GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs

FINANCIAL INSTRUMENTS AND INVENTORIES

Section 11

BASIC FINANCIAL INSTRUMENTS

Accounting Policy Choice IFRS for SMEs Full IFRS Apply either: Not applicable. Provisions of both Sec 11 and 12 in full Recognition and measurement provisions of IAS 39 FI: Recognition and Measurement; Disclosure provisions of Sec 11&12 ** Should there be changes in this accounting policy, Par. 10.8-10.14 contains the following: o determining when change is appropriate o o how change should be accounted what information should be disclosed

Scope Recognising, derecognising, measuring and disclosing financial instruments Introduction to Sec. 11: Financial Instrument Definition IFRS for SMEs Full IFRS Defined as a contract that gives rise to a Same as IFRS for SMEs. financial asset of one entity and a financial liability or equity instrument of another entity. [IAS 32.11]

Categories IFRS for SMEs Distinguishes financial instruments between: Basic, covered by Section 11 Complex, covered by Section 12

Full IFRS Distinguishes 4 measurement categories: FVTPL HTM Loans and Receivables AFS [IAS 39.9]

Scope of Sec 11 & 12 IFRS for SMEs Applies to all financial instruments except: Investments in subsidiaries, associates and joint ventures FI that meet the definition of an entitys

Full IFRS Similar to IFRS for SMEs; except full IFRS also scopes out contracts between acquirer and vendor in business combinations and certain loan commitments

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories own equity Leases ! Derecognition requirements in par. 11.33-38 apply to lease receivables of lessor & lease payables of lessee ! Sec 12 may apply to leases meeting chars. in par. 12.3(f) Employers rights and obligations under employment benefit plans

[IAS 32.4, IAS 39.2, IFRS 7.3]

Initial Recognition of Financial Assets and Liabilities IFRS for SMEs Full IFRS Recognizes a financial asset or a financial Similar to IFRS for SMEs. liability only when the entity becomes a party to the contractual provisions of the instrument. [IAS 39.14] Financial Instruments Requires an amortized cost model for basic financial instruments investments in non-convertible and non-puttable P/S and non-puttable O/S that are public traded or fair value can be measured reliably Basic Financial Instruments IFRS for SMEs Accounts the following as Basic FI: Cash Debt instrument that satisfies ALL of the following: a) Returns to the holder are a fixed amount, a fixed rate of return, a variable return equal to a single referenced quote OR a combination of fixed and variable provided that both are (+) b) No contractual provision that would cause holder to lose principal amount or any interest c) Contractual provisions permitting issuer to prepay debt or holder to put it back to issuer before maturity, are not contingent on future events d) No conditional returns or repayment provisions except for variable return rate in (a) and prepayment provisions in (c) Commitment to receive loan that a) Cannot be settled net in cash, and

Full IFRS Not applicable.

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories b) When executed, is expected to meet conditions (a)-(d) of debt instruments aforementioned Investment in non-convertible P/S and nonputtable O/S and P/S

Initial Measurement IFRS for SMEs Measured at the transaction price (inc. transaction costs except for FVTPL assets and liabilities) Unless arrangement constitutes a financing transactions -> PV of future payments discounted at a market interest rate Examples of transaction costs: 1) brokers fees 2) commission fees Subsequent Measurement Measure at At amortized cost using the effective interest method Cost less impairment

Full IFRS Measures at Fair Value (inc. transaction costs except for FVTPL assets and liabilities) Normally the transaction price unless: part of the consideration is for something other than FI FI bears an off-market interest rate [IFRS 39.43, IAS 39, AG64-65]

Fair value

When Debt instrument that satisfies requirements in sec11.9 of IFRS for SMEs *Commitments to receive a loan that satisfy requirements in sec 11.8 *Investments in non-convertible preference shares and non-puttable ordinary or preference shares that meet the conditions in paragraph 11.8 but do not meet the requirement to be presented at fair value (shown below) Investments in non-convertible preference shares and non-puttable ordinary or preference shares that meet the conditions in paragraph 11.8 if the shares are publicly traded or fair value can be measured reliably Full IFRS a. Fair value through profit or loss if: - Financial assets held for trading (by requirement) - Financial assets are designated on initial recognition at FVTPL (by designation)

IFRS for SMEs a. basic debt instruments are measured at amortized cost using the effective interest method b. commitments to receive a loan are measured at cost less impairment

