Under the Corporation Code of the Philippines, a business

CHAPTER 1 combination effected through asset acquisition may be

BUSINESS COMBINATION PT. 1 either:

a. Merger- occurs when two or more companies merge into

a single entity which shall be one of the combining
Introduction
companies. For example: A Co. + B Co. = A Co. or B Co.

A business combination occurs when one company acquires

b. Consolidation- occurs when two or more companies
another or when two or more companies merge into one.
consolidate into a single entity which shall be the
After the combination, one company gains control over the
consolidated company. For example: A Co. + B Co. - C Co.
other. The company that obtains control over the other is
referred to as the parent or acquirer. The other company
➤ Stock acquisition instead of acquiring the assets and
that is controlled is the subsidiary or acquiree.
assuming the liabilities of the acquiree, the acquirer
obtains control over the acquiree by acquiring a majority
Business combinations are carried out either through:
ownership interest (e.g., more than 50%) in the voting
rights of the acquiree.
1. Asset acquisition; or

2. Stock acquisition
A business combination may also be described as:

Asset acquisition the acquirer purchases the assets and

1. Horizontal combination - a business combination of two
assumes the liabilities of the acquiree in exchange for cash
or more entities with similar businesses, e.g., a bank
or other non-cash consideration (which may be the
acquires another bank eliminate/reduce competition
acquirer's own shares). After the acquisition, the acquired
entity normally ceases to exist as a separate legal or
2. Vertical combination- a business combination of two or
accounting entity. The acquirer records the assets
more entities operating at different levels in a marketing
acquired and liabilities assumed in the business combination
chain, e.g., a manufacturer acquires its supplier of raw
in its books of accounts.
materials.less cost
3. Conglomerate- a business combination of two or more 3. Output the result of 1 and 2 above that provides goods
entities with dissimilar businesses, e.g., a real estate or services to customers, investment income or other
developer acquires a bank income from ordinary activities.

Identifying a business combination

Business
An entity determines whether a transaction is a business
Business is "an integrated set of activities and assets that combination in relation to the definition provided under
is capable of being conducted and managed for the purpose PFRS 3.
of providing goods or services to customers, generating
investment income (such as dividends or interest) or
generating other income from ordinary activities." If the assets acquired (and related liabilities assumed) do
not constitute a business, the entity accounts for the
A business has the following three elements: transaction as a regular asset acquisition

1. Input any economic resource that results to an output not a business combination. Accordingly, the entity applies
when one or more processes are applied to it, e.g., non- other applicable Standards
current assets, intellectual property, the ability to obtain
access to necessary materials or rights and employees. Accounting for business combination Business combinations
are accounted for using the acquisition method. This
2. Process any system, standard, protocol, convention or method requires the following: a. Identifying the acquirer,
rule that when applied to an input, creates an output, e.g.,
strategic management processes, operational processes and
resource
b. Determining the acquisition date; and
management processes. Administrative systems, e.g., c. Recognizing and measuring goodwill. This requires
accounting, billing, payroll, and the like, are not processes
used to create outputs. recognizing and measuring the following:
i. Consideration transferred
ii. Non-controlling interest in the acquireerimage m FORMULA:
cursidiary
iii. Previously held equity interest in the acquiree
Consideration transferred
iv. Identifiable assets acquired and liabilities assumed on
the business combination. Non-controlling interest (NCI) in the acquiree

Previously held equity interest in the acquiree

Identifying the acquirer
The acquirer is the entity that obtains control of the Total
acquiree. The acquiree is the business that the acquirer
obtains control of in a business combination Less: Fair value of net identifiable assets acquired

Goodwill/ (Gain on a bargain purchase)

