PREPARED BY: HENRY JAMES B.

NEPOMUCENO

CHAPTER 22 – AGRICULTURE (BIOLOGICAL ASSET AND AGRICULTURAL PRODUCE) PAS 41

DEFINITION OF TERMS

BIOLOGICAL ASSETS – LIVING ANIMALS AND LIVING PLANTS

AGRICULTURAL PRODUCE – HARVESTED PRODUCT OF AN ENTITY’S BIOLIGICAL ASSETS

AGRICULTURAL ACTIVITY

- IS THE MANAGEMENT BY AN ENTITY OF THE BIOLOGICAL TRANSFORMATION AND HARVEST OF

BIOLOGICAL ASSETS FOR SALE OR FOR CONVERSION INTO AGRICULTURAL PRODUCE OR INTO
ADDITIONAL BIOLOGICAL ASSET

BIOLOGICAL TRANSFORMATION

- COMPRISES THE PROCESSES OF GROWTH DEGENERATION, PRODUCTION AND PROCREATION

THAT CAUSE QUALITATIVE' OR QUANTITATIVE CHANGES IN A BIOLOGICAL ASSET.

1. ASSET CHANGES THROUGH:

A. GROWTH — AN INCREASE IN QUANTITY OR IMPROVEMENT QUALITY OF AN ANIMAL OR PLANT.

B. DEGENERATION — A DECREASE IN QUANTITY OR DETERIORATION IN QUALITY OF AN ANIMAL OR

PLANT.

C. PROCREATION — CREATION OF ADDITIONAL LIVING ANIMAL OR PLANT.

2. PRODUCTION OF AGRICULTURAL PRODUCE SUCH AS LATEX, TEA LEAF, WOOL AND MILK.

RECOGNITION

AN ENTITY SHALL RECOGNIZE A BIOLOGICAL ASSET OR AGRICULTURAL PRODUCE WHEN:

A. THE ENTITY CONTROLS THE ASSET AS A RESULT OF PAST EVENT.

B. IT IS PROBABLE THAT FUTURE ECONOMIC BENEFITS ASSOCIATED WITH THE ASSET WILL FLOW TO THE
ENTITY.

C. THE FAIR VALUE OR COST OF THE ASSET CAN BE MEASURED RELIABLY.

IN AGRICULTURAL ACTIVITY, CONTROL MAY BE EVIDENCED BY, FOR EXAMPLE, LEGAL OWNERSHIP OF
CATTLE AND THE BRANDING OR OTHERWISE MARKING OF THE CATTLE ON ACQUISITION OR BIRTH.
 MEASUREMENT

MEASUREMENT

BIOLOGICAL ASSET SHALL BE MEASURED ON INITIAL RECOGNITION AND AT THE END

OF EACH REPORTING PERIOD AT FAIR VALUE LESS COST OF
DISPOSAL
AGRICULTURAL PRODUCE HARVESTED SHALL BE MEASURED AT FAIR LESS COST OF DISPOSAL AT THE
POINT OF HARVEST

AGRICULTURAL PRODUCE GROWING IS MEASURED AT FAIR VALUE LESS COST OF DISPOSAL.

ON BEARER PLANT

FAIR VALUE OF BIOLOGICAL ASSET

FAIR VALUE IS DEFINED AS THE PRICE THAT WOULD BE RECEIVED TO SELL AN, ASSET IN AN ORDERLY
TRANSACTION BETWEEN MARKET PARTICIPANTS AT THE MEASUREMENT DATE. THERE IS A
PRESUMPTION THAT FAIR VALUE CAN BE MEASURED RELIABLY FOR A BIOLOGICAL ASSET.

NOTE: MEASUREMENT
SHALL BE MEASURED AT COST LESS
CLEARLY UNRELIABLE ACCUMULATED DEPRECIATION AND ANY
ACCUMULATED IMPAIRMENT LOSS
BIOLOGICAL ASSET THE ENTITY SHALL MEASURE THE
CLEARLT MEASURABLE BIOLOGICAL ASSET AT FAIR VALUE LESS
COSTS OF DISPOSAL.

FAIR VALUE OF AGRICULTURAL PRODUCE

- IN ALL CASES, AN ENTITY SHALL MEASURE AGRICULTURAL PRODUCE AT THE POINT OF HARVEST
AT FAIR VALUE LESS COST OF DISPOSAL.
- THE FAIR VALUE OF AGRICULTURAL PRODUCE AT THE POINT OF HARVEST CAN ALWAYS BE
MEASURED RELIABLY.
- THE FAIR VALUE MEASUREMENT OF AGRICULTURAL PRODUCE STOPS AT THE POINT OF
HARVEST. AFTER THAT DATE, PAS 2 ON INVENTORIES SHALL APPLY. THIS MEANS THAT THE
INVENTORY SHALL BE MEASURED AT THE LOWER OF COST AND NET REALIZABLE VALUE AFTER
HARVEST.
- THE HARVESTED PRODUCT IS RECORDED BY DEBITING INVENTORY AND CREDITING GAIN FROM
CHANGE IN FAIR VALUE OF AGRICULTURAL PRODUCE.
 GAIN AND LOSS

A GAIN OR LOSS ARISING ON INITIAL RECOGNITION OF A BIOLOGICAL ASSET AT FAIR VALUE LESS COST
OF DISPOSAL AND ANY IN SUBSEQUENT CHANGE IN THE FAIR VALUE LESS COST OF DISPOSAL SHALL BE
INCLUDED PROFIT OR LOSS.

 A LOSS MAY ARISE ON INITIAL RECOGNITION OF A BIOLOGICAL ASSET BECAUSE COST OF

DISPOSAL IS DEDUCTED IN DETERMINING FAIR VALUE LESS C'OST OF DISPOSAL OF A
BIOLOGICAL ASSET.
 A GAIN MAY ARISE ON INITIAL RECOGNITION OF A BIOLOGICAL ASSET, FOR EXAMPLE, WHEN A
CALF IS BORN.
 A GAIN OR LOSS MAY ARISE ON INITIAL RECOGNITION OF AGRICULTURAL PRODUCE AS A
RESULT OF HARVESTING WHICH SHALL ALSO BE INCLUDED IN PROFIT OR LOSS. AN ENTITY SHALL
DISCLOSE THE AGGREGATE GAIN OR LOSS ARISING ON THE INITIAL RECOGNITION OF
BIOLOGICAL ASSET AND AGRICULTURAL PRODUCE AND FROM THE CHANGE IN FAIR VALUE LESS
COST OF DISPOSAL OF BIOLOGICAL ASSET.

NOTE: AGRICULTURAL LAND IS NOT DEEMED A BIOLOGICAL ASSET.

- FOR PURPOSE OF MEASUREMENT PAS 16 ON PROPERTY, PLANT AND EQUIPMENT AND PAS 40
ON INVESTMENT PROPERTY WILL APPLY.

BIOLOGICAL ASSETS ATTACHED TO LAND

THERE MAY BE NO SEPARATE MARKET FOR BIOLOGICAL ASSETS THAT ARE ATTACHED TO THE LAND BUT
AN ACTIVE MARKET MAY EXIST FOR THE COMBINED ASSETS, THAT IS, FOR THE BIOLOGICAL ASSETS AND
LAND AS A PACKAGE.

AN ENTITY MAY USE INFORMATION REGARDING THE COMBINED ASSETS TO DETERMINE THE FAIR
VALUE OF THE BIOLOGICAL ASSETS.

EXAMPLE: THE FAIR VALUE OF THE LAND MAY BE DEDUCTED FROM THE FAIR VALUE OF THE COMBINED
ASSETS TO ARRIVE AT THE FAIR VALUE OF THE TREES IN THE PLANTATION FOREST.

FV:
COMBINED ASSET PLANTATION FOREST = 2, 500 000 LAND = 1, 500, 000
TREES =2, 500, 000 – 1,500, 000
TREES =1, 000, 000
BEARER PLANTS

IASB DECIDED THAT BEARER PLANTS SHOULD BE ACCOUNTED FOR IN THE SAME WAY AS PROPERTY,
PLANT AND EQUIPMENT BECAUSE THE OPERATION OF BEARER PLANTS IS SIMILAR TO THAT OF
MANUFACTURING. BEARER PLANTS ARE USED SOLELY TO GROW AGRICULTURAL PRODUCE OVER
SEVERAL PERIODS. AT THE END OF THEIR PRODUCTIVE LIFE, THE BEARER PLANTS ARE USUALLY
SCRAPPED.