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories c. Investments in non-convertible and nonputtable O/S and P/S are measured at fair value through profit or loss if fair value can be measured reliably; otherwise, cost less impairment Investments in quoted equity instruments (by consequence) b. Amortized cost if: - bond investments are classified at initial recognition as financial assets measure at amortized cost using effective interest method (IFRS 9) a. FVTPL if financial instrument held for trading and designated as fair value through profit or loss Amortized Cost HTM investments and loans and receivables; financial liab other than those at FVTPL AFS investments are recorded at FV with gains/losses recorded in equity Cost less impairment Investments in equity securities whose fair value cannot be measured reliably

b.

c. d.

Amortized Cost a. Amortized cost at reporting date = amount at initial recognition repayments of principal +/cumulative amortization any reduction for impairment b. Financial assets and financial liabilities that have no stated interest rate and are classified as current assets or current liabilities are initially measured at an undiscounted amount. c. Amortized cost of financial asset at initial recognition = present value of future cash receipts (payments) discounted at the effective interest rate d. Interest expense in a period = carrying amount of financial asset (liability) at the start of the period x effective interest rate for the period IFRS for SMEs Full IFRS Amortized cost at reporting date = amount at Similar to IFRS for SMEs initial recognition repayments of principal +/cumulative amortization any reduction for impairment
examples of initial and subsequent measurement: (1) Debt instrument On January 1, 20x0, an entity buys a 5-year bond for Php 900, incurring transaction costs of Php 50. Cash interest is Php 40 per year. The bond has a mandatory redemption of Php 1,100 on December 31, 20X4.
Year X0 X1 X2 X3 X4 Carrying amount Int. income Cash Carrying amt beginning at 6.9583%* inflow ending 950.00 66.10 (40) 976.11 976.11 67.92 (40) 1,004.03 1,004.03 69.86 (40) 1,033.89 1,033.89 71.94 (40) 1,065.83 1,065.83 74.16 (40) 1,100.00

*effective interest rate is 6.9583% Initial measurement:

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories
Investment in bonds 950 Cash 950 Subsequent measurement: (@ Dec. 31) Cash 40 Interest income 40 Investment in bonds 26.10 Interest income 26.10 Balance @ Dec. 31 = 976.10 (2) Equity instruments On January 20x0, an entity acquires a 10% interest in ABC, Inc. at a cost of Php 1,000,000. On December 31, the investment is valued at Php 1,100,000. Initial measurement: Investment in equity securities 1,000,000 Cash 1,000,000 Subsequent measurement: Investment in equity securities Gain on investment

100,000 100,000

Impairment of Financial Instruments Measured at Cost or Amortized Cost a. Recognition i. At the end of each reporting period, an entity recognizes impairment in profit or loss immediately if there is objective evidence of impairment. ii. The following are assessed for impairment individually 1. ALL equity instruments regardless of significance 2. SIGNIFICANT financial assets b. Measurement Impairment loss is measured as follows: i. IF AT AMORTIZED COST = difference between the assets carrying amount and the present value of estimated cash flows discounted at the assets original effective interest rate; if interest rate is variable, use current effective interest rate ii. IF AT COST LESS IMPAIRMENT = the difference between the assets carrying amount and the best estimate (which will necessarily be an approximation) of the amount (which might be zero) that the entity would receive for the asset if it were to be sold at the reporting date c. Reversal i. the entity shall reverse the previously recognised impairment loss either directly or by adjusting an allowance account ii. reversal shall not result in a carrying amount of the financial asset (net of any allowance account) that exceeds what the carrying amount would have been had the impairment not previously been recognized iii. reversal shall be recognized immediately in profit or loss Fair Value No active market IFRS for SMEs FV of investment in assets that do not have a quoted market price in an active market is reliably measurable if: Variability in range of reasonable FV estimates is insignificant OR

Full IFRS Similar to IFRS for SMEs [IAS 39, AG80-81]

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories Probabilities of various estimates can be reasonably assessed and used in estimating FV

