) until the financial asset is derecognized or reclassified.

When the asset is derecognized, the cumulative gain or loss previously

recognized in OCI is reclassified from equity to profit or loss as a
reclassification adjustment. Interest calculated using the effective interest method
is recognized in profit or loss.

NOTE: Gains and losses on investments in equity securities that are irrevocably
elected to be measured at FVOCI are also recognized in OCI. However, when
Initial Measurement of Financial Assets – at fair value plus transaction costs, except the financial asset is derecognized, the cumulative gain or loss previously
financial assets at fair value through profit or loss. Financial assets classified as FVPL are recognized in OCI is not subsequently transferred to profit or loss, but the entity
initially measured at fair value; transaction costs are expensed immediately. may transfer the cumulative gain or loss within equity, e.g. as a direct transfer to
retained earnings. Dividends received are recognized in profit or loss.
NOTE: Transaction costs are incremental costs that are directly attributable to
the acquisition, issue or disposal of a financial asset or liability. Reclassification of financial assets (when there is a change in business model)

Subsequent Measurement If an entity reclassifies financial assets, it shall apply the reclassification prospectively
Subsequent measurement depends on the category of a financial instrument. If: from the reclassification date. The entity shall not restate any previously recognized
• FA@AC – then at Amortized costs. gains, losses (including impairment gains or losses) or interest.

NOTE: Gains or losses on financial assets measured at amortized cost, such as NOTE: Only debt instruments can be reclassified.
those arising from derecognition, reclassification, amortization, or impairment,
are recognized in profit or loss. Fair value changes are not recognized. NOTE: Reclassification date is the first day of the first reporting period
following the change in business model that results in an entity reclassifying
NOTE: Amortized cost is the amount at which the asset or liability was financial assets.
measured upon initial recognition, minus principal repayments, plus or minus the
cumulative amortization of any premium or discount, and minus any write-down
for impairment or uncollectibility.
 Type of asset/exposure Approach
1. Trade receivables, contract assets and Simplified approach
lease receivables
2. Originated or purchased credit- Changes in lifetime expected credit losses
impaired financial assets approach
3. Other assets/exposures General approach (i.e., three stage or
three-bucket approach)

General model for measuring a loss allowance: This model recognizes loss allowance
depending on the stage in which the financial asset is. There are 3 stages:

• Stage 1 – Performing assets: Loss allowance is recognized in the amount of 12-

month expected credit loss;
• Stage 2 – Financial assets with significantly increased credit risk: Loss
allowance is recognized in the amount of lifetime expected credit loss; and
• Stage 3 – Credit-impaired financial assets: Loss allowance is recognized in the
amount of lifetime expected credit loss and interest revenue is recognized based
on net carrying amount (i.e., gross carrying amount less loss allowance).

The General approach is summarized below.

Impairment
PFRS 9 requires entities to estimate and account for expected credit losses for all
relevant financial assets (mostly debt securities, receivables including lease receivables,
contract assets under PFRS 15, loans), starting from when they first acquire a financial
instrument.

NOTE: There is no special accounting for impairment of financial assets

measured at FVPL because changes in their fair values are simply recognized as
unrealized gains or losses in profit or loss.

The ECL Model requires three approaches depending on the type of asset or credit
exposure. These are summarized below:
Stage 1: Performing financial assets Stage 3: Credit-impaired financial assets

Here, we have financially healthy financial assets that are expected to perform normally When your financial asset has already become credit impaired (meaning that certain
in line with their contractual terms and there are no signs of increased credit risk. PFRS 9 default events have occurred), then an entity still recognizes lifetime expected credit
requires recognizing impairment loss amounting to 12-month expected credit losses. losses.

What is 12-month expected credit loss? It is the expected credit loss resulting from However, this time, interest revenue is calculated and recognized based on the amortized
default events on a financial instrument that are possible within 12 months after the cost/net carrying amount (that is gross carrying amount less loss allowance).
reporting date.
In this stage, financial assets might need to be individually assessed.
In this case, the interest revenue is recognized based on effective interest rate method on
gross carrying amount, so no loss allowance is taken into account. NOTE: Unless you work for a financial institution like bank, you don’t have to
follow the above general model.
Stage 2: Financial assets with significantly increased credit risk
Simplified model:
When the credit risk of certain financial asset significantly increased and the resulting You don’t need to determine the stage of a financial asset, because a loss allowance is
credit quality is NOT low risk, then an entity needs to recognize full lifetime expected recognized always at a lifetime expected credit loss.
credit losses.
Derecognition of Financial assets (when):
What are they? They are present value of losses that arise if a borrower defaults on their a. The contractual rights to the cash flows from the financial asset expire; or
obligations throughout the life of the financial instrument. In fact, 12-month expected b. An entity transfers the financial asset and the transfer qualifies for the
credit losses are just the portion of the life time expected credit losses. derecognition.

Now, please be careful, because expected credit losses are in fact a difference between: Transfers of financial assets (Guide)
• The present value of cash flows based on the contract of a financial instrument; 1. Decide whether the asset (or its part) was transferred or not,
and 2. Determine whether also risks and rewards from the financial asset were
• The present value of cash flows that an entity really expects to obtain from the transferred.
financial instrument. 3. If you have neither retained nor transferred substantially all of the risks and
rewards of the asset, then you need to assess whether you have retained control
As a result, the timing of payments from the financial instrument directly affects their of the asset or not.
present value and thus the amount of an impairment loss.
Evaluation of transfers
In practice, if you expect that debtor will pay you in full, but later than in line with the
contract, there IS an impairment loss! If the entity transfers substantially all the risks and rewards of ownership of the financial
asset, the entity derecognizes the financial asset and recognizes separately as assets or
Interest revenue for stage 2 assets is calculated exactly in the same way as in stage 1 (on liabilities any rights and obligations created or retained in the transfer.
gross carrying amount).
If the entity retains substantially all the risks and rewards of ownership of the financial
asset, the entity continues to recognize the financial asset. PAS 28 – INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

If the entity neither transfers nor retains substantially all the risks and rewards, the Investment in Associate
entity determines whether it has retained control of the financial asset:
a. If the entity has not retained control, it derecognizes the financial asset and Associate – an entity over which the investor has significant influence.
recognizes separately as assets or liabilities any rights and obligations created or
retained in the transfer. Significant influence – the power to participate in the financial and operating policy
b. If the entity has retained control, it continues to recognize the financial asset to decisions of the investee but is not control or joint control of those policies.
the extent of its continuing involvement in the financial asset.
GENERAL RULE: Reclassification of financial liabilities after initial
Classification of Financial Liabilities (2 main categories) recognition is prohibited. If an entity holds, directly or indirectly (e.g. through
a. Financial liabilities at amortized cost subsidiaries), twenty per cent (20%) or more of the voting power of the investee,
b. Financial liabilities at fair value through profit or loss and derivative liabilities it is presumed that the entity has significant influence.

NOTE: PFRS 9 mentions separately some other types of financial liabilities EXCEPTION: Unless it can be clearly demonstrated that this is not the case.
measured in a different way, such as financial guarantee contracts and
commitments to provide a loan at a below market interest rate, NOTE: The existence of significant influence by an entity is usually evidenced in
one or more of the following ways:
NOTE: Reclassification of financial liabilities after initial recognition is (a) representation on the board of directors or equivalent governing body of
prohibited. the investee;
(b) participation in policy-making processes, including participation in
Initial Measurement of Financial Liabilities - @fair value minus transaction costs, decisions about dividends or other distributions;
except financial liabilities at FVPL whose transactions costs are expensed immediately. (c) material transactions between the entity and its investee;
(d) interchange of managerial personnel; or
Subsequent Measurement of Financial Liabilities (e) provision of essential technical information.
• Financial liabilities @ Amortized cost are subsequently measured at amortized
cost. Accounting for Investment in associates (Equity Method)
• Financial liabilities held for trading are subsequently measured at fair value with Under this method, the investment is initially recognized at cost and subsequently
changes in fair values recognized in profit or loss adjusted for the investor’s share in the investee’s changes in equity.
• Financial liabilities designated at FVPL are subsequently measured at fair value
with changes in fair values recognized as follows: NOTE: If there’s a difference between cost and investor’s share on investee’s
a. the amount of change in the fair value of the financial liability that is net fair value of identifiable assets and liabilities, then it depends, whether this
attributable to changes in the credit risk of that liability is presented in difference is positive or negative:
other comprehensive income, and • When the difference is positive (cost is higher than the share on net
b. the remaining amount of change in the fair value of the liability is assets), then there’s a goodwill and you don’t recognize it separately. It
presented in profit or loss. is included in the cost of an investment and NOT amortized.
• When the difference is negative (cost is lower than the share on net
assets), then it’s recognized as an income in profit or loss in the period
 when the investment is acquired. After the disposal takes place, an entity shall account for any retained interest in the
associate or joint venture in accordance with PFRS 9 Financial Instruments unless the
NOTE: Subsequently, after initial recognition: retained interest continues to be an associate or a joint venture, in which case the entity
• The carrying amount of the investment is increased or decreased by the uses the equity method.
investor’s share on investee’s net profit or loss after the acquisition
date. Discontinuance of Equity Method
• When an associate or joint venture make losses and these losses exceed An investor stops applying the equity method when its investment ceases to be an
the carrying amount of the investment, investor cannot bring down the associate or a joint venture.
carrying amount of the investment below zero. Investor simply stops
bringing in further losses. If the associate or joint venture subsequently
reports profits, the entity resumes recognizing its share of those profits PFRS 7 – FINANCIAL INSTRUMENTS: DISCLOSURES
only after its share of the profits equals the share of losses not
recognized. PFRS 7 requires certain disclosures in 2 main areas:
• If the investee has outstanding cumulative preference shares that are 1. Significance of financial instruments, and
held by parties other than the investor and classified as equity, the 2. Nature and extent of risks from financial instruments and how they are managed
investor computes its share of profits or losses after deducting the one-
year dividends on those shares, whether declared or not. If the shares Significance of financial statements
are noncumulative, the dividends on those shares shall will deducted 1. Disclosures for the statement of financial position:
only when they are declared for distribution. o Carrying amounts of your financial instruments by their categories
• When an investee distributes some dividends to the investor, then such o Financial assets or financial liabilities measured at fair value through
a distribution decreases the carrying amount of the investment. profit or loss (FVTPL)
o Investments in equity instruments designated at fair value through other
Exemption from applying the Equity Method comprehensive income (FVOCI)
An entity need not apply the equity method to its investment in an associate or a joint o Reclassifications
venture if the entity is a parent that is exempt from preparing consolidated financial o Offsetting financial assets and financial liabilities
statements. o Collaterals
o Allowance account for credit losses
When an investment in an associate or a joint venture is held by in entity that is a venture o Compound financial instruments with multiple embedded derivatives
capital organization, mutual fund, unit trust or similar entity, then investor might opt to o Default and breaches
measure investments at fair value through profit or loss under PFRS 9 (and thus not
apply equity method).The same applies for the situation when an investor has an 2. Disclosures for the statement of comprehensive income:
investment in an associate a portion of which is held by these organizations. You should disclose the items of income, expense, gains or losses (by
categories), mainly:
Classification as Held for sale o Net gains or net losses on each category of the financial instruments
An entity shall apply PFRS 5 Non-current Assets Held for Sale and Discontinued o Total interest revenue and total interest expense
Operations to an investment, or a portion of an investment, in an associate or a joint o Fee income and expense
venture that meets the criteria to be classified as held for sale. o Analysis of the gain or loss in the statement of comprehensive income
from the derecognition of financial assets at amortized cost
 3. Other disclosures: WRAP UP EXERCISES:
o Accounting policies
o Hedge accounting disclosures (risk management strategies, effect of
hedge accounting…) Exercise 1. Multiple Choices.
o Fair value (how it was determined, fair values of FA and FL,
explanations when the fair value cannot be determined) 1. Which of the following is within the scope of PAS 32?
a. Financial assets in the form of investments in subsidiaries,
Nature and extent of risks arising from financial instruments associates and joint ventures.
PFRS 7 requires qualitative and quantitative disclosures for three main risks: b. Contracts for the delivery or receipt of commodity and other non-
1. Credit risk financial items that can be settled net in cash or other financial
2. Liquidity risk assets.
3. Market risk c. Physical assets, such as inventories and PPE
d. Liabilities arising from constructive obligations
Credit risk relates to your financial assets and simply speaking, it is a risk that you will
suffer a financial loss due to counterparty failing to pay its obligations. 2. A contract that evidences a residual interest in the entity’s assets after
deducting all of its liabilities is classified as
Liquidity risk relates to your financial liabilities and it is a kind of “opposite” to the credit a. A financial liability
risk. b. An equity instrument
c. A or B
Market risk is the risk that either the fair value or future cash flows from your financial d. Neither A nor B
assets or financial liabilities will fluctuate due to changes in market prices. Market risk
has a few components, based on what causes the change in future cash flows or fair 3. Which of the following statement is incorrect?
value: a. The PAS 32 definition of “equity” reflects the basic accounting
• Currency risk: the risk that foreign exchange rate changes cause the fluctuations equation of “Assets – Liabilities = Equity.”
in cash flows or fair values; b. According to PAS 32, a contract is an equity instrument if it may
• Interest rate risk: : fluctuations are caused by the changes in interest rates; result in the receipt or delivery of the entity’s own equity
• Other price risk: Fluctuations are caused by the changes in other market prices, instruments.
such as commodity prices, equity prices, etc. c. Entity A issues a compound financial instrument for P1M. if the
fair value of the liability component without the equity feature is
P.8M, the value to be assigned to the equity component is P.2M.
d. An intention to settle a financial asset and a financial liability on a
net basis without the legal right to do so is not sufficient to justify
offsetting because the rights and obligations associated with the
individual financial asset and financial liability remain unaltered.

