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LECTURE NOTES
THE CONCEPTUAL FRAMEWORK OF ACCOUNTING
1. The Conceptual Framework deals with the concepts used in the preparation and presentation of financial statements
(FS).
2. The Conceptual Framework is not a PFRS¹; it does not define standards for any particular measurement or disclosure
issue. Nothing in the Framework overrides any specific PFRS. In case of conflict, PFRS prevails over the Framework.
3. The purpose of the Framework is to:
A.) Assist FRSC² in the developing GAAP and its review and adoption of existing International Financial Reporting
Standards (IFRS).
B.) Assist preparers of FS in applying PFRS
C.) Assist auditors in forming an opinion as to whether FS conforms to GAAP.
D.) Assist users in interpreting the FS
E.) Provide interested parties with information about PFRS formulation by FRSC
4. The scope of the Framework covers the following:
A.) C APITAL CONCEPTS: the concept of capital and capital maintenance
B.) O BJECTIVE: the objective of FS
C.) Q UALITIVE CHARACTERISTICS: the qualities or attributes that make FS useful to the users.
D.) E LEMENTS: the definition, recognition and measurement of the elements of FS.
5. The objective of FS is to provide information about the financial position, performance and changes in financial
position of an entity that is useful to a wide range of users in making economic decisions. The FS also shows the results
of the stewardship of management- - the accountability of management for the resources entrusted to it; the
management of an entity has the primary responsibility for the preparation and presentation of FS.
6. The framework is concerned with general-purpose financial statements (including consolidated financial statements) of
all commercial, industrial and business reporting public or private entities.
7. Special purpose financial reports (e.g., prospectuses and computations prepared for taxation purposes) are outside the
scope of this Framework.
8. Underlying assumptions on FS preparation and presentation : (1) Accrual basis (2) Going Concern
9. The users of financial statements include (1) present and potential investors, (2) employees and their representative
groups, (3) lenders, (4) suppliers and other trade creditors , (5) customers, (6) governments and their agencies and
(7) The public.
10. The qualitative characteristics of FS:
PRESENTATION C – Comparability: inter-period comparability; intercompany comparability.
U- Understandability: compliance with PFRS to make information understandable to users
CONTENT (Primary) R- Relevance: predictive value; feedback /confirmatory value; timeliness
Ry – Reliability: faithful representation; substance over form; prudence; neutrality; completeness
11. Constraints on relevant and reliable information: (1) On timeliness: if there is undue delay in the reporting of
information, it may lose its relevance (2) On cost-benefit: the benefits derived from information should exceed the cost
of providing it (3) On qualitative characteristics: the aim is to achieve an appropriate balance among characteristics in
order to meet the objective of FS.
12. Information is material if its omission or misstatement could influence economic decisions of users taken on the basis
of the financial statements. Materiality provides a threshold or cut-off point rather than being a primary qualitative
characteristic which information must have if it is to be useful.
13. The elements of FS:
On financial position: (1) Assets (2) Liabilities (3) Equity
On performance: (4) Income ( includes revenue and gains) (5) Expenses (include losses)
14. An item that meets the definition of an element should be recognized if:
A.) PROBABLE : it is probable that any future economic benefit associated with the item will flow to or from the
entity, AND
B.) MEASURABLE: the item has a cost or value that can be measured with reliability. Four different measurement
bases are used to measure the elements of FS:
Historical cost (this is considered as the most common valuation basis)
Current cost
Realizable value (or settlement value , in the case of liabilities )
Present value (this is also known as discounted value)
¹ Philippine Financial Reporting Standards (PFRS) replaces SFAS (Statements of Financial Accounting Standards) as the main
source of Generally Accepted Accounting Principles (GAAP) in the Philippines. Based on PAS 1, par.7, the term’ PFRS’ shall
be composed of (a) PFRS (b) Philippine Accounting Standards (PAS), and (c) Interpretations.
² The FRSC (Financial Reporting Standards Council) replaces ASC (Accounting Standards Council). FRSC currently issues PFRSC as
ASC, in the past, issued SFAS. Refer to page 10 of the TA Lecture Notes for further details.
³ The financial position of any entity is affected by the economic resources it control, its financial structure, its liquidity and
solvency, and its capacity to adapt changes in the environment in which the entity operates.
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15. Two capital concepts: 1.) Financial concept (most common) and 2.) Physical concept. The concept of capital
maintenance provides the linkage between the concepts of profit since it provides the point of reference by which
profit is measured:
A.) Under the concept of financial capital maintenance, a profit is earned only if the financial amount of ending net
assets exceeds beginning net assets, excluding any contributions from and distributions to owners during the
period. This concept does not require the use of a particular basis of measurement.
B.) Under the concept of physical capital maintenance, a profit is earned only if the physical productive capacity
(operating capability) at the end of periods exceeds the physical productive capacity at the beginning of period,
excluding any contributions from and the distributions to owners during the period. This concept requires the
adoption of the CURRENT COST basis of measurement.
PAS 1: PRESENTATION OF FINANCIAL STATEMENTS
1. COMPONENTS OF FINANCIAL STATEMENTS (FS). A complete set of FS is composed of:
A.) Statement of financial position (balance sheet) – as at the end of the period
B.) Statement of comprehensive income⁴- for the period
C.) Statement of cash flows –for the period
D.) Statement of changes in equity –for the period
E.) Notes, comprising a summary of significant accounting policies & other explanatory information.
F.) Statement of financial position – as at the beginning of the earliest comparative period when an entity applies an
accounting policy retrospectively⁵ or makes a retrospective restatement of items in its FS.
2. HEADING AND TITLES. An entity may use other titles for the statements other than those used in PFRS and shall present
with equal prominence all of the FS and distinguish them from other information in the same published document. In
addition, the following information shall be displayed prominently:
A.) The name of reporting entity
B.) Whether the financial statements cover the individual entity or a group of entities
C.) The date at the end of reporting period or the period covered by the set of financial statements
D.) The presentation currency (as defined under PAS 21)
E.) The level rounding (also known as ‘ truncation’) used in presenting amounts in the FS
3. GENERAL FEATURES in the presentation of FS.
FAIR PRESENTATION. The application of PFRS is presumed to result in financial statements (FS) that achieve a fair
presentation. FS that comply with PFRS should include in the notes to FS an explicit and unreserved statement of
such compliance⁶
GOING CONCERN. An entity shall prepare FS on a going concern basis unless management either intends to
liquidate the entity or to cease trading, or has no realistic alternative but to do so.
ACCRUAL BASIS OF ACCOUNTING. An entity shall prepare its FS, except for cash flow information, using the accrual
basis of accounting.
⁴ The term “Comprehensive Income’ refers to all changes in equity other than changes resulting from contributions from and
distribution to owners; hence, the Statement of Comprehensive Income shall include:
1. Components of profit or loss- these are income and expense accounts usually found in the traditional income statement. As
a
Minimum requirement, the line items to be presented are: (PAS 1, par.82)
Revenue
Finance costs
Share in the income or loss of associates and joint venture accounted for using the equity method
Tax expense
Post-tax profit or loss on discontinued operations
Profit or loss
2. Components of other comprehensive income-these are income and expense accounts are recognized in profit or loss and
are usually required by PFRS to be recognized directly in the equity section of the statement of financial position (balance
sheet). Examples include: (PAS 1, par. 7)
Unrealized gain or loss on available –for-sale-securities(PAS 39)
Gain or loss from translating the financial statements of a foreign operation (PAS 21)
Change in revaluation surplus (PAS 16 and 38)
Unrealized gain or loss on from derivative contracts designated as cash flow hedge (PAS 39)
Accrual gain or loss on defined benefit pension plans (PAS 19, par.93A)
An entity has two options of presenting comprehensive income: (PAS 1, par.81)
Option 1: SINGLE STATEMENT
The components of profit or loss and components of other comprehensive income are shown in a single statement of
comprehensive income.
Option 2: TWO STATEMENTS
An income statement showing components of profit or loss
A statement of comprehensive income beginning with profit or loss as shown in the income statement plus or minus
the components of other comprehensive income.
⁵ Retrospective application of a change in accounting policy is covered by PAS 8. Refer to page 5 of the TA Lecture Notes.
⁶Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by explanatory
note.(PAS 1, par.18)
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MATERIALITY and AGGREGATION. An entity shall present separately each material class of similar items and shall
present separately items of dissimilar nature or function unless they are immaterial.
OFFSETTING. An entity shall not offset assets and liabilities or income and expenses, unless offsetting is required
or permitted by PFRS.
COMPARATIVE INFORMATION. An entity shall include comparative information for narrative and descriptive
information when it is relevant to an understanding the current period FS.
FREQUENCY OF REPORTING. An entity shall present a complete set of FS at least annually. When an entity presents
FS for a period longer or shorter than one year, an entity shall disclose: (A) the period covered by FS, (B) the reasons
for using a longer or shorter period; and (C) the fact that comparative amounts for FS are not entirely comparable.
CONSISTENCY OF PRESENTATION. An entity shall retain the presentation and classification of items in the FS from
one period to the next unless: (A) it is apparent , following a change in the nature of the entity’s operations or a
review of its FS, which another presentation or classification would be more appropriate ; or( B) a standard requires
a change in presentation.
4. INCOME STATEMENT PRESENTATION. When items of income and expenses are material, an entity shall disclose their nature
and amount separately. In addition, an entity shall present an analysis of expenses using a classification based on either
the (1) nature of expense method or (2) function of expense method, whichever provides more reliable and more relevant
information.
5. BALANCE SHEET(BS) PRESENTATION. An entity shall present current and non-current assets, and current and non-current
liabilities , except when a presentation based on liquidity provides more reliable and relevant information. When the
exception applies, all assets and liabilities shall be presented broadly in order of liquidity.
6.CURRENT vs. NONCURRENT ASSETS. An entity shall classify an asset as current when:
A.) The asset is a cash or a cash equivalent (unless restricted for at least 12 months after BS date)
B.) It holds the assets primarily for the purpose of trading.
C.) It expects to realize the asset within 12 months after the reporting period (BS date)
D.) It expects or intends to realize or consume it within the entity’s normal operating cycle⁸
An entity shall classify all other assets as non-current.
7. CURRENT vs. NONCURRENT LIABILITIES. An entity shall classify a liability as current when:
A.) The liability is due to be settled within 12 months after the reporting period (BS date)
B.) It holds the liability primarily for the purpose of trading.
C.) It expects to settle the liability within the entity’s normal operating cycle.
D.) The entity does not have an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period (BS date).
An entity shall classify all other liabilities as non-current.
8. BALANCE SHEET LINE ITEMS. As a minimum requirement, the face of the statement of financial position shall include
line items that present the following amounts:
A.) Property, plant and equipment
B.) Investment property
C.) Intangible assets
D.) Financial Assets¹⁰(excluding amounts shown under E,H and I)
E.) Investments accounted for using the equity method.
F.) Biological assets (defined as “living animals or plants” under PAS 41)
G.) Inventories
H.) Trade and other receivables
I.) Cash and cash equivalents.
J.) Total assets held for sale (including assets of disposal groups held for sale under PFRS 5)
K.) Trade and other payables
L.)Provisions (defined as the “liabilities of uncertain timing of amount” under PAS 37)
M.) Financial liabilities¹¹(excluding amounts shown under J and K)
N.) Liabilities and assets for current tax.