If it does not meet either condition, the entity is precluded from measuring asset at fair value, and is carried at cost less impairment, which is the carrying amount at the last day when asset was reliably measurable. Derecognition of a financial asset Instances when an entity shall derecognize a financial asset: Contractual rights to the cash flows from the financial asset expire or are settled Entity transfers to another party substantially all of the risks and rewards of ownership of the financial asset Entity has transferred control of asset to another party, who has practical ability to sell the asset In addition to derecognizing the asset, the entity shall also recognize separately any rights and obligations retained or created in the transfer. Where transfer does not result in derecognition Condition: Entity has retained significant risks and rewards of ownership of the asset - the entity shall continue to recognize the transferred asset in its entirety and shall recognize a financial liability for the consideration received - the asset and liability shall not be offset - subsequent periods: entity shall recognize any income on the transferred asset and any expense on the financial liability Where transferor provides non-cash collateral to the transferee The parties shall account for the collateral as follows: Situation How to account for Transferee has the right to sell or repledge the Transferor shall reclassify it in the statement of collateral financial position as a loaned asset, pledged equity instruments or repurchase receivable Transferee sells collateral pledged to it Transferee shall recognize the proceed from the sale and a liability measured at fair value for its obligation to return the collateral Transferor defaults under the terms of the Transferor shall derecognize it and the transferee contract and is no longer entitled to redeem the shall recognize the collateral as its asset collateral Derecognition of a financial liability Financial liability is ONLY derecognized when it is extinguished. Financial liability is considered extinguished when: Obligation is discharged, is cancelled or expires Entity exchanges financial liability with substantially different terms

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories Any difference between the carrying amount of the financial liability and consideration paid will be recognized in profit or loss. Disclosures General rule: Information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance. 1. Significant accounting policies 2. Categories of financial assets and financial liabilities a. Financial asset measured at FVTPL b. Financial asset (debt instruments) measured at amortized cost c. Financial asset (equity instruments) measured at colt less impairment d. Financial liabilities measured at FVTPL e. Financial liabilities measured at amortized cost f. Loan commitments measured at cost less impairment 3. For financial instruments measured at fair value, basis for determining fair value 4. For equity instrument measured at FVTPL and the fair value is no longer available, these facts 5. For transferred financial assets that does NOT qualify for derecognition, a. Nature of assets b. Nature of risks and rewards of ownership c. Carrying amounts of assets and associated liabilities 6. For pledged financial assets which are used for collateral, a. Carrying amount of asset pledged b. Terms and conditions relating to its pledge 7. For loans payable recognized at reporting date for which there is breach or default that has not been remedied by the reporting date, a. Details of breach or default b. Carrying amount of related loans payable at reporting date c. Whenever the breach or default was remedied or terms were renegotiated before F/S were authorized for issue 8. Income, expense, gains or losses a. Financial instruments measured at FVTPL b. Financial instruments measured at amortized cost c. Total interest income and total interest expense for financial instruments that are not measured a FVTPL d. Amount of any impairment loss

Section 12-12.14

OTHER FINANCIAL INSTRUMENTS ISSUES

Scope of Section 11 and 12 Section 11 and 12 together deal with recognizing, derecognizing, measuring, and disclosing financial instruments (financial assets and financial liabilities). Section 12 applies to other, more complex financial instruments and transactions. Scope of Section 12 Section 12 applies to all financial instruments except:

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories (a) (b) (c) (d) those covered by Section 11 interests in subsidiaries, associates, and joint ventures employers rights and obligations under employee benefit plans rights under insurance contracts unless the insurance contract could result in a loss to either party as a result of contractual terms that are unrelated to: (i.) changes in the insured risk (ii.) changes in foreign currency exchange rates (iii.) a default by one of the counterparties (e) financial instruments that meet the definition of an entitys own equity (f) leases unless the lease could result in a loss to the lessor or the lessee as a result of contractual terms that are unrelated to: (i.) changes in the price of the leased asset (ii.) changes in foreign exchange rates (iii.) a default by one of the counterparties (g) contracts for contingent consideration in a business combination (applies only to acquirer) Section 12 is relevant if: SME owns or issues financial instruments that impose risks or rewards that are not typical of basic financial instruments SME wants to do hedge accounting (but this is not covered by our report) Examples of financial instruments under Section 12: (a) investment in convertible or puttable shares or debt (b) swaps, forwards, futures, options, rights, and other derivatives (c) loans with unusual prepayment conditions (based on tax change, accounting change, linked to company performance) (note: These will be covered in BA 118.2.) Basic principle of Section 12 Financial instruments not covered by Section 11 are at fair value through profit or loss Initial recognition - only when the entity becomes a party to the contractual provisions of the instrument Initial measurement IFRS for SMEs Full IFRS - Measured at FV (normally transaction Similar to IFRS to SMEs [IAS 39.43, IAS 39 AG64-65] price); transaction costs are expensed - FV of a financial liability due on demand is not less than the amount payable on demand, discounted from the first date that amount could be required to be paid - if payment for an asset is deferred or financed at a rate of interest that is not a market rate PV of future payments discounted at a market rate of interest Subsequent measurement IFRS for SMEs - done at the end of each reporting period - measured at fair value through profit or