4. During the period, an entity acquires an investment. The entity has a “hold
to collect and sell” business model. The investment should be classified as
a. Investment measured at fair value through other comprehensive
 income 9. Entity A acquires 20% interest in Entity B on September 1, 20x1. On
b. Investment measured at amortized cost November 30, 20x3, because of a short-fall in cash flows, Entity A sells
c. Investment measured at fair value through profit or loss one-half of the investment in Entity B. The remaining shares held do not
d. Any of these give Entity A significant influence over Entity B. Entity A uses a calendar
year accounting period. During what period should Entity A apply the
5. If an entity’s business model’s objective is to hold investments in order to equity method of PAS 28?
collect contractual cash flows that are solely payments for principal and Start Cease
interests, then investments should be classified as a. Earliest period presented November 30, 20x3
a. Investment measured at fair value through other comprehensive b. September 1, 20x1 November 30, 20x3
income c. January 1, 20x1 November 30, 20x3
b. Investment measured at amortized cost d. Entity A should not apply the equity method.
c. Investment measured at fair value through profit or loss
d. Any of these 10. PFRS 7 requires the disclosure of the significance of financial instruments
to the entity’s financial position and performance. Which of the following
6. A permanent decline in the fair value of an investment in equity securities is not included in this disclosure?
that the entity made an irrevocable election at initial recognition to a. Disclosure of fair values of financial instruments in a way that the
subsequently measure at FVOCI is recognize in fair value can be compared with the carrying amount of the
a. Profit or loss financial instrument
b. Other comprehensive income b. The carrying amounts of the various categories of financial
c. Either A or B instruments
d. Not recognized c. Information on any reclassification between categories of financial
instruments
7. According to PAS 28, significant influence is presumed to exist when the d. Information on financial instruments arising from employee benefit
investor plans and share-based payment transactions
a. Hold 10% or more of the voting power of the investee
b. Hold 20% or more of the voting power of the investee
c. Holds 51% or more of the voting power of the investee
d. Has the ability to appoint a majority of the investee’s board of Answers to Exercise:
directors. 1. B; 2. B; 3. B; 4. A; 5. B; 6. B; 7. B; 8. C; 9. B; 10. D

8. Under the equity method, which of the following decreases the carrying
amount of an investment in associate or joint venture?
a. Share in the profits of the investee
b. Share in the other comprehensive income of the investee
c. Share in the dividends declared by the investee
d. A decline in the fair value of the investment
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Conceptual Framework & Accounting
Textbook: Conceptual Framework & Accounting Textbook: Conceptual Framework & Accounting Standards by Zeus Vernon B. Millan
Standards by Zeus Vernon B. Millan Standards by Zeus Vernon B. Millan
References and Sources:
References and Sources: References and Sources: 1. https://www.ifrsbox.com/ias-32-financial-
1. https://www.ifrsbox.com/ias-32-financial- 1. https://www.ifrsbox.com/ias-32-financial- instruments-presentation/
instruments-presentation/ instruments-presentation/ 2. https://www.ifrsbox.com/ifrs-9-financial-
2. https://www.ifrsbox.com/ifrs-9-financial- 2. https://www.ifrsbox.com/ifrs-9-financial- instruments/
instruments/ instruments/ 3. https://www.pkf.com/media/10034542/ifrs-9-
3. https://www.pkf.com/media/10034542/ifrs-9- 3. https://www.pkf.com/media/10034542/ifrs-9- financial-instruments-summary.pdf
financial-instruments-summary.pdf financial-instruments-summary.pdf 4. https://www.pwc.com/gx/en/audit-
4. https://www.pwc.com/gx/en/audit- 4. https://www.pwc.com/gx/en/audit- services/ifrs/publications/ifrs-9/ifrs-9-
services/ifrs/publications/ifrs-9/ifrs-9- services/ifrs/publications/ifrs-9/ifrs-9- understanding-the-basics.pdf
understanding-the-basics.pdf understanding-the-basics.pdf 5. https://www2.deloitte.com/content/dam/Deloitte/
5. https://www2.deloitte.com/content/dam/Deloitte/ 5. https://www2.deloitte.com/content/dam/Deloitte/ ru/Documents/audit/ifrs-9-financial-instruments-
ru/Documents/audit/ifrs-9-financial-instruments- ru/Documents/audit/ifrs-9-financial-instruments- en.pdf
en.pdf en.pdf 6. https://www.ifrsbox.com/ifrs-9-expected-credit-
6. https://www.ifrsbox.com/ifrs-9-expected-credit- 6. https://www.ifrsbox.com/ifrs-9-expected-credit- loss/
loss/ loss/ 7. https://www.ifrsbox.com/ias-28-investments-
7. https://www.ifrsbox.com/ias-28-investments- 7. https://www.ifrsbox.com/ias-28-investments- associates-joint-ventures/
associates-joint-ventures/ associates-joint-ventures/ 8. https://www.pkf.com/media/10033177/ias-28-
8. https://www.pkf.com/media/10033177/ias-28- 8. https://www.pkf.com/media/10033177/ias-28- investments-in-associates-and-joint-ventures-
investments-in-associates-and-joint-ventures- investments-in-associates-and-joint-ventures- summary.pdf
summary.pdf summary.pdf 9. https://www.ifrsbox.com/ifrs-7-financial-
9. https://www.ifrsbox.com/ifrs-7-financial- 9. https://www.ifrsbox.com/ifrs-7-financial- instruments-disclosures/
instruments-disclosures/ instruments-disclosures/

Activities:
Activities: Activities: Topic discussion will be during classroom meetups,
Topic discussion will be through GoogleMeet App., Topic discussion will be through GoogleMeet App., and during which the exercises will be supplied with
during which the exercises will be supplied with during which the exercises will be supplied with answers.
answers. answers. Such teleconferencing will be recorded, the
 video of which will be made available to you via Assessment:
Assessment: Messenger Group Chat or Gmail address. Topic quiz will be issued to you and will be answered
Topic quiz will be published at Schoology App. at home, which will be immediately due for submission
Instructions as to the time allocated for answering and Assessment: the following day at the box placed at the SVCI guard
deadline for submission of quiz will be announced via Topic quiz will be published at Schoology App. house. Communication as to the receipt the said quiz
Messenger Group Chat. Instructions as to the time allocated for answering and will be through text messaging.
deadline for submission of quiz will be announced via
Messenger Group Chat.
PFRS 16, PAS 38, PAS 36, PFRS 13
Time Duration and Allotment: Week 6; 6 hours

Abstract:
This study focuses on the summary of the accounting standards enumerated above.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• can properly account the different types of lease.
• can define an intangible asset and state the initial and subsequent measurements of the different types of intangible assets.
• can properly account impairment of assets as envisaged by PAS 36.
• can apply the principles provided by PFRS 13 in measuring fair value.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the exercise presented after the topic content below.

TOPIC CONTENT time in exchange for consideration.

b. Lessor – the entity that provides the right to use an underlying asset for a period
of time in exchange for consideration.
PFRS 16 – LEASES (international counterpart: IFRS 16)

Lease – a contract is, or part of a contract, that conveys the right to control the use of an
identified asset for a period of time in exchange for consideration.

NOTE: An entity has the right to control the use of an identified asset if it has
both the following throughout the period of use:
a. the right to obtain substantially all of the economic benefits from the
use of the identified asset; and
b. the right to direct the use of the identified asset.

The following are the parties to a lease contract:

a. Lessee – the entity that obtains the right to use an underlying asset for a period of
Identified asset – an asset that is either: Right to direct the use
• explicitly identified in the contract, or In evaluating whether the customer has the right to direct the use of an identified asset, a
• is implicitly specified by being identified at the time that the asset is made customer must have the right to direct ‘how and for what purpose’ the asset is used
available for use by the customer. throughout the period of use. In making this evaluation, a customer considers the
decisions that most directly impact the economic benefits to be derived from the use of
NOTE: An identified asset can be a physically distinct portion of a larger asset. the asset, including:
A capacity or other portion of an asset that is not physically distinct is not an • rights to decide the type of output to be produced by the asset(s)
identified asset unless it represents substantially all of the capacity of the asset • rights to decide when the output is produced
and thereby provides the customer with the right to obtain substantially all of the • rights to decide where the output is produced
economic benefits from use of the asset. • rights to decide whether the output is produced and the quantity thereof.

NOTE: Even if an asset is explicitly specified, a customer does not have the right NOTE: In many cases, contracts will include terms and conditions that protect
to use an identified asset if the supplier has a substantive substitution right the supplier’s interest in the asset, protect its personnel and/or ensure the
throughout the period of use. A substantive substitution right exists if the supplier supplier complies with laws and regulations. These rights are considered to be
has the practical ability to substitute alternative assets throughout the period of protective and do not, in isolation, prevent the customer from having the right to
use and the economic benefits of substituting the asset would exceed the cost (or direct the use of the asset within the scope of the contract.
in other words, the supplier would benefit economically from substituting the
asset). To identify a lease, consider the following flowchart:

NOTE: A supplier’s right to substitute an asset is not substantive if it cannot be

exercised throughout the period of use, such as when substitution is made:
a. only on a particular date or upon the occurrence of a specified event; or
b. only during repairs, maintenance, or upgrading.

Right to obtain economic benefits from use

To control the use of an identified asset, a customer is required to have the right to obtain
substantially all of the economic benefits from use of the asset throughout the period of
use (for example, by having exclusive use of the asset throughout that period). The
economic benefits from use of an asset include its primary output and by-products
(including potential cash flows derived from these items), and other economic benefits
from using the asset that could be realized from a commercial transaction with a third
party.

NOTE: If a contract requires a customer to pay the supplier or another party a

portion of the cash flows derived from use of an asset as consideration, those
cash flows paid as consideration shall be considered to be part of the economic
benefits that the customer obtains from use of the asset.
Commencement date of the lease Accounting for leases – LESSEE
The commencement date is the date on which the lessor makes an underlying asset (i.e.,
the asset that is subject to the lease) available for use by the lessee. Initial Recognition
At lease commencement, a lessee accounts for two elements:
NOTE: In some cases, the commencement date of the lease may be before the 1. Right-of-use asset. Initially, a right-of-use asset is measured in the amount of the
date stipulated in the lease agreement (e.g., the date on which rents become due lease liability and initial direct costs. Then it is adjusted by the lease payments
and payable). This often occurs when the leased space is modified by the lessee made before or on commencement date, lease incentives received, and any
prior to commencing operations in the leased space (e.g., during the period a estimate of dismantling and restoration costs.
lessee uses the leased space to construct its own leasehold improvements). If a
lessee takes possession of, or is given control over, the use of the underlying 2. Lease liability. The lease liability is in fact all payments not paid at the
asset before it begins operations or making lease payments under the terms of the commencement date discounted to present value using the interest rate implicit in
lease, the lease term has commenced even if the lessee is not required to pay rent the lease (or incremental borrowing rate if the previous one cannot be set).These
or the lease arrangement states the lease commencement date is a later date. payments may include fixed payments, variable payments, payments under
residual value guarantees, purchase price if purchase option will be exercised,
Lease term etc.
The lease term begins at the lease commencement date and is determined on that date
based on the non-cancellable term of the lease, together with both of the following: NOTE: Lessees do NOT classify the leases as finance or operating anymore!
• The periods covered by an option to extend the lease if the lessee is reasonably
certain to exercise that option; and Subsequent Measurement
• The periods covered by an option to terminate the lease if the lessee is reasonably After commencement date, lessee needs to take care about both elements recognized
certain not to exercise that option initially:
1. Right-of-use asset. Normally, a lessee needs to measure the right-of-use asset
NOTE: When evaluating whether a lessee is reasonably certain to exercise an using a cost model under PAS 16 Property, Plant and Equipment. It basically
option to renew the lease, not terminate the lease or to purchase the underlying means to depreciate the asset over the lease term.
asset, lessees and lessors are required to assess all relevant factors that create
an economic incentive for the lessee to exercise lease renewal, termination or However, the lessee can apply also PAS 40 Investment Property (if the right-of –
purchase options. use asset is an investment property and fair value model is applied), or
using revaluation model under PAS 16 (if right-of-use asset relates to the class of
The longer the period from commencement of the lease to the exercise date of an PPE accounted for by revaluation model).
option, the more difficult it will be, in certain cases, to determine whether the
exercise of the option is reasonably certain. The difficulty arises from several NOTE: The lessee depreciates the underlying asset over its useful life if:
factors. For example, a lessee’s estimates of its future needs for the leased asset a. The contract provides for the transfer of ownership to the lessee by the
become less precise the further into the future the forecast goes. Also, the future end of the lease term; or
fair value of certain assets such as those involving technology is more difficult to b. There is a reasonable certainty that the lessee will exercise a purchase
predict than the future fair value of a relatively stable asset, such as a fully option.
leased commercial office building located in a prime area.
In any other case, the lessee depreciates the underlying asset over the shorter of
the asset’s useful life and the lease term.
 2. Lease liability. The lease liability is subsequently measured similar to an sufficiently lower than the fair value at the date of the option exercisability. It is
amortized cost financial liability (but remeasured to reflect any reassessments or reasonably certain, at the inception of the lease, that the option will be exercised.
lease modifications). Accordingly, interest on lease liability, computed using the c. The lease term is for the major part (at least 75% under US GAAP) of the
effective interest method, is recognized in profit or loss, unless it forms part of economic life of the asset even if the title is not transferred.
the carrying amount of another asset. Lease payments are apportioned between d. At the inception of the lease the present value of the lease payments amounts to
the interest and a reduction to the lease liability. at least substantially all (at least 90% under US GAAP) of the fair value of the
leased asset.
Recognition exemptions e. The leased assets are of such a specialized nature that only the lessee can use
A lessee may elect not to apply the recognition requirements described earlier (i.e., them without major modifications.
recognition of lease liability and right-of-use asset) for:
1. Leases with the lease term of 12 months or less with no purchase Other indicators of finance lease
option (applied to the whole class of assets) a. If the leases can cancel the lease, the lessor’s losses associated with the
2. Leases where underlying asset has a low value when new (applied on one-by- cancellation are borne by the lessee;
one basis) b. Gains or losses from the fluctuation in the fair value of the residual accrue to the
lessee; and
c. The lessee has the ability to continue the lease for a secondary period at a rent
that is substantially lower than market rent.