Determining the acquisition date
“A negative amount resulting from the formula is called
The acquisition date is the date on which the acquirer "gain on a bargain purchase"
obtains control of the acquiree. This is normally the closing
date (i.e., the date on which the acquirer legally transfers
the consideration, acquires the assets and assumes the
CHAPTER 2
liabilities of the acquiree). BUSINESS COMBINATION PT .
2
Share-for-share exchanges
Recognizing and measuring goodwill  A business combination may be accomplished
through exchange of equity interests between the
On acquisition date, the acquirer computes and recognizes acquirer and the acquiree (or its former owners).
goodwill (or gain on a bargain purchase The general principle is that the consideration
 transferred (in this case, the shares issued by the Reacquired rights
acquirer) is measured at fair value..  A right that an acquirer has previously granted to
the acquiree that is reacquired as a result of a
Measurement period business combination is recognized as an intangible
 If the initial accounting for a business combination asset separately from goodwill.
is incomplete by the end of the reporting period in
which the combination occurred, the acquirer can Settlement of pre-existing relationship Prior to business
use provisional amounts to measure any of the combination, the acquirer and acquiree may have a pre-
following for which the accounting is incomplete: existing relationship. Such a relationship may be:
a. Consideration transferred
b. Non-controlling interest in the acquiree a. Contractuale.g., as vendor and customer, licensor and
c. Previously held equity interest in the acquiree licensee, or franchisor and franchisee. A pre-existing
d. Identifiable assets acquired and liabilities assumed relationship may be a contract that the acquirer recognizes
as a reacquired right.
Within 12 months from the acquisition date (ie., the
'measurement period), the acquirer retrospectively adjusts b. Non-contractual - e.g., as plaintiff and defendant on a
the provisional amounts for any new information obtained pending lawsuit.
that provides evidence of facts and circumstances that
existed as of the acquisition date, which if known would Business combination achieved in stages is also called
have affected the measurement of the amounts recognized "step acquisition."
on that date.
In accounting for a business combination achieved in
Determining what is part of the business combination stages, the acquirer:
transaction
 Before the business combination, the acquirer and 1. Remeasures the previously held equity interest in the
acquiree may have pre-existing relationship or they acquiree at acquisition-date fair value; and
may enter into transactions during the negotiation
period that are separate from the business 2. Recognizes the gain or loss on the remeasurement in:
combination.
a. Profit or loss if the previously held equity interest was
classified as FVPL, Investment in Associate, or Investment
in Joint Venture; or

b. Other comprehensive income if the previously held

equity interest was classified as FVOCI..
CHAPTER 3
retrospectively for information obtained during the BUSINESS COMBINATION PT 3
measurement period (i.e., maximum of 12 months from
Goodwill
acquisition date) that provides evidence of facts and
 Only a goodwill that arises from a business
circumstances that existed as of the acquisition date.
combination is recognized as an asset. Goodwill
arising from other sources (e.g internally generated)
The consideration transferred includes only those that are
is not recognized. Goodwill is measured and
transferred to the previous owners of the acquiree. It
recognized on acquisition date. Subsequent
excludes those that are retained by the combined entity
expenditures on maintaining goodwill are expensed
after the combination and those that are in effect used to
immediately.
settle a pre- existing relationship.