Full IFRS Assets/liabilities at FVTPL at FVTPL Other liabilities, loans, receivables,

HTM

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories loss exceptions! measured at cost less impairment o equity instruments that is not publicly traded and whose fair value cannot otherwise be measured reliably o contracts linked to such instruments that, if exercised, will result in delivery of such instruments if FV is no longer available for an equity instrument not publicly traded but is measured at FVTPL treat most recent FV measure as cost and measure instrument at this cost amount less impairment until a reliable FV measure becomes available investments amortized cost AFS investments at FV through equity Investments in equity securities whose FV cannot be measured reliably cost less impairment [IAS 39.46-47, IAS 39.66]

Impairment of financial instruments measured at cost or amortized cost IFRS for SMEs Full IFRS - apply guidance in Section 11 paragraphs Similar to IFRS for SMEs except that impairment 21-26 to financial instruments measured losses on equity investments carried at cost, and at cost less impairment AFS equity investments cannot be reversed [IAS 39.58, 39.66, 39.69] Derecognition of a financial asset or financial liability IFRS for SMEs Full IFRS - apply derecognition requirements in Similar to IFRS for SMEs [IAS 39.17-39] Section 11 paragraphs 33-38

Section 13

INVENTORIES
Definition (Same with Full IFRS) Inventories are assets: 1. held for sale in the ordinary course of business (finished goods) 2. in the process of production for such sale (work in process) 3. in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials & consumables)

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories Scope (Same with Full IFRS) Section 13 applies to all inventories, except 1. work in progress arising under construction contracts 2. financial instruments 3. biological assets related to agricultural activity and agricultural produce at the point of harvest Section 13 does not apply to the measurement of inventories of 1. producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, or commodity brokers and dealers

2.

when measured at fair value less costs to sell through profit or loss

Measurement IFRS for SMEs Lower of cost and estimated selling price less costs to complete and sell (SP-CTC&S) Full IFRS Lower of cost and net realizable value

Costs COST = costs of purchase + costs of conversion + other costs incurred in bringing the inventories to their present location and condition a. costs of purchase = purchase price + import duties + other taxes (non-refundable in nature) + other direct costs - trade discounts, rebates, etc ***if purchase arrangement effectively contains an unstated financing element, eg a difference between the purchase price for normal credit terms and the deferred settlement amount, the difference is recognised as interest expense over the period of the financing (not added to the cost of the inventories) (Same with Full IFRS) costs of conversion = direct costs + indirect costs (fixed + variable production overheads) (Same with Full IFRS)

b.

other costs IFRS for SMEs Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. In some circumstances, the change in the fair value of the hedging instrument in a hedge of fixed interest rate risk or commodity price risk of a commodity held adjusts the carrying amount of the commodity.

c.

Full IFRS SAME

Borrowing costs are included in the cost of inventories under limited circumstances as identified by IAS 23.

Allocation of production overheads (Same with Full IFRS)

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories a. Fixed production overheads are allocated based on normal capacity or actual level of production b. Variable production overheads are allocated based on actual production ***note: unallocated overheads are expensed when incurred Joint and By-Products Conversion costs not separately identifiable allocate joint costs between the products on a rational and consistent basis (Same with Full IFRS) If by-product is immaterial: IFRS for SMEs Measured at selling price less costs to complete and sell (SP-CTC&S) and deduct this amount from the cost of the main product

Full IFRS Measured at net realizable value and deduct this amount from the cost of the main product