Initial measurement – Finance lease

At the commencement of the lease term, lessor should recognize lease receivable in his
statement of financial position. The amount of the receivable should be equal to the net
investment in the lease.

Gross investment in the lease – The sum of:

(a) the lease payments receivable by a lessor under a finance lease; and
Accounting for leases – LESSOR (b) any unguaranteed residual value accruing to the lessor.

Classification of leases Net investment in the lease – is the gross investment in the lease discounted at the
Unlike lessees, lessors need to classify the lease first, before they start accounting. There interest rate implicit in the lease.
are 2 types of leases defined in PFRS 16:
1. A finance lease is a lease that transfers substantially all the risks and rewards Unguaranteed residual value – That portion of the residual value of the underlying
incidental to ownership of an underlying asset. asset, the realization of which by a lessor is not assured or is guaranteed solely by a party
2. An operating lease is a lease other than a finance lease. related to the lessor.

Finance Lease (Indicators of a finance lease (individually or in combination)) Lease payments (include the following):
a. The lease transfers ownership of the asset to the lessee by the end of the lease a. fixed payments (including in-substance fixed payments, less any lease incentive
term. payable;
b. The lessee has the option to purchase the asset at a price that is expected to be b. variable lease payments that depend on an index or a rate, initially measured
 using the index or rate as at the commencement date; operating lease.
c. any residual value guarantees provided to the lessor by the lessee, a party related b. otherwise, the sublease shall be classified by reference to the right-of use asset
to the lessee or a third party unrelated to the lessor that is financially capable of arising from the head lease, rather than by reference to the underlying asset (for
discharging the obligations under the guarantee; example, the item of property, plant, or equipment that is the subject of the
d. the exercise price of a purchase option if the lessee is reasonably certain to lease).
exercise that option; and
e. payments of penalties for terminating the lease, if the lease term reflects the Sale and leaseback transactions – involves the transfer of an asset by an entity (the
lessee exercising an option to terminate the lease. seller-lessee) to another entity (the buyer-lessor) and the leaseback of the same asset by
the seller-lessee.
Subsequent measurement – Finance Lease
The net investment in the lease is subsequently measured at amortized cost. NOTE: Both the seller-lessee and the buyer-lessor are required to apply PFRS
15 to determine whether to account for a sale and leaseback transaction as a sale
NOTE: The lessor does not recognize depreciation because the leased asset is and purchase of an asset.
already derecognized. The lessee will be the one to depreciate the asset.
1. If a transfer is a sale:
Operating Lease • The seller (lessee) accounts for the right-of-use asset at the
The accounting for operating leases by lessor is the same as the recognition exemption proportion of the previous carrying amount related to the right-
available to a lessee for “short-term” and “low value” leases. Under an operating lease, of-use retained. Gain or loss is recognized only to the extent
the lessor does not recognize any finance lese receivable. related to the rights transferred.
• The buyer (lessor) accounts for a purchase of an asset under
The leased asset remains the asset of the lessor. Therefore, the lessor continues to applicable standards and for the lease under PFRS 16.
depreciate it.
2. If a transfer is NOT a sale:
NOTE: Here you can see that the accounting for operating leases • The seller (lessee) keeps recognizing transferred asset and
is asymmetrical: both lessees and lessors recognize an asset in their financial accounts for the cash received as for a financial liability
statements (it’s a bit controversial and there were huge debates around). under PFRS 9 Financial Instruments.
• The buyer recognizes a financial asset under PFRS 9 amounting
Sublease - A transaction for which an underlying asset is re-leased by a lessee to the cash paid.
(‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head
lessor and lessee remains in effect. In these arrangements, one party acts as both the
lessee and lessor of the same underlying asset. The original lease is often referred to as a PAS 38 – INTANGIBLE ASSETS
head lease, the original lessee is often referred to as an intermediate lessor or sub-lessor
and the ultimate lessee is often referred to as the sub-lessee. Intangible asset - an identifiable, non-monetary item without physical substance, which
is within the control of the entity and is capable of generating future economic benefits
In classifying a sublease, an intermediate lessor shall classify the sublease as a finance for the entity.
lease or an operating lease as follows:
a. if the head lease is a short-term lease that the entity, as a lessee, has accounted for
applying the recognition exemption, the sublease shall be classified as an
Essential elements of an intangible asset: • Any directly attributable costs of preparing the asset for its intended use.
1. Identifiability
2. Control Acquisition as part of a business combination
3. Future economic benefits The cost of an intangible asset acquired in a business combination is its fair value at the
acquisition date.

Acquisition by way of a government grant: Fair value or nominal amount + directly

attributable expenditure

Exchanges of assets (depends on whether there is commercial substance or not)

With commercial substance (order of priority):
1. Fair value of the asset given up;
2. Fair value of the asset received; or
3. Carrying amount of the asset given up.

Lacks commercial substance: Carrying amount of the asset given up.

NOTE: No gain or loss arises if the asset received is measured at the carrying
amount of the asset given up.
NOTE: IAS 38 is the international counterpart of PAS 38.
Internally generated intangible assets – generation is classified into:
When can we recognize an intangible asset? (onhy when): 1. Research phase; and
1. Future economic benefits from the asset are probable; and 2. Development phase.
2. Cost can be measured reliably.
Research – original and planned investigation undertaken with the prospect of gaining
Initial Measurement - @Cost new scientific or technical knowledge and understanding.
The measurement of cost depends on how the intangible asset is acquired. Intangible
assets may be acquired through: NOTE: You cannot capitalize any expenditure for research. You need to expense
a. Separate acquisition; it in your profit or loss when incurred. Hence, all feasibility studies, evaluating
b. Acquisition as part of a business combination; whether the project is viable or not, ARE research and need to be EXPENSED in
c. Acquisition by way of a government grant; profit or loss.
d. Exchanges of assets; or
e. Internal generation. Development (usually happens after the research phase) – the application of research
findings or other knowledge to a plan or design for the production of new or substantially
Separate acquisition improved materials, devices, products, processes, systems or services before the start of
Cost of a separately acquired intangible asset comprises: commercial production or use.
• Its purchase price, plus import duties and non-refundable taxes, less discounts
and rebates,
 NOTE: Costs incurred during the development phase are capitalized if the entity intended by management. It stops when the asset is derecognized, classified as
can demonstrate all of the following (mnemonic: PIRATE): held for sale under PFRS 5, or becomes fully depreciated.
1. Probable future economic benefits,
2. Intention to complete and use or sell the asset, NOTE: Amortization does not cease when the asset is no longer used, unless one
3. Resources adequate and available to complete and use or sell the asset, of the conditions above are met.
4. Ability to use or sell the asset,
5. Technical feasibility, Amortization Methods:
6. Expenditures can be reliably measured. 1. Straight line method
2. Diminishing balance method
NOTE: The cost of an internally generated intangible asset includes all directly 3. Units of production method
attributable costs necessary to create, produce, and prepare the asset for its
intended purpose, as from the date the recognition criteria and the conditions for NOTE: PAS 38, does not prescribe any specific method. It merely requires
capitalization of development costs have been met. management to choose the method that best reflects the expected pattern of
consumption of the future economic benefits embodied in the asset.
Subsequent Measurement – the entity will choose, by way of an accounting policy,
either:
1. The Cost Model; or PAS 36 - IMPAIRMENT OF ASSETS
2. The Revaluation Model.
Objective of PAS 36: to ensure that its assets are carried at no more than its recoverable
NOTE: The revaluation model is not applied very frequently for intangible amount (in accordance with the Conservatism/Prudence Principle)
assets because there must be an active market – which is rare.
NOTE: PAS 36 applies to the following assets:
Useful life • Property, Plant, and Equipment
An entity shall assess whether the intangible asset has: • Investment in associates, joint ventures and subsidiaries
a. Finite useful life; or • Investment property measured under the cost model
b. Indefinite useful life (i.e., there is no foreseeable limit to period over which the • Intangible assets
asset will generate cash flows) • Goodwill
NOTE: When you have an asset with indefinite useful life, you do NOT NOTE: An asset is impaired if its carrying amount exceeds its recoverable
amortize it. amount.
Amortization – the systematic allocation of the depreciable amount of an intangible asset Identifying an asset that may be impaired
over its useful life. If you want to be compliant with PAS 36, you have to perform the following procedures:
• You need to assess whether there is any indication that an asset might be
NOTE: The depreciable amount of an intangible asset with a finite useful life is impaired at the end of each reporting period. You don’t need to perform
amortized over the shorter of its useful life and legal life, if any. impairment testing if there’s no indication. However, you need to assess the
existence of such an indication.
NOTE: Amortization starts when the asset is available for use, in the manner
• If you hold some intangible asset with an indefinite useful life (such as
 trademarks) or intangible asset not yet available for use, then you need to test NOTE: When an individual asset does not generate cash inflows that are
these assets for impairment annually. largely independent of those from other assets (or groups of assets), then
• If your accounting records show some goodwill acquired in a business you need to determine recoverable amount for the cash-generating unit
combination, you also need to test this goodwill for impairment annually. (CGU) to which this asset belongs.

Indications of impairment Fair value less costs of disposal (FVLCD)

• External sources of information This is the amount obtainable from the sale of an asset or cash generating unit (CGU) in
 Observable indications that the asset’s value has declined during the an arm’s length transaction between knowledgeable, willing parties, less the cost of
period significantly more than would be expected as a result of the disposal.
passage of time or normal use.
 Significant changes with an adverse effect on the entity in the The best evidence of an assets fair value less cost to sell is a price in a binding sale
technological, market, economic or legal environment in which the entity agreement in an arm’s length transaction, adjusted for incremental costs that are directly
operates or in the market to which an asset is dedicated. attributable to the disposal of the asset. If there is no binding sale agreement, but an asset
 Market interest rates or other market rates of return on investments is traded in an active market, the asset’s market price less costs of disposal would provide
have increased during the period, and those increases are likely to affect the best evidence of fair value less cost to sell.
the discount rate used in calculating an asset’s value in use and decrease
the asset’s recoverable amount materially. If there is no sale agreement or active market for an asset, fair value less costs to sell is
 The carrying amount of the net assets of the entity is higher than its determined based on the best information available to reflect the amount that an entity
market capitalization. could obtain, at reporting date, from the disposal of the asset through an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal.
• Internal sources of information
 Obsolescence or physical damage of an asset. Cost of disposals include legal costs, stamp duty and similar transaction taxes, costs of
 Significant changes with an adverse effect on the entity related to the removing the asset and direct incremental costs to bring an asset into condition for its
use of an asset, for example: an asset becoming idle, plans to discontinue sale.
or restructure the operation to which an asset belongs, plans to dispose of
an asset before the previously expected date, and reassessing the useful Value in use (VIU) - the present value of the future cash flows expected to be derived
life of an asset as finite rather than indefinite. from an asset or cash-generating unit.
 Evidence is available from internal reporting that indicates that
the economic performance of an asset is, or will be, worse than Recognizing and measuring an impairment loss
expected. If the asset’s recoverable amount is lower than its carrying amount, then an entity must
recognize an impairment loss as a difference between these 2 amounts.
Measuring recoverable amount
Recoverable amount is the higher of an asset’s (or cash-generating unit’s) fair value less Impairment loss is recognized immediately in profit or loss, unless the asset is carried at
costs of disposal and its value in use. revalued amount, in which case, revaluation surplus is decreased first and any excess is
recognized in profit or loss. The decrease in the revaluation surplus is recognized in other
NOTE: You don’t necessarily need to determine both of these amounts, because comprehensive income.
if just one of them is higher than asset’s carrying amount, then there’s no
impairment. NOTE: Don’t forget to adjust the depreciation in the future periods in
 order to