O.) Deferred tax liabilities and deferred tax assets, not to be presented as current (PAS 1, par.56)
P.) Minority (non-controlling) interest, presented within equity¹²
Q.) Issued capital and reserves attributable to equity holders of the parent.
⁷An entity that uses the function of expense method (a.k.a ‘cost of sales’ method) shall disclose additional information on the nature
of expense , including depreciation and amortization expense and employee benefits expense. (PAS1, par 104)
⁸The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or
cash equivalents . When the entity’s normal operating cycle is not clearly identifiable , its duration is assumed to be twelve
months. (PAS,par.68)
⁹An investment property is a property (land or building) held by the owner or by the lessee under a finance lease to earn
rentals or for capital appreciation or both, rather than for use or sale (PAS 40)
¹⁰A financial asset is any asset that is a cash , an equity instrument of another entity , a contractual right to receive cash or another
financial asset from another entity. (PAS 32)
¹¹ A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset to another entity. (PAS 32)
¹²Non-controlling interests, which is previously known as minority interest, shall be presented in the consolidated balance sheet
within equity, separately from the parent shareholders’ equity.(PAS 27, par 27)
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9. FINANCIAL LIABILITIES .An entity classifies its financial liabilities as current when they are due to be settled within twelve
months after the balance sheet date , even if:
A.) The original term was for a period longer than twelve months; and
B.) An agreement to refinance, or to reschedule payments, on a long –term basis is completed after the reporting period
(BS date) and before the FS are authorized for issue¹³
10. EFFECTS OF BREACHES. When an entity breaches a provision of a long-term loan agreement on or before the end of reporting
period (BS date) with the effect that the liability becomes payable on demand, the liability is classified as current, even if
the lender has agreed not to demand payment as a consequence of the breach.¹⁴
11. STATEMENT OF CHANGES IN EQUITY (SCE). An entity shall present a statement of changes in equity showing:
A.) Total comprehensive income for the period, showing separately the total amounts attributed to owners of the
parent and to non-controlling (minority) interest.
B.) For each component of equity , the effects of retrospective application / restatement under PAS 8.
C.) The amount of transactions with owners in their capacity as owners , showing separately contributions by and
distributions to owners.
D.) For each component of equity , a reconciliation of the between the carrying amount at the beginning and the end
of the period , disclosing each change separately.
12. DIVIDENDS. An entity shall present either in the statement of changes in equity or in the notes , the amount of dividends
recognized as contributions to the owners and the related amount per share.
13. NOTES TO THE FS. The notes are normally presented in the following order, which assists users in understanding the FS and
comparing them with FS of other entities:
A.) A statement of compliance with PFRS
B.) A summary of significant accounting policies applied¹⁵, which shall include:
The measurement bases used in preparing FS
The other accounting policies used that are relevant to an understanding of the FS
C.) Supporting information for an items shown on the face of each FS, in the order in which each statement and each line
item is presented.
D.)Other disclosures, including:
Contingent liabilities and unrecognized contractual commitments
Non-financial disclosures (e.g., the entity’s financial risk under PFRS 7)
THE ACCOUNTING PROCESS
1. JOURNAL a chronological records of transactions; also called as the ‘book of original entry’
General Journal- used to record (1) transactions not covered in special journals and (2) adjusting, closing , and
revising entries.
Special Journal: CRJ – cash receipts journal SJ- sales journal
CDJ – cash disbursements journal PJ- purchase journal
2. LEDGER(general or subsidiary ) a group of accounts; also called as the ‘ book of final entry’;
ACCOUNT – summarizes the effect of transactions on each asset, liability , equity, income & expenses.
Nominal(temporary) accounts- subject to closing entries, mainly found in income statement
Real (permanent) accounts – not subject to closing entries , mainly found in the balance sheet
Contra Accounts- an account that is deducted from another account .(e.g., sales discounts)
Adjunct accounts- an account that is added to another account .(e.g., freight-in)
3. WORKSHEET(optional)- a tool that typically contains columns for trial balance (unadjusted and adjusted), adjustments ,
income statement and balance sheet; it is used to facilitate FS preparation.
4. ADJUSTING ENTRIES- to update amount of certain accounts
A.) Accrued revenue- revenue already earned but not yet collected
B.) Accrued expense- expense already incurred but not yet paid ACCRUALS
C.) Unearned revenue – revenues already collected but not yet earned
D.) Prepaid expense – expense already paid but not yet incurred DEFERRALS
E.) Others(e.g., depreciation, amortization, depletion, impairment , bad debts) S
5. CLOSING ENTRIES- to bring all nominal accounts to zero balance ; Income Summary account is used to close both
income and expense accounts.
6.REVERSING ENTRIES(optional)- to simplify recording of certain recurring transactions .
The following adjusting entries may be subject to reversing entries:
A.) ACCRUALS : accrued revenue and accrued expense
B.) DEFERRALS: prepaid expense (expense method) and unearned revenue (income method)
¹³ If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the balance sheet under an
existing loan facility, it classifies the obligation as non-current , even if it would otherwise be due within a shorter period . (PAS 1, par. 73)
¹⁴The liability is classified as non-current if the lender agreed by the balance sheet date to provide a grace period ending at least 12 months after the
balance sheet date , within which the entity can rectify the breach and during which the lender cannot demand immediate payment.(PAS 1, par 75)
¹⁵An entity is required to disclose the judgments that management has made in the process of applying the entity’s accounting policies and that have
the most significant effect on the amounts recognized in the FS .(PAS 1, par 122). In addition, the notes shall contain key assumptions concerning the
future and other key sources of estimation that will pose a significant risk of causing a material adjustment to the amount of assets and liabilities
within the nest period. In such a case, the notes shall include nature, amount and other details of such assets and liabilities.(PAS 1, par 125)
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PAS 8: ACCOUNTING POLICIES , CHANGES IN ACCOUNTING ESTIMATES & ERRORS
OBJECTIVE . The objective of PAS 8 is to prescribe the criteria for selecting and changing ACCOUNTING POLICIES¹⁶
changes in ACCOUNTING ESTIMATES and CORRECTION OF ERRORS to enhance relevance, reliability and comparability of
FS of an entity over time as well as with FS of other entities.
SELECTION OF ACCOUNTING POLICIES. When a standard specifically applies to a transaction, the accounting policy
applied to an affected account shall be determined by applying the standard. In the absence of a standard that applies to
a transaction, management shall use its judgement¹⁷ in developing and applying accounting policy that is relevant and
reliable.
CONSISTENCY OF ACCOUNTING POLICIES. Once selected, accounting policies must be applied consistently for similar
transactions, unless a standard specifically requires otherwise. An entity shall change an accounting policy if the change
(1) is required by a standard or (2) results in the FS providing more relevant financial information.
CHANGES IN ACCOUNTIONG POLICIES. A change in accounting policy that is required by a standard shall be applied in
accordance with the transitional provisions therein. If a standard contains no transitional provisions or if an accounting
policy is changed voluntarily, the change shall be applied retrospectively (as if the policy had always been applied)as
adjustment to the opening balance of each affected component of equity(e.g., retained earnings) for the earliest prior
period presented.
For purposes of PAS 8, the following are NOT considered as changes in accounting policies:
1. Application of accounting policies for events that differ in substance from those previously occurring.
2. Application of new accounting policy prospectively from the start of the earliest period practicable.
EXCEPTION to the RULE. When it is impracticable¹⁸ for an entity to apply new accounting policy retrospectively (i.e., it
cannot determine the cumulative effect of applying the policy to all prior periods), the entity applies the new policy
prospectively from the start of the earliest period practicable.
APPLICATION of NEW STANDARDS. When an entity has not applied a new standard that been issued but not yet effective,
the entity shall disclose this fact, and the reasonably estimable information relevant for assessing the possible impact that
application of the new standard will have on the entity’s FS in the period of initial application.
CHANGES in ESTIMATES¹⁹. The effect of a change in an accounting estimate shall be recognized prospectively by including
it in the profit or loss during the periods( if the change affects that period only) or the period of the change and the future
periods (if the change affects both).
EXAMPLES of CHANGES in ESTIMATES. Due to uncertainties inherent in business activities, many items in FS cannot be
measured with the precision but can only be estimated. Estimation involves judgments based on the latest available,
reliable information. Common examples of accounting estimates include:
1. Bad debts and inventory obsolescence
2. Fair value of financial assets or financial liabilities
3. Useful lives of depreciable assets; and
4. Provision for warranty obligations
A change in the measurement basis applied is a change in an accounting policy, it is not a change in an accounting
estimate. When it is difficult to distinguish a change in an accounting policy from a change in an accounting policy from a
change in an accounting estimate , the change is treated as a change in an accounting estimate.
CORRECTION OF ERRORS.²⁰An entity shall correct material prior period errors retrospectively as an adjustment to the
opening balances of retained earnings and affected assets and liabilities. If comparative statements are presented, the FS
of prior period shall be restated to reflect the retrospective application of the prior period errors. If the error occurred
before the earliest period presented, the opening balances of assets, liabilities and equity for the earliest period
presented shall be restated.
MATERIALITY²¹. In applying the concept of materiality:
1. Accounting policies in the PFRSs need not to be applied when the effect of applying them is immaterial.
2. FS do not comply with PFRSs if they contain material errors, whether due to omissions or misstatements.
3. Material prior period errors should be corrected retrospectively in the first set of FS authorized for issue after their
discovery.
¹⁶Accounting policies are the specific principles, bases, convention, rules and practice adopted by an entity in preparing and presenting financial
statements.
¹⁷In making judgments, management shall refer to the following sources in descending order:
1.) The requirements and guidance in standards dealing with similar and related issues.
2.) The definition, recognition criteria and measurement concepts set forth in the Conceptual Framework.
In the making the judgment, management may also consider the most recent pronouncements of other standard-setting bodies that
use similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the
extent that these do not conflict with PFRS and the Conceptual Framework.
¹⁸Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.
¹⁹A change in accounting estimates results from a new information or developments and, hence, are not correction of errors.
²⁰The concept of ‘fundamental error’ has been eliminated .Instead, PAS 8 uses and defines term ‘ prior period prior’. Prior period errors are omission
and misstatements in the FS for one or more periods; they are committed in prior periods but are discovered only in the current period.
²¹ Omissions or misstatements of items are material, if they could, individually or collectively, influence the economic decisions of users taken
on the basis of the FS. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances.
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PFRS 5: NON-CURRENT ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS
NON-CURRENT ASSETS HELD FOR SALE
An entity shall classify separately from other assets a non-current asset (or disposal group²²) as held for sale if its carrying
amount will be recovered principally through a sale²³ transaction rather than through continuing use.
The following conditions must be met for a non-current asset to be classified as held for sale:
1. Management is committed to a plan to sell the asset or disposal group.
2. An active program to locate a buyer and complete the plan must have been initiated.
3. The asset must be available for immediate sale.
4. The sale is highly probable within one year from the date of classification as held for sale.
5. The asset is being actively marketed for sale at price that is reasonable in relation to its fair value.
6.Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed
or withdrawn.
An entity shall measure a non-current asset classified as held for sale at the lower of its carrying amount or fair value less
costs to sell²⁴. Non-current assets held for sale is NOT be depreciated form the date classified as such.