AGRICULTURAL PRODUCE GROWING ON BEARER PLANTS

THE AGRICULTURAL PRODUCE GROWING ON BEARER PLANTS REMAINS WITHIN THE SCOPE OF IAS 41.

IN OTHER WORDS, THE AGRICULTURAL PRODUCE AS IT GROWS IS MEASURED AT THE END OF EACH
REPORTING PERIOD PRIOR TO HARVEST AT FAIR VALUE LESS COST OF DISPOSAL.

THE AGRICULTURAL PRODUCE GROWING ON BEARER PLANT IS CLASSIFIED AS BIOLOGICAL ASSET. ONCE
HARVESTED, THE AGRICULTURAL PRODUCE IS MEASURED AT FAIR VALUE LESS COST OF DISPOSAL AT
THE POINT OF HARVEST.

THE FAIR VALUE LESS COST OF DISPOSAL AT THE POINT OF HARVEST IS THE DEEMED COST OF
INVENTORY. THE HARVESTED PRODUCT IS RECORDED AS INVENTORY AND RECOGNIZED AS GAIN FROM
AGRICULTURAL PRODUCE.

DEFINITION OF BEARER PLANT

A BEARER PLANT IS A LIVING PLANT THAT:

A. IS USED IN THE PRODUCTION OR SUPPLY OF AGRICULTURAL PRODUCE.

B. IS EXPECTED TO BEAR PRODUCE FOR MORE THAN ONE PERIOD.

C. HAS A REMOTE LIKELIHOOD OF BEING SOLD AS AGRICULTURAL PRODUCE, EXCEPT FOR INCIDENTAL
SCRAP SALES.

NOTE: A BEARER PLANT THAT NO LONGER BEARS PRODUCE IS COMMONLY CUT DOWN AND SOLD AS
SCRAP AT THE END OF THE PRODUCTIVE LIFE. THE INCIDENTAL SCRAP SALES WOULD NOT PREVENT THE
PLANT FROM BEING A BEARER PLANT.

NOT CONSIDERED BEARER PLANTS:

A. TREES GROWN TO BE HARVESTED AND SOLD AS LOG OR LUMBER ARE NOT BEARER PLANTS.

B. ANNUAL CROPS WHICH DO NOT BEAR PRODUCE FOR MORE THAN ONE PERIOD AND ARE HELD
SOLELY TO BE HARVESTED AS AGRICULTURAL PRODUCE SUCH AS CORN AND RICE ARE NOT BEARER
PLANTS.
PLANT WITH DUAL USE

A PLANT WITH DUAL USE IS REPORTED AS BIOLOGICAL ASSET AND NOT AS BEARER PLANT. A PLANT
MAY HAVE A DUAL USE, NAMELY:

A. THE PLANT IS CULTIVATED FOR BEARING AGRICULTURAL PRODUCE

B. THE PLANT ITSELF IS BEING SOLD EITHER AS A LIVING PLANT OR AN AGRICULTURAL PRODUCE.

FOR EXAMPLE, RUBBER TREES MAY BE CULTIVATED TO GROW RUBBER MILK AS AGRICULTURAL
PRODUCE AND AT THE SAME TIME, MAY BE SOLD AS LIVING PLANT OR CUT DOWN AT THE END OF THE
PRODUCTIVE LIFE TO BE SOLD AS LUMBER OR WOOD.

IN THIS CASE, THE RUBBER TREES ARE RECOGNIZED AS BIOLOGICAL ASSET BECAUSE OF THE DUAL USE.

HOWEVER, THE RUBBER TREES ARE RECOGNIZED AS BEARER PLANTS WHEN SIMPLY CUT DOWN AND
SOLD FOR SCRAP UPON MATURITY.

JUDGMENT REQUIRED

DETERMINING WHETHER A PLANT IS A BEARER PLANT IS CRITICAL AS IT DRIVES THE SUBSEQUENT

MEASUREMENT OF THE PLANT. JUDGMENT IS REQUIRED IN DETERMINING IF THE DEFINITION OF
BEARER PLANT IS MET ESPECIALLY IN DECIDING WHETHER THE SALES OF THE PLANT ITSELF ARE
INCIDENTAL SCRAP SALES.

BEARER ANIMALS

BEARER ANIMALS, LIKE BEARER PLANTS, MAY BE HELD SOLELY FOR THE PRODUCE THAT THEY BEAR.
HOWEVER, BEARER ANIMALS HAVE BEEN EXPLICITLY EXCLUDE FROM THE IASB AMENDMENT AND WILL
CONTINUE TO BE ACCOUNTED FOR UNDER IAS 41.

THE REASON IS THAT THE MEASUREMENT MODEL WOULD BECOME MORE COMPLEX IF APPLIED TO
BEARER ANIMALS.

IN OTHER WORDS, BEARER ANIMALS CONTINUE TO BE REPORTED AS BIOLOGICAL ASSETS.

ANIMAL-RELATED RECREATIONAL ACTIVITIES

MANAGING RECREATIONAL ACTIVITIES, FOR EXAMPLE AND ZOOS, IS NOT AGRICULTURAL ACTIVITY.

GAME PARKS

THE REASON IS THAT THERE IS NO MANAGEMENT OF THE TRANSFORMATION HOF THE BIOLOGICAL
ASSET BUT SIMPLY CONTROL OF THE NUMBER OF ANIMALS.
THE NATURAL BREEDING THAT TAKES PLACE IS NOT A MANAGED ACTIVITY AND IS INCIDENTAL ONLY
TO THE MAIN ACTIVITY OF PROVIDING A RECREATIONAL FACILITY.

ACCORDINGLY, ANIMALS RELATED TO RECREATIONAL ACTIVITIES SHALL BE ACCOUNTED FOR IN

ACCORDANCE WITH PAS 16, PROPERTY, PLANT AND EQUIPMENT.

INSIGHT:

THE REASON CREATION OF THIS STANDARD IS TO ESTABLISH STANDARDS OF ACCOUTING FOR

AGRICULTURAL ACTIVITY.
CHAPTER 24 – FINANCIAL INSTRUMENTS – PRESENTATION PAS 32

FINANCIAL INSTRUMENT

PAS 32, PARAGRAPH 11, DEFINES A FINANCIAL INSTRUMENT AS ANY CONTRACT THAT GIVES RISE TO
BOTH A FINANCIAL ASSET OF ONE ENTITY AND A FINANCIAL LIABILITY OR EQUITY INSTRUMENT OF
ANOTHER ENTITY.

"FINANCIAL INSTRUMENT" ENCOMPASSES:

- FINANCIAL ASSET,
- FINANCIAL LIABILITY
- AND AN EQUITY INSTRUMENT.

CHARACTERISTICS OF A FINANCIAL INSTRUMENT

A. THERE MUST BE A CONTRACT.

B. THERE ARE AT LEAST TWO PARTIES TO THE CONTRACT.
C. THE CONTRACT SHALL GIVE RISE TO A FINANCIAL ASSET OF ONE PARTY AND FINANCIAL
LIABILITY OR EQUITY INSTRUMENT OF ANOTHER PARTY.