reflect the asset’s new carrying amount. Any amount that cannot be allocated to an asset because of the limitation above
is allocated to the other assets of the CGU pro rata based on their carrying
Cash Generating Unit – the smallest identifiable group of assets that generates cash amounts.
inflows that are largely independent of the cash inflows from other assets or groups of
assets. If the recoverable amount of an individual asset cannot be determined, no
impairment loss is recognized for that asset if the CGU to which it belongs is not
NOTE: If you are not able to determine recoverable amount for an individual impaired. This applies even if the individual asset’s fair value less costs of
asset, then you might need to establish cash-generating unit to which this asset disposal is less than it carrying amount.
belongs. In such a case, the asset is tested for impairment, not on its own, but
together with the other assets in the CGU as a whole. Corporate Assets - assets (other than goodwill) that contribute to the future cash flows
of both the CGU under review and other CGUs.
As an exception, an asset for which management is committed to
dispose is tested for impairment separately even if it belongs to a CGU. NOTE: When you are testing a CGU, then you should first identify all the
corporate assets that relate to the CGU under review.
Goodwill
If there is a goodwill acquired in a business combination, then it must be allocated to Then, if a portion of the carrying amount of a corporate asset can be allocated to
each of the acquirer’s cash-generating units (or group of them) that are expected to that unit on some reasonable and consistent basis, then you shall compare the
benefit from the synergies of the combination. carrying amount of that unit plus allocated portion of a corporate asset with its
recoverable amount.
Goodwill does not generate its own cash flows but it often contributes to the cash flows
of multiple CGUs. Goodwill is an unidentifiable asset; thus, it can only be tested for If such an allocation is not possible, then you go so-called bottom-up direction:
impairment if it is allocated to the CGUs that are expected to benefit from the synergies 1. You shall test the CGU without corporate asset for impairment first and
of the combination. recognize any impairment loss.
2. Identify the smallest group of CGUs that includes the CGU under review
NOTE: Goodwill should be tested for impairment on an annual basis. Hence, a and to which a portion of the carrying amount of the corporate asset can
cash-generating unit with allocated goodwill shall be tested for impairment at be allocated on a reasonable and consistent basis.
least annually. If there is impairment, the impairment loss on the CGU is 3. Compare the carrying amount of that group of CGUs including the
allocated as follows: allocated portion of a corporate asset with the recoverable amount of the
a. First, to any goodwill included in the CGU; group of CGUs.
b. Then, to the other assets of the CGU pro rata based on their carrying 4. Recognize impairment loss.
amounts.
Reversal of impairment loss
When allocating the impairment loss, the carrying amount of an asset belonging An entity shall assess at the end of each reporting period whether there is any indication
to the CGU shall not be reduced below the highest of: that an impairment loss recognized in prior periods for an asset other than goodwill may
a. its fair value less costs of disposal (if determinable); no longer exist or may have decreased. If any such indication exists, the entity shall
b. it value in use (if determinable); and estimate the recoverable amount of that asset as follows:
c. zero. 1. Reversing an impairment loss for an individual asset
 The increased carrying amount of an asset other than goodwill attributable to a

reversal of an impairment loss shall not exceed the carrying amount that would PFRS 13 – FAIR VALUE MEASUREMENT
have been determined (net of amortization or depreciation) had no impairment
loss been recognized for the asset in prior years. Objectives of PFRS 13:
1. To define fair value;
2. Reversing an impairment loss for a cash-generating unit 2. To set out in a single standard a framework for measuring fair value; and
A reversal of an impairment loss for a cash-generating unit shall be allocated to 3. To require disclosures about fair value measurements.
the assets of the unit, except for goodwill, pro rata with the carrying amounts of
those assets. These increases in carrying amounts shall be treated as reversals of Fair value – the price that would be received to sell an asset or paid to transfer a liability
impairment losses for the individual assets within the cash-generating unit. In in an orderly transaction between market participants at the measurement date.
allocating the reversal of the impairment, the carrying amount of an asset shall
not be increased above the lower of: NOTE: Fair value is a market-based measurement, not an entity-specific
i. its recoverable amount (if determinable); and measurement. It means that an entity:
ii. the carrying amount that would have been determined (net of  shall look at how the market participants would look at the asset or
amortization or depreciation) had no impairment loss been recognized for liability under measurement
the asset in prior periods.  shall not take own approach (e.g. use) into account.

3. Reversing an impairment loss for goodwill – An impairment loss recognized for Market participant – a buyer and seller in the principal (or most advantageous) market
goodwill shall not be reversed in a subsequent period. for the asset or liability that have all of the following characteristics:
a. They are independent of each other, i.e. they are not related parties, although the
price in a related party transaction may be used as an input to a fair value
measurement if the entity has evidence that the transaction was entered into at
market terms.
b. They are knowledgeable, having a reasonable understanding about the asset or
liability and the transaction using all available information, including information
that might be obtained through due diligence efforts that are usual and
customary.
c. They are able to enter into a transaction for the asset or liability.
d. They are willing to enter into a transaction for the asset or liability, i.e. they are
motivated but not forced or otherwise compelled to do so.

Requirements on fair value measurement

When an entity performs the fair value measurement, it must determine all of the
following:
• the particular asset or liability that is the subject of the measurement
(consistently with its unit of account)
• for a non-financial asset, the valuation premise that is appropriate for the
measurement (consistently with its highest and best use)
 • the principal (or most advantageous) market for the asset or liability received to sell the asset or minimizes the amount that would be paid to transfer the

• the valuation techniques appropriate for the measurement, considering: liability, after taking into account transaction costs and transport costs.
 the availability of data with which to develop inputs that represent the
assumptions that market participants would use when pricing the asset or NOTE: If the principal market is identifiable, the price in that market is used in
liability; and measuring the fair value of an asset or liability, even if the price in another
 the level of the fair value hierarchy within which the inputs are market is potentially more advantageous.
categorized.
Transaction price vs. Fair value at initial recognition
The asset or liability When an entity acquires an asset or assumes a liability, the price paid/received or
The asset or liability measured at fair value might be either: the transaction price is an entry price.
• a stand-alone (individual) asset; or
• a group of assets, a group of liabilities, or a group of assets and liabilities However, PFRS 13 defines fair value as the price that would be received to sell the asset
or paid to transfer the liability and that’s an exit price.
Whether the asset or liability is stand-alone or a group depends on its unit of account.
Unit of account is determined in accordance with the other PFRS standard that requires or In most cases, transaction or entry price equals to exit price or fair value. But there are
permits fair value measurement. some situations when transaction price is not necessarily the same as exit price or fair
value:
When measuring fair value, an entity takes into account the characteristics of the asset or • The transaction happens between related parties
liability that a market participant would take into account when pricing the asset or • The transaction takes place under duress or the seller is forced to accept the price
liability at measurement date. These characteristics include for example: in the transaction
• the condition and location of the asset • The unit of account represented by the transaction price is different from the
• the restrictions on the sale or use of the asset. unit of account for the asset or liability measured at fair value
• The market in which the transaction takes place is different from principal or the
The market most advantageous market.
A fair value measurement assumes that the asset or liability is exchanged in an orderly
transaction between market participants to sell the asset or transfer the liability at the If the transaction price differs from the fair value, then an entity shall recognize the
measurement date under current market conditions. resulting gain or loss to profit or loss unless another PFRS standard specifies other
treatment.
A fair value measurement assumes that the transaction to sell the asset or transfer the
liability takes place either: Valuation Techniques
i. in the principal market for the asset or liability; or When determining fair value, an entity shall use valuation techniques:
ii. in the absence of a principal market, in the most advantageous market for the • Appropriate in the circumstances
asset or liability. • For which sufficient data are available to measure fair value
• Maximizing the use of relevant observable inputs
Principal market – a market with the greatest volume and level of activity for the asset • Minimizing the use of unobservable inputs.
or liability.
NOTE: Valuation techniques used to measure fair value shall be
Most advantageous market – a market that maximizes the amount that would be applied consistently. However, an entity can change the valuation technique or
 its application, if the change results in equally or more representative of fair event takes place between the measurement date and market closing date).

value in the circumstances. Level 2 inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. Adjustments to Level 2
The thee widely used valuation techniques are: inputs will vary depending on factors specific to the asset or liability.
1. Market approach: uses prices and other relevant information generated by
market transactions involving identical or comparable (i.e., similar) assets, Level 2 inputs include the following:
liabilities, or a group of assets and liabilities, such as a business a. quoted prices for similar assets or liabilities in active markets.
2. Cost approach: reflects the amount that would be required currently to replace b. quoted prices for identical or similar assets or liabilities in markets that are not
the service capacity of an asset (often referred to as current replacement cost). active.
3. Income approach: converts future amounts (e.g. cash flows or income and c. inputs other than quoted prices that are observable for the asset or liability, for
expenses) to a single current (i.e. discounted) amount. The fair value example:
measurement is determined on the basis of the value indicated by current market i. interest rates and yield curves observable at commonly quoted intervals;
expectations about those future amounts. ii. implied volatilities; and
iii. credit spreads.
Fair value hierarchy d. market-corroborated inputs.
PFRS 13 provides the following fair value hierarchy (order of priority) that categorizes
the inputs to valuation techniques used in measuring fair values into three levels: Level 3 inputs Level 3 inputs are unobservable inputs for the asset or liability. An entity
shall use Level 3 inputs to measure fair value only when relevant observable inputs are
not available.

Fair value measurement of non-financial assets

A fair value measurement of a non-financial asset takes into account a market
participant’s ability to generate economic benefits by using the asset in its highest and
best use or by selling it to another market participant that would use the asset in its
highest and best use.

The highest and best use of a non-financial asset takes into account the use of the asset
that is physically possible, legally permissible and financially feasible, as follows:
a. A use that is physically possible takes into account the physical characteristics of
the asset that market participants would take into account when pricing the asset
(e.g. the location or size of a property).
b. A use that is legally permissible takes into account any legal restrictions on the
use of the asset that market participants would take into account when pricing the
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or asset (e.g. the zoning regulations applicable to a property).
liabilities that the entity can access at the measurement date. c. A use that is financially feasible takes into account whether a use of the asset that
is physically possible and legally permissible generates adequate income or cash
An entity shall not make adjustments to quoted prices, only under specific circumstances, flows (taking into account the costs of converting the asset to that use) to produce
for example when a quoted price does not represent the fair value (i.e. when a significant an investment return that market participants would require from an investment
 in that asset put to that use.

WRAP UP EXERCISES: 4. According to PFRS 16, lease liabilities are presented in the lessee’s
statement of financial position
a. Separately form the other liabilities of the lessee
Exercise 1. Multiple Choices. b. Together with other liabilities, with disclosure of the line items
that include the lease liabilities
1. Entity A (customer) enters into a contract with Entity B (supplier) for the c. A or B
use of a data processing equipment. According to the contract, Entity A d. Not presented in the lessee’s financial statements but only in the
shall operate the equipment only in accordance with the standard operating lessor’s financial statements
procedures stated in the accompanying user’s manual. In assessing the
existence of a lease, does Entity A have the right to direct the use of the 5. According to PFRS 16, right-of-use assets are presented in the lessee’s
asset? statement of financial position
a. No, because the asset’s use is restricted. a. Separately from the other assets of the lessee
b. Yes, because Entity A has the right to direct how and for what b. Together with other assets as if they were owned, with disclosure
purpose the asset is used. of the line items that include the right-of-use assets
c. Yes, because the asset’s use is predetermined and Entity B is c. A or B
precluded from changing that predetermined use d. Not presented in the lessee’s financial statements but only in the
d. Maybe yes, maybe no, but exactly I don’t know. lessor’s financial statements

2. Which of the following is not one of the criteria when determining whether 6. According to PAS 38, intangible assets are measured as follows:
a contract is or contains a lease? Initial Measurement Subsequent Measurement
a. Identified asset a. Cost Fair value
b. Identified liability b. Cost Cost model or revaluation model
c. Right to obtain substantially all of the economic benefits from use c. Cost Cost model or fair value model
of an identified asset throughout the period of use d. Fair value Cost model or revaluation model
d. Right to direct the use of the identified asset throughout the period
of use 7. According to PAS 38, research and development costs incurred in self-
generating an intangible asset are recognized as follows:
3. Which of the following statements is correct regarding the accounting for Research Costs Development Costs
lease a. Expensed Expensed
a. The lessor depreciates the leased asset under a finance lease. b. Capitalized Capitalized
b. The lessee depreciates the leased asset under a “short-term” or a c. Expensed Capitalized
“low-valued asset” lease. d. Expensed Expensed, but may be capitalized in
c. When discounting lease payments the lessor and the lessee use the some circumstances
interest rate implicit in the lease.
d. An entity can never be both a lessor and a lessee of a same leased 8. According to PAS 38, which of the following intangible assets are not
asset. subsequently amortized?
a. Internally generated intangible assets
 b. Intangible assets that were impaired d. All of these

c. Intangible assets measured under the revaluation model 14. The PFRSs require some specific asset to be measured at fair value. Before
d. Intangible assets with indefinite useful life fair value can be used as basis for subsequent measurement, which of the
e. All intangible assets are amortized following conditions must exist?
a. The asset must have been acquired principally for trading
9. If is not clear whether an expenditure is a research or a development cost, it purposes.
is treated as a(an) b. The asset must have a principal market.
a. Research cost c. The fair value in subsequent periods must be expected to
b. Development cost approximate the asset’s carrying amount based on the cost model.
c. Regular expense d. The fair value must be determinable using the fair value hierarchy.
d. Ignored
15. Which of the following statements regarding fair value is/are correct?
10. Which of the following assets is not tested for impairment in accordance I. Fair value is an entity-specific measurement.
with PAS 36? II. Fair value is the price to acquire an asset or assume a liability.
a. Investment property measured under the cost model III. Fair value includes transportation costs, but not transactions costs
b. Investment in associate IV. The price in a principal market, if one exists, is used to measure the
c. Goodwill fair value of an asset or a liability.
d. Accounts receivable
a. I and II
11. According to PAS 36, an asset is impaired if it carrying amount exceeds its b. I and IV
recoverable amount. Recoverable amount is the asset’s c. II and III
a. Fair value less costs of disposal d. III and IV
b. Value in use
c. Higher of A and B 16. Which of the following is not a valuation technique that can be used to
d. Lower of A and B measure the fair value of an asset or liability?
a. Market approach
12. Entity A uses a calendar year accounting period. On May 21, 20x1, Entity b. Impairment approach
A acquires an intangible asset with an indefinite useful life. According to c. Income approach
PAS 36, the first impairment testing of the asset is d. Cost approach
a. On May 21, 20x2
b. Anytime between May 21, 20x1 to May 21, 20x2 17. According to PFRS 13, what is the best evidence of fair value of an asset?
c. On or before December 31, 20x1 a. Its quoted price in active market, if one exists.
d. When an indication of impairment is assessed to exist for the asset b. A price determined based on observable data, maximizing the use
of external data.
13. The impairment loss on which of the following assets is never reversed? c. Its estimated value determined using management’s estimation.
a. Intangible assets with indefinite useful life d. The present value of future cash flows to be derived from the
b. Goodwill asset.
c. Intangible assets not yet available for use
18. Which of the following statements is incorrect regarding inputs that can be
used to measure fair value?
I. Level I inputs are the most reliable fair value measurements and
Level III inputs are the least reliable.
II. Level III measurements are quoted prices in active markets for
identical assets or liabilities.
III. A fair value measurement based on management assumptions only
(no market data) would not be acceptable under current standards.
IV. The level in the fair value hierarchy of a fair value measurement is
determined by the level of the highest level significant input.