An entity shall present a non-current asset classified as held for sale and the assets of a disposal group classified as held for
sale separately from other assets in the balance sheet. The liabilities of disposal group classified as held for sale shall be
presented as a single amount. The major classes of assets and liabilities classified as held for sale shall be separately disclosed
either on the face of the balance sheet or in the notes.
An entity shall measure a non-current assets that ceases to be classified as held for the sale at the lower of its carrying
amount ²⁵before the asset was classified as held for sale ) and its recoverable amount²⁶ (at the date of the subsequent
decision not to sell).
DISCOUNTED OPERATIONS.
A discounted operation is a component of an entity ²⁷that either has been disposed of , or is classified as held for sale, and
1. Represents a separate major line of business or geographical area of operations.
2.Is a part of a single coordinated plan to dispose a separate major line of business or geographical area of operations, or
3.Is a subsidiary acquired exclusive with a view to resell (for resale)
A component of an entity is classified as discounted operation at the date entity has actually disposed of the operation
or when the operation meets the criteria to be classified as held for sale.
An entity shall disclose a SINGLE amount²⁸ on the face of income statement comprising the total of:
1. The post-tax profit or loss of discounted operations and
2. The post-tax gain or loss recognized:
A.) On the measurement to ‘ fair value less costs to sell²⁹ OR
B.) On the disposal of the assets constituting the discontinued operations
²² A group of assets possibly to disposed of, by sales or otherwise, together as a group in a single transaction, and liabilities directly
associated with those assets that will be transferred in the transaction.
²³The asset (or disposal group) must be available for immediate sale in its present condition and the sale must be highly probable.
‘Highly probable’ means that the probability of the future sale is higher than ‘more likely than not’. An entity shall not classify
as held for sale a non-current asset(disposal group) that is to be abandoned.
²⁴ If anon-current asset within the scope of PFRS 5 is a part of a disposal group, the measurement requirements of PFRS 5 apply
to the group as a whole, so that the group is measured at lower of its carrying amount and fair value less costs to sell. The write
down to fair value less cost to sell is treated as an impairment loss.
²⁵The carrying amount is adjusted for depreciation, amortization or revaluations that would have been recognized had the asset not
been classified as held for sale.
²⁶Recoverable amount is measured as the higher of an asset’s fair value less costs to sell and its value in use. This is well
emphasized in PAS 36 on impairment of assets.
²⁷A component of an entity may be a subsidiary, major line business or geographical segment whose operations and cash flows
can be clearly distinguished , operationally and for financial reporting purposes, from the rest of the entity.
²⁸ The results of discontinued operations, net of tax, should be shown as a single amount in the income statement separately
from the income from continuing operations. To explain the details of this single amount, the following should be disclosed in
the notes to the FS:
1. The amount of revenue, expenses and income or loss attributable to the discontinued operation during the current period
and the related income tax.
2. Any impairment loss( as the fair value less cost to sell of the net assets of the discontinued operations is lower than their
carrying amounts).If the carrying amount is lower , the expected gain is not recognized but only disclosed.
3. The termination cost of employees and other costs that are directly incurred as a result of the discontinuance.
4. Any gain or loss from the actual disposal of the assets and settlement of liabilities of a discontinued operation.
²⁹’ Cost to sell’ is the incremental costs directly attributable to the disposal of an asset (or disposal group ), excluding finance
costs and income tax expense.
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PAS 24: RELATED PARTY DISCLOSURES
PURPOSE. Related party relationships are a normal feature of commerce and business. Related parties may enter into
transactions that unrelated parties would not. Also, transactions between related parties may not be made at the same time
amounts as between in related parties. (e.g., an entity that sells goods to its parent company at cost might not sell on those
terms to another customer). For these reasons, knowledge of related party transactions, outstanding balances and
relationships any affect assessments f an entity’s operations by users of financial statements, including assessments of the
risks and opportunities facing the entity; hence, related party disclosures are necessary.
RELATED PARTY. A party is related to any entity if:
A.) Directly, on indirectly through one or more intermediaries, the party:
has the ability to control ³⁰, is controlled by, or is under common control with, the entity(this includes parents,
subsidiaries and fellow subsidiaries)
has an interest in the entity that gives it significant influence³¹over the entity
has joint control ³² over entity
B.) The party is an associate of the entity
C.) The party is the joint venture in which the entity is a venture
D.) The party is a member of the key management personnel³³ of the entity or its parent
E.) The party is a close family member o any individual referred in A or D
F.)The party is an entity that is controlled, jointly controlled or significantly influenced by any individual referred to in D or E
G.) The party is a post-employment benefit plan for the benefit of employees of the entity , or of an entity that is related party
of the entity.
NOT NECESSARILY RELATED PARTIES. Under PAS 24, the following are NOT necessarily related parties:
A.) Two entities simply because they have common director or other common member of key management personnel.
B.) Two ventures simply because they share joint control over a joint venture.
C.)Providers of finance, trade unions, public utilities, government department and agencies, simply by virtue of their normal
dealings with an entity.
D.) A customer, supplier, franchisor, distributor, or general agent with whom an entity transacts significant volume of
business , merely by virtue of the resulting economic dependence.
CLOSE FAMILY MEMBERS OF AN INDIVIDUAL. Close family members of an individual are those family members who may be
expected to influence, or be influenced by that individual, in their dealings with the entity. They may include:
A.)The individual’s domestic partner and children
B.) Children of the individual’s domestic partner
C.) Dependents of the individual’s domestic partner
PARENT & SUBSIDIARIES. Relationship between parents and subsidiaries shall be disclosed irrespective of whether there have
been transactions between those related parties. An entity shall disclose the name of the entity’s parent and if different, the
ultimate controlling party.
COMPENSATION³⁴. An entity shall disclose key management personnel compensation in total and for each of the following
categories:
A.) Short –term employee benefits (e.g., wages, social security contributions, paid leaves, bonuses)
B.) Post-employment benefits (e.g., pension, retirement benefits)
C.) Other long-term benefits (e.g., long service leave, long term disability benefits)
D.) Termination benefits
E.) Equity compensation benefits
RELATED PARTY DISCLOSURES. If there have been transactions between related parties, an entity shall disclose the nature of
the related party relationship as a well as information about the transactions and outstanding balances necessary for the
understanding of the potential effect of the relationship on the FS. At the minimum, disclosures shall include:
A.) The amount of the transactions
B.) The amount of the outstanding balances and
Their terms and conditions , and whether they are secured or unsecured.
The nature of settlement consideration , and details of guarantees given or received
C.) Provisions for bad debts related to the amount of the outstanding balances
D.)Expenses recognized in respect of bad debts due from related parties.
³⁰ ‘ Control’ is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. (PAS 27)
³¹ ‘ Significant influence’ is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies.
Significant influence may be gained by share of ownership, statute or agreement (PAS 28)
³² ‘ Joint Control’ is a contractually agreed sharing of control over an economic activity. (PAS 31)
³³’Key management personnel’ refer to those persons having authority and responsibility for planning, directing, and controlling the activities of an
entity, directly or indirectly include directors (executive or otherwise) of the entity.
³⁴’ Compensation’ includes all employee benefits, which include all forms of consideration paid, payable or provided by the entity, or on behalf of the
entity, in exchange for services rendered to the entity . (PAS 19)
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EXAMPLES OF RELATED PARTY TRANSACTIONS REQUIRING DISCLOSURES
The following are examples of transactions that are disclosed if they are made with a related party:
A.) Purchases or sales of goods |(finished or unfinished)
B.) Purchases or sales of property and other assets
C.) Rendering or receiving of services
D.) Leases
E.) Transfers of research and development
F.)Transfers of license agreements
G.) Transfers under finance arrangements (including loans and equity contributions in cash or in kind)
H.) Provision of guarantees or collateral
I.) Settlement of liabilities on behalf of the entity or by the entity on behalf of another party
Items of similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the
effects of related party transactions on the FS of the entity.
PAS 10: EVENTS AFTER THE BALANCE SHEET DATE (EVENTS AFTER THE REPORTING PERIOD)
EVENTS AFTER THE BALANCE SHEET DATE³⁵ are favorable and unfavorable events that occur between the balance sheet
and the date when the FS are authorized for issue; FS shall be disclose the date when the FS were authorized for issue , and
who gave that authorization³⁶
ADJUSTING EVENTS after a balance date sheet (i.e., those that provide evidence of conditions that existed at the balance
sheet date) should be recognized in the FS. Examples are (among others):
a.) Resolution or settlement after BS date of a court case that confirms that the entity had a present obligation at the BS
date.
b.) Bankruptcy of a customer that occurs after BS date, confirming that a loss existed at the BS date on a trade receivable.
c.) Sale of inventories after the BS date that may give evidence on net realizable value (NRV) at the BS date.
d.) Determination after the BS date of the cost of the assets purchased; or the proceeds from the assets sold , before the
BS date.
e.) Determination after the BS date of the profit sharing or bonus payment if the enterprise had the present obligation
at the BS date to make such payment.
f.)The discovery of fraud or errors that show the FS are incorrect.
An entity shall adjust the amounts recognized in its FS to reflect the adjusting events after the BS date . If an entity receives an
information after the BS date about conditions that existed at the BS date , it shall update disclosures that relate to those
conditions, in the light of the new information.
NON-ADJUSTING EVENTS³⁷ after the balance sheet date (i.e., those that are indicative of conditions that arose after the
balance sheet date) are not recognized but are disclosed in the notes to the FS. Examples are( among others) :
a.) Major business combination or disposing a major subsidiary after the BS date
b.) Announcement of the plan to discontinue an operation
c.) Major purchase and disposal of assets, or expropriation of major assets by government
d.) Destruction of major production plant by a fire after the BS date
e.) Announcement of a major restructuring³⁸
f.) Major ordinary share transactions and potential ordinary share transactions after the BS date.
g.) Abnormally large changes after BS date in asset prices or foreign exchange rates.
h.) Changes in tax rates or tax laws enacted or announced after the BS date.
i.) Entering into significant commitments or contingent liabilities, for example , by issuing guarantees.
j.)Commencing major litigation arising solely from events the occurred after the BS date.
k.)Decline in market value of investments between the BS date and the date when the FS are authorized for issue.
DIVIDENDS . Dividends on equity shares declared after the balance sheet date should not be recognized as a liability at the
balance sheet date. Such dividends are disclosed in the notes to the FS (i.e., a non-adjusting subsequent event).
GOING CONCERN. Deterioration in operating results and financial position after the balance sheet date may indicate a need
to consider whether the going concern is still appropriate; an entity should not prepare its financial statements on a going
concern basis if management determines after the balance sheet date either that it intends to liquidate the entity or cease
trading, or that it has no realistic alternative but to do so.
³⁵ This is previously called as ‘subsequent events’. Subsequent events , as defined previously , are events that happened after the
BS date until the date of FS issuance.
³⁶If the entity’s owners (or other parties) have the power to amend the FS after issue, the entity shall disclose this fact. The process
involved in authorizing the FS for issue will vary depending upon the management structure, statutory requirements and
procedures followed in preparing and finalizing the FS.
³⁷An entity shall disclose the following for each material category of non-adjusting event after the BS date:
The nature of event
An estimate of its financial effect , or statement that such an estimate cannot be made.