EXAMPLES OF FINANCIAL INSTRUMENT

A. CASH IN THE FORM OF NOTES AND COINS — THIS IS A FINANCIAL ASSET OF THE HOLDER OR
BEARER AND A FINANCIAL LIABILITY OF THE ISSUING GOVERNMENT.
B. CASH IN THE FORM OF CHECKS — THIS IS A FINANCIAL ASSET OF THE PAYEE AND A FINANCIAL
LIABILITY OF THE DRAWER OR ISSUER.
C. CASH IN BANK — THIS IS A FINANCIAL ASSET OF THE DEPOSITOR AND A FINANCIAL LIABILITY OF
THE DEPOSITORY BANK.
D. TRADE ACCOUNTS — THIS IS A FINANCIAL ASSET OF THE SELLER AS ACCOUNTS RECEIVABLE AND
A FINANCIAL LIABILITY OF THE CUSTOMER OR BUYER AS ACCOUNTS PAYABLE.
E. NOTE AND LOAN — THIS A FINANCIAL ASSET OF THE LENDER OR CREDITOR AS NOTE
RECEIVABLE OR LOAN RECEIVABLE AND A FINANCIAL LIABILITY OF THE BORROWER OR DEBTOR
AS NOTE PAYABLE OR LOAN PAYABLE.
F. DEBT SECURITY — THIS IS A FINANCIAL ASSET OF THE INVESTOR AND A FINANCIAL LIABILITY OF
THE ISSUER.
G. EQUITY SECURITY — THIS IS A FINANCIAL ASSET OF THE INVESTOR AND AN EQUITY OF THE
ISSUER.

FINANCIAL ASSETS

CASH OR CURRENCY IS A FINANCIAL ASSET BECAUSE IT REPRESENTS THE MEDIUM OF EXCHANGE AND IS
THEREFORE THE BASIS ON WHICH TRANSACTIONS IS MEASURED AND RECOGNIZED IN FINANCIAL
STATEMENTS.
A DEPOSIT OF CASH WITH A BANK OR SIMILAR FINANCIAL INSTITUTION IS A FINANCIAL ASSET BECAUSE
IT REPRESENTS THE CONTRACTUAL RIGHT OF THE DEPOSITOR TO OBTAIN CASH FROM THE BANK OR TO
DRAW A CHEEK AGAINST THE BALANCE IN FAVOR OF A CREDITOR IN PAYMENT OF A FINANCIAL
LIABILITY.

BUT GOLD BULLION DEPOSITED IN BANK IS NOT A FINANCIAL ASSET BECAUSE ALTHOUGH IT IS VERY
PRECIOUS THE GOLD IS A COMMODITY.

FINANCIAL ASSETS REPRESENTING A CONTRACTUAL RIGHT TO RECEIVE CASH IN THE FUTURE INCLUDE:
A. TRADE ACCOUNTS RECEIVABLE

B. NOTES RECEIVABLE

C. LOANS RECEIVABLE

D. BONDS RECEIVABLE

EXCHANGES OF FINANCIAL INTRUMENTS WITH ANOTHER ENTITY

CONDITIONS
FAVORABLE WHEN SUCH EXCHANGES WILL RESULT TO GAIN
OR ADDITIONAL CASH INFLOW TO THE ENTITY
UNFAVORABLE WHEN SUCH EXCHANGES WILL RESULT TO LOSS
OR ADDITIONAL CASH OUTFLOW TO THE ENTITY

NOTE:

INVESTMENTS IN SHARES OR OTHER EQUITY INSTRUMENTS ISSUED BY OTHER ENTITIES, FOR EXAMPLE,
TRADING SECURITIES, CAN BE CLASSIFIED AS FINANCIAL ASSETS.

NONFINANCIAL ASSETS

a. PHYSICAL ASSETS SUCH AS INVENTORY AND PROPERTY, PLANT AND EQUIPMENT

b. INTANGIBLE ASSETS, SUCH AS PATENT AND TRADEMARK
c. PREPAID EXPENSES FOR WHICH THE FUTURE ECONOMIC BENEFIT IS THE RECEIPT OF GOODS OR
SERVICES, RATHER THAN THE RIGHT TO RECEIVE CASH OR ANOTHER FINANCIAL ASSET.
d. RIGHT OF USE ASSET OR LEASED ASSET IS NOT A FINANCIAL ASSET BECAUSE CONTROL OF THE
UNDERLYING ASSET DOES NOT GIVE RISE TO A PRESENT RIGHT TO RECEIVE CASH OR ANOTHER
FINANCIAL ASSET.
FINANCIAL LIABILITY

A FINANCIAL LIABILITY IS ANY LIABILITY THAT IS A CONTRACTUAL OBLIGATION:

a. TO DELIVER CASH OR OTHER FINANCIAL ASSET TO ANOTHER ENTITY.

b. TO EXCHANGE FINANCIAL INSTRUMENTS WITH ANOTHER ENTITY UNDER CONDITIONS THAT IS
POTENTIALLY UNFAVORABLE.

EXAMPLES OF FINANCIAL LIABILITIES

A. TRADE ACCOUNTS PAYABLE

B. NOTES PAYABLE
C. LOANS PAYABLE
D. BONDS PAYABLE

NONFINANCIAL LIABILITIES

A. DEFERRED REVENUE AND WARRANTY OBLIGATIONS ARE NOT FINANCIAL LIABILITIES BECAUSE THE
OUTFLOW OF ECONOMIC BENEFITS IS THE DELIVERY OF GOODS AND SERVICES RATHER THAN A
CONTRACTUAL OBLIGATION TO PAY CASH.

B. INCOME TAX PAYABLE IS NOT A FINANCIAL LIABILITY BECAUSE IT IS IMPOSED BY LAW AND
NONCONTRACTUAL.

C. CONSTRUCTIVE OBLIGATIONS ARE NOT FINANCIAL LIABILITIES BECAUSE THE OBLIGATIONS DO NOT
ARISE FROM CONTRACT.

EQUITY INSTRUMENT

AN EQUITY INSTRUMENT IS ANY CONTRACT THAT EVIDENCES A RESIDUAL INTEREST IN THE ASSETS OF
AN ENTITY AFTER DEDUCTING ALL OF THE LIABILITIES.

EQUITY INSTRUMENTS INCLUDE:

- ORDINARY SHARE CAPITAL

- PREFERENCE SHARE CAPITAL
- AND WARRANTS OR OPTION.

WHEN LIABILITY AND WHEN EQUITY

PAS 32, PARAGRAPH 15, PROVIDES THAT THE ISSUER OF A FINANCIAL INSTRUMENT SHALL CLASSIFY THE
INSTRUMENT AS A FINANCIAL LIABILITY OR EQUITY INSTRUMENT IN ACCORDANCE WITH THE
SUBSTANCE OF THE CONTRACTUAL ARRANGEMENT AND THE DIFINITION OF A FINANCIAL LIABILITY,
FINANCIAL ASSET AND EQUITY INSTRUMENT.

PARAGRAPH 16 FURTHER PROVIDES THAT TO DETERMINE WHETHER A FINANCIAL INSTRUMENT IS AN

EQUITY INSTRUMENT RATHER THAN A FINANCIAL LIABILITY, THE INSTRUMENT IS AN EQUITY
INSTRUMENT IF THE INSTRUMENT INCLUDES NO CONTRACTUAL OBLIGATION TO DELIVER CASH, OR
ANOTHER FINANCIAL ASSET.

REDEEMABLE PREFERENCE SHARE

A. A PREFERENCE SHARE THAT PROVIDES FOR MANDATORY REDEMPTION BY THE ISSUER FOR A
FIXED OR DETERMINABLE AMOUNT AT A FUTURE DATE IS A FINANCIAL LIABILITY OF THE ISSUER
BECAUSE THE ISSUER HAS A CONTRACTUAL OBLIGATION TO PAY CASH AT SOME FUTURE TIME.
B. A PREFERENCE SHARE THAT GIVES THE HOLDER THE RIGHT TO REQUIRE THE ISSUER TO REDEEM
THE INSTRUMENT AT A PARTICULAR DATE FOR A FIXED OR DETERMINABLE AMOUNT IS ALSO A
FINANCIAL LIABILITY BECAUSE THE ISSUER HAS A CONTRACTUAL OBLIGATION TO PAY CASH AT
SOME FUTURE TIME.

ACCORDINGLY, DIVIDENDS PAID TO HOLDERS OF "MANDATORILY REDEEMABLE PREFERENCE SHARE"

SHALL BE ACCOUNTED FOR AS INTEREST EXPENSE. THE MANDATORILY REDEEMABLE PREFERENCE
SHARE SHALL .BE CLASSIFIED AS CURRENT OR NONCURRENT LIABILITY DEPENDING ON THE DATE OF
REDEMPTION.