A reacquired right in a business combination is recognized

 A CGU to which goodwill has been allocated is
as an intangible asset measured at the "at-market" value.
tested for impairment annually. A CGU is impaired if
its recoverable amount is less than its carrying
The gain or loss on settlement of a pre-existing
amount including the allocated goodwill. Impairment
relationship is measured as follows:
loss is charged first to the CGU's goodwill and any
excess is charged to the other assets in the CGU.
a) If contractual - at the lower of (i) "off-market" value,
Impairment of goodwill is not reversed in a
favorable/unfavorable determined based on the acquirer's
subsequent period
perspective; and (ii) any settlement amount stated in the
 If the CGU is disposed, the goodwill allocated to it
contract.
is also derecognized and included in the
determination of gain or loss from the disposal.
b) If non-contractual - at fair value
Methods of estimating goodwill Before the actual business
combination transaction takes place, thetrat amount of Ave. earnings
goodwill may be estimated using any of the following AC Co (Normal earnings)
methods: Excess earnings
Divide by: cap rate
1. Indirect valuation - this is a residual approach wherein GOODWILL
the goodwill is measured as the excess of the sum of
consideration transferred, non-controlling interest in the Method 3- Capitalization of average earnings
acquiree, and Residual previously held equity interest in the
acquiree over the fair value of net identifiable assets Ave earnings
acquired. Divide by: cap rate
2. Direct valuation - under this method, goodwill is Estimated purch price
measured based on expected future earnings from the (fv of acquiree’s net assets)
business to be acquired. GOODWILL
4 METHODS
Method 4- PV ov average excess earnings
Method 1- Multiples of average excess earnings
Total earnings Average earnings
Less: expropriation gain (Normal earnings in the industry)
Normalized earnings Excess earnings
Divided by years Multiply by: PV of an ordinary annuity @10%, n=5
a.) average annual earnings Goodwill
FV of acquiree’s net assets Reverse acquisitions
Multiply by: normal rate of return  In a business combination accomplished through
b.) Normal earnings exchange of equity interests, the acquirer is usually
Excess earnings: a-b the entity that issues its equity interests. However,
Multiply by: probable duration of excess earnings the opposite is true for reverse acquisitions. In a
Goodwill reverse acquisition, the entity that issues securities
acquirer) identified as the acquiree for the legal,
Method 2- Capitalization of average excess earnings que the entity whose equity interests are acquired
 (the legal acquiree) is the acquirer for accounting  Consolidation starts when control is obtained and
purposes ceases when control is lost. Both cases are
accounted for prospectively.
 Consolidated financial statements are prepared
CHAPTER 4 using uniform accounting policies and same reporting
date.
CONSOLIDATED FINANCIAL  Consolidation involves the following:
STATEMENT PT 1 1. Eliminate the "Investment in subsidiary" account.
a. Measure the subsidiary's assets and liabilities at
their acquisition-date fair values, net of depreciation.
 PFRS 3 deals with the accounting for a business b. Recognize the goodwill.
combination at the acquisition date, while PFRS 10 c. Replace the subsidiary's equity accounts with
deals with the preparation and presentation of NCI in net assets.
consolidated financial statements after the 2. Add, line by line, similar items of assets and liabilities.
business combination.

➤ Consolidated financial statements - "the financial  Consolidated retained earnings include the retained
statements of a group in which the assets, liabilities, earnings of the parent plus the parent's share in
equity, income, expenses and cash flows of the A parent is the change in net assets of the subsidiary since
required to prepare consolidated financial statements acquisition date.
except in limited cases mentioned in PFRS 10.  NCI in net assets includes the NCI at acquisition
 Consolidated financial statements provide date plus the NCI's share in the change in net
information on a parent and its subsidiaries viewed assets of the subsidiary since acquisition date.
as a single reporting entity.  NCI in net assets is presented within equity but
 The basis for consolidation is control. Control exists separate from the equity of the owners of the
if an investor has the following over an investee: (1) parent.
power; (2) exposure, or rights, to variable returns,  The consolidated profit or loss is attributed to the
and (b) ability to affect returns. (a) owners of the parent and (b) NCI.
 LESS: ACC IMP Xxx
LOSS

GOODWILL xxx
( end)

STEPS IN CONSOLIDATING FS STEP 3: NCI IN NET ASSETS

STEP 1: ANALYSIS OF SUBS ASSETS
SUBS NET XXX
ASSETS @FV
BEG END NET
BAL BAL CHANGE x NCI percentage XXX
NET XXX XXX XXX
ASSETS NCI END XXX
@CA
FVA XXX XXX XXX STEP 4: CONSOLIDATED RE
NET XXX XXX XXX
PARENTS’ RE XXX
ASSET
END
S @FV
STEP 2: GW COMPUTATION
P’s SHARE IN XXX
THE net change
CT Xxx
IN SUBS ASSET
NCI Xxx
CONSO RE XXX
PHEI Xxx

TOTAL Xxx STEP 5: CONSOLIDATED P/L

FVNA Xxx PROFITS OF P XX

DEP OF FVA XX
GW (BEG) Xxx
 CONSO P/L XXX Intercompany sale of inventory

Intercompany sales are either:

1. Downstream - the parent sells to the subsidiary

CHAPTER 5 2. Upstream - the subsidiary sells to the parent

CONSOLIDATED FINANCIAL
*It is important to identify whether an intercompany sale
STATEMENT PT 2 is downstream or upstream because only upstream sales
affect non-controlling interests. The entity that
Intercompany transactions recognizes profit from a sale transaction is the seller.
 Intercompany transactions are transactions
between a parent and a subsidiary. The effects of In a downstream sale, the parent recognizes the profit.
these transactions are eliminated when preparing NCI is not affected because the profit pertains solely to
consolidated financial statements because the the owners of the parent.
parent and the subsidiary are viewed as a single
reporting entity. This is like the statement "You In an upstream sale, the subsidiary recognizes the profit.
cannot transact with your own self." NCI is affected because the profit pertains to both the
owners of the parent (because of their interest in the
The following are the common intercompany transactions subsidiary) and the NCI (the other owners of the
that are eliminated when preparing consolidated financial subsidiary)
statements:
Intercompany sale of property, plant and equipment
a. Intercompany sale of inventory
Intercompany sales of property, plant, and equipment are
b. Intercompany sale of property, plant, and equipment also identified as either downstream or upstream because
c. Intercompany dividends only upstream sales affect non-controlling interests.
d. Intercompany bond transactions Accounting procedures:
a. Any gain or loss is deferred and reduction to the carrying amount of the investment. in any
case, the dividends must be eliminated when the
i. amortized over the asset's remaining life, if the asset is consolidated financial statements are prepared. It is as if
depreciable. the parent never received the dividends

ii. not amortized, if the asset is non-depreciable. Intercompany bond transaction

b. If the asset is subsequently sold to an unrelated party When a parent or a subsidiary acquires bonds issued by the
or otherwise derecognized, the unamortized balance of the other, both the investment in bonds and the bonds payable
deferred gain or loss is recognized in profit or loss. are eliminated in the consolidated financial statements.

c. In a downstream sale, the gain or loss is adjusted to the STEP 1: Analysis of effect of intercompany
controlling interest only. Therefore, NCI is not affected. transaction.

d. In an upstream sale, the adjustments for the gain or loss Step 2: Analysis of subsidiary's net assets
are shared between the controlling interest and NCI.
Therefore, NCI is affected. Net assets at carrying amount
Fair value adjustments (FVA) Unrealized profit (upstream
e. The unamortized balance of the deferred gain or loss is only)
eliminated when consolidated financial statements are Net assets at fair value
prepared.
Step 3: Goodwill computation
Intercompany dividends
Consideration transferred (equal to cost of investment in
When the investment in subsidiary is measured at cost or subsidiary)
in accordance with PFRS 9, dividends received from the Non-controlling interest in the acquiree
subsidiary are loss. Previously held equity interest in the acquiree
Total
in subsidiary is measured using the equity method, Fair value of net identifiable assets acquired (see Step 2)
dividends received from the subsidiary are recognized as Goodwill - Jan, 1, 20x1
Less: Accumulated impairment losses
Goodwill-Dec. 31, 20x1
CONSOLIDATED FINANCIAL
STATEMENT PT 3
Step 4: Non-controlling interest in net assets

Subsidiary's net assets at fair value - Dec. 31, 20x1 (see

Step 2) Impairment of Goodwill
 When NCI is measured at proportionate share,
Multiply by: NCI percentage
Non-controlling interest in net assets - Dec. 31, 20x1 goodwill is attributed only to the owners of the
parent. Therefore, any impairment of goodwill is
also attributed only to the owners of the parent.
 When NCI is measured at fair value, goodwill is
Step 5: Consolidated retained earnings attributed to both the owners of the parent and
Parent's retained earnings - Dec. 31, 20x1 NCI. Therefore, any impairment of goodwill is
Unrealized profit (Downstream only) allocated to both the owners of the parent and NCI.
Parent's share in the net change in subsidiary's net assets
Consolidated retained earnings - Dec. 31, 20x1