³⁸ A restructuring is a program, planned and controlled by management, that materially changes either the scope of a business
undertaken by an enterprise or the manner in which that business is conducted. (PAS 37)
Page 8 of 30
PAS 37: PROVISIONS , CONTIGENT LIABILITIES & CONTIGENT ASSETS
1. PROVISIONS are liabilities of uncertain timing or amount. A provision should be recognized when:
AN enterprise has a present obligation (legal or constructive) as a result of a past event,
It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation ,
and
The amount of obligation can be measured reliably.
Provision should not be recognized for future operating losses. If an enterprise has a contract that is onerous³⁹, the present
obligation under the contract should be recognized as a provision.
2. An OBLIGATION EVENT is an event that creates a legal or constructive obligation that results in an enterprise having no
realistic alternative but to settle the obligation created by the event.
3. A LEGAL OBLIGATION is an obligation that is derived from a contract , legislation, or other operation of law.
4. A CONSTRUCTIVE OBLIGATION is an obligation that derives from an enterprise’s actions where:
A.) The enterprise has indicated to other parties that it will accept certain responsibilities, and
B.) The enterprise had created a valid expectation on the part of other parties that will discharge certain responsibilities
5. A CONTIGENT LIABILITY is either:
A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or
non- occurrence of one or more uncertain further events not wholly within the control of the enterprise , OR
A present obligation that arises from past events but is not recognized because it is not probable that an outflow of
resources embodying economic benefits will be required to settle obligation or the amount of the obligation cannot
be measured with sufficient reliability.
Hence, an enterprise should be recognize a contingent liability on the face of FS. A contingent liability is required to be
disclosed in the notes to the FS , unless the possibility of an outflow of economic benefit is remote.
6. A CONTIGENT ASSET is a possible asset that arises from the past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
Hence, an enterprise should be recognize a contingent asset. A contingent liability is required to be disclosed in the notes to
the FS , where an inflow of economic benefit is probable. However, when the realization of income is virtually certain , then
the related asset is not a contingent asset and is therefore recognized. Consider the following:
7. MEASUREMENT OF PROVISION. The amount recognized as a provision should be the BEST ESTIMATE of the expenditure
required to settle the present obligation at the balance sheet date , taking into account the risks and uncertainties
surrounding the circumstances that relate to the provision.
Where the provision being measured involves a large population in terms, the obligation is estimated by weighing
all possible outcomes by their associated probabilities. This statistical method of estimation is known as the
EXPECTED VALUE.
Where there is a continuous range of possible outcomes, and each point in the range is a s likely as any other, the
the MID-POINT of the range is used.
Where the effect of the time value of money is material, the amount of provision should be the PRESENT VALUE
of the expenditures expected to be required to settle the obligation .⁴⁰
8. REIMBURSEMENT. Where some or all of the expenditures required in settling a provision is expected to be reimbursed by
another party, the reimbursement should be recognized as a separate asset when it is virtually certain that reimbursement
will be received if the enterprise settles an obligation. The amount recognized for the reimbursement should not exceed
the amount of the provision. In the incomes statement, the expense relating to a provision may be presented net of the
amount recognized for a reimbursement.
9. RESTRUCTURING⁴¹. A provision for restructuring costs is recognized only when the general criteria for a provision are met
(see item no.1). A restructuring provision should not be associated with ongoing activities of the enterprise and should not
include costs such as retraining or relocating continuing staff, marketing or investment in new system and distribution
networks.
³⁹ An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits to be received under it. The term ‘onerous’ is literally to mean burdensome.
⁴⁰ The discount rate should a pre-tax that reflects the current market assessments of the time value of money and the risks specific
to the liability. The discount rate should not reflect risks for which future cash flow estimates have been adjusted.(PAS 37, par 47)
⁴¹ A restructuring is a program , planned and controlled by movement , that materially changes either the scope of a business
undertaken by an enterprise or the manner in which that business is conducted.
Page 9 of 30
EXCERPTS ON PHILIPPINE ACCOUNTANCY ACT OF 2004’S IMPLEMENTING RULES AND REGULATIONS (IRR)
HISTORICAL BACKGROUND
Republic Act NO. 9298 or otherwise known as the Philippine Accountancy Act of 2004 repeals Presidential Decree No. 692 or
otherwise known as the Revised Accountancy Law. The new Act was passed during the 3rd regular session of the 12th Philippine
Congress form the Consolidation of Senate Bill No. 2748 (passed 6 February 2004) and House Bill No. 6678 (passed 7 February
2004). President Arroyo signed and approved it on 13 May 2004, the day the consolidated bill became a law.
RATIONALE
The Philippine Accountancy Act provides for the set of rules governing the practice of accountancy in the Philippines. The
Professional Regulatory Board of Accountancy (BoA), , one of the professional boards under the Professional Regulatory Board
(PRC), is mandated by law to promulgate rules pertaining to “the supervision , control and regulation of the practice of
accountancy in the Philippines”. In November 2004, BoA issued and approved a set of rules and regulation implementing RA
9298, known as Implementing Rules and Regulations (IRR)
FINANCIAL REPORTING STANDARDS COUNCIL
Within 90 days from the effectivity of the IRR for the Philippine Accountancy Act of 2004, the Financial Reporting Standards
Council (FRSC) shall be created. The FRSC replaces the ACS and will study and evaluate the IAS and IFRS that will be adopted
locally. Other than the chairman⁴², the FRSC shall be composed of 14 members representing the following organizations:
Professional Regulatory Board of Accountancy (BoA) 1 member
Securities and Exchange Commission (SEC) 1 member
Bangko Central ng Plilipinas (BSP) 1 member
Bureau of Internal Revenue (BIR)* 1 member
A major organization composed of FS preparers and users 1 member
Commission on Audit (CoA) 1 member
Accredited Professional Organization (APO) 8 members
*NOTE: BIR and COA were not part of the old council (Accounting Standards Council). The 8 representatives From Accredited
Professional Organization (APO) shall be equally divided among the accounting sectors:
Public practice 2 members
Commerce and industry 2 members
Education 2 members
Government 2 members
ACCOUNTING STANDARDS COUNCIL (ASC).
The ASC was the ‘ author’ of what is used to be known as SFAS (Statements of Financial Accounting Standards). Formed to
establish the generally accepted accounting principles in the Philippines, the ASC had performed its function since November
1981 until it was replaced by the Financial Reporting Standards Council, pursuant to the IRR of the new accountancy law.ASC
was composed of eight members, nominated by the following organizations:
Philippine Institute of Certified Public Accountants 4 members
Securities and Exchange Commission 1 member
Bangko Central ng Pilipinas 1 member
Board of Accountancy 1 member
Financial Executives Institute of the Philippines 1 member
In 1997, the ASC made a decision to harmonize accounting standards in the Philippines with International Accounting
Standards (IAS), which later evolved into International Financial Reporting Standards (IFRS)⁴³. Consequently, IFRS becomes
the basis of the Philippine Financial Reporting Standards (PFRS)⁴⁴.
⁴²The FRSC Chairman, who had been or presently as senior accounting practitioner in any scope of accounting practice, shall be
appointed by the PRC upon the recommendation of BoA in coordination with PICPA as the accredited professional organizations. The
Chairman and members of FRSC shall have a term of three (3) years renewable for another term.
⁴³IFRSs are standards issued by the International Accounting Standards Board (IASB); the IASB replaced the International Accounting
Standards Committee (IASC).
⁴⁴Based on paragraph 7 of PAS 1, the term ‘ PFRS’ shall composed of (a) PFRS (b) Philippine Accounting Standards (c) Interpretations.
PFRS sets out the recognition, measurement, presentation and disclosure requirements dealing with transactions and events that
are important in general purpose of FS. A PFRS is developed through a due process that normally involves the following:
(a)Consideration of the pronouncement of IASB.
(b) Formation of task force, when deemed necessary, to give advice to FRSC.
(c) Issuing for comment an exposure draft approved by at least eight (8) FRSC members; comment period will be at least
60days unless a shorter period (not less than 30 days) is considered appropriate by FRSC.
(d) Consideration of all comments received within the comment period and when appropriate, preparing the comment letter to
the IASB.
(e) Approval of standard by at least eight (8) FRSC members.
Page 10 of 30
PAS 34: INTERIM REPORTING
ENTITIES COVERED BY INTERIM REPORTING STANDARDS
1. Certain companies required by Securities Exchange and Commission (SEC) & the Philippine Stock Exchange (PSE)
to publish interim FS⁴⁵
2. Certain companies that elect to publish an interim financial report.
INTERIM FINANCIAL REPORT
An interim financial report means a financial report containing either a complete set of FS or set of condensed FS for an interim
period ⁴⁶. As a minimum requirement, an interim financial report should include the following components:
1. Condensed balance sheet
2. Condensed income statement
3. Condensed statement showing either all changes in equity or ‘comprehensive income’⁴⁷
4. Condensed cash flow statement
5. Selected explanatory notes
Basic and diluted earnings per share should be presented on the face of an income statement , complete or condensed , for
an interim period.
SELECTED EXPLANATORY NOTES⁴⁸
An enterprise should include the following information, a minimum, in the notes to its interim FS, if material and if not
disclosed elsewhere in the interim financial report:
1. A statement that the same accounting policies and methods of computation are followed in the interim FS as compared with
the most recent annual FS or, if those policies or methods have been changed , a description of the nature and effect of the
change.
2. Explanatory comments about the seasonality or cyclicality of interim operations
3. The nature and amount of items affecting assets, liabilities, equity , net income or cash flow as that are unusual because of
their nature, size and incidence.
4. The nature of amount of changes in estimates of amounts reported in prior interim periods of the current financial year or
changes in the estimates of amounts reported prior financial years if those changes have current interim period.
5. Issuances, repurchase and repayments of debt and equity securities
6. Dividend paid (aggregate or per share) separately for ordinary shares and other shares
7. Segment revenue and segment result for business segments or geographical segments, whichever is the primary basis of
segment reporting.
8. Material events subsequent to the end interim period that have not been reflected in the FS for the interim period
9. The effect on changes in composition of the enterprise during the interim period , including business combinations,
acquisitions or disposal of subsidiaries and long-term investments, restructurings , and discontinued operations.
10. changes in contingent liabilities or contingent assets since that last annual BS date.
PERIODS for which INTERIMS FS are REQUIRED to be PRESENTED.
Interim reports should include interim FS for periods as follows:
1. Balance sheet as of the end of the current interim period and a comparative BS as of the end of the immediately preceding
financial year.
2. Income statements for the current interim period and cumulatively for the current financial year to date , with comparative
income statements for the comparable interim periods (current and year-to –date) of the immediately preceding financial
year.
3. Statement showing changes in equity cumulatively for the current financial year to date , with comparative statement for
the comparable year-to-date period of the immediately preceding the financial year.
4. Cash flow statement cumulatively for the current financial year to date , with a comparative statement for the comparable
year-to-date period of the immediately preceding financial year.
⁴⁵ The SEC and PSE require companies covered by the reportorial requirements of Revised Securities A ct to file quarterly interim
financial reports within 45 days after the end of each of the first three quarters. Also, the SEC requires companies covered by the
Rules on Commercial Papers and Financing Act to file quarterly financial reports within 45 days after each year-end.