COMPOUND FINANCIAL INSTRUMENT

PAS 32, PARAGRAPH 28, DEFINES A COMPOUND FINANCIAL INSTRUMENT AS "A FINANCIAL
INSTRUMENT THAT CONTAINS BOTH A LIABILITY AND AN EQUITY ELEMEMNT FROM THE PERSPECTIVE
OF THE ISSUER."

IN OTHER WORDS, ONE COMPONENT OF THE FINANCIAL INSTRUMENT MEETS THE DEFINITION OF A
FINANCIAL LIABILITY AND ANOTHER COMPONENT OF THE FINANCIAL INSTRUMENT MEETS THE
DEFINITION OF AN EQUITY INSTRUMENT.

COMMON EXAMPLES OF COMPOUND FINANCIAL INSTRUMENT ARE:

A. BONDS PAYABLE ISSUED WITH SHARE WARRANTS

B. CONVERTIBLE BONDS PAYABLE

ACCOUNTING FOR COMPOUND INSTRUMENT

THE ISSUER OF A FINANCIAL INSTRUMENT SHALL EVALUATE THE TERMS OF THE INSTRUMENT WHETHER
IT CONTAINS BOTH A LIABILITY AND AN EQUITY COMPONENT.

IF THE FINANCIAL INSTRUMENT CONTAINS BOTH A LIABILITY AND AN EQUITY COMPONENT, PAS 32
MANDATES THAT SUCH COMPONENTS SHALL BE ACCOUNTED FOR SEPARATELY.

THE APPROACH IN ACCOUNTING FOR A COMPOUND FINANCIAL INSTRUMENT IS KNOWN AS "SPLIT

ACCOUNTING".
THIS MEANS THAT THE CONSIDERATION RECEIVED FROM THE ISSUANCE OF THE COMPOUND FINANCIAL
INSTRUMENT SHALL BE ALLOCATED BETWEEN THE LIABILITY AND EQUITY COMPONENTS. IN OTHER
WORDS, THE FAIR VALUE OF THE LIABILITY COMPONENT IS FIRST DETERMINED. THE FAIR VALUE OF THE
LIABILITY COMPONENT IS THEN DEDUCTED FROM THE TOTAL CONSIDERATION RECEIVED FROM THE
ISSUANCE OF THE COMPOUND FILLANCIAL INSTRUMENT. THE RESIDUAL AMOUNT IS ALLOCATED TO
THE EQUITY COMPONENT.

BONDS PAYABLE ISSUED WITH SHARE WARRANTS

WHEN THE BONDS ARE SOLD WITH SHARE WARRANTS, THE BONDHOLDERS ARE GIVEN THE RIGHT TO
ACQUIRE SHARES OF THE ISSUER AT A SPECIFIED PRICE AT SOME FUTURE TIME. ACTUALLY, IN THIS
CASE, TWO SECURITIES ARE SOLD - THE BONDS AND THE SHARE WARRANTS.

SHARE WARRANTS ATTACHED TO A BOND MAY BE DETACHABLE OR NONDETACHABLE.

DETACHABLE WARRANTS CAN BE TRADED SEPARATELY FROM THE BOND

NONDETACHABLE WARRANTS CANNOT BE TRADED SEPARATELY

PAS 32 DOES NOT DIFFERENTIATE WHETHER THE EQUITY COMPONENT IS DETACHABLE OR

NONDETACHABLE.

WHETHER DETACHABLE OR NONDETACHABLE, THE WARRANTS HAVE A VALUE AND THEREFORE SHALL
BE ACCOUNTED FOR SEPARATELY.

ALLOCATION OF ISSUE PRICE

THE BONDS ARE ASSIGNED AN AMOUNT EQUAL TO THE "MARKET VALUE OF THE BONDS EX-
WARRANTS", REGARDLESS OF THE MARKET VALUE OF THE WARRANTS.

THE RESIDUAL AMOUNT OR REMAINDER OF THE ISSUE PRICE SHALL THEN BE ALLOCATED TO THE
WARRANTS.

CONVERTIBLE BONDS

AN ENTITY FREQUENTLY MAKES ITS BOND ISSUE TO INVESTORS BY MAKING THE BONDS CONVERTIBLE.
GENERALLY, AN ENTITY CAN OBTAIN FINANCING AT LOWER INTEREST RATE BY ISSUING CONVERTIBLE
BOND.

CONVERTIBLE BONDS GIVE THE HOLDERS THE RIGHT TO CONVERT THEIR BONDHOLDINGS INTO SHARE
CAPITAL OF THE ISSUING ENTITY WITHIN A SPECIFIED PERIOD OF TIME.

CONVERTIBLE BONDS ARE CONCEIVED AS COMPOUND FINANCIAL INSTRUMENTS.

ACCORDINGLY, THE ISSUANCE OF CONVERTIBLE BONDS SHALL BE ACCOUNTED FOR AS PARTLY

LIABILITY AND PARTLY EQUITY.
IN OTHER WORDS, THE ISSUE PRICE OF THE CONVERTIBLE BONDS SHALL BE ALLOCATED BETWEEN THE
BONDS PAYABLE AND THE CONVERSION PRIVILEGE.

ALLOCATION OF ISSUE PRICE

THE BONDS ARE ASSIGNED AN AMOUNT EQUAL TO THE MARKET VALUE OF THE BONDS WITHOUT THE
CONVERSION PRIVILEGE. THE RESIDUAL AMOUNT OR REMAINDER OF THE ISSUE PRICE SHALL THEN BE
ALLOCATED TO THE CONVERSION PRIVILEGE OR EQUITY COMPONENT.

INSIGHT:

THE SAID STANDARD IS CREATED TO PROVIDEAN OUTLINE ON WHAT IS NEEDED FOR THE
PRESENTATION OF FINANCIAL INSTRUMENTS, PARTICULARLY AS TO THE CLASSIFICATION OF SUCH
INSTRUMENTS INTO FINANCIAL ASSETS, FINANCIAL LIABILITIES AND FINANCIAL EQUITY.
CHAPTER 30 – FIRST TIME ADOPTION OF PRFS (PFRS 1)

FIRST TIME ADOPTER

A FIRST TIME ADOPTER IS AN ENTITY THAT PRESENTS FOR THE FIRST TIME ITS FINANCIAL STATEMENTS
IN CONFORMITY WITH PHILIPPINE FINANCIAL REPORTING STANDARDS.

IN OTHER WORDS, AN ENTITY IS CONSIDERED FIRST TIME ADOPTER WHEN FOR THE FIRST TIME SUCH
ENTITY MAKES AN EXPLICIT AND UNRESERVET STATEMENT THAT ITS GENERAL PURPOSE FINANCIAL
STATEMENTS COMPLY WITH PHILIPPINE FINANCIAL REPORTING STANDARS.

FIRST PFRS FINANCIAL STATEMENTS

THE FIRST PFRS FINANCIAL STATEMENTS ARE THE FIRST ANNUAL STATEMENTS IN WHICH AN ENTITY
ADOPTS PFRS BY AN EXPLICIT AND UNRESERVED STATEMENT OF COMPLIANCE WITH PFRS

FINANCIAL STATEMENTS PRESENTED BY AN ENTITY IN THE CURRENT YEAR WOULD QUALIFY AS FIRST
PFRS FINANCIAL STATEMENTS UNDER THE FALLOWING CONDITIONS:

1. WHEN AN ENTITY PRESENTED ITS MOST RECENT PREVIOUS FINANCIAL STATEMENTS:

A. UNDER NATIONAL GAAP INCONSISTENT WITH PFRS IN ALL RESPECTS.
B. IN CONFORMITY WITH PFRS IN ALL RESPECTS BUT THESE STATEMENTS DID NOT CONTAIN
AN EXPLICIT AND UNRESERVED STATEMENT OF COMPLIANCE WITH PFRS.
C. CONTAINING AN EXPLICIT STATEMENT OF COMPLIANCE WITH SOME BUT NOT ALL PFRS.
D. UNDER NATIONAL GAAP WITH A RECONCILIATION OF SELECTED FIGURES TO AMOUNTS
DETERMINED UNDER PFRS.
2. WHEN AN ENTITY PREPARED FINANCIAL STATEMENTS IN THE PREVIOUS PERIOD UNDER PFRS
BUT THE FINANCIAL STATEMENTS WERE FOR INTERNAL USE ONLY.
3. WHEN AN ENTITY PREPARED FINANCIAL STATEMENTS IN THE PREVIOUS PERIOD UNDER PFRS
FOR CONSOLIDATION PURPOSES WITHOUT PREPARING A COMPLETE SET OF FINANCIAL
STATEMENTS.
4. WHEN AN ENTITY DID NOT PRESENT FINANCIAL STATEMENTS IN THE PREVIOUS PERIOD.