Costs Excluded from Inventories (Same with Full IFRS) - examples of costs excluded from inventories and thereafter recognized as expense are: (1) abnormal amounts of wasted materials, labor or other production costs. (2) storage costs, unless those costs are necessary during the production process before a further production stage. (3) administrative overheads that do not contribute to bringing inventories to their present location and condition. (4) selling costs. Costs of Inventories of a Service Provider (Same with Full IFRS) Measured at the costs of their production. These costs consist primarily of the labor and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads. Labor and other costs relating to sales and general administrative personnel are not included but are recognized as expenses in the period in which they are incurred. The cost of inventories of a service provider does not include profit margins or non-attributable overheads that are often factored into prices charged by service providers. Cost of Agricultural Produce Harvested from Biological Assets (Same with full IFRS, compliant with IAS 41) Agricultural produce that an entity has harvested from its biological assets should be measured on initial recognition at their fair value less estimated costs to sell at the point of harvest. This becomes the cost of the inventories. Techniques for the Measurement of Cost IFRS for SMEs Techniques that may be used for cost measurement include: (1) Standard cost (2) Retail method (3) Most recent purchase price Cost Formulas

Full IFRS Same as IFRS for SMEs, except most recent purchase price not included in techniques

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories IFRS for SMEs Applicable cost formulas are: (1) Specific identification (2) First-in First Out (FIFO) (3) Weighted average LIFO is not permitted Impairment of Inventories IFRS for SMEs Inventories shall be measured at its selling price less costs to complete and sell and difference between it and the carrying amount is to be recognized as an impairment loss. Such impairment loss may be reversed.
example: (under IFRS for SMEs) CA of raw materials = Php 100,000 Est. selling price = Php 180,000 Est. costs to convert raw materials to FG = Php 60,000 Est. costs to sell FG = 30 Selling price Conversion costs Costs to sell SP less CTC&S CA of raw materials Impairment loss 180,000 60,000 30,000 90,000 100,000 10,000

Full IFRS Same as IFRS for SMEs, except that full IFRS gives examples and detailed descriptions on the use of certain cost formulas

Full IFRS Same as IFRS for SMEs, except that Full IFRS talks of net realizable value
example: Assume on December 31, 2012, the total cost of the inventory is Php 1,000,000 and the NRV is Php 990,000 Direct method Inventory Income summary

990,000 990,000

Allowance method Cost 1,000,000 NRV 990,000 Allowance for 10,000 inventory writedown Inventory 1,000,000 Income summary 1,000,000 Loss on inventory writedown 10,000 Allowance for inventory writedown 10,000

Recognition as an Expense IFRS for SMEs When inventories are sold, the entity shall recognize the carrying amount of those inventories as an expense in the period in which the related revenue is recognized.

Full IFRS Same as IFRS for SMEs, except that IFRS for SMEs do not have a provision on the specific recognition of inventory write-downs as an expense in the period the write-down or loss occurs, while reversal of write-downs are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs

Recognition as an Expense IFRS for SMEs Inventories allocated to another asset are accounted for subsequently in accordance with the pertinent section in the IFRs for SMEs relevant to that type of asset. Disclosures

Full IFRS Same as IFRS for SMEs, except that the full IFRS specifically mandates that such inventory shall be accounted for as an expense during the useful life of that asset.

GROUP 2 | Anatalio | Andales | Cruz | Lustre | Magtagnob | Racoma | Reyes | Turano

Summary of Sections 11, 12 12.14, and 13 of IFRS for SMEs Financial Instruments and Inventories IFRS for SMEs The following are the mandated disclosures: (1) the accounting policies adopted in measuring inventories, including the cost formula used. (2) the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity. (3) the amount of inventories recognized as an expense during the period. (4) impairment losses recognized or reversed in profit or loss in accordance with Section 27. (5) the total carrying amount of inventories pledged as security for liabilities. Full IFRS Same as IFRS for SMEs. However, full IFRS mandates the disclosure of the following, aside from those already mentioned: (1) the carrying amount of inventories carried at fair value less costs to sell. (2) the amount of any write-down of inventories recognized as an expense in the period in accordance with paragraph 34; (3) the amount of any reversal of any write-down that is recognized as a reduction in the amount of inventories recognized as expense in the period in accordance with paragraph 34; (g) the circumstances or events that led to the reversal of a write-down of inventories in accordance with paragraph 34; It can be inferred that write-downs of inventory found in full IFRS is lumped together in the concept of inventory impairment in IFRS for SMEs. Also, discussion of reversals of impairment, including the events that led to it, are not mandated to be disclosed in IFRS for SMEs.