⁴⁶An interim period is a financial reporting period shorter than a full financial year . Interim financial reports may be presented
monthly, quarterly, or semiannually.
⁴⁷Comprehensive income is to include all changes in equity , except contributions from and distributions to owners.
⁴⁸ An example of kinds of disclosures as required by PAS 34, par 17 are as follows:
(a) write-down of inventories to net realizable value and the reversal of such write-down
(b) recognition of loss from the impairment of PPE and intangibles and the reversal of such an impairment loss
(c) reversal of any provision for the costs of restructuring
(d) acquisitions and disposals of items of PPE
(e) commitments for the purchase of PPE
(f) litigations settlements
(g) corrections of fundamental errors in previously reported financial data
(h) any debt default or breach of a debt covenant that has not been corrected subsequently
(i) related party transactions.
Page 11 of 30
PFRS 8 : OPERATING SEGMENTS
RATIONALE (CORE PRINCIPLE)
An entity shall disclose information to enables the users of FS to evaluate the nature and financial effects of the business activities
In which it engages and the economic environments in which it operates.
ENTITIES REQUIRED TO APPLY SEGMENT REPORTING STANDARDS (SCOPE)
1. Entities whose equity or debt securities in public securities market.
2. Entities that are group of companies (i.e., parent and subsidiaries ), PFRS 8 applies to the consolidated financial statements of the
Group only.
OPERATING SEGMENTS
An operating segment is a component of an entity:
A.) That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating
to transactions with other components of the same entity).
B.) Whose operating results are regularly reviewed by the entity’s chief operating decision maker⁴⁹ to make decisions about resources
to be allocated to then segment and assess its performance, and
C.) For which discrete financial information is available.
REPORTABLE SEGMENTS
An entity shall report separately information about an operating segment that meets any of the following quantitative thresholds:
A.) Its reported revenue , including both sales to external customers and intersegment sales or transfers , is 10% or more of the
combined revenue , internal and external, of all operating segments.
B.) The absolute amount of its reported profit or loss is 10% or more the greater, in absolute amount , of
(1) combined and reported profit of all operating segments that did not report a loss and (2) combined reported loss of all operating
segments that reported a loss.
C.)Its assets are 10% or more of the combined assets of all operating segments.
If the total external revenue reported by operating segments is less than 75 % of the entity’s revenue, additional operating segments
should, be identified as reportable segments , even if they do not meet the 10% thresholds , until at least 75% of entity’s revenue
is included in reportable segments.
AGGREGATION OF OPERATING SEGMENTS
Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with core principle of
PFRS 8, the segments have similar economic characteristics, and the segments are similar in each of the following respects:
A.) The nature of the products and services
B.) The nature of the production processes
C.) The type or class of customer for their products and services.
D.)The methods used to distribute their products or provide their services
E.) If applicable, the nature of regulatory environment, for example, banking , insurance or public utilities.
DISCLOSURE OF OPERATING SEGMENT INFORMATION
An entity shall disclose the following for each period for which an income statement is presented:
A.) General information⁵⁰about the reporting segment
B.) Information about segment profit or loss⁵¹, segment assets⁵²and segment liabilities.
C.) Reconciliations of the totals of segment revenue , segment profit or loss, segment assets , segment liabilities and other material
segment items to corresponding entity accounts.
ENITY –WIDE DISCLOSURES
Entity wide disclosure is additional information that is required to be disclosed by all entities if such information is not provided as
part of the reportable segment information. An entity shall report information about: 1.) products and services, 2.) geographical areas
and 3.) major customers.
⁴⁹The chief operating decision maker identifies a function , not necessarily a manager with a specific title. That function is to allocate resources to
and assess the performance of the operating segments of an entity. (PFRS 8, par.7)
⁵⁰An entity shall disclose the following general information about an operating segment: (PFRS 8,par.22)
1. Factors used to identify the reportable segments , including the basis of organization .(e.g., whether the management has chosen to
organize the entity around differences in products and services have been aggregated.)
2.)Types of products and services from which each reportable segment drives its revenue.
⁵¹ An entity shall disclose the following about each reportable segment if the specified amounts are included in the measure of profit or
loss: (PFRS 8, par.23)
(a.)Revenues from external customers and transactions with other operating segments of the same entity
(b.)Interest revenue and interest expense
(c.)Depreciation and amortization
(d.)Material times of income and expenses and material noncash items other than depreciation and amortization
(e.)Interest in profit or loss of associates and joint venture accounted for by the equity method.
(f.) Income tax expense
⁵²An entity shall disclose the following about each reportable segment if the specified amounts are included in the measure of segment
assets reviewed by chief operating officer: (PFRS 8, par.24)
(a.) The amount of investments in associates and joint venture accounted for the equity method, and
(b.)The amounts of additions to non-current assets other financial instruments , deferred tax assets, post –employment benefit asset
and rights arising under insurance contracts.
Page 12 of 30
PAS 41: AGRICULTURE
SCOPE & COVERAGE.
PAS 41 applies the following items, when they relate to agricultural activity:
1. Biological assets⁵³
2. Agricultural produce ⁵⁴at the point of harvest⁵⁵
3. Government grants⁵⁶ related to biological asset
AGRICULTURAL PRODUCE harvested from an entity’s biological assets shall be measured at the point of harvest at its fair
value less estimated costs to sell.
Any gain or loss⁶⁰on the initial recognition of biological assets at fair value less costs to sell and any changes in the fair value
less costs to sell of biological assets during the reporting period is included in profit or loss for the period. All costs related
to biological assets that are measured at fair value are recognized in profit or loss when incurred to purchase biological assets.
Any gain on the initial recognition of agricultural produce at fair value less costs to sell will be included in the profit or loss
for the period to which it relates.
Page 13 of 30
GUIDELINES IN DETERMINING FAIR VALUE
In deciding on the fair value for a biological asset or agricultural produce, it is possible to group together items in accordance with, for
example, their age or quality.
Entities often contract to sell their biological assets or produce at a future date. These contract prices do not necessarily represent value.
The fair value of a biological asset or agricultural produce is not necessarily adjusted because of the existence of contract.
If an active market⁶¹ exist for a biological asset or an agricultural produce, the quoted price in that market is the appropriate basis for
determining the fair value of that asset.
If an entity has an access to different active markets, the entity uses the most relevant one.
If an active market does not exist, then the following methods can be used to determine fair value:
A.) The most recent market transaction price
B.) Market prices similar for assets with adjustment to reflect differences; and
C.) Any sector benchmark such as the value of cattle per kilogram or value of a farmland per hectare.
In some cases, the entity can use the present value of expected net cash flow from the asset discounted at a current market pretax rate.
In some cases, costs may an indicator for fair value , especially where little biological transformation has taken place or the impact of
biological transformation on the price is not expected to be significant.
However, this presumption can be rebutted for a biological asset that, when first recognized, does not have a quoted price in an active
market and for which other valuation methods are clearly inappropriate and unreliable. In this case, the biological asset shall be measured at
its cost less any accumulated depreciation and impairment losses⁶³
Unlike a biological asset, agriculture produce is always assumed to have a measurable fair value.
An entity is encouraged (but not required) to have separate disclosure of physical and price changes that is useful in appraising current period
performance and future prospect , particularly when there is a production cycle of more than one year.
Biological transformation results in a number of types of physical change - - growth , degeneration, production, and procreation , each of
which is observable and measurable . Each of those physical changes has a direct relationship to future economic benefits. A change in fair
value of biological asset due to harvesting is also physical change.
Agricultural activity is often exposed to climatic , disease, and other natural risks. If an event occurs and given rise to a material item of an
income or expense, the nature and amount of that item are disclosed in accordance with PAS 1 Presentation of Financial Statements.
Examples of such an event include an outbreak of a virulent disease, a flood, a severe drought or frost, and a plague of insects.
GOVERNMENT GRANTS
An unconditional government grant related to a biological asset measured at its fair value less costs to sell shall be recognized as income
when the government grant becomes receivable.
If a government grant related to a biological asset measured at its fair value less costs to sell is conditional , including where a government
grant requires an entity not to engaging specified agricultural activity , an entity shall recognized the government grant as income when the
conditions attaching to the government grant are met.
If a government grant related to biological asset measured at its cost less any accumulated depreciation and impairment losses, then PAS 20
(Accounting for Government Grants and Disclosure of Government Assistance) is applied.
⁶¹An active market is a market where all the following conditions exist:
a.)The items traded within the market are homogenous;
b.) Willing buyers and sellers can normally be found at any time ; and
c.)Prices are available to the public
⁶²In a noncurrent biological asset meets the criteria to be classified as held for sale or is included in a disposal group in accordance with PFRS 5,then
it is presumed that the fair value can be measured reliably (PAS 41, par.30)
⁶³In determining the cost, accumulated depreciation and accumulated impairment losses, an entity considers PAS 2 Inventories, PAS 16 Property,
Plant & Equipment and PAS 36 Impairment of Assets (PAS 41, par.33)
Page 14 of 30
PFRS 3: BUSINESS COMBINATIONS
DEFINITION
A business combination is a transaction or other event in which an acquirer⁶⁴ obtains control of one or more businesses.
ACQUISITION METHOD
An entity shall account for each business combination by applying the acquisition method . Applying the acquisition method
requires.
Identifying the acquirer
Determining acquisition date
Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in
the acquiree ; and
Recognizing and measuring goodwill or a gain from a bargain purchase.
RECOGNITION PRINCIPLE.
On the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired , the liabilities
assumed and any non-controlling interest in the acquiree. Contrary to PAS 37 (see related notes on page 9) , PFRS 3 requires
that an acquirer shall recognize a contingent liability assumed in a business combination if it is a present obligation that arises
from the past events (even if it is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation and it’s fair value can measured reliably.
MEASURMENT PRINCIPLE
The acquirer shall measurer the identifiable assets acquired and the liabilities assumed at their acquisition date FAIR
VALUES. Few exemptions are:
The acquire shall measure an acquired non-current asset or disposal group that is classified as held for sale at the
acquisition date at their fair value less costs to sell in accordance with PFRS 5 (see related notes on page 6).
The acquire shall measure the value of a reacquired right recognizes as an intangible asset on the basis of the remaining
contractual term of the related contract regardless o whether market participants would consider potential contractual
renewals in determining its fair value.
GOODWILL.
On the acquisition date, the acquirer shall recognize GOODWILL⁶⁹measured as the excess of consideration transferred over the
net of acquisition –date amounts of the identifiable assets acquired and liabilities assumed.
BUSINESS COMBINATION ACHIEVED IN STAGES
An acquirer sometimes obtains control of an acquiree in which it was held an equity interest immediately before the
acquisition date. PFRS refers to such a transaction as a business combination achieved in stages , sometimes also referred to
as a STEP ACQUISITION.
In a business combination achieved in stages, the acquirer shall measure its previously held equity interest in the acquirer
at its acquisition-date fair value and recognize the resulting gain or loss, if any , in profit or loss.
BUSINESS COMBINATION ACHIEVED WITHOUT THE TRANSFER OF CONSIDERATION.
The acquisition method of accounting for a business combination applies to business combinations where an acquirer obtains
control of an acquiree without transferring consideration or where business combinations are achieved by contract alone in
stapling arrangement.