a. I only
b. I, II and IV
c. II, III and IV
d. I, II, III and IV

Answers to Exercise:
1. C; 2. B; 3. C; 4. C; 5. C; 6. B; 7. D; 8. D; 9. A; 10. D; 11. C; 12. C; 13. B; 14. D; 15. D; 16. B;
17. A; 18. C.
 Activities, Resources, and Assessment
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Textbook: Conceptual Framework & Accounting Textbook: Conceptual Framework & Accounting Standards by Zeus Vernon B. Millan
Standards by Zeus Vernon B. Millan Standards by Zeus Vernon B. Millan
References and Sources:
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2. https://www.grantthornton.global/en/insights/ifrs- 2. https://www.grantthornton.global/en/insights/ifrs- 16/ifrs-16---definition-of-a-lease/
16/ifrs-16---definition-of-a-lease/ 16/ifrs-16---definition-of-a-lease/ 3. https://www.ey.com/Publication/vwLUAssets/ey-
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apply-leases-update-december_2018/$File/ey- apply-leases-update-december_2018/$File/ey- apply-leases-update-december%202018.pdf
apply-leases-update-december%202018.pdf apply-leases-update-december%202018.pdf 4. https://www.ifrsbox.com/ias-38-intangible-assets/
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5. https://www.ifrsbox.com/ias-36-impairment- 5. https://www.ifrsbox.com/ias-36-impairment- assets/
assets/ assets/ 6. https://www.pkf.com/media/10033172/ias-36-
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impairment-of-assets-summary.pdf impairment-of-assets-summary.pdf 7. https://www.ifrsbox.com/ifrs-13-fair-value-
7. https://www.ifrsbox.com/ifrs-13-fair-value- 7. https://www.ifrsbox.com/ifrs-13-fair-value- measurement/
measurement/ measurement/ 8. https://www.pkf.com/media/10032366/ifrs-13-fair-
8. https://www.pkf.com/media/10032366/ifrs-13-fair- 8. https://www.pkf.com/media/10032366/ifrs-13-fair- value-measurement-summary.pdf
value-measurement-summary.pdf value-measurement-summary.pdf
Activities:
Activities: Activities: Topic discussion will be during classroom meetups,
Topic discussion will be through GoogleMeet App., Topic discussion will be through GoogleMeet App., and during which the exercises will be supplied with
during which the exercises will be supplied with during which the exercises will be supplied with answers.
answers. answers. Such teleconferencing will be recorded, the
video of which will be made available to you via Assessment:
Assessment: Messenger Group Chat or Gmail address. Topic quiz will be issued to you and will be answered
Topic quiz will be published at Schoology App. at home, which will be immediately due for submission
Instructions as to the time allocated for answering and Assessment: the following day at the box placed at the SVCI guard
deadline for submission of quiz will be announced via Topic quiz will be published at Schoology App. house. Communication as to the receipt the said quiz
Messenger Group Chat. Instructions as to the time allocated for answering and will be through text messaging.
 deadline for submission of quiz will be announced via
Messenger Group Chat.

Semi-Final Term Major Examination

Time Duration and Allotment: 1 day

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Assessment:

Schoology App Schoology App Semi-Final Term Major Examination will be issued to
you and will be answered at home, which will be
Assessment: Assessment: immediately due for submission the following day at
Semi-Final Term Major Examination will be published Semi-Final Term Major Examination will be published the box placed at the SVCI guard house.
at Schoology App. Instructions as to the time allocated at Schoology App. Instructions as to the time allocated Communication as to the receipt the said quiz will be
for answering and deadline for submission of for answering and deadline for submission of through text messaging.
assessment will be announced via Messenger Group assessment will be announced via Messenger Group
Chat. Chat.
PFRS 15, PAS 8, PAS 34, PFRS 8
Time Duration and Allotment: Week 7; 6 hours

Abstract:
This study focuses on the summary of the accounting standards enumerated above.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• state the five steps in the recognition of revenue and the timing of revenue recognition and its measurement;
• differentiate the accounting treatments of a change in accounting policy, a change in accounting estimate, and correction of prior period errors;
• state the scope and applicability of PAS 34; and
• explain the importance of segment reporting and state the quantitative thresholds in identifying operating segments as reportable.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the exercise presented after the topic content below.

consideration to which the entity expects to be entitled in exchange for those

TOPIC CONTENT
goods or services.

PFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS NOTE: If you have a contract with party other than a customer, then IFRS 15
does not apply.
PFRS 15 sets the principles to apply when reporting about:
• the nature; Income – the increase in economic benefits during the accounting period in the form of
• the amount; inflows or enhancements of assets or decrease of liabilities that result in increases in
• the timing; and equity, other than those relating to contributions form equity participants.
• the uncertainty
Revenue – income arising in the course of an entity’s ordinary activities.
of revenue and cash flows from a contract with a customer.
Revenue Recognition
CORE PRINCIPLE: An entity recognizes revenue to depict the transfer of PFRS 5 requires the application of the 5 step model for revenue recognition as shown
promised goods or services to customers in an amount that reflects the in the following:
 received or not yet entitled to receive any consideration.

Step 2: Identify the performance obligations in the contract

At contract inception, an entity shall assess the goods or services that have been promised
to the customer, and shall identify as a performance obligation:
• A good or a service (or a bundle of goods or services) that is distinct; or
• A series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.

NOTE: A good or service is distinct if the following criteria are met:

• The customer can benefit from the good or service on its own or together
with other readily available resources; and
Step 1: Identify the contract with the customer • The entity’s promise to transfer the good or service to the customer is
A contract can be oral, written or implied by an entity’s business practice. A contract separately identifiable from other promises in the contract.
with a customer will fall within the scope of PFRS 15 when all the following criteria are
met: NOTE: A series of distinct goods or services has the same pattern of transfer to
• The parties to the contract have approved the contract; the customer if the following criteria are met:
• Each party’s rights in relation to the goods or services to be transferred can be • Each distinct good or service that the entity promises to transfer
identified; consecutively to the customer would be a performance obligation that is
• The payment terms and conditions for the goods or services to be transferred can satisfied over time; and
be identified; • The same method of measuring progress would be used to measure the
• The contract has commercial substance; and entity’s progress towards the complete satisfaction of the performance
• The collection of an amount of consideration to which the entity is entitled to in obligation to transfer each distinct good or service in the series to the
exchange for the goods or services is probable. customer.

NOTE: No revenue is recognized on a contract that does not meet the criteria NOTE: Factors for consideration as to whether an entity’s promise to transfer
above. Any consideration received from such contract is recognized as a liability the good or service to the customer is separately identifiable include, but are not
and recognized as revenue only when either of the following has occurred: limited to:
a. The entity has no remaining obligation to transfer goods or services to • The entity does not provide a significant service of integrating the good
the customer and all, or substantially all, of the consideration has been or service with other goods or services promised in the contract.
received and is non-refundable; or • The good or service does not significantly modify or customize another
b. The contract has been terminated and the consideration received is non- good or service promised in the contract.
refundable. • The good or service is not highly dependent on or highly interrelated
with other goods or services promised in the contract.
NOTE: A contract does not exist if each contracting party ha the unilateral
enforceable right to terminate a wholly unperformed contract without Step 3: Determine the transaction price
compensating the other party. A contract is wholly unperformed if the entity has Transaction price – the amount of consideration that an entity expects to be entitled to
not yet transferred any promised good or service to the customer and has not yet in exchange for transferring promised goods or services to a customer. An entity will
consider the terms of the contract and past customary business practices when making discount is allocated between the performance obligations on a relative stand-
this determination. alone selling price basis. In some circumstances it may be appropriate to

NOTE: It’s NOT always the price set in the contract. It is your expectation of allocate the discount to some but not all of the performance obligations.
what you receive. It means that you need to estimate the transaction price. How?
Step 5: Recognize revenue when a performance obligation is satisfied
First, you need to take the price stated in the contract as some basis (if An entity shall recognize revenue when (or as) it satisfies a performance obligation by
applicable). transferring a promised good or service to a customer, which is when control is passed,
either over time or at a point in time.
Then, you need to take some items into account, such as:
• Variable consideration – are there some bonuses or discounts, for An entity recognizes revenue over time if one of the following criteria are met:
example, performance bonus? • The customer simultaneously receives and consumes the benefit provided by the
• Constraining estimates in variable consideration – you should include entity as the entity performs;
variable consideration (e.g. bonus) in the transaction price only when • The entity’s performance creates or enhances an asset that the customer controls
it’s highly probable that you can keep it (this is a big simplification); as the asset is created or enhanced; or
• Significant financing component – if your clients will pay you with • The entity’s performance does not create an asset with an alternative use to the
delay, do the payments reflect the time value of money? entity and the entity has an enforceable right to payment for the performance
• Non-cash consideration – do you receive some non-cash items from completed to date.
your customer in return for your goods or services?
• Consideration payable to a customer – do you provide some vouchers or NOTE: For a performance obligation satisfied over time, an entity would select
coupons to your customers? an appropriate measure of progress to determine how much revenue should be
• And other factors. recognized as the performance obligation is satisfied.

Step 4: Allocate the transaction price Factors which may indicate that control is passed at a point in time include, but are not
An entity shall allocate the transaction price to each performance obligation in an amount limited to:
that depicts the amount of consideration to which the entity expects to be entitled in • The entity has a present right to payment for the asset;
exchange for transferring the promised goods or services to the customer. • The customer has legal title to the asset;
• The entity has transferred physical possession of the asset;
Where a contract has many performance obligations, an entity shall allocate the • The customer has significant risks and rewards related to the ownership of the
transaction price to the performance obligations in the contract by reference to their asset; and
relative stand-alone selling prices. If a standalone selling price is not directly observable, • The customer has accepted the asset.
an entity will need to estimate it.
Contract costs
PFRS 15 suggests various methods that may be used, including: PFRS 15 provides a guidance about two types of costs related to the contract:
• Adjusted market assessment approach; 1. Costs to obtain a contract
• Expected cost plus a margin approach; or Those are the incremental costs to obtain a contract. In other words, these costs
• Residual approach (only permissible in limited circumstances). would not have been incurred without an effort to obtain a contract – for
example, legal fees, sales commissions and similar. These costs are not expensed
NOTE: Sometimes the transaction price may include a discount. Any overall in profit or loss, but instead, they are recognized as an asset if they are expected
 to be recovered (the exception is the contract costs related to the contracts for less information as possible.
then 12 months).

2. Costs to fulfill a contract How should you develop your accounting policy?
If these costs are within the scope of PAS 2, PAS 16, PAS 38, then you should • First, you need to look at other PFRSs dealing with the similar or related issues.
treat them in line with the appropriate standard. If not, then you should capitalize • Second, you need to apply concepts from the Conceptual Framework.
them only if certain criteria are met. • Also, in order to help, you can look to other standard setting bodies and their
rules or standards for guidance.
Presentation
An entity shall present the performance of a contract in the statement of financial position NOTE: PAS 8 requires the consistent selection and application of accounting
as a contract asset or contract liability, depending on the relationship between the entity’s policies.
performance and the customer’s payment. Any unconditional rights to consideration shall
be presented separately as a receivable. When can you change your accounting policy?
Only at 2 circumstances:
Where a customer has paid an amount of consideration prior to the entity transferring the 1. When it is required by another IFRS. This will be the case when new IFRS is
related good or service to the customer, a contract liability will be presented in the issued and you HAVE TO apply it mandatorily.
statement of financial position. 2. When new accounting policy provides better, more reliable and relevant
information. In this case, you apply new accounting policy voluntarily.
Where the customer has not yet paid the related consideration for the transfer of a good or
service, a contract asset (right to consideration is conditional on something other than the How can you change an accounting policy? (in the following order of priority)
passage of time) or receivable (right to consideration is unconditional except for the 1. Transitional provision in a PFRS, if any.
passage of time) is presented in the statement of financial position. Contract assets and 2. Retrospective application, in the absence of a transitional provision.
receivables together with any impairment shall be accounted for in accordance with 3. Prospective application, if retrospective application is impracticable.
PFRS 9 Financial Instruments. The difference between the initial recognition of a
receivable and the amount of revenue should be presented as an expense. Accounting Estimates (not directly defined by PAS 8, but indirectly via changes in
accounting estimates)
A change in an accounting estimate is an adjustment of the carrying amount of an asset or
PAS 8 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES liability, or related expense or the amount of the periodic consumption of an asset,
AND ERRORS resulting from reassessing the present status of expected future benefits and obligations
associated with the asset or liability.
Accounting Policies – are anything from rules, guidelines, conventions, principles and
similar norms used by entities for the preparation of the financial statements. How can you account for change in accounting policy?
Unlike accounting for change in accounting policy, we need to change our accounting
How to select accounting policy? (depends on whether there is a particular PFRSs that estimates prospectively, either:
deals with your specific transaction or situation or not) • In the current reporting period, in form of so-called “catch-up adjustment“;
1. If there is some standard or interpretation, then you simply apply it. • In both the current and future reporting periods, if the change affects both.
2. When there is NO specific standard or interpretation dealing with your
transaction or item, then management needs to use judgement and develop its NOTE: When it is difficult to distinguish a change in accounting policy from a
own policy, but careful, the policy needs to provide as reliable and relevant change in accounting estimate, the change is treated as a change in an
 accounting estimate.