DATE TRANSITION TO PFRS

THE DATE OF TRANSITION TO PFRS REFERS TO THE BEGINNING OF THE EARLIEST PERIOD FOR WHICH AN
ENTITY PRESENTS FULL COMPARATIVE INFORMATION UNDER PFRS IN ITS FIRST PFRS FINANCIAL
STATEMENTS.
THE DATE OF TRANSITION TO PFRS DEPENDS ON TWO FACTORS, NAMELY:

A. THE DATE OF ADOPTION OF PFRS

B. THE NUMBER OF YEARS OF COMPARATIVE INFORMATION THAT AN ENTITY DECIDES TO PRESENT
TOGETHER WITH THE FINANCIAL STATEMENTS IN THE YEAR OF ADOPTION

OPENING PFRS STATEMENT FINANCIAL POSITION

AN OPENING PFRS STATEMENT OF FINANCIAL POSITION IS THE STATEMENT OF FINANCIAL POSITION BY

A FIRST TIME ADOPTER ON THE DATE OF TRANSITION TO PFRS.

THE OPENING PFRS STATEMENT OF FINANCIAL POSITION IS THE STARTING POINT FOR ACCOUNTING IN
ACCORDANCE WITH PFRS.

IN PREPARING THE OPENING STATEMENT OF FINANCIAL POSITION, AN ENTITY IS REQUIRED TO:

a. RECOGNIZE ALL ASSETS AND LIABILITIES REQUIRED BY PFRS

b. DERECOGNIZE ASSETS AND LIABILITIES NOT PERMITTED BY PFRS. UNDER PREVIOUS GAAP
c. RECLASSIFY ITEMS THAT IT RECOGNIZED AS ONE TYPE OF ASSET, LIABILITY OR EQUITY BUT A
DIFFERENT TYPE OF ASSET, LIABILITY OR EQUITY UNDER PFRS
d. MEASURE ALL RECOGNIZED ASSETS AND LIABILITIES IN COMPLIANCE WITH PFRS STATEMENT OF
FINANCIAL POSITION SHOULD RECOGNIZED

ANY ADJUSTMENTS REQUIRED TO PRESENT AN OPENING PFRS STATEMENT OF FINANCIAL POSITION

SHOULD BE RECOGNIZE IN RETAINED EARNINGS OR IF APPROPRIATE, IN ANOTHER COMPONENT OF
EQUITY.

FIRST PFRS FINANCIAL STATEMENTS

IF THE ENTITY ADOPTS PFRS FOR THE FIRST TIME IN THE CURRENT YEAR, ITS FIRST PFRS FINANCIAL
STATEMENTS INCLUDE THE FOLLOWING:

1. THREE STATEMENTS OF FINANCIAL POSITION AT THE END OF CURRENT YEAR, AT THE END OF
PRIOR YEAR AND AT THE DATE OF TRANSITION TO PFRS
2. TWO STATEMENTS OF COMPREHENSIVE INCOME FOR THE CURRENT YEAR AND PRIOR YEAR
3. TWO SEPARATE INCOME STATEMENTS FOR THE CURRENT YEAR AND PRIOR YEAR
4. TWO STATEMENTS OF CHANGES IN EQUITY FOR THE CURRENT YEAR AND PRIOR YEAR
5. TWO STATEMENTS OF CASH FLOWS FOR THE CURRENT YEAR AND PRIOR YEAR
6. NOTES TO FINANCIAL STATEMENTS INCLUDING COMPARATIVE INFORMATION

INSIGHT:
THIS STANDARD IS CREATED TO SETS OUT THE PROCEDURES THAT AN ENTITY MUST FOLLOW WHEN IT
ADOPTS PFRS FOR THE FIRST TIME AS THE BASIS FOR PREPARING ITS GENERAL PURPOSE FINANCIAL
STATEMENTS.

CHAPTER 23 – PROVISION, CONTINGENT LIABILITY AND ASSET (PAS 37)

PROVISION

PROVISION - IS AN EXISTING LIABILITY OF UNCERTAIN TIMING OR UNCERTAIN AMOUNT.

THE ESSENCE OF A PROVISION IS THAT THERE IS UNCERTAINTY ABOUT THE TIMING OR AMOUNT OF THE
FUTURE EXPENDITURE. IT IS THIS UNCERTAINTY THAT DISTINGUISHES PROVISION FROM OTHER
LIABILITIES. THE LIABILITY DEFINITELY EXISTS AT THE END OF REPORTING PERIOD BUT THE AMOUNT IS
INDEFINITE OR THE DATE WHEN THE OBLIGATION IS DUE IS ALSO INDEFINITE, AND IN SOME CASES, THE
PAYEE CANNOT BE IDENTIFIED OR DETERMINED.

ACTUALLY, A PROVISION MAY BE THE EQUIVALENT OF AN ESTIMATED LIABILITY OR A LOSS

CONTINGENCY THAT IS ACCRUED BECAUSE IT IS BOTH PROBABLE AND MEASURABLE.

RECOGNITION OF PROVISION

PAS 37, PARAGRAPH 14, PROVIDES THAT A PROVISION SHALL BE RECOGNIZED AS A LIABILITY IN THE
FINANCIAL STATEMENTS UNDER THE FOLLOWING CONDITIONS:

A. THE ENTITY HAS A PRESENT OBLIGATION, LEGAL OR CONSTRUCTIVE, AS A RESULT OF A PAST

EVENT.
B. IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES EMBODYING ECONOMIC BENEFITS WOULD
BE REQUIRED TO SETTLE THE OBLIGATION.
C. THE AMOUNT OF THE OBLIGATION CAN BE MEASURED RELIABLY.

PRESENT OBLIGATION

THE PRESENT OBLIGATION MAY BE LEGAL OR CONSTRUCTIVE IT IS FAIRLY CLEAR WHAT A LEGAL
OBLIGATION IS.

LEGAL OBLIGATION - AN OBLIGATION ARISING FROM LEGISLATION OR OTHER OPERATION OF LAW

CONSTRUCTIVE OBLIGATION - AN OBLIGATION THAT IS DERIVED FROM AN ENTITY'S ACTIONS WHERE:

A. THE ENTITY HAS INDICATED TO OTHER PARTIES THAT IT WILL ACCEPT CERTAIN RESPONSIBILITIES
BY REASON OF AN ESTABLISHED PATTERN OF PAST PRACTICE, PUBLISHED POLICY, OR A
SUFFICIENTLY SPECIFIC CURRENT STATEMENT
B. AND AS A RESULT, THE ENTITY HAS CREATED A VALID EXPECTATION ON THE PART OF OTHER
PARTIES THAT IT WILL DISCHARGE THOSE RESPONSIBILITIES.

OTHERWISE DEFINED, A CONSTRUCTIVE OBLIGATION EXISTS WHEN THE ENTITY FROM AN ESTABLISHED
PATTERN OF PRACTICE OR STATED POLICY HAS CREATED A VALID EXPECTATION THAT IT WILL ACCEPT
CERTAIN RESPONSIBILITIES.

PAST EVENT

OBLIGATING EVENT - THE PAST EVENT THAT LEADS TO A PRESENT OBLIGATION

AN ACCOUNTING PROVISION CANNOT BE CREATED IN ANTICIPATION OF A FUTURE EVENT.

THE EVENT MUST HAVE ALREADY OCCURRED WHICH GIVES RISE TO THE LEGAL OR CONSTRUCTIVE
OBLIGATION AN OBLIGATING EVENT IS AN EVENT THAT CREATES A LEGAL OR CONSTRUCTIVE
OBLIGATION BECAUSE THE ENTITY HAS NO REALISTIC ALTERNATIVE BUT TO SETTLE THE OBLIGATION
CREATED BY THE EVENT.

