Philippine Accounting Standards Compilation

In Partial Fulfillment of the Requirements for the Subject Financial Accounting and Reporting
(Bachelor of Science In Accountancy 201)

Submitted by:

Jessica Lyka Aquino

Submitted to:

Eric Ama
 Table of Contents

PAS# TITLE EFFECTIVITY DATE

1 (Revised) Presentation of financial January 1, 2009
statements
2 Inventories January 1, 2005
7 Statement of cash flows January 1, 2005
8 Accounting policies changes in January 1, 2005
accounting estimates and
errors
10 Events after reporting period January 1, 2005
11 Construction contracts January 1, 2005
12 Income taxes January 1, 2005
16 Property, plant and January 1, 2005
equipment
17 Leases January 1, 2005
18 Revenue January 1, 2001
19 (Revised) Employee benefits January 1, 2013
20 Accounting for government January 1, 2005
grant and disclosure of
government assistance
21 The Effects of Changes in January 1, 2005
Foreign Exchange Rate
23 (Revised) Borrowing cost January 1, 2009
24 (Revised) Related party disclosure January 1, 2011
26 Accounting Reporting by January 1, 2005
Retirement Benefit Plans
27 (Amended) Separate Financial Statement January 1, 2013
28 (Amended) Investment in associates and January 1, 2013
Joint Ventures
29 Financial reporting January 1, 2005
hyperinflationary economy
31 Interest in Joint Ventures January 1, 2005
32 Financial instruments - January 1, 2007
presentation
33 Earnings per share January 1, 2005
34 Interim financial reporting January 1, 2005
36 Impairment of assets January 1, 2005
37 Provisions, contingent January 1, 2005
liabilities and contingent
assets
38 Intangible assets January 1, 2005
39 Financial instruments: January 1, 2005
recognition and measurement
40 Investment property January 1,2005
41 Agriculture January 1, 2005
Philippine Accounting Standard #1

Preparation of Financial Statements

Financial statements are the means by which the information accumulated and
processed in financial accounting is periodically communicated to the users.

The financial statements are the end product or main output of the financial
accounting process.

Financial statements are a structured financial representation of the financial

position and financial performance of an entity.

Objective of PAS 1

 PAS 1 prescribe the basis for presentation of general-purpose financial

statements to improve comparability both with the financial statements
of previous periods and with the financial statements of other entities.
 The standard set out the following:
- Overall requirements for the presentation of financial statements
- Guidelines for their structure: and
Minimum requirements for their content

General purpose of financial statements

General purpose of financial statements or simply referred to as financial

statements are those intended to meet the needs of users who are not in a
position to require an entity to prepare reports tailored to their particular
information needs.

SCOPE

 The standard shall be applied to all general purpose financial prepared and
presented in accordance with International Financial Reporting Standards
(IFRSs).
 General purpose financial statements are those that are intended to meet
the needs of the users who are not in a position to demand reports tailored
to meet their information needs.
Components of financial statement

A complete set of financial statements comprises the following components:

1. Statement of the financial position

2. Income statement
3. Statement of the comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other
explanatory notes.
Frequency of Reporting – an entity shall present a complete set of financial statement
(including comparative information at least annually. When an entity changes the end of
its reporting period and present financial statement for a period longer or shorter than
one (1) yea, an entity shall disclose the following;

 The period covered by the financial statements.

 The reason for using a longer and shorter period; and
 The facts that amounts presented in the financial statements are not
entirely comparable.

Objective of financial statements

The objective of financial statements is to provide information about the financial

position, financial performance and cash flows of an entity that is useful to wide
range of users in making economic decisions.

To meet the objectives of the financial statement provide the information about
the following:

a. Assets
b. Liabilities
c. Equity
d. Income and expenses, including gains and losses
e. Contribution by and distributions to owners in their capacity as owners.
f. Cash flows

Statement of Financial Position

Investors, creditors and other statement users analyze the statement of financial
position to evaluate such factors as liability, solvency and the need of the entity
for additional financing.

Forms of Statement of Financial Position

In practices, there are two customary forms in presenting the statement of
financial position namely:

Report form
This form sets forth the three major sections in a downward sequence of assets,
liabilities and equity.

Account form
As the title suggest, the presentation follows that of an account, meaning the
assets are shown on the left side and the liabilities and equity on the right side of 
the statement of financial statement..

Line items in the statement of the financial position

PAS 1 paragraph 54, states that as a minimum, the face of the statement of
financial position shall include the following line items:
1.  Cash and cash equivalents
2. Financial assets (other than 1, 3 and 6)
3.Trade and other receivables
4. Inventories
5.Property, plant and equipment
6.Investment in associates accounted for by the equity method.
7. Intangible assets
8.Investment property
9.Biological assets
10. Total of assets classified as held for sale and assets included in disposal group
classified as held for sale.
11. Trade and other payables
12. Current tax liability
13.Deffered tax asset and deferred tax liability
14. Provisions
15.Financial liabilities (other than 11and 4)
16.Liabilities included in disposal group classified as held for sale.
17. Non-controlling interest
18. Share capital and reserves.

Income Statement

An income statement is a formal statement showing the financial performance of

an entity for a given period of time.

Comprehensive Income

Comprehensive income is the change in equity during a period resulting from

transactions and other events, other than changes resulting from transactions
with owners in their capacity as owners.
Accordingly comprehensive income includes:
1. Components of profit or loss
2. Components of other comprehensive income
Profit or Loss
The term profit or loss is the total of income less expenses excluding the
components of other comprehensive income.
An entity may use "net income" or "net loss" to describe profit or loss.

Other comprehensive income (OCI)

Other comprehensive income comprises  items of income and expenses including
reclassification adjustments that are not recognized in profit or loss  as requiredor
permitted by Philippine Financial Reporting Standards.