Step 6: Consolidated profit or loss Each of the ny items imbers individual financial statements
are adjusted first for the following before consolidation:
Profits before adjustments
Effects of intercompany transactions: a. Accruals and deferrals of income and expenses and
Unrealized profits(Step 1) corrections of errors;
Profits before FVA
Depreciation of FVA b. In-transit items - items arising from intercompany
Consolidated profit transactions that were already recorded by one party but
not yet by the other (e.g., intercompany deposits in transit,
outstanding checks, credit memos, and debit memos).
CHAPTER 6
C. Hyperinflationary economy - the financial statements of Less: FV of NA acquired
a group member that reports in a currency of a Goodwill (Gain on bargain purchase)
hyperinflationary economy are restated first in accordance Formula 2: Computation of Total Assets
with PAS 29 before they are consolidated. This is
discussed in Chapter 9. Total assets of acquirer at BV
Total assets of acquiree at FV
d. Currency translations - the financial statements of a Cash paid
subsidiary whose functional currency is different from the Acquisition costs
group's presentation currency are translated first in Goodwill
accordance with PAS 21 before they are consolidated. This Total Assets
is discussed in Chapter 10.
Formula 3: Computation of Total Liabilities
Continuous assessment
 whether it controls an investee if facts and Total liabilities of acquirer at BV
assessment circumstances indicate that there are Total liabilities of acquiree at FV
changes to one or more of the three elements of Contingent cash consideration
control. Other liabilities assumed
Total Liabilities
Changes in ownership interest not resulting to loss of
control Formula 4: Computation of Share Capital
 If the parent's ownership interest in a subsidiary
changes but does tult to loss of control, the change Share capital of acquirer at par
is accounted for as an equity transaction Shares issued at par
Total Share Capital
Formula 1: Computation of Goodwill or Gain

Cash paid (@face value) Formula 5: Computation of Share Premium

Stocks issued (@FMV)
Contingent consideration (cash or share*) Share premium - acquirer
Total consideration Share premium from issuance
Contingent share consideration* c. Control is lost if the parent ceases to be entitled to
Share issue costs receive returns.
Total Share Premium
d. Control is lost if the parent's previous status as a
Formula 6: Computation of Total Retained Earnings principal changes to an agent.
Retained earnings - acquirer
Share issue costs Impairment of goodwill is:
Acquisition costs (except Share issue costs)
Gain on Bargain Purchase (a) attributed to the parent only, if NCI is measured at
proportionate share.

Retained Earnings (b) attributed to both parent and NCI, if NCI is measured
at fair value.
Loss of control
 A parent can lose control of a subsidiary in much the A change in the parent's ownership interest in the
same way it can obtain control. That is, with or subsidiary that:
without a change in absolute or relative ownership
levels and with or without the investor being (a) does not result to loss of control is accounted for as
involved in that event. Examples: equity transaction.

a. Control is lost even without a change in the parent's (b) results to loss of control is accounted for as
ownership interest when the subsidiary becomes subject to deconsolidation.
the control of a government, court, administrator or
regulator, or as a result of a contractual agreement.

/ b. Control is lost even without the parent being involved

CHAPTER 7
in that event if decision-making rights are given to another CONSOLIDATED FINANCIAL
party or the decision-making rights previously granted to
the parent have elapsed.
STATEMENT PT 4
Investment in subsidiary measured at other than cost The Fair value adjustments (FVA) Unrealized profit (upstream
investment in subsidiary is initially measured equal to the only)
value assigned to the consideration transferred at the Net assets at fair value
acquisition date and subsequently measured either:
Step 3: Goodwill computation
a. at cost;
b. in accordance with PFRS 9 Financial Instruments; or Consideration transferred (equal to cost of investment in
c. using the equity method. subsidiary)
Non-controlling interest in the acquiree
Identifying the acquisition date Previously held equity interest in the acquiree
 The acquisition date is the date the acquirer obtains Total
control of the acquiree. For a "sub-subsidiary," it is Fair value of net identifiable assets acquired (see Step 2)
the date the sub-subsidiary becomes a member of Goodwill - Jan, 1, 20x1
the parent group. This may precede, coincide with or Less: Accumulated impairment losses
follow the acquisition of the parent's or Goodwill-Dec. 31, 20x1
subsidiary's direct holdings over the sub-subsidiary.
Step 4: Non-controlling interest in net assets
Consolidation of a vertical group
 A parent entity is required to consolidate all Subsidiary's net assets at fair value - Dec. 31, 20x1 (see
entities it controls, whether through direct or Step 2)
indirect holdings. Therefore, the parent shall Multiply by: NCI percentage
consolidate both the subsidiary and the 'sub- Non-controlling interest in net assets - Dec. 31, 20x1
subsidiary.