Errors – include misapplication of accounting policies, mathematical mistakes, PAS 34 – INTERIM FINANCIAL REPORTING
oversights or misinterpretations of facts, and fraud.
Interim Reporting – pertains to the preparation and presentation of interim financial
Types of errors according to the period of occurrence: report for an interim period.
1. Current period errors (corrected simply by correcting entries)
2. Prior period errors (corrected by retrospective restatement) Interim Period - a financial reporting period shorter than a full financial year.

NOTE: An entity shall correct material prior period errors respectively in the Interim Financial Report - a financial report prepared for an interim period which
first set of financial statements authorized for issue after their discovery by: contains either:
a. restating the comparative amounts for prior period(s) in which error a. a complete set of financial statements (PAS 1); or
occurred, or b. a set of condensed financial statements (PAS 34)
b. If the error occurred before that date – restating the opening balance of
assets, liabilities and equity for earliest prior period presented. NOTE: PAS 34 does not require entities to provide interim financial reports.

In summary: NOTE: PAS 34 applies if an entity is (a) required by government, securities

regulators, stock exchanges, and accountancy bodies or (b) the entity elects or
chooses to publish an interim financial report in accordance with PFRSs.

NOTE: PAS 34 encourages publicly traded entities to provide at least semi-

annual interim financial report and publish them not later than 60 days after the
end of the interim period.

Complete set of financial statements under PAS 1:

1. Statement of financial position;
2. Statement of profit or loss and other comprehensive income;
3. Statement of changes in equity;
4. Statement of cash flows;
5. Notes, comprising a summary of significant accounting policies and other
explanatory information;
• comparative information in respect of the preceding period; and
6. A statement of financial position as at the beginning of the preceding period (i.e.,
in cases of retrospective application, retrospective restatement or reclassification
adjustment).

Minimum content of an interim financial report under PAS 34

1. Condensed statement of financial position;
 2. Condensed statement of profit or loss and other comprehensive income, preceding year
presented as either (a) a condensed single statement; or (b) a condensed separate d. Comparative income statement cumulatively for the comparable

income statement and a condensed statement of comprehensive income; financial year to date of the preceding year
3. Condensed statement of changes in equity;
4. Condensed statement of cash flows; and 3. Statement of comprehensive income
5. Selected explanatory notes. a. Statement of comprehensive income for the current interim period
b. Statement of comprehensive income cumulatively for the current
NOTE: The term “condensed” means an entity needs only to provide the financial year to date
minimum information required under PAS 34. At a minimum, condensed c. Comparative statement of comprehensive income for the comparable
financial statements include each of the headings and subtotals that were interim period of the preceding year
included in the entity’s most recent annual financial statements and the selected d. Comparative statement of comprehensive income cumulatively for the
explanatory notes required by PAS 34. Additional line items or notes are comparable financial year to date of the preceding year
provided if their omission makes the condensed financial statements misleading.
4. Statement of changes in equity
Two views on interim reporting a. Statement of changes in equity cumulatively for the current financial
1. Integral view – each interim period is an integral part of the annual accounting year to date
period. Accordingly, annual operating expenses are estimated and then allocated b. Comparative statement of changes in equity for the comparable financial
to the interim periods based on forecasted revenue or sales volume. In other year to date of the preceding year
words, costs incurred which clearly benefit the entire year are allocated to the
interim periods benefited. 5. Statement of cash flows
2. Independent view/Discrete view – each interim period is considered a separate a. Statement of cash flows cumulatively for the current financial year to
accounting period with status equal to a fiscal year. Thus, no estimations or date
allocations are made for interim purposes, unless such estimations or allocations b. Comparative statement of cash flows for the comparable financial year to
are allowed for annual reporting. The same expense recognition rules shall apply date of the preceding year
as under annual reporting and no special interim accruals or deferrals are
permitted.
PFRS 8 – OPERATING SEGMENTS
NOTE: PAS 34 adopts a combination of the two views.
Operating segment - a component of an entity:
Presentation of comparative interim report • that engages in business activities from which it may earn revenues and incur
1. Statement of financial position expenses (including internal revenues with other segments of the same entity);
a. Statement of financial position at the end of current interim period • whose operating results are reviewed regularly by the entity's chief operating
b. Comparative statement of financial position at the end of preceding year decision maker to make decisions about resources to be allocated to the segment
and assess its performance; and
2. Income Statement • for which discrete financial information is available.
a. Income statement for the current interim period
b. Income statement cumulatively for the current financial year to date Component of an entity – operations and cash flows that can be clearly distinguished,
c. Comparative income statement for the comparable interim period of the operationally and for financial reporting purposes, from the rest of the entity.
 public utilities.

Who must apply PFRS 8? Few more rules on reportable segments

Each entity: • If the total external revenue reported by operating segments constitutes less than
• whose debt or equity instruments are traded in a public market; or 75% of the entity's revenue, additional operating segments must be identified as
• that files, or is in the process of filing, its financial statements with a securities reportable segments until at least 75% of the entity's revenue is included in
commission or other regulatory organization for the purpose of trading its reportable segments.
instruments on a public market. • Information about other business activities and operating segments that are not
reportable shall be combined and disclosed in an "all other segments" category.
This applies to both individual (separate) financial statements and consolidated financial • If the number of reported segments exceeds 10, then the entity should assess
statements. whether it is practical to report them all separately and whether the information is
too detailed.
Reportable segments • If the management identifies new reportable segment based on quantitative
Not every single identified segment is reportable. If one segment, or aggregated segments thresholds in the current reporting period, the comparative information for the
based on aggregation criteria, meet at least ONE quantitative threshold, it must be previous reporting period should be restated in order to disclose the new segment
reported separately: separately also in the comparative period.
1. The segment's total revenue (including external and intersegment) is 10% or
more of the total combined revenue of all operating segments (careful - not total Information about major customers
entity's revenue); or An entity discloses the extent of its reliance on its major customers. A major customer is
2. The absolute amount of its reported profit or loss is 10% or more of the greater, a single external customer who has provided 10% or more of the entity’s revenues.
in absolute amount, of
• the combined reported profit of all operating segments that did not report If an entity has major customers, it discloses that fact, along with the total amount of
a loss; and revenues from each major customer, and the identity of the segment or segments
• the combined reported loss of all operating segments that reported a loss; reporting the revenues.
or
3. Its assets are 10% or more of the combined assets of all operating segments. NOTE: The entity need not disclose the identity of a major customer or the
amount of revenues that each segment reports from that customer.
NOTE: However, even if a segment does not meet any of the above thresholds,
management can still decide to present it separately. (This is in accordance with
the Management Approach).

Aggregation criteria (for segments having similar economic characteristics and similar
in each of the following respects:
a. Nature of the products and services;
b. Nature of the production processes;
c. Type or class of customers for their products and services;
d. The methods used to distribute their products or provide their services; and
e. Nature of the regulatory environment, if applicable, e.g., banking, insurance or
 b. Recorded through memo entry only

WRAP UP EXERCISES: c. Disclosed only

d. B and C.
Exercise 1. Multiple Choices.
4. A good or service that is not distinct (choose the incorrect statement)
1. PFRS 15 applies to a. Shall be combined with the other promises in the contract.
a. Contracts with customers b. May be treated, together with other promises in the contract, as a
b. Contracts with sellers single performance obligation
c. All contracts entered into by an entity in the ordinary course of its c. May be identified as a part of a bundle of goods or services or a
business part of a series of goods or services to be transferred to the
d. A and B. customer.
d. Shall be ignored. The entity allocates the transaction price only to
2. ABC Co., a dealer of medical machines, enters into the following contracts: the other promises in the contract that are distinct.
I. ABC Co. transfers a machine to X Hospital at contract inception
but ABC Co. retains legal title until the full payment of the 5. According to PFRS 15, revenue from a performance obligation that is not
consideration. satisfied over time is recognized
II. ABC Co. transfers a machine to Y Medical Clinic at contract a. Over time as the entity progresses towards the complete
inception. The consideration is due after two years. At contract satisfaction of the obligation
inception, Y is undergoing financial difficulties. This raises b. At a point in time when the performance obligation is satisfied
significant doubt in Y’s ability and intention of paying the c. When the contract ceases to be enforceable
consideration. ABC Co. cannot reliably estimate the outcome of d. A or B.
the contract.
III. ABC Co. transfers a machine to Z Co. under a lease contract. The 6. A change in measurement basis is most likely a
contractual period is 5 years, which is equal to the machine’s a. change in accounting policy
estimated useful life. At the end of the contract, Z Co. is given the b. change in accounting estimate
option of purchasing the machine. ABC’s past experience shows c. error
that almost all customers avail of the purchase option. d. any of these
Identify the contracts to which PFRS 15 may be applied. 7. A correction of prior period error is accounted for by
a. Contract 1
a. Retrospective application
b. Contract 2
b. Retrospective restatement
c. Contract 1 and 3
c. Prospective application
d. None of these.
d. Impracticable application
3. The consideration received from a contract with a customer that does not
8. Which of the following is a change in accounting estimate?
meet the criteria under “Step 1” of PFRS 15 is a. Change from the cost model to the fair value model of measuring
a. Recognized as liability investment property
 b. Change in business model for classifying financial assets resulting 13. Which of the following is correct regarding the provisions of PAS 34?
to the reclassification of a financial asset from being measured at a. All entities should publish quarterly interim reports.

amortized cost to fair value b. All publicly-listed entities should publish quarterly interim reports
c. Change in the method of recognizing revenue from long-term c. All publicly-listed entities should publish semi-annual interim
construction contracts reports
d. Change in the depreciation method, useful life or residual value of d. PAS 34 does not require any entity to publish interim reports, and
an item of property, plant and equipment. how often

9. These result from new information or new developments. 14. Interim financial reports prepared in accordance with PAS 34 shall, at a
a. Changes in accounting estimates minimum, include
b. Changes in accounting policies a. Semi-annual interim financial statements
c. Correction of errors b. Complete set of financial statements
d. All of these c. Condensed set of financial statements
d. A statement of financial position and an income statement
10. The effect of which of the following is presented in profit or loss in the
current period (or current and future periods, if both are affected) rather 15. PFRS 8 requires which of the following approaches in identifying
than as an adjustment to the opening balance of retained earnings. operating segments?
a. Correction of a prior period error a. Manager’s approach
b. Change in accounting policy b. Gentle approach
c. Change in accounting estimate c. Direct approach
d. All of these d. Management approach

11. Entity A wants to publish quarterly interim financial reports. Which of the 16. According to PFRS 8, a reportable operating segment is one which
following standards may Entity A apply in preparing and presenting its a. Management uses in making decisions about operating matters
interim financial reports? b. Results from aggregation of two or more segments and qualify
a. PAS 1 under any of the quantitative thresholds
b. PAS 34 c. A and B
c. PFRS 1 d. None of these
d. A or B.
17. Which of the following is not among the quantitative thresholds under
12. If an entity does not prepare interim financial reports, PFRS 8?
a. Its annual financial statements would not conform to the PFRSs a. At least 10% of total revenues (external and internal)
b. Its annual financial statements should not be described to have b. At least 10% of the higher of total profits of segments reporting
been prepared in accordance with PFRSs profits and total losses of segments reporting losses, in absolute
c. The conformance of its annual financial statement with the PFRSs amount
is not affected c. At least 10% of total assets (inclusive of intersegment receivables)
d. A and B. d. At least 10% of total revenues (external only)
 18. ABC Co. operates in six geographical areas offering three major types of
products and services. Internal reports are structured based on the major

types of products and services. How should ABC Co. identify its reportable
segments for external reporting in accordance with PFRS 8?
a. Based on the six geographical areas
b. Based on the three products and services
c. Based on quantitative threshold
d. Based on the operating results of either the geographical areas or
the products and services.