THIS IS THE CASE WHERE:

A. THE SETTLEMENT OF THE OBLIGATION CAN BE ENFORCED BY LAW.

B. THE EVENT CREATES VALID EXPECTATIONS ON THE PART OF OTHER PARTIES THAT THE ENTITY
WILL -DISCHARGE THE OBLIGATION, AS IN THE CASE OF A CONSTRUCTIVE OBLIGATION.

PROBABLE OUTFLOW OF ECONOMIC BENEFITS

FOR A PROVISION TO QUALIFY FOR RECOGNITION, THERE ONLY A PRESENT OBLIGATION BUT ALSO A
PROBABLE OUTFLOW OF RESOURCES EMBODYING ECONOMIC BENEFITS TO SETTLE THE OBLIGATION.

AN OUTFLOW OF RESOURCES IS REGARDED AS PROBABLE IF THE EVENT, IS MORE LIKELY THAN NOT TO
OCCUR, MEANING, THE PROBABILITY THAT THE EVENT WILL OCCUR IS GREATER THAN THE PROBABILITY
THAT IT WILL NOT OCCUR.

AS A RULE OF THUMB,

"PROBABLE" MEANS MORE THAN 50% LIKELY TO OCCUR.

"POSSIBLE" MEANS 50% LESS LIKELY TO OCCUR.
"REMOTE" MEANS 10% LESS LIKELY TO OCCUR OR VERY
SLIGHT OCCURRENCE.
RELIABLE ESTIMATE

PARAGRAPH 25 OF PAS 37 PROVIDES THAT THE USE OF ESTIMATES IS AN ESSENTIAL PART OF THE
PREPARATION OF FINANCIAL STATEMENTS AND DOES NOT UNDERMINE THEIR RELIABILITY. THIS IS
ESPECIALLY TRUE IN THE CASE OF PROVISION BECAUSE BY NATURE, A PROVISION IS MORE UNCERTAIN
THAT MOST ITEMS IN THE STATEMENT OF FINANCIAL POSITION. THE STANDARD SUGGESTS THAT BY
USING A RANGE OFPOS§IBLE OUTCOMES, AN ENTITY USUALLY WOULD BE ABLE TO MAKE AN ESTIMATE
OF THE OBLIGATION THAT IS SUFFICIENTLY RELIABLE.

WHERE NO RELIABLE ESTIMATE CAN BE MADE, NO LIABILITY IS RECOGNIZED.

MEASUREMENT OF PROVISION ROVISION

THE AMOUNT RECOGNIZED AS A PROVISION SHOULD BE THE BEST ESTIMATE OF THE EXPENDITURE
REQUIRED TO SETTLE THE PRESENT OBLIGATION AT THE END OF REPORTING PERIOD.

THE BEST ESTIMATE IS THE AMOUNT THAT AN ENTITY WOULD RATIONALLY PAY TO SETTLE THE
OBLIGATION AT THE END OF REPORTING PERIOD OR TO TRANSFER IT TO A THIRD PARTY AT THAT TIME.
WHEREAS A SINGLE OBLIGATION IS BEING MEASURED, THE INDIVIDUAL MOST LIKELY OUTCOME
ADJUSTED FOR THE EFFECT OF OTHER POSSIBLE OUTCOMES MAY BE THE BEST ESTIMATE. WHERE
THERE IS A CONTINUOUS RANGE OF POSSIBLE OUTCOMES AND EACH POINT IN THAT RANGE IS AS
LIKELY AS ANY OTHER, THE MIDPOINT OF THE RANGE IS USED. WHERE THE PROVISION BEING
MEASURED INVOLVES A LARGE POPULATION OF ITEMS, THE OBLIGATION IS ESTIMATED BY
"WEIGHTING" ALL POSSIBLE OUTCOMES BY THEIR ASSOCIATED POSSIBILITIES.

MEASUREMENT CONSIDERATIONS

THE FOLLOWING ITEMS ARE TAKEN INTO CONSIDERATION IN RECOGNIZING AND MEASURING A
PROVISION:

1. RISKS AND UNCERTAINTIES

2. PRESENT VALUE OF OBLIGATION
3. FUTURE EVENTS
4. EXPECTED DISPOSAL OF ASSETS
5. REIMBURSEMENTS
6. CHANGES IN PROVISION
7. USE OF PROVISION
8. FUTURE OPERATING LOSSES
9. ONEROUS CONTRACT

RISKS AND UNCERTAINTIES

THE RISKS AND UNCERTAINTIES THAT INEVITABLY SURROUND EVENTS AND CIRCUMSTANCES SHALL BE
TAKEN INTO ACCOUNT IN REACHING THE BEST ESTIMATE OF A PROVISION.

RISK DESCRIBES VARIABILITY OF OUTCOME.

A RISK ADJUSTMENT MAY INCREASE THE AMOUNT AT WHICH A LIABILITY IS MEASURED.

AS PRUDENCE DICTATES, CAUTION IS NEEDED IN MAKING JUDGMENT UNDER CONDITIONS OF

UNCERTAINTY SO THAT INCOME AND ASSETS ARE NOT OVERSTATED, OR EXPENSES AND LIABILITIES ARE
NOT UNDERSTATED.

HOWEVER, UNCERTAINTY DOES NOT JUSTIFY THE CREATION OF EXCESSIVE PROVISION OR A

DELIBERATE OVERSTATEMENT OF LIABILITIES.

PRESENT VALUE OF OBLIGATION

WHERE THE EFFECT OF THE TIME VALUE OF MONEY IS MATERIAL, THE AMOUNT OF PROVISION SHALL
BE THE PRESENT VALUE OF THE EXPENDITURE EXPECTED TO SETTLE THE OBLIGATION.

THE DISCOUNT RATE SHOULD BE A PRETAX RATE THAT REFLECTS THE CURRENT MARKET ASSESSMENT
OF THE TIME VALUE OF MONEY AND THE RISK SPECIFIC TO THE LIABILITY.

FUTURE EVENTS

FUTURE EVENTS THAT AFFECT THE AMOUNT REQUIRED SETTLING AN OBLIGATION SHALL BE REFLECTED
IN THE AMOUNT OF A PROVISION WHERE THERE IS SUFFICIENT EVIDENCE THAT THEY WILL OCCUR.

SUCH FUTURE EVENTS INCLUDE NEW LEGISLATION AND CHANGES IN TECHNOLOGY.

EXPECTECTED DISPOSAL OF ASSETS

GAINS FROM EXPECTED DISPOSAL OF ASSETS SHALL NOT BE TAKEN INTO ACCOUNT IN MEASURING A
PROVISION.

INSTEAD, AN ENTITY SHALL RECOGNIZE GAIN DISPOSAL AT THE TIME OF THE DISPOSAL OF THE ASSETS
DISPOSAL ARE TREATED. IN OTHER WORDS, ANY CASH INFLOWS FROM SEPARATELY FROM THE
MEASUREMENT OF THE PROVISION.

REIMBURSEMENTS

WHERE SOME OR ALL OF THE EXPENDITURE REQUIRED SETTLING A PROVISION IS EXPECTED TO BE

REIMBURSED BY ANOTHER PARTY, THE REIMBURSEMENT SHALL BE RECOGNIZED WHEN IT IS
VIRTUALLY CERTAIN THAT REIMBURSEMENT WOULD BE RECEIVED IF THE ENTITY SETTLES THE
OBLIGATION.
THE REIMBURSEMENT SHALL BE TREATED AS A SEPARATE ASSET AND NOT NETTED AGAINST THE
ESTIMATED LIABILITY FOR THE PROVISION.

THE AMOUNT OF REIMBURSEMENT SHALL NOT EXCEED THE AMOUNT OF THE PROVISION.

HOWEVER, IN THE INCOME STATEMENT, THE EXPENSE RELATING TO THE PROVISION MAY BE
PRESENTED NET OF THE REIMBURSEMENT.

CHANGES IN PROVISION

PROVISIONS SHALL BE REVIEWED AT EVERY END OF G THE REPORTING PERIOD AND ADJUSTED TO
REFLECT THE CURRENT BEST ESTIMATE.