⁶⁴ An acquirer is the entity that obtains control of the acquiree; the acquiree is the business or businesses that the acquirer
contains control of an business combination.
⁶⁵Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its
activities. Control is presumed to exist when an entity acquires more than one-half of another entity’s voting rights.
⁶⁶Business is an integrated set of activities and assets that is capable of being conducted and managed for purpose of providing
return in the form of dividends , lower costs or other economic benefits directly to investors or other owners, members or
participants.
⁶⁷Acquisition method of business combination is previously known as the purchase method.
⁶⁸Acquisition date is the date on which the acquirer obtains control of the acquiree.
⁶⁹Under paragraph 32 of PFRS 3, GOODWILL is equal to the excess of (A) over (B) below;
(A) The aggregate (total) of:
The consideration transferred, which shall be calculated as the sum of the sum of the acquisition-date fair values
of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree
and the equity interests issued by the acquirer. (Examples of potential forms of consideration include cash, other
assets, contingent consideration , ordinary or preference equity instruments)
The amount of any non-controlling interest in the acquiree
In a business combination achieved in stages, the acquisition date fair value of the acquirer’s previously held
equity interest in the acquiree
(B)The net of acquisition of the identifiable assets acquired and the liabilities assumed.
Occasionally, an acquirer makes a BARGAIN PURCHASE, which is a business combination in which (B) exceeds (A) above . In
which case, the acquirer shall recognize the resulting GAIN in profit or loss on the acquisition date, after making
reassessment whether it has correctly identified all of the assets acquired and liabilities assumed. (PFRS 3,par.3)
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PAS 27: CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
1. Consolidated financial statements are the financial statements of a group presented as those of a single economic
entity; consolidated FS shall include all subsidiaries of the parent.
2. A group is parent and all of its companies while a parent is an entity that has one or more subsidiaries.
3. A subsidiary⁷⁰is an entity that is controlled by another entity (parent).
4. Control is presumed to exist even when the parent owns half or less of the voting power of an entity but has the power:
over more than half of the voting rights by virtue of an agreement with other investors.
to govern the financial and operating policies of entity under a statute or an agreement .
to appoint or remove the majority of the members of the board of directors or equivalent governing body.
to cast majority of votes at meetings of the board of directors or equivalent governing body.
The existence and effect of potential voting rights currently exercisable or convertible (e.g., share warrant, share call
options, convertible securities to ordinary shares) are considered when assessing whether an entity has the power to
govern the financial and operating policies of another entity.
5. Consolidated FS shall include all domestic and foreign subsidiaries⁷¹of then parent , even if subsidiaries are engaged
in business activities dissimilar from those of other entities within the group.
6. A parent need not present consolidated FS if and only if:
The parent itself is a wholly-owned subsidiary, or partially-owned subsidiary and its other owners do not object to the
parent not presenting consolidate FS.
The parent’s debt and equity instruments are not traded in a public market- a domestic or foreign stock exchange or an
over-the-counter market.
Then parent did not file or is not in the process of filling its FS with a securities and exchange commission or other
regulatory body for the purpose of issuing any class of instruments in a public market.
The ultimate or any intermediate parent of the parent produces consolidated FS available for public use that comply with
PFRS.
A parent that is exempted from presenting consolidated FS may present separate FS as it’s only FS⁷²
7. In preparing consolidated FS, the following consolidation procedures are normally followed:
The FS of the parent and its subsidiaries are combined in on a line by line basis by adding together like items of assets,
liabilities, equity , income, and expenses.
Intergroup balances and transactions including income and expenses , are eliminated in full.
When FS used in consolidation are drawn up from different reporting dates, adjustments should be made for the effects of
significant transactions or other events that occur between those dates and the date of the parent’s FS.In any case, the
difference between reporting dates should be no more than three months.
Consolidated FS should be prepared using uniform accounting policies for like transactions and other events similar
circumstances.
Non-controlling interest ⁷³shallbe presented in the consolidated statement of financial position within equity , separately
from parent shareholder’s equity. Non-controlling interests in the profit or loss of the group should also be separately
presented.
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control⁷⁴are accounted for a equity
transactions (i.e., transactions with owners in their capacity as owners.)
8. In the parent’ separate FS, investments in subsidiaries (including investments in jointly controlled entities and associates ) shall be
accounted for either:
At cost⁷⁵, or
In accordance with PAS 39 on financial instruments
The same accounting (policy) shall be applied for each category of investment; investments in subsidiaries , jointly
controlled entities and associates that are classified as held for sale shall be accounted for under PFRS 5. (see related
notes on page 6)
⁷⁰The definition of ‘subsidiary’ under PAS 27 includes unincorporated entities like partnerships.
⁷¹Under SIC Interpretations 12, special purpose entities shall be consolidated when the substance of the relationship between
an entity and the special purpose entities are controlled by that entity. A subsidiary are classified as ‘ held for sale’ if control
is likely to be temporary with the view of the disposal within twelve months form acquisition and management is actively
seeking buyer.
⁷²Separate financial statements are these presented by parent in which the investments are accounted for on the basis of the
direct equity interest rather than on the basis of the reported and net assets of subsidiary.
⁷³Non-contorlling interest is used to be known as’ minority’ interest.
⁷⁴A parent can lose control of subsidiary with or without a change in absolute or relative ownership levels. This could occur
as result of a contractual agreement or in two or more arrangements.
⁷⁵PAS 27 (as amended May 2008) states that “an entity shall recognize a dividend form a subsidiary , jointly controlled entity,
associate in profit or loss in its separate financial statements when its right to receive the dividend is established”.
Consequently, the requirement to separate the retained earnings of an entity into pre-acquisition and post-acquisition
components as a method for assessing whether a dividend is a recovery of its associated has been removed
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PAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES⁷⁶
1. The objective of PAS 21 is to prescribe how to include foreign currency transactions and foreign operations on the financial
statements of an entity and how to translate financial statements from a certain functional currency⁷⁷into the presentation
currency⁷⁸ -- the principal issues are:
Which exchange rate(s) to use, and
How to report the effects of changes in exchange rates⁷⁹in the financial statements
2. FOREIGN CURRENCY TRANSACTIONS⁸⁰
Initial Recognition
A foreign currency transaction should be recorded initially at the exchange rate at the date of the transaction. The
use of averages is permitted if they are a reasonable estimate of actual.
Reporting on Subsequent Balance Sheet Dates
Foreign currency monetary amounts should be reported using the CLOSING RATE⁸¹
Non-monetary items carried at historical cost should be reported using the exchange rate at the date of
transaction.
Non-monetary items carried at fair value should be reported at the rate that existed when the fair values were
determined.
Recognition of Exchange Differences⁸²
Exchange differences arising when monetary items⁸³are settled or when monetary items are translated at rates
different from those at which they were translated when initially recognized are reported in profit or loss in the
period.
Exchange differences arising on the monetary items that form part of the reporting entity’s net investment⁸⁴ in
a foreign operation, in a separate component of equity; upon disposal of the net investment, they will be
recognized in profit or loss.
If gain or loss on a non- monetary item is recognized directly in equity (for example, a property revaluation
under PAS 16), any foreign exchange component of that gain or loss is also recognized directly in equity.
An exchange loss on foreign currency debt used to finance the acquisition of an asset could no longer be added
to the carrying amount of the asset even if the loss resulted from a severe devaluation of a currency which
there against which there was no practical means of hedging.
⁷⁶PAS 21 excludes from its scope foreign currency derivatives that are within the scope of PAS 39 Financial Instruments
Recognition and Measurement. Similarly, the material on hedge accounting has been moved to PAS 39.
⁷⁷Functional currency is the currency of the primary economic environment which the entity operates. The primary economic
environment in which an entity operates is normally the one in which it primarily generates and expends cash.
⁷⁸Presentation currency is the currency in which financial statements are presented by the reporting entity.
⁷⁹Exchange rate is the ratio of exchange for two currencies.
⁸⁰A foreign currency transaction that is denominated or requires settlement in a foreign currency, including transactions arising
when an entity:
buy or sells goods or services whose prices is denominated in a foreign currency.
borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency
acquires and disposes of assets, or incurs or settles liabilities, denominated in a foreign currency
⁸¹Closing rate is the spot exchange rate at the balance sheet date.
⁸²Exchange difference is the difference resulting from translating a given number of units of one currency into another currency
at different exchange rates.
⁸³Monetary items are unit of currency held and assets and liabilities to be received and paid in a fixed or determinable number
of units of currency.
⁸⁴Net investment in a foreign operation is the amount of the reporting entity‘s interest in the net assets of that operation.
⁸⁵Foreign operation is an entity that is subsidiary, associate, joint venture or branch of a reporting entity, whose activities
are based in a country other than of the reporting entity.
⁸⁶This refers to an entity whose functional currency of a hyperinflationary economy.
⁸⁷This would include any good will arising on the acquisition of a foreign operation and any fair value adjustments to the
carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as part of the assets
and liabilities of the foreign operation.
⁸⁸For practical reasons, the use of average rate for the period may be used as translation basis. However, if the exchange
rates fluctuate significantly, the use of the average rate for a period is inappropriate.
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4. DISPOSAL OF A FOREIGN OPERATION
When a foreign operation is disposed, the cumulative amount of the exchange differences deferred in the separate
component of equity relating to that foreign operation shall be recognized in profit or loss when the gain or loss on disposal
is recognized.
5. CONVENIENCE TRANSLATIONS.
Sometimes, an entity displays its financial statements or other financial information in a currency that is different from either
its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. This is
sometimes called a convenience translation. A result of making a convenience translation is that the resulting information to
distinguish it from the PFRS. In this case, the following disclosures are required:
Clearly identify the information as supplementary information to distinguish it from the information that complies
with PFRS.
Disclose the currency in which the supplementary information displayed.
Disclose the entity’s functional currency and the method of translation used to determine the supplementary
information.
When an entity presents its financial statements in a currency in that is different from its functional currency, it may
describe those financial statements as complying with PFRS only if they comply with all the requirements of each applicable
Standard and Interpretation.
6. DISCLOSURE REQUIREMENTS.
The net amount of exchange differences recognized in profit or loss.
Net exchanges differences classified in a separate component of equity and reconciliation of the amount of such
exchange differences at the beginning and end of the period.
When the presentation currency is different from the functional currency, disclose that fact together with the
functional currency and the reason for using a different presentation currency.
A change in the functional currency of either the reporting entity or a significant foreign operation and the reason
therefore
3. The Standard does not establish an absolute rate at which hyperinflation is deemed to arise - - but allows judgment
as to when restatement of financial statements becomes necessary. Characteristics of the economic environment
of a country which indicate the existence of hyperinflation include:
The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign
currency. Amounts of local currency held are immediately invested to maintain purchasing power.
The general population regards monetary amounts not in terms of the local currency but in terms of a
relatively stable foreign currency. Prices may be quoted in that currency;
Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power
during the credit period ,even if the period is short ; and
The cumulative inflation rate over three years approaches, or exceeds , 100%
4. When an economy ceases to be hyperinflationary and an enterprise discontinues the preparation and presentation of
financial statements in accordance with PAS 29, it should treat the amounts expressed on the measuring unit current
at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements.