19. According to PFRS 8, disclosures for major customers shall be provided if

revenues from transactions with a single external customer amount to
a. At least 75% of the entity’s external and internal revenues
b. At least 75% of the entity’s external revenues
c. 10% or more of the entity’s external revenues
d. Less than 10% of the entity’s external revenues
Answers to Exercise:
20. Catalyst Co. is engaged in business process outsourcing. Catalyst 1. A; 2. A; 3. A; 4. D; 5. B; 6. A; 7. B; 8. D; 9. A; 10. C; 11. D; 12. C; 13. D; 14. C; 15. D; 16. C;
subcategorizes its main services into four: Information Technology, After- 17. D; 18. B; 19. C; 20. B
sales Support, Accounting, and Offsite Data Management. Catalyst
operates in five major geographical areas: Southeast Asia, North America,
South America, Australia and Europe. Internal reports are based on these
five geographical areas. What is the most appropriate basis of segment
reporting for Catalyst?
a. On the basis of the main services provided
b. On the basis of the geographical areas of operations
c. On the basis of the domicile country of Catalyst and the rest of the
world
d. Any of these.

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Conceptual Framework & Accounting
Textbook: Conceptual Framework & Accounting Textbook: Conceptual Framework & Accounting Standards by Zeus Vernon B. Millan
Standards by Zeus Vernon B. Millan Standards by Zeus Vernon B. Millan
References and Sources:
References and Sources: References and Sources: 1. https://www.ifrsbox.com/ifrs-15-revenue-
1. https://www.ifrsbox.com/ifrs-15-revenue- 1. https://www.ifrsbox.com/ifrs-15-revenue- contracts-customers/
contracts-customers/ contracts-customers/ 2. https://www.pkf.com/media/10031241/ifrs-15-
2. https://www.pkf.com/media/10031241/ifrs-15- 2. https://www.pkf.com/media/10031241/ifrs-15- revenue-from-contracts-with-customers-
revenue-from-contracts-with-customers- revenue-from-contracts-with-customers- summary.pdf
summary.pdf summary.pdf 3. https://www.ifrsbox.com/ias-8-policies-estimates-
3. https://www.ifrsbox.com/ias-8-policies-estimates- 3. https://www.ifrsbox.com/ias-8-policies-estimates- errors/
errors/ errors/ 4. https://www.pkf.com/media/10033173/ias-8-
4. https://www.pkf.com/media/10033173/ias-8- 4. https://www.pkf.com/media/10033173/ias-8- accounting-policies-changes-in-accounting-
accounting-policies-changes-in-accounting- accounting-policies-changes-in-accounting- estimates-and-errors-summary.pdf
estimates-and-errors-summary.pdf estimates-and-errors-summary.pdf 5. Theory Financial Accounting 2018 Edition by
5. Theory Financial Accounting 2018 Edition by 5. Theory Financial Accounting 2018 Edition by Conrado T. Valix and Christian Aris M. Valix
Conrado T. Valix and Christian Aris M. Valix Conrado T. Valix and Christian Aris M. Valix 6. https://www.ifrsbox.com/ifrs/ifrs-8/
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PAS 12, PAS 19, PFRS 2, and PAS 33

Time Duration and Allotment: Week 8; 6 hours

Abstract:
This study focuses on the summary of the accounting standards enumerated above.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
• discuss the scope and fundamental principle of PAS 12.
• differentiate between the four classifications of employee benefits under PAS 19 and state the timing of the recognition of employee benefits.
• define a share-based payment transaction and state its accounting treatment.
• compute the basic EPS and diluted EPS.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the exercise presented after the topic content below.

• Deduct expenses not recognized but deductible for tax purposes

TOPIC CONTENT • Deduct income recognized but not taxable under tax regulations.

PAS 12 – INCOME TAXES Permanent differences vs. Temporary differences

The varying treatments of economic activities between the PFRSs and the tax laws result
Accounting Profit vs. Taxable Profit to the following differences:
Accounting profit is profit or loss for a period before deducting tax expense. a. Permanent differences – arise when income and expenses enter in the
computation of either accounting profit or taxable profit but not both.
NOTE: PAS 12 defines accounting profit as a before-tax figure (not after tax as
we normally do) in order to be consistent with the definition of a taxable profit. NOTE: Permanent differences usually arise from non-taxable and non-
deductible expenses and those that have already been subjected to final taxes.
Taxable profit (tax loss) is the profit (loss) for a period determined in accordance with Since they are non-taxable, non-tax-deductible or have already been taxed under
the rules established by the taxation authorities upon which income taxes are payable
(recoverable). final taxation, they do not have future tax consequences, and hence, do not give
rise to deferred tax assets and liabilities.
NOTE: You can clearly see here that these 2 numbers can differ significantly
because accounting and tax rules are not the same. A number of differences can b. Temporary differences – differences between the carrying amount of an asset or
liability in the statement of financial position and its tax base.
pop out between accounting profit and taxable profit to the point that you have to
make the following adjustments to your accounting profit: NOTE: What is a tax base? Tax base of an asset or liability is the amount
• Add back the expenses recognized but non-deductible for tax purposes attributed to that asset or liability for tax purposes. Tax base of an asset is the
• Add income not recognized but included under tax regulations amount that will be deductible for tax purposes against any taxable economic
 benefits that will flow to an entity when it recovers the carrying amount of the tax asset, the difference is deferred tax expense. If the increase in deferred tax
asset. Tax base of a liability is its carrying amount, less any amount that will be asset exceeds the increase in deferred tax liability, the difference is deferred tax
deductible for tax purposes in respect of that liability in future periods. income or benefit.

NOTE: When the carrying amount of an asset or a liability is greater than its tax Recognition
base, then there is a taxable temporary difference and it gives rise to deferred Deferred tax liability is recognized for all taxable temporary differences you discovered,
tax liability. In the opaque situation, when the carrying amount of an asset or a except for the following situations:
liability is lower than its tax base, then there is a deductible temporary • No deferred tax liability shall be recognized from initial recognition of goodwill
difference and it gives rise to deferred tax asset. • No deferred tax liability shall be recognized from initial recognition of asset or
liability in a transaction that is not a business combination and at the time of the
NOTE: Temporary differences include timing differences. Timing differences transaction it affects neither accounting nor taxable profit (loss)
arise when income and expenses are recognized for financial reporting purposes • Investments in subsidiaries, branches, and associates, and interests in joint
in one period but are recognized for taxation purposes in another period (or vice arrangements to the extent that the entity is able to control the timing of the
versa). They are temporary differences because their effect reverses in one or reversal of the differences and it is probable that the reversal will not occur in the
more subsequent periods. foreseeable future.

Deferred tax liability vs. Deferred tax asset A deferred tax asset shall be recognized for all deductible temporary differences to the
Deferred tax liabilities – amounts of income taxes payable in future periods in respect of extent that it is probable that taxable profit will be available against which the
taxable temporary differences. deductible temporary difference can be utilized. No deferred tax asset shall be recognized
from initial recognition of asset or liability in a transaction that is not a business
Deferred tax assets – amounts of income taxes recoverable in future periods in respect combination and at the time of the transaction it affects neither accounting nor taxable
of: profit (loss).
a. Deductible temporary differences;
b. The carryforward of unused tax losses; and Measurement
c. The carryforward of unused tax credits. In measuring deferred tax assets / liabilities you need to apply the tax
rates that are expected to apply to the period when the asset is realized or
Income tax expense vs. Current tax expense vs. Deferred tax expense the liability is settled.
Income tax expense is the total amount included in the determination of profit or loss for
the period. It comprises current tax expense (current tax income) and deferred tax However, these expected rates need to be based on tax rates or tax laws that
have been enacted or substantively enacted by the end of the reporting
expense (deferred tax income). period.
Current tax expense is the amount of income taxes payable (recoverable) in respect of Presentation
the taxable profit (tax loss) for a period. Deferred tax assets and deferred tax liabilities are presented separately as noncurrent
assets and noncurrent liabilities, respectively, in the statement of financial position. PAS
Deferred tax expense (income or benefit) is the sum of the net changes in deferred tax 12 permits offsetting of deferred tax assets and deferred tax liabilities only if:
assets and deferred tax liabilities during the period. 1. You have a legally enforceable right to set off the current income tax assets
against current income tax liabilities (see above when it happens); and
NOTE: If the increase in deferred tax liability exceeds the increase in deferred 2. The deferred tax assets and the deferred tax liabilities relate to income taxed
 levied by the same taxation authority 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
Accounting for Current Taxes prior periods.
An entity uses relevant tax laws in computing for its current taxes. Unpaid current taxes • Defined benefits plant – the employer has the obligation to pay
are recognized as current tax liability. Excess tax payments over the current tax due are specified amount of benefits according to the plan to the employee and
recognized as current tax asset. PAS 12 permits offsetting of current tax assets and all investment and actuarial risk thus fall on the entity.
current tax liabilities only if: 3. Other long-term benefits – all employee benefits other than short-term employee
1. You have a legally enforceable right to set off the recognized amounts; and benefits, post-employment benefits and termination benefits.
2. You intend either to settle on a net basis or to realize the asset and settle the 4. Termination benefits – employee benefits provided in exchange for the
liability simultaneously. termination of an employee’s employment as a result of either:
a. an entity’s decision to terminate an employee’s employment before the
normal retirement date; or
PAS 19 – EMPLOYEE BENEFITS b. an employee’s decision to accept an offer of benefits in exchange for the
termination of employment.
Objective
The main objective of PAS 19 is to prescribe the accounting and disclosure for employee How to account short-term employee benefits
benefits. PAS 19 requires and entity to recognize: The entity shall recognize short-term employee benefits as an expense to profit or loss
• a liability when an employee has provided service in exchange for employee (unless another PFRS requires or permits the inclusion of the benefits in the cost of an
benefits to be paid in the future; and asset). The expense shall be recognized in the undiscounted amount of short-term
• an expense when the entity consumes the economic benefit arising from service employee benefits expected to be paid in exchange for employee’s service rendered
provided by an employee in exchange for employee benefits. during an accounting period.

NOTE: That’s the clear demonstration of matching principle—to recognize an Short-term paid absences: Expected cost of short-term paid absences shall be recognized
expense in the period when matching revenue is recognized. when the employees render service that increases their entitlement to future paid absences
(in the case of accumulating paid absences); or when the absences occur (in the case
Employee benefits – all forms of consideration given by an entity in exchange for of non-accumulating paid absences).
service rendered by employees or for the termination of employment.
Profit sharing and bonuses: An entity shall recognize the expected cost of profit-sharing
Classification of employee benefits and bonus payments when the entity has a present legal or constructive obligation to
1. Short-term employee benefits – employee benefits (other than termination make such payments as a result of past events; and a reliable estimate of the obligation
benefits) that are expected to be settled wholly before twelve months after the can be made. A present obligation exists when, and only when, the entity has no realistic

end of the annual reporting period in which the employees render the related alternative but to make the payments.
service.
2. Post-employment benefits – employee benefits (other than termination benefits How to account for defined contribution plans
and short-term employee benefits) that are payable after the completion of The employer shall recognize contributions payable to a defined contribution plan as an
employment. There are two basic types of post-employment benefits: expense to profit or loss (unless another PFRS requires or permits the inclusion of the
• Defined contribution plan – entity pays fixed contributions into a benefits in the cost of an asset).
separate entity (a fund) and will have no legal or constructive obligation
When the contributions are not expected to be settled wholly before twelve months after • Any gain or loss on settlement
the end of the reporting period, they shall be discounted. • Net interest on the net defined benefit liability (asset) – the change in the net
defined benefit liability (asset) during the period due to passage of time
How to account for defined benefit plans (STEPS) (“unwinding the discount”)
Step 1: Determine Deficit or Surplus.
Deficit or surplus is a difference between the present value of defined benefit obligation Step 4: Determine remeasurements in other comprehensive income
and fair value of plan assets as at the end of the reporting period. In order to determine it, The entity shall present the following remeasurements to other comprehensive income:
the entity must: • Actuarial gains and losses – the changes in the present value of the defined
• Estimate the ultimate cost of a benefit. The entity must use projected unit credit benefit obligation resulting from experience adjustments or the effects of changes
method to estimate how much the employees have earned for their work in the in actuarial assumptions
current and prior periods, to attribute the benefit to the periods of service and to • Return on plan assets, excluding amounts included in net interest on the net
incorporate estimates about demographic and financial variables (“actuarial defined benefit liability (asset)
assumptions”) into calculations. • Any change in the effect of the asset ceiling.
• Discount the benefit in order to determine the present value of the defined
benefit obligation and the current service cost. How to account for other long-term employee benefits?
• Deduct the fair value of any plan assets from the present value of the defined As other long-term benefits are not subject to so much uncertainty as defined benefit
benefit obligation. plans, the accounting treatment is a bit easier.

Step 2: Determine amount in the statement of financial position However, the entity should perform the same steps as that of defined benefit plans. The
Although there is quite enough numbers involved in accounting for defined benefit plan, only difference is that all items such as service cost, net interest on the net defined benefit
PAS 19 requires to present them as 1 single amount in the statement of financial position liability (asset) and remeasurements of the net defined benefit liability (asset) are
– the net defined benefit liability (asset), which is basically deficit or surplus calculated presented in the profit or loss – so nothing goes to other comprehensive income.
in the step 1, but adjusted for the effect of asset ceiling.
How to account for termination benefits?
Asset ceiling is the present value of any economic benefits available in the form of The primary question here is WHEN to recognize the liability and expense for
refunds from the plan or reductions in the future contributions to the plan. termination benefits. It is at the earlier of:
• when the company can no longer withdraw the offer of those benefits (either the
NOTE: If there is a surplus, the net benefit asset is the lower of the: termination plan exists or employee accepts the offer of benefits) and
1. Surplus; and • when the company recognizes cost for a restructuring (PAS 37) and involves the
2. Asset ceiling. payment of termination benefits.