THE PROVISION SHALL BE REVERSED IF IT IS NO LONGER PROBABLE THAT AN OUTFLOW OF ECONOMIC

BENEFIT IS BE REQUIRED TO SETTLES THE OBLIGATION.

WHERE DISCOUNTING IS USE PROVISION INCREASES EACH PERIOD TO REFLECT THE PASSAGE OF TIME.

USE OF PROVISION

A PROVISION SHALL BE USED ONLY FOR EXPENDITURES FOR WHICH THE PROVISION WAS ORIGINALLY
RECOGNIZED. FOR EXAMPLE, A PROVISION FOR PLANT DISMANTLEMENT CANNOT BE USED TO ABSORB
ENVIRONMENTAL POLLUTION CLAIMS OR WARRANTY PAYMENTS.

IF AN EXPENDITURE IS CHARGED AGAINST A PROVISION THAT WAS ORIGINALLY RECOGNIZED FOR

ANOTHER PURPOSE, THAT WOULD CAMOUFLAGE THE IMPACT OF TWO DIFFERENT EVENTS, THUS
DISTORTING FINANCIAL PERFORMANCE AND POSSIBLY CONSTITUTING FINANCIAL REPORTING FRAUD.

FUTURE OPERATING LOSSES

PROVISION SHALL NOT BE RECOGNIZED FOR FUTURE OPERATING LOSSES.

IN OTHER WORDS, A PROVISION FOR OPERATING LOSSES IS NOT RECOGNIZED BECAUSE A PAST EVENT
CREATING A PRESENT OBLIGATION HAS NOT OCCURRED.

ONEROUS CONTRACT

IF AN ENTITY HAS AN ONEROUS CONTRACT, THE PRESENT OBLIGATION UNDER THE CONTRACT SHALL
BE RECOGNIZED AND MEASURED AS A PROVISION.

AN ONEROUS CONTRACT IS A CONTRACT IN WHICH THE UNAVOIDABLE COSTS OF MEETING THE

OBLIGATION UNDER THE CONTRACT EXCEED THE ECONOMIC BENEFITS EXPECTED TO BE RECEIVED
UNDER IT.

PAS 37, PARAGRAPH 68, MANDATES THAT THE UNAVOIDABLE COSTS UNDER A CONTRACT REPRESENT
THE LEAST NET COST OF EXITING FROM THE CONTRACT.
THE LOWER AMOUNT BETWEEN THE COST OF FULFILLING THE CONTRACT AND THE COMPENSATION OR
PENALTY ARISING FROM FAILURE TO FULFILL THE CONTRACT IS THE LEAST COST OF EXITING FROM THE
CONTRACT.

EXAMPLES OF PROVISION

1. WARRANTIES — THE BEST ESTIMATE OF THE WARRANTY COST IS RECOGNIZED AS A PROVISION

BECAUSE THERE IS A CLEAR CONSTRUCTIVE OBLIGATION ARISING FROM AN OBLIGATING EVENT
WHICH IS THE SALE OF THE PRODUCT WITH WARRANTY
2. ENVIRONMENTAL CONTAMINATION — IF AN ENTITY HAS AN ENVIRONMENTAL POLICY SUCH
THAT OTHER PARTIES WOUFTI EXPECT THE ENTITY TO CLEAN UP ANY CONTAMINATION, OR IF
THE ENTITY HAS BROKEN CURRENT ENVIRONMENTAL LEGISLATION THEN A PROVISION FOR
ENVIRONMENTAL DAMAGE SHALL BE MADE. THE OBLIGG EVENT IS THE CONTAMINATION OF
THE PROPERTY ATIN WHICH GIVES RISE TO CONSTRUCTIVE OR LEGAL OBLIGATION. A
PROVISION IS RECOGNIZED FOR THE BEST ESTIMATE OF THE COST OF CLEANING UP THE
CONTAMINATION.
3. DECOMMISSIONING OR ABANDONMENT COSTS — WHEN AN OIL ENTITY INITIALLY PURCHASES
AN OIL FIELD, IT IS PUT UNDER A LEGAL OBLIGATION TO DECOMMISSION THE SITE AT THE END
OFTHE LIFE. THE COSTS OF ABANDONMENT OR &COMMIS&ORIIN SHALL BE RECOGNIZED AS A
PROVISION.
4. COURT CASE - AFTER A WEDDING IN THE CURRENT YEAR, TEN PEOPLE DIED POSSIBLY AS A
RESULT OF FOOD POISONING FROM PRODUCTS SOLD BY THE ENTITY. LEGAL PROCEEDINGS ARE
STARTED SEEKING DAMAGES FROM THE ENTITY.
WHEN THE ENTITY PREPARES THE FINANCIAL STATEMENTS FOR THE CURRENT YEAR, THE
LAWYERS ADVISE THAT OWING TO THE DEVELOPMENTS IN THE CASE, IT IS PROBABLE THAT THE
ENTITY WOULD BE FOUND LIABLE. A PROVISION IS RECOGNIZED FOR THE BEST ESTIMATE OF
THE DAMAGES BECAUSE THERE IS A PRESENT OBLIGATION.
5. GUARANTEEE — IN THE CURRENT YEAR, AN ENTITY GIVES A GUARANTEE OF CERTAIN
BORROWINGS OF ANOTHER ENTITY. DURING THE YEAR, THE FINANCIAL CONDITION OF THE
BORROWER DETERIORATES AND AT YEAR-END, THE BORROWER FILES A PETITION FOR
BANKRUPTCY. A PROVISION IS RECOGNIZED FOR THE BEST ESTIMATE OF THE GUARANTEE
OBLIGATION BECAUSE THERE IS LEGAL OBLIGATI" ARISING FROM THE OBLIGATING EVENT
WHICH IS THE GUARANTEE.

CONTINGENT LIABILITY

PAS 37, PARAGRAPH 10, DEFINES A CONTINGENT LIABILITY IN TWO WAYS:

A CONTINGENT LIABILITY IS A POSSIBLE OBLIGATION THAT ARISES FROM PAST EVENT AND WHOSE
EXISTENCE WILL BE CONFIRMED ONLY BY THE OCCURRENCE OR NONOCCURRENCE OF ONE OR MORE
UNCERTAIN FUTURE EVENTS NOT WHOLLY WITHIN THE CONTROL OF THE ENTITY.

A CONTINGENT LIABILITY IS A PRESENT OBLIGATION THAT ARISES FROM PAST EVENT BUT IS NOT
RECOGNIZED BECAUSE IT IS NOT PROBABLE THAT AN OUTFLOW OF RESOURCES EMBODYING
ECONOMIC BENEFITS WILL BE REQUIRED TO SETTLE THE OBLIGATION OR THE AMOUNT OF THE
OBLIGATION CANNOT BE MEASURED RELIABLY.

CONTINGENT LIABILITY AND PROVISION

THE SECOND DEFINITION STATES THAT A CONTINGENT LIABILITY IS A PRESENT OBLIGATION.

HOWEVER, THE PRESENT OBLIGATION IS EITHER PROBABLE OR MEASURABLE BUT NOT BOTH TO BE
CONSIDERED A CONTINGENT LIABILITY.

IF THE PRESENT OBLIGATION IS PROBABLE AND THE AMOUNT CAN BE MEASURED RELIABLY, THE
OBLIGATION IS NOT A CONTINGENT LIABILITY BUT SHALL BE RECOGNIZED AS A PROVISION.

TREATMENT OF CONTINGENT LIABILITY

A CONTINGENT LIABILITY SHALL NOT BE RECOGNIZED IN THE FINANCIAL STATEMENTS BUT SHALL BE
DISCLOSED ONLY. THE REQUIRED DISCLOSURES ARE:

A. BRIEF DESCRIPTION OF THE NATURE OF THE CONTINGENT LIABILITY.

B. AN ESTIMATE OF ITS FINANCIAL EFFECTS.
C. AN INDICATION OF THE UNCERTAINTIES THAT EXIST.
D. POSSIBILITY OF ANY REIMBURSEMENT.

IF A CONTINGENT LIABILITY IS REMOTE, NO DISCLOSURE IS NECESSARY.