5. DISCLOSURE REQUIREMENTS
Gain or loss on monetary items
The fact that financial statements and other period data have been restated for changes in the general
purchasing power of the reporting currency
Whether the financial statements are based on historical cost or current cost approach
Identity and level of the price index at the balance sheet date and moves during the current and previous
reporting period.
Page 18 of 30
PAS 7: STATEMENT OF CASH FLOWS⁸⁹
SCOPE
All entities regardless of the nature of activities should prepare a cash flows statement and present it as an integral part
its financial statements.
BENEFITS
A cash flow statement, when in conjunction with rest of the financial statements, provides additional information to
users of FS:
1. A better insight into the financial structure of an entity , including its liquidity and solvency , and its ability to affect
the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities.
2. Enhanced information for purposes of evaluating changes in assets, liabilities, and equity of an entity.
3. The statement enhances the comparability of reporting operating performance by different entities because it
eliminates the effects of using different accounting treatments for similar transactions.
4. The statement serves as indicator of the amount, timing and reasonable certainty of future cash flows.
PRESENTATION
The cash flow statement shall report cash flows during the period classified by operating, investing and financing
activities:
1. OPERATING ACTIVITIES – are the principal revenue producing activities of an entity and other activities
that are not investing or financing activities. Cash flows from operating activities⁹⁰generally results from the
transactions and other events those enter into the determination of profit or loss⁹¹
2. INVESTING ACTIVITES- are the acquisition and disposal of long-term assets and other investments not include in cash
equivalents. ‘Investing ‘cash flows represent the extent to which expenditures have been resources intended to
generate future income and cash flows.
3. FINANCING ACTIVITIES-are activities that result in changes in size and composition of contributed equity and
borrowings of the entity.
An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation of the amounts
in its cash flows statement with the equivalent items reported on the balance sheet.
DIRECT vs. INDIRECT METHOD
An entity shall report cash flows from operating activities using either direct or indirect method:
1. DIRECT METHOD- major classes of gross cash receipts and gross cash payments are disclosed.
2. INDIRET METHOD- profit or loss is adjusted for the effects of the transactions of a non-cash nature ,any deferrals
and accruals of past or future operating cash receipts or payments, and items of income and expense associated
with investing or financing cash flows⁹².
INTERESTS and DIVIDENDS.
Cash flows from interest s and dividends received and paid shall each be disclosed separately each shall be classified in a
consistent manner from period to period using the following guidelines:
1. INTEREST PAID. Interest paid is usually classified as operating cash flows because it enters into the determination of
profit or loss .Alternatively it may be classified as financing cash flows because it is a cost of obtaining financial
resources.
2. INTEREST and DIVIDENDS RECEIVED. Interest and dividends received are usually classified as operating cash flows
because they enter into the determination of profit or loss. Alternatively, both may be classified as investing cash
flows because they are both represent returns on investments.
3. DIVIDENDS PAID. Dividends are paid usually classified as financing cash flows because they represent costs of
obtaining financial resources. Alternatively, dividends paid may be classified a s a component of cash flows from
operating activities in order to assist users to determine the ability of man entity to pay dividends out of operating
cash flows.
NON-CASH TRANSACTIONS
Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a cash
flow statement. Such transactions shall be disclosed elsewhere in the financial statements (e.g., notes to the financial
statements) in a way that provides all the relevant information about these investing and financing activities. Examples
are:
1. The acquisition of assets either by assuming directly related liabilities or by means of a finance lease.
2. The acquisition of an entity by means of an equity issue , and
3. The conversion of debt to equity
⁸⁹Cash flows are inflows and outflows of cash and cash equivalents .Cash comprises of cash on hand and demand deposits.
Cash equivalents are short-term l, highly liquid investment that are readily convertible to known amounts of cash and which
are subject to a significant risk of change in value.
⁹⁰An entity may hold securities and loans for trading purposes, in which case they are similar to inventory acquired specially for
resale. Therefore, cash flows arising from the purchase and sale of trading securities are classified as operating activities. Similarly cash
and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing
activity of that entity.
⁹¹Some transactions, such as the sale of an item of plant give rise to gain or loss that is included in the determination of profit or loss
However, the flows relating to such transactions are cash flows from investing activities. Cash flows arising from taxes on income
shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.
⁹²Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the revenue
expenses disclosed in the income statement and the changes during the period in inventories and operating receivables and payables.
Page 19 of 30
PAS 33: EARNINGS PER SHARE (EPS)
OBJECTIVE.
The objective of PAS 33 is to prescribe principles for the determination and presentation of EPS, so as to improve
comparisons of performance among different entities in the same reporting period and among different reporting periods
for the same entity.
SCOPE.
The EPS standards shall be applied by:
1. Entities whose ordinary shares⁹³or potential ordinary shares⁹⁴are publicly traded.
2. Entities that are in the process of issuing ordinary shares or potential ordinary shares in public markets.
3. Entities that voluntarily elect to disclose on EPS in financial statements.
PRESENTATION.
An entity should present on the face of the income statement both basis and diluted EPS. Basic and diluted EPS must be
presented with equal prominence for all periods presented, even if the amounts are negative (i.e., loss per share).
BASIC EARNINGS PER SHARE.
Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders (the numerator) by the weighted
average number of ordinary shares outstanding (the denominator)during the period.
1. EARNINGS.⁹⁵
For the purpose of calculating basic EPS, the amounts attributable to ordinary equity holders shall be adjusted for the
tax amount of preference dividends⁹⁶and other similar effects of preference shares classified as equity.
2. SHARES.
For the purpose of calculating basic EPS, the number of ordinary shall be the weighted average number of ordinary
shares outstanding for the period. The weighted average number of ordinary shares outstanding during the period is
the number of ordinary outstanding at the beginning of the period, adjusted by the number of ordinary shares
issued⁹⁷ and bought back during the period multiplied by a time-weighting factor⁹⁸
In this case of ordinary shares issued or reduce without a corresponding changes in resources ⁹⁹, the number of
ordinary shares is adjusted for the proportionate change in the number or ordinary shares outstanding if the event had
occurred at the beginning of the earliest period presented (i.e., the calculation of the basic and diluted EPS for all
periods presented shall be adjusted retrospectively¹⁰⁰).
DILUTED EARNINGS PER SHARE.
1. EARNINGS.
For the purpose of calculating diluted EPS, the ‘earnings used in computing basic EPS shall be adjusted by the after
tax-effect of:
a.) any dividends related to diltutive¹⁰¹potentila ordinary shares deducted from the earnings
b.) any interest recognized in the period related to dilutive potential ordinary shares
c.) any change in earnings that would result from the conversion of dilutive potential ordinary shares
2. SHARES
In computing diluted EPS, the ordinary shares shall be the weighted average number of ordinary shares outstanding
for the plus the weighted average number of ordinary shares that would have been issued on the conversion of all
the dilutive shares¹⁰²into ordinary shares.
⁹³An ordinary shares are an equity instrument that is a subordinate to all other classes of equity instruments. It is usually known
as ‘common’ stock under the Philippine Corporation Code.
⁹⁴A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares. Examples
include convertible bonds, convertible preferences shares, options and warrants. Options and warrants are financial
instruments that give the holder the right to purchase ordinary shares.
⁹⁵Earnings are calculated after all expenses including taxes and if, any minority interest.
⁹⁶The after-tax amount of preference dividends that is deducted from the earnings are:
a.) the preference dividends on non-cumulative preference shares declared for the period and
b.) the preference dividends on cumulative preference shares for the period whether or not dividends have been declared.
⁹⁷Contingently issuable shares treated as outstanding and are included in the calculation of the basic EPS only from the date
necessary conditions are satisfied .Contingently issuable ordinary shares are ordinary shares issuable for free or little
consideration upon the satisfaction of specified conditions in a contingent share agreement. A contingent share agreement is
an agreement to issue shares that is dependent on the satisfaction of specified conditions.
⁹⁸’Time-weighted –factor’ is the number of days of shares are outstanding as a proportion of total number of days for the
period.
⁹⁹Ordinary shares may be issued, or the number of ordinary shares outstanding may be reduced , without corresponding
change in resources .Examples include: (a) capitalization or bonus issue (i.e., stock dividend) and (b) a share split or reverse split
share (consolidation of shares).
¹⁰⁰In addition, basic and diluted EPS of all periods presented shall be adjusted for the effects of errors and adjustments
resulting from changes in accounting policies accounted for prospectively.
¹⁰¹Dilution is a reduction of EPS or an increase in loss per share resulting from the assumption that convertible instruments
are converted, options and warrants are exercised, or ordinary shares are issued upon fulfillment of certain conditions
¹⁰²Contract that require the entity to repurchase own shares , such written put option, which give the holder the contractual
right to sell ordinary shares at a specified price, are reflected in the calculation of diluted EPS if the effect is dilutive.
Page 20 of 30
Accounting for BOT transactions
Build/operate/transfer transactions (commonly called “BOT” transactions) give the guarantee the right to
construct or to buy and operate certain public work. BOT transactions typically occur under a long term contract to construct
infrastructure projects such as roads, rail roads, bridges, viaducts, dams, airports, tunnels, etc., which take several years to
complete.
These transactions are usually entered to as a means for the government to finance the construction of a public work.
The grantee receives from the grantor the right to carry out the specific project and be suitably remunerated. In this case,
the remuneration received normally comprises the payment for the construction costs incurred and a profit margin.
Sometimes the grantee is entitled to operate the public works projected after its completion in order to generate
income .The operating incomes enables the grantee recover the construction costs and the operating and maintenance
expenses and to earn profit margin. The grantee normally would also be allowed to recover any amount that was paid to
the government for the cession rights. At the end of the term of the cession the project assets and operating rights are
transferred to the grantor.
Costs
Costs incurred for the construction of public works might include:
(A) Materials used in the construction of the project, depreciation of fixed assets used in the work
(B) Labor cist related directly to the specific contract, i.e. costs of labor on the construction site, including supervision
(C) Indirect costs such as insurance, technical assistance, and indirect construction expenses
(D) General or overhead costs such as administrative expenses or financial costs.
Accounting for income earned form a concession
The operating revenues earned under BOT contract should be recognized when it is possible to generate income through
the provision of services, usually to third parties, and when the related costs and expenses have been incurred or can be
estimated. Otherwise, payments received from the governments and others should be deferred liabilities (deferred or
unearned income) and revenues should not be accrued into the profit and loss accounts for the accounting period.
When the grantee has the right to receive income from the operation of public work after it construction, the
construction costs incurred should be charged to fixed assets accounts (e.g., road construction where the income is
generated form the right to collect tolls. In one of the largest BOT transactions in history, the grantees responsible for the
construction of the tunnel which links the United Kingdom and France have until the year 2041 to recover their investment
through the operations before they to turn the operations back to the grantors of the operating rights.
Income for the construction of public should be recognized using the ‘percentage of completion’ method of accounting for
construction projects if the amounts earned can be reasonably accurately estimated during the period of construction. As
alternative, if the amounts earned can reasonably accurately, the grantee may use the complete method of accounting,
which would mean that construction earrings would be recognized upon the conclusion of the construction phase of the
contract when the work has been completed to satisfaction for the government. These two methods of accounting are
accrual methods, which mean that recording of income, would be made when the earned according to the principles
described in this paragraph regardless of when accounts become billable to the government for cash flow purposes – either
on an interim basis or on completion of the project.