Step 3: Determine amount in the profit or loss The next question is HOW to recognize termination benefits. This depends on the
The entity shall present the following amounts to profit or loss: specific terms of the benefits:
• Current service cost – the increase in the present value of the defined benefit • if the termination benefits are expected to be settled wholly before 12 months
obligation resulting from employee service in the current period; after the end of the reporting period, then we should apply the requirements
• Any past service cost – the change in the present value of the defined benefit for short-term employee benefits (so recognize it as an expense to profit or loss
obligation for employee service in prior periods, resulting from a plan on undiscounted basis)
amendment or a curtailment • if the termination benefits are not expected to be settled wholly before 12 months
 after the end of the reporting period, then we should apply the requirements transaction, then the corresponding increase is recognized as a liability.
for other long-term employee benefits (so recognize it as an expense to profit or
loss on discounted basis) Equity-settled share-based payment transactions

Employees and other providing similar

Non-employees (Measurement)
PFRS 2 – SHARE-BASED PAYMENT services (Measurement)
Order of priority in measurement: Order of priority in measurement:
Share-based payment transaction – a transaction in which the entity acquires goods or 1. Fair value of goods or services received 1. Fair value of equity instruments
services and pays for them by issuing its own equity instruments (equity-settled) or cash 2. Fair value of equity instrument granted
based on the value of its own equity instruments (cash-settled). 2. Intrinsic value

NOTE: There’s also the third type of share-based payment arrangements: NOTE: Intrinsic value is the difference between the fair value of the shares
transactions in which either the entity or the supplier has a choice of settlement which the counterparty has the right to subscribe or receive and the subscription
(to receive equity instruments or cash / other assets). price (if any) that the counterparty is required to pay.

NOTE: If there are some specified vesting conditions, these must be met before How to deal with vesting conditions?
receiving any share-based payment. PFRS 2 recognizes 2 types of vesting • If the share-based payment IS vested immediately, or there are no vesting
conditions: conditions, then PFRS 2 regards this transaction as granted in return for the
1. Service conditions: they require the counterparty to complete a specified supplier’s (employee’s) service in the past. Therefore, an entity needs to
period or service; recognize the services received immediately in full at the grant date, with the
2. Performance conditions: they require the counterparty to complete a corresponding increase in equity.
specified period of services AND specified performance targets to be • If the share-based payment DOES NOT vest until the counterparty meets some
met. vesting conditions, then PFRS 2 regards this transaction as granted in return for
the supplier’s (employee’s) service rendered during the vesting period.
A performance condition might include a market condition that is linked to the In this case, an entity should recognize an amount for the goods or services
market price of shares in some way, for example, vesting might depend on received during the vesting period based on the best available estimate of the
achieving a minimum increase in the share price of the entity. number of equity instruments expected to vest.

Recognition How to deal with changes?

The basic recognition principle is to recognize goods or services received in a share- Sometimes, an entity might change the terms of the share-based payment transaction.
based payment transaction when the goods are obtained or as the services are received.

Goods or services acquired should be recognized as expenses in profit or loss unless they Modification of the terms on which equity instruments were granted depends on the fair
qualify for recognition as assets. That’s the debit side of an accounting entry. value of the new equity instruments:
• If the fair value of the new instruments is greater than the fair value of the old
The credit side depends on the type of share-based payment arrangement: instruments, then the incremental amount is recognized over the remaining
• If the goods or services were acquired in an equity-settled share-based payment vesting period (or immediately if modification happens after the vesting period).
transaction, then the corresponding increase is recognized in equity. • If the fair value of the new instruments is lower than the fair value of the old
• If the goods or services were acquired in a cash-settled share-based payment instruments, the original fair value of the equity instruments granted should be
 expensed as if the modification never occurred.

If an entity cancels or settles the equity instruments, then it is recognized as an

acceleration of the vesting period and any remaining unrecognized amount is
recognized immediately.

Cash-settled share-based payment transactions

Typical examples of cash-settled share-based payment transactions are:
• Share appreciation rights: employee is entitled to the cash payment in the future
based on the increase of entity’s share price over specified period of time from a
specified level;
• Rights to redeemable shares: employee will receive the shares in the future that
are redeemable in cash. NOTE: Earnings basically include all items of income and expense including tax
and non-controlling interests LESS the net profit attributable to preference
Similarly as in the equity-settled share-based payment transaction, the goods or services shareholders, including preference dividends.
received are measured at the fair value of the liability. The fair value of the liability has
to be remeasured at each reporting date until this liability is settled and any changes of NOTE: When ordinary shares are issued without a corresponding change in
fair value are recognized in profit or loss. resources (assets), the basic and diluted EPS and the weighted average number
of ordinary shares outstanding during the period and for all periods presented
Vesting conditions are treated in the similar manner as in the equity-settled share-based are adjusted retrospectively.
payment transactions.
NOTE: When stock rights are issued, the weighted average shares before the
issue is multiplied by the following adjustment factor: (FV of stocks right-on ÷
PAS 33 – EARNINGS PER SHARE FV of stocks ex-right). FV of stocks ex-right = FV of stocks right-on less Value
of 1 right
Earnings per share – a computation made for ordinary shares. It is a form of
profitability ratio which provides a measure of how much profit (loss) each ordinary Diluted earnings per share
share has earned (incurred) during the period. An entity with dilutive potential ordinary shares presents diluted EPS in addition to basic
EPS. An entity with no dilutive potential ordinary shares presents basic EPS only.

Before you start calculating the diluted EPS, you need to determine whether the potential

Types of Earnings per share ordinary share is dilutive or not. Some potential ordinary shares can have dilutive
1. Basic earnings per share effect (your EPS would go down) and some can have antidilutive impact (your EPS
2. Diluted earnings per share would go up).

Basic earnings per share (calculated simply as the):

• Net profit or loss for the period attributable to ordinary shareholders, divided by
• Weighted average number of ordinary shares outstanding during the period.
 WRAP UP EXERCISES:

Exercise 1. Multiple Choices.

1. In layman’s terms, to “defer” means to postpone. Thus, a deferred tax

liability
a. Increases the tax payment in the current period
b. Increases the tax payment in a future period
c. Decreases the tax payment in the current period
d. Decreases the tax payment in a future period

2. If the change in deferred tax asset exceeds the change in deferred tax
liability during the period, the net change is referred to as
a. Deferred tax expense
b. Deferred tax income
c. Deferred tax liability
The formula: d. Deferred tax asset

Profit (Loss) 𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑡𝑡𝑡𝑡𝑡𝑡 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 3. Entity A reports an income tax expense of P1,000 and a current tax expense
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 of P800 during the period. The difference between these amounts is best
Weighted average number of outstanding described as
𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑛𝑛𝑛𝑛 a. Deferred tax expense
𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡ℎ𝑒𝑒 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑜𝑜𝑜𝑜 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑜𝑜𝑜𝑜 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 b. Deferred tax income
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 c. Deferred tax liability
d. Deferred tax asset
Multiple potential ordinary shares
When there are two or more potential ordinary shares, they need to be ranked according 4. Which of the following is not correct regarding the recognition of a
to their dilutive effect on basic EPS. The most dilutive potential ordinary share is ranked deferred tax asset or a deferred tax liability?
first; the least dilutive is ranked last. The most dilutive potential ordinary share is the one a. A deferred tax liability will ultimately result to a higher tax
with the least incremental EPS. payment in a future period
b. A deferred tax asset is expected to cause a reduction in the tax
When computing for the diluted EPS, the potential ordinary shares are considered step- payment in a future period
by-step according to their rankings. If any time the diluted EPS exceeds the basic EPS, c. Recognizing deferred tax assets and liabilities result to proper
the entity discontinues considering further any potential ordinary share and the lowest matching of items in the financial statements
amount computed is the amount presented as diluted EPS. d. Recognizing a deferred tax asset reduces the tax payment in the
current period, below the amount that would have to be paid if only
 the tax laws are used to compute for the tax due
10. According to PAS 19, how are other long-term benefits accounted for
5. If the economic benefits from an asset will not be taxable when they are a. Similar to defined benefit plans
recovered, the tax base of the asset is equal to b. Similar to short-term employee benefit except that the cash flows
a. Its carrying amount are discounted
b. Zero c. Similar to defined benefit plans except that all the components of
c. A or B the defined benefit cost is recognized in other comprehensive
d. Neither A nor B income
d. Similar to defined benefit plans except that all the components of
6. Entity’s A employees are entitled to six days paid sick leaves per year. Any the defined benefit cost is recognized in profit or loss
unused sick leave is converted to cash when the employee resigns or
retires. The sick leave benefits are considered 11. A share-based payment transaction is one in which an entity receive goods
a. Vesting or services and pays for them
b. Non-vesting a. By issuing its own equity instruments
c. Non-accumulating b. Through cash, but the amount is based on the fair value of the
d. Monetizing entity’s equity instruments
c. Either A or B, as a choice given to either the entity or the supplier
7. Compensated absences that can be carried forward and used in future of the goods or services
periods if not fully used in the current period of entitlement are referred to d. Any of these
as
a. Contributory 12. Which of the following is excluded from the scope of PFRS 2?
b. Non-contributory a. Employee share option plans
c. Accumulating b. Employee share appreciation rights
d. Vesting c. Purchase of goods from an unrelated party in exchange for an
entity’s own shares of stocks
8. Under this post-employment benefit plan, the retirement benefit cost is d. Transfer of equity instruments as consideration for a business
equal to the contribution due for the period. combination
a. Defined contribution plan
b. Defined benefit plan 13. On February 1, 20x1, Entity A offered its employees share options subject
c. State plan to the offer being ratified in the shareholders’ general meeting. The share
d. Multi-employer plan option offer was approved in the shareholders’ general meeting held on
March 1, 20x1. Entity A issued the share options on April 1, 20x1. The fair
9. Actuarial gains or losses result from the accounting for which of the value of the share options vary between these dates. For purposes of PFRS
following employee benefits? 2, the share options should be valued at the fair value determined on
a. Short-term compensated absences a. February 1, 20x1

b. Post-employment defined contribution plans b. March 1, 20x1

c. Post-employment defined benefit plans c. April 1, 20x1
d. Profit sharing and bonus plans d. Any of these
14. PAS 33 is intended to apply t which of the following?
a. Publicly-listed entities
b. Non-publicly listed entities
c. Financial institutions
d. All entities using the PFRSs

15. Which of the following does not result to a retrospective adjustment of

prior period EPS information?
a. Share dividends
b. Share split
c. Issuance of shares for cash
d. Issuance of stock rights

16. Earnings per share is not required to be computed on

a. Profit or loss from continuing operations
b. Results of discontinued operations
c. Profit or loss for the year
d. Other comprehensive income

Answers to Exercise:
1. B; 2. B; 3. A; 4. D; 5. A; 6. A; 7. C; 8. A; 9. C; 10. D; 11. D; 12. D; 13. B; 14. A; 15. C; 16. D;
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Conceptual Framework & Accounting
Textbook: Conceptual Framework & Accounting Textbook: Conceptual Framework & Accounting Standards by Zeus Vernon B. Millan
Standards by Zeus Vernon B. Millan Standards by Zeus Vernon B. Millan
References and Sources:
References and Sources: References and Sources: 1. https://www.ifrsbox.com/ias-12-income-taxes/
1. https://www.ifrsbox.com/ias-12-income-taxes/ 1. https://www.ifrsbox.com/ias-12-income-taxes/ 2. https://www.ifrsbox.com/ias-19-employee-benefits/
2. https://www.ifrsbox.com/ias-19-employee-benefits/ 2. https://www.ifrsbox.com/ias-19-employee-benefits/ 3. ifrsbox.com/ifrs-2-share-based-payment/
3. ifrsbox.com/ifrs-2-share-based-payment/ 3. ifrsbox.com/ifrs-2-share-based-payment/ 4. https://www.ifrsbox.com/ias-33-earnings-per-
4. https://www.ifrsbox.com/ias-33-earnings-per- 4. https://www.ifrsbox.com/ias-33-earnings-per- share/
share/ share/

Activities: Activities:
Topic discussion will be through GoogleMeet App., Activities: Topic discussion will be during classroom meetups,
during which the exercises will be supplied with Topic discussion will be through GoogleMeet App., and during which the exercises will be supplied with
answers. during which the exercises will be supplied with answers.
answers. Such teleconferencing will be recorded, the
Assessment: video of which will be made available to you via Assessment:
Topic quiz will be published at Schoology App. Messenger Group Chat or Gmail address. Topic quiz will be issued to you and will be answered
Instructions as to the time allocated for answering and at home, which will be immediately due for
deadline for submission of quiz will be announced via Assessment: submission the following day at the box placed at the
Messenger Group Chat. Topic quiz will be published at Schoology App. SVCI guard house. Communication as to the receipt
Instructions as to the time allocated for answering and the said quiz will be through text messaging.
deadline for submission of quiz will be announced via
 Messenger Group Chat.

Final Term Major Examination

Time Duration and Allotment: 1 day

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Assessment:

Schoology App Schoology App Final Term Major Examination will be issued to you
and will be answered at home, which will be
Assessment: Assessment: immediately due for submission the following day at
Final Term Major Examination (Comprehensive Final Term Major Examination (Comprehensive the box placed at the SVCI guard house.
Examination) will be published at Schoology App. Examination) will be published at Schoology App. Communication as to the receipt the said quiz will be
Instructions as to the time allocated for answering and Instructions as to the time allocated for answering and through text messaging.
deadline for submission of assessment will be deadline for submission of assessment will be
announced via Messenger Group Chat. announced via Messenger Group Chat.
_End of module_