STEP 1: Analysis of group structure Step 5: Consolidated retained earnings

Parent's retained earnings - Dec. 31, 20x1
Step 2: Analysis of subsidiary's net assets Unrealized profit (Downstream only)
Parent's share in the net change in subsidiary's net assets
Net assets at carrying amount Consolidated retained earnings - Dec. 31, 20x1
 Separate financial statements are prepared in accordance
with all applicable PFRSs, except that investments in
Step 6: Consolidated profit or loss subsidiaries, associates or joint ventures are accounted for
either:
Profits before adjustments a. at cost,
Effects of intercompany transactions: b. in accordance with PFRS 9 Financial Instruments, or
Unrealized profits(Step 1) c. using the equity method under PAS 28 Investments in
Profits before FVA Associates and Joint Ventures
Depreciation of FVA
Consolidated profit Accounting policy election

CHAPTER 8 Investments in subsidiaries, associates and jointly

controlled entities are accounted for in the separate
SEPARATE FINANCIAL financial statements either
STATEMENTS
a. at cost less impairment,
b. at fair value with changes in fair value recognized in
Separate financial statements profit or loss, or
c. using the equity method
Separate financial statements are those presented in
addition to:
a. consolidated financial statements; or CHAPTER 9
b. the financial statements of an entity with an investment
in associate or joint venture that is accounted for using FINANCIAL RORTING
equity method in accordance with PAS 28 Investments in
Associates and Joint Ventures. HYPERINFLATIONARY
Preparation of Separate financial statements
ECONOMIES
 Entities whose functional currency is that of a • Monetary items are money held and items to be received
hyperinflationary economy disregard the concept of or paid in fixed or determinable amount of money. All other
stable monetary unit assumption. items are non-monetary except retained earnings.
Their financial statements, whether they are based • The gain or loss on net monetary position is computed as
on a historical cost approach or a current cost the difference between the "net monetary items, end -
approach, are restated in terms of the measuring historical" and "net monetary items, end-restated" and is
unit current at the end of the reporting period. recognized in profit or loss.

PAS 29 does not establish an absolute rate at which • Holding gains and losses are recognized under current
hyperinflation is deemed to arise. This is a matter of cost accounting.
judgment. In making the judgment, PAS 29 provides some
indicators of hyperinflation. Both holding gains and losses and gain or loss on net
monetary position are recognized under current cost /
• General price level changes and the purchasing power of constant peso accounting.
money have an inverse relationship. An increase in general
price level means that the purchasing power of money has
FORMULA:
decreased a condition known as inflation. The opposite is
deflation.  HISTORICAL COST x CURRENT PRICE INDEX /
HISTORICAL PRICE INDEX
• Constant peso accounting is used to restate non-monetary
items to the measuring unit current at the end of the
reporting period.

• Only non-monetary items, statement of financial position

amounts not already expressed in terms of the measuring
unit current at the end of the reporting period, are CHAPTER 10
restated when using the constant peso accounting.
EFFECT OF FOREIGN
EXCHANGE RATES
 ACCOUNTING FOR
 Careful sa mga dates
 The two ways of conducting foreign activities are
DERIVATIVES AND
(a) foreign currency transactions and (b) foreign HEDGING TRANSACTION PT
operations.
 A reporting entity is required to identify its
1
functional currency, which is the currency of the
primary economic environment in which the entity
operates. This is the currency that mainly affects A derives its value from the changes in value of some other
the entity's sales, cost of sales, financing activities underlying asset or other instrument.
and operating activities.
 Once determined, the functional currency is not The characteristics of a derivative are: (a) its value
changed unless there is a change in those underlying changes in response to the change in an underlying; (b)
transactions, events and conditions. A change in requires no initial net investment or a very minimal initial
functional currency is accounted for prospectively. net investment; and(c) it is settled at a future date.