To achieve proper matching of costs incurred and revenues earned, all preconstruction and construction costs should
be capitalized when incurred (meaning paid or an obligation incurred to make payments at a later date) into asset accounts
in the records of the grantee. Such amount would then be transferred to accounting period profit or loss accounts when the
related income is earned on the accrual basis. If this method of accounting is followed, the profit and loss in the years of
concession operations might show only the expenses incurred, and thus losses; and the year in which revenues are received
in cash would show the earnings, which might not have been earned exclusively in that year. Of course, if all of the
construction is completed and the revenues are earned in the same accounting period, there would be no violation of the
generally accepted concept of the matching principle of accounting.
In applying the ‘percentage of completion’ method of construction accounting, there are two ways which may used
to estimate the revenues earned during accounting periods:
(a) Cost incurred during the year as a percentage of the total estimated costs of the project; and.
(b) Revenue recognized on the basis of a technical report on the extent of the project completion.
The percentage of the proportion of completion in method (b) should be applied to the amount of total revenue set forth in the
concession agreement. Also, related pre-construction and construction period cost s should be charged to the same accounting
period’ s profit or loss accounts, whether or not such costs have been actually paid in cash. However, for large and
complex public works, particularly those with sub-projects of variable durations, it may be difficult to use one single percentage
of completion with respect to the entire project. In this situation the ratio of costs incurred over year total costs of the works is
the best method to applied to the total agreed revenues for the construction phase. The use of either these two
method permits the income to be distributed among the periods in which the work is performed, or the costs are incurred, and
results in a more accurate economic measurement overtime of net income.
Page 21 of 30
Accounting for advance payments
Cash advances received for services to be performed in the future should recorded as liabilities since payments represent an
obligation of an enterprise to perform services at a later date. If for some reason this is not possible, the advances would have
to be returned under normal circumstances. Advances received which exceed the income earned in the period should remain
under the ‘liabilities’ section of the accounts until the services are rendered or the advance payments have been returned.
Transfer to the public works assets to the grantor following the termination of the concession agreement
When the agreement states the grantee should not fully or partially reimbursed for the assets transferred to the government
at the end of the contract period, the grantee’s compensation is the revenues from the operation of the concession .In this
case, the assets should be depreciated down to their net realizable value, if any at the conclusion of the contract .Generally, the
net book value upon disposal will be equal to the amount of the repayment since the rate of depreciation must take into
account the residual value of the concession assets. Any difference from what was the recorded would be recognized as a gain
or loss from the revision of an estimate in the accounting period when determinable. If the contract state that the asset should
be transferred at fair value any difference between that amount and the net book value is recorded in the profit and loss
account.
Disclosures
In addition to the appropriate disclosures referred to in previous paragraphs, the notes to financial statements of concessions
for the construction of public works should include the total value of the assets, the stage of completion at the balance sheet
date, and the method adopted recognize revenues.
Operating revenue
The operator of a service concession arrangement recognizes and measures revenue in accordance with PASs 11 and 18 for the
services it performs.
Effective Date
IFRIC 12 is effective for annual periods beginning on or after 1 January 2008.
Page 22 of 30
PRFS for Small & Medium Entities (SMEs)
HISTORICAL BACKGROUND
The Philippine Financial Reporting Standards for Small & Medium Entities (PFRS for SMEs) is the answer to the long-felt need
for the standards of financial reporting for small and medium-size entities, which a consequence do not have to comply with
full PFRS. Many of the principles in full PFRS for recognizing and measuring assets, liabilities, income and expenses have been
simplified, topics that are not relevant to small and medium entities (SMEs) have been omitted , and the required disclosure
have been significantly reduced.
In the Philippines, FRSC (Financial Reporting Standards Council) and SEC (Securities and Exchange Commission) set the rules
and regulations pertinent o financial reporting SMEs:
13 October 2009 – FRSC adopts “PFRS for SMEs” form IFRS for SMEs” issued in July 2009 by IASB.
3 December 2009 –Philippine SEC adopts “PFRS for SMEs” as a part of its rules and regulation.
1 January 2010 – Effective date of application of “PFRS for SMEs” in the Philippines.
WHAT ARE SMALL & MEDUIM ENTITIES?
This common question of someone studying PFRS for SMEs for the first time. SMEs are known by variety of terms, including
small & medium-sized entities (SMEs), private entities, and non-publicly accountable entities (NPAEs). Consider the following
definition provided by Section 1 of the PFRS for SMEs:
The Securities and Exchange Commission, in its En Banc Resolution dated August 13, 2009, adopted a definition of ‘small &
medium entities’ that includes a size criterion:
FULL PFRS
PRFS
PRFS for SMEs
It is important to note that while the PFRS for SMEs is mainly patterned after full PRFS. PFRS for SMEs is completely stand-alone
set of standards .The only fallback option to full PFRS is the option to use PAS 39 instead of the financial instruments sections of
PFRS for SMEs. There are certain standards in full PFRS that were not include as part of PFRS for SMEs: segment reporting,
interim reporting, earnings per share and assets held for sale
The PFRS for SMEs has a total of 35 sections, organized by topic. No bold front was used (unlike full PFRS) and it is simplified.
Page 23 of 30
NOTES TO THE REVIEWEES
The following section of lecture notes is not exhaustive enumeration of the standards contained in the PFRS for SMEs;
they are mere highlights of each of the thirty-five 35 sections of the PFRS for SMEs.
Variations and deviations from full PFRS as well as exclusive or unique standards for SMEs are highlighted boxes.
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SECTION 3: Financial Statement Presentation
The application of PFRS for SMEs with additional disclosures when necessary is presumed to result in FS that achieve a
fair presentation of then financial position, financial performance and cash flows of SMEs.
Financial statements shall not be described as complying with PFRS for SMEs unless they comply with all the
requirements of this PFRS.
A complete set of FS shall include of the following :
(a) Statement of Financial Position (balance sheet)
(b) Either a singles Statement of Comprehensive Income (showing profit or loss and items of other comprehensive
income”) or two statements : income statements & statement comprehensive income
(c) Statement of Changes in Equity
(d) Statement of Cash Flows
(e) Notes, comprising summary of significant accounting policies and other explanatory information
If an entity has no items of other comprehensive income (OCI), it can present only an Income Statement, it may present
a Statement of Comprehensive Income in which the bottom line is “profit or loss”.
If only changes to equity arises from profit or loss payments of dividends , corrections of prior period errors and changes
in accounting policy , the entity may present a single Statement of Income and Retained Earnings .(See Section 6)
The only OCI items under PFRS for SMEs are:
Some foreign exchange translation gain and losses (See Section 30)
Some changes in fair values of hedging instruments (See Section 12)
Some actuarial gains and losses (See Section 28)
SECTION 6: Statement of Changes in Equity and Statement Income and Retained Earnings
Section 3 permits an entity to present a statement of income and retained earnings in place of statement of comprehensive
income and a statement of changes in equity if the only changes in equity arise from:
Profit or loss
Payment of dividends
Correction of prior period errors
Changes in accounting policy
An entity shall present in the statement of income and retained earnings of the following information:
Retained earnings (at the beginning of reporting period)
Dividends declared and paid or payable (during the period)
Restatement of retained earnings for corrections of prior period errors
Restatement of retained earnings for changes in accounting policy.
Retained earnings (at the end of the reporting period)
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SECTION 9: Consolidated and Separate Financial Statements
A parent entity shall present consolidated financial statements in which it consolidates its investment in subsidiaries ;
consolidated financial statements shall include all subsidiaries of the parent.
Consolidation of FS required when there is a parent subsidiary relationship ; except when :
The subsidiary was acquired with intent to sell or to dispose within one year
The parent itself is subsidiary and the ultimate or intermediate parent produces consolidated FS that
comply with full PFRS or PFRS for SMEs
An entity shall prepare consolidated FS that include the entity and any Special Purpose Entities* that are controlled
by that entity.
*SPECIAL PURPOSE ENTITIES (SPEs) are created to accomplish a narrow objective (e.g.,to effect a lease , indertake
research and development activities or securitize financial assets); SPEs may take the form of a corporation, trust,
partnership or unincorporated entity. SME’s are created with the legal arrangements that impose strict
requirements over the operations of the SPE.
An entity shall present non-controlling interest in the consolidated statements of financial position within equity,
separately form the equity of the owners of then parent
PFRS for SMEs does not acquire presentation of separate financial statements for the parent entity or for the
individual subsidiaries; If parent prepares separate FS and describes them as conforming to PFRS for SMEs.
In the separate FS, the parent shall adopt a policy of accounting for its investment in subsidiaries either at:
(a) Cost less impairment or
(b) Fair value with changes in fair value recognized in profit or loss.
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SECTION 12: Other Financial Instrument Issues
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SECTION 19: Business Combination and Goodwill
• All business combinations shall be accounted for by applying the purchase method.
The acquirer shall measure the cost of a business combination as the aggregate of:
(a) The fair values of assets given, liabilities incurred and equity instruments issued by the acquirer, in exchange for
control of the acquiree, plus
(b) Any costs directly attributable to the business combination.
Any difference between the cost of the business combination and the acquirer’s interest in the net fair value of the
identifiable assets, liabilities and provisions for contingent liabilities recognized shall be accounted for as goodwill or
negative goodwill.
After initial recognition, the acquirer shall measure goodwill acquired in a business combination at cost less accumulated
amortization and accumulated impairment losses .
If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall be presumed to be ten years.
If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities
recognized exceeds the cost of the business combinations (sometimes referred to as negative goodwill) the acquirer shall:
(a)reassess the identification and measurement of the cost of combination, and
(b) recognize immediately in profit or loss any excess remaining after that reassessment.
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SECTION 24: Government Grants
Most provisions of this Section are similar to PAS 20.
An entity shall measure grants at the fair value of the asset received or receivable.
An entity shall recognize government grants as follows:
(a) A grant that does not impose specified future performance conditions on the recipient is recognized in income when
the grant proceeds are receivable.
(b) A grant that imposes specified future performance conditions on the recipient is recognized income only when the
performance conditions are met.
(c) Grants received before the revenue recognition criteria are satisfied are recognized as a liability.
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SECTION 30: Foreign Currency Translation
An entity shall record a foreign currency transaction by applying to the foreign currency amount the spot exchange rate
between the functional currency and the foreign currency at the date of the transaction.
An entity shall translate it’s results and financial position into a different presentation currency using the following
procedures:
Assets and liabilities shall be translated at the closing rate.
Income and expenses shall be translated at the exchange rates at the dates of the transaction.
( The use of average rate is allowed if this approximates the exchange rates at the transaction dates)
All resulting exchange differences shall be recognized in other comprehensive income.
A first-time adopter of PFRS for SMEs shall apply this section in it’s FS that conform to PFRS for SMEs.
Section 35 requires an entity to prepare comparative FS Covering the current year and at least one prior year using PFRS for
SMEs.
An entity’s date of transition to PFRS for SMEs is the beginning of the earliest period for which the entity present full
comparative information in accordance with PFRS for SMEs in it’s first FS that conform to PFRS for SMEs
Section 35 cites many exemptions for restating specific items in it’s first PFRS-for-SME-based FS.
(END)
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