CONTINGENT ASSET

PAS 37, PARAGRAPH 10, DEFINES CONTINGENT ASSET AS A POSSIBLE ASSET THAT ARISES FROM PAST
EVENT AND WHOSE EXISTENCE WILL BE CONFIRMED ONLY BY THE OCCURRENCE OR NONOCCURRENCE
OF ONE OR MORE UNCERTAIN FUTURE EVENTS NOT WHOLLY WITHIN THE CONTROL OF THE ENTITY.

A CONTINGENT ASSET SHALL NOT BE RECOGNIZED BECAUSE THIS MAY RESULT TO RECOGNITION OF
INCOME THAT MAY NEVER BE REALIZED.

HOWEVER, WHEN THE REALIZATION OF INCOME IS VIRTUALLY CERTAIN, THE RELATED ASSET IS NO
LONGER CONTINGENT ASSET AND ITS RECOGNITION IS APPROPRIATE.

A CONTINGENT ASSET IS ONLY DISCLOSED WHEN IT IS PROBABLE. THE DISCLOSURE INCLUDES A BRIEF
DESCRIPTION OF THE CONTINGENT ASSET AND AN ESTIMATE OF ITS FINANCIAL EFFECTS.

IF A CONTINGENT ASSET IS ONLY POSSIBLE OR REMOTE, NO DISCLOSURE IS REQUIRED.

INSIGHTS:
FOR ME, THIS STANDARD IS CREATED TO ENSURE THAT APPROPRIATE RECOGNITION CRITERIA AND
MEASUREMENT BASES ARE APPLIED TO PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT
ASSETS.

CHAPTER 34 – EXPLORATION AND EVALUATION OF MINERAL RESOURCES (PFRS 6)

EXPLORATION AND EVALUATION

MINERAL RESOURCES INCLUDE MINERALS, OIL, NATURAL GAS AND SIMILAR NONREGENERATIVE.

EXPLORATION AND EVALUATION OF MINERAL RESOURCES - IS THE SEARCH FOR MINERAL RESOURCES
AFTER THE ENTITY I HAS OBTAINED LEGAL RIGHT TO EXPLORE IN A SPECIFIC AREA AS WELL AS THE
DETERMINATION OF THE TECHNICAL FEASIBILITY AND COMMERCIAL .ABILITY OF EXTRACTING THE
MINERAL RESOURCES.

EXPLORATION AND EVALUATION EXPENDITURES ARE EXPENDITURES INCURRED BY AN ENTITY IN

CONNECTION WITH THE EXPLORATION AND EVALUATION OF MINERAL RESOURCES BEFORE THE
TECHNICAL FEASIBILITY AND COMMERCIAL VIABILITY OF EXTRACTING A MINERAL RESOURCE.

SIMPLY STATED, EXPLORATION COST IS THE COST INCURRED IN AN ATTEMPT TO LOCATE THE NATURAL
RESOURCE THAT CAN ECONOMICALLY BE EXTRACTED.

ACCORDINGLY, EXPLORATION AND EVALUATION EXPENDITURES DO NOT INCLUDE EXPENDITURES

INCURRED:

A. BEFORE AN ENTITY HAS OBTAINED THE LEGAL RIGHT TO EXPLORE A SPECIFIC AREA.
B. AFTER THE TECHNICAL FEASIBILITY AND COMMERCIAL VIABILITY OF EXTRACTING A MINERAL
RESOURCE ARE DEMONSTRABLE.

THIS PERTAINS TO DEVELOPMENT EXPENDITURE.

 EXPENDITURES RELATED TO DEVELOPMENT OF MINERAL RESOURCES, FOR EXAMPLE,
PREPARATION FOR COMMERCIAL PRODUCTION, SUCH AS BUILDING ROADS AND TUNNELS,
CANNOT BE RECOGNIZED AS EXPLORATION AND EVALUATION EXPENDITURES.
DEVELOPMENT COST IS THE COST INCURRED TO EXTRACT THE NATURAL RESOURCE THAT HAS
BEEN LOCATED THROUGH SUCCESSFUL EXPLORATION.

EXPLORATION AND EVALUATION EXPENDITURES

A. ACQUISITION OF RIGHTS TO EXPLORE

B. TOPOGRAPHICAL, GEOLOGICAL, GEOCHERNICAL AND GEOPHYSICAL STUDIES
C. EXPLORATORY DRILLING
D. TRENCHING
E. AMPLING
F. ACTIVITIES IN RELATION TO EVALUATING THE TECHNICAL FEASIBILITY AND COMMERCIAL
VIABILITY OF EXTRACTING A MINERAL RESOURCE.
G. GENERAL AND ADMINISTRATIVE COSTS DIRECTLY ATTRIBUTABLE TO EXPLORATION AND
EVALUATION ACTIVITIES.

EXPLORATION AND EVALUATION ASSET

THE EXPLORATION AND EVALUATION EXPENDITURES MAY QUALIFY AS EXPLORATION AND EVALUATION
ASSET. HOWEVER, THE STANDARD DOES NOT PROVIDE CLEARCUT GUIDANCE FOR THE RECOGNITION
OF EXPLORATION AND EVALUATION ASSET.

ACCORDINGLY, AN ENTITY MUST DEVELOP ITS OWN ACCOUNTING POLICY FOR THE RECOGNITION OF
SUCH ASSET. AS A MATTER OF FACT, IFRS 6 PERMITS AN ENTITY TO CONTINUE TO APPLY ITS PREVIOUS
ACCOUNTING POLICY PROVIDED THAT THE RESULTING INFORMATION IS RELEVANT AND RELIABLE.

MEASUREMENT AND CLASSIFICATION

EXPLORATION AND EVALUATION ASSET SHALL BE MEASURED INITIALLY AT COST.

AFTER INITIAL RECOGNITION, AN ENTITY SHALL APPLY EITHER THE COST MODEL OR THE REVALUATION
MODEL. EXPLORATION AND EVALUATION ASSET IS CLASSIFIED EITHER AS TANGIBLE ASSET OR AN
INTANGIBLE ASSET.

EXAMPLE: VEHICLES AND DRILLING RIGS WOULD BE CLASSIFIED AS TANGIBLE ASSETS AND DRILLING
RIGHTS WOULD BE CLASSIFIE AS INTANGIBLE ASSETS.

TWO METHODS OF ACCOUNTING FOR EXPLORATION COST

A. SUCCESSFUL EFFORT METHOD

THE EXPLORATION COST DIRECTLY RELATED TO THE DISCOVERY OF COMMERCIALLY PRODUCIBLE
NATURAL RESOURCE IS CAPITALIZED AS COST OF THE RESOURCE PROPERTY.

THE EXPLORATION COST RELATED TO "DRY HOLES" OR UNSUCCESSFUL DISCOVERY IS EXPENSED IN THE
PERIOD INCURRED.

B. FULL COST METHOD

ALL EXPLORATION COSTS, WHETHER SUCCESSFUL OR UNSUCCESSFUL, ARE CAPITALIZED AS COST OF THE
SUCCESSFUL RESOURCE DISCOVERY. THIS IS ON THE THEORY THAT ANY EXPLORATION COST IS A "WILD
GOOSE CHASE" AND THEREFORE NECESSARY BEFORE ANY COMMERCIALLY PRODUCIBLE AND
PROFITABLE RESOURCE CAN BE FOUND. THE COST OF DRILLING DRY HOLES IS PART OF THE COST OF
LOCATING PRODUCTIVE HOLES. BOTH METHODS ARE USED IN PRACTICE.

MOST LARGE AND SUCCESSFUL OIL ENTITIES FOLLOW THE SUCCESSFUL EFFORT METHOD.

THE FULL COST METHOD IS POPULAR AMONG SMALL OIL ENTITIES.

INSIGHT: I THINK THE REASON FOR THE CREATION OF THIS STANDARD IS TO PROVIDE A GUIDELINE ON
HOW TO ACCOUNT THE EXPLORATION AND EVALUATION OF MINERAL RESOURCES. THE CREATION OF
THIS STANDARD WILL HELP MINING COMPANIES .

AN ENTITY FREQ
NVERTIBLE BOND
CONVERTIBLE BO