 A foreign currency transaction is initially Underlying a specified price, rate, or other variable,
recognized at the spot exchange rate at the date of including a scheduled event that may or may not occur.
the transaction.
 Subsequently, foreign currency monetary items are Notional amount - a specified unit of measure (e.g.,
re-translated at the closing rate. currency units, shares, bushels, pounds, etc.).
 Exchange differences arising from the translation
or settlement of monetary items are recognized in Derivatives are obtained either as (a) hedging instrument
profit or loss, except when other PFRSs require to hedge some kind of risk or (b) non-hedging instrument
them to be recognized in other comprehensive (e.g., for speculation).
income.
Examples of derivatives:
CHAPTER 11
a. Forward contract an agreement between two parties involve related parties are eliminated in the consolidated
to exchange a specified amount of a commodity, security, financial statements, but may be presented in the separate
or foreign currency at a specified date in the future at a or individual financial statements.
pre- agreed price.

b. Futures contract - similar to forward contact but is

CHAPTER 12
traded on an exchange. ACCOUNTING FOR
c. Option - a contract that gives the holder the right,
DERIVATIVES AND
but not the obligation, to buy (call option) or sell (put HEDGING TRANSACTION PT
option) an asset at a specified price any time during a
specified period in the future. 2
 Accounting for forward contracts - Forward
d. Swap - a contract in which two parties agree to
contract is an agreement between two parties to
exchange payments in the future based on the movement
exchange a specified amount of a commodity,
of some agreed-upon price or rate. Common examples
security, or foreign currency at a specified date in
include: (i) Interest rate swap - a contract between two
parties who agree to the future at a pre-agreed price.
 Fair value hedge of an Unrecognized firm
Foreign operation is an entity that is a subsidiary, commitment - A firm commitment is a binding
associate, joint venture or branch of a reporting entity, agreement to sell or purchase a specified quantity
the activities of which are based or conducted in a country of resources at a specified price on a specified
or currency other than those of the reporting entity. future date or dates

Net investment in a foreign operation is the amount of the  The initial carrying amount of the asset or liability
reporting entity's interest in the net assets of that that results from the entity meeting the firm
operation. commitment is adjusted to include the cumulative
change in the fair value of the firm commitment
Only items or transactions that involve external parties can that was recognized in the statement of financial
be designated as hedged items. Items or transactions that position.
 Accounting for net investment hedges
CHAPTER 13 AND 14 -A net investment hedge is a hedge of the foreign currency
risk of a net investment in a foreign operation with either a
foreign currency derivative instrument or a foreign-
Cash flow hedge - Specific accounting
currency- denominated non-derivative financial instrument
More specifically, a cash flow hedge is accounted for as
(e.g., foreign- currency-denominated debt
follows:
a. The separate component of equity associated with the
hedged item is adjusted to the lesser of the following (in Hybrid contracts with financial asset hosts If the host
absolute amounts): instrument in a hybrid contract is a financial asset within
the scope of PFRS 9, the entire hybrid contract is
i. The cumulative gain or loss on the hedging instrument accounted for as a single instrument and classified as
from inception of the hedge; and either FVPL, FVOCI, or amortized cost.

ii. The cumulative change in fair value (present value) of

the expected future cash flows on the hedged item from
inception of the hedge;

b. Any remaining gain or loss on the hedging instrument or

designated component of it (that is not an effective hedge)
is recognized in profit or loss.

Option premium = intrinsic value + time value

Accounting for swaps

-Swap is a contract in which two parties agree to exchange
payments in the future based on the movement of some
agreed- upon price or rate. Common examples include
interest rate swap and foreign currency swap.