Presentation of other comprehensive income

PAS 1 , paragraph 82A l, provides that the statement of comprehensive income

shall present line items for amounts of other comprehensive income during the
period classified by nature

The line items  for amounts of OCI shall be grouped as follows:

• OCI that will be reclassified subsequently to profit or loss when specific
conditions are met.
• OCI that will not be reclassified subsequently to profit or loss but to retained
earnings.
Presentation of comprehensive income

An entity has two options of presenting comprehensive income, namely

1. Two statements:
• An income statement showing the components of profit or loss
• A statement of comprehensive income beginning with profit or loss as shown in
yhe income statement plus or minus the components of other comprehensive
income.
1. Single statement of comprehensive income

This is the combined statement showing the components of profit or loss and
components of other comprehensive income in a single statement.
The Revised Conceptual Framework calls this single statement as Statement of
financial performance

Current Assets – an entity shall classify as assets as current when

 Expect to realize the asset
 It holds the assets primarily to purpose of trading
 Assets within 12 months before the reporting period
  Assets is cash or cash equivalent

Non- Current Assets – assets that do not meet the definition of current assets.
Examples of this are, machinery, land, equipment, and building.

Current Liabilities – an entity shall classify a liability current when:

 It expects to settle the liability in its normal operating cycle.

 It holds the liability primarily for the purpose of trading.
 The liability is due to be settled within 12 months
 Does not have an unconditional right to differ settlement of the
liability

Non-Current Liabilities – assets that do not have meet the definition of current
liabilities. Examples: of this type of liabilities are bonds payable and mortgage payable.

Forms of statements of financial position

Account Form – this form provides information horizontally. It has two (2) columns; the
left list all the assets of the company while the right columns list both liabilities and
equity.

Report Form – this form provides information vertically, this starts with assets, then a
list of a total liabilities, followed by the equity, and ends with the final line totaling the
liabilities and equity of the entity.

STATEMENT OF COMPREHENSIVE INCOME

Definition of Income Statement – operation of the business and shows the revenues
and expenses of a particular period.

Definition of Comprehensive Income – it is a financial report detailing the change

in a company’s net assets during a specific period of time.

Components of Other Comprehensive Income

  Changes in revaluation surplus
 Remeasurement of defined benefit plans
 Gains and losses arising from translating the financial statements of the
foreign operation
 Gains and losses from investments in equity instruments designated fair
value through other comprehensive income.
 Gains and loses on financial assets measured at fair value through other
comprehensive income.
 The effective portion of gains and losses on hedging instruments in a
cash flow hedge and the gains and losses on hedging instruments that
hedge investments in equity instruments measured at fair value through
other comprehensive income.
 For particular liabilities designated as a fair value through profit or loss ,
the amount of the change in fair value that is attributable to changes in
the liability’s credit risks.
 Changes I the value of the time value of options when separating intrinsic
value and time value of an option contract and designating as the
hedging instrument only the changes in the intrinsic value; and
 Changes in the value of the forward elements of forward contracts when
separating the forward element and spot element of a forward contract
and designating as the hedging instrument only the changes in the spot
element, and changes in the value of the foreign currency basis spread of
ah financial instruments when excluding it from the designation of the
financial instruments as the hedging instruments.

Line Items of Statements of Comprehensive Income

Profit or loss Section are the following:

a. Revenue, presenting separately interest revenue calculated using the effective
interest method.
b. Gains and losses arising from the derecognition of financial assets measured at
amortized cost.
c. Finance costs.
d. Impairment losses
e. Share of the profit or loss of associates and joint ventures accounted for using the
equity method.
f. Financial assets is reclassified out of the amortized cost measurement
g. If the financial asset is reclassified out of the fair value
h. Tax Expense; and
i. A single amount for the total of discounted operations
Forms of Income Statement

PAS 1, paragraph 99, provides that an entity shall present an analysis of expenses
recognize in profit or loss using a classification based on either the function of
expenses or their nature within the entity, whichever provides information that
us reliable and more relevant.
Functional presentation

This form classifies expenses according to their function as part of cost of good
sold, distribution costs, administrative expenses and other expenses.

The functional presentation us also known as the cost of good sold method.

An entity classifying expenses by function shall disclose additional information  on

the nature of expenses, including depreciation, amortization and employee
benefit cost.

Natural presentation

The natural presentations referred to as the nature expense method.

 
In other words the expense are no longer classified as cost of good sold,
distribution costs, administrative expenses and other expenses. 

Statement of retained earnings

The statement of retained earnings shows the changes affecting directly the

retained earnings of an entity and relates the income statement to the statement
of financial position.
OTHER FINANCIAL STATEMENTS
 Statements of Changes in Equity – The standards that the statements of changes
in equity includes the following information

 Total comprehensive income for the period,

 For each component of equity, the effects that retrospective application or
retrospective restatement recognized.;
 For each component of equity, a reconciliation between the carrying amount at
the beginning and the end of the period ,separately (as a minimum)disclosing
changes resulting from:
i. Profit or loss
ii. other comprehensive income; and

iii. Transactions with owners in their capacity as owners, showing separately

contributions by and distributions to owners and changes on ownership interest in
subsidiaries that do not result I a loss of control

 Statements of Cash Flows - basis to asses the ability of the entity to generate cash
and cash equivalents and the needs of the entity to utilize those cash flows. This
type of financial statements is presented using the cash basis of accounting.

 Notes to Financial Statements – accompanying the numerical data listed on the

financial statements

Philippine Accounting Standard #2

INVENTORIES
Inventories are assets held for sale in the ordinary course of business in the
process of production for such sale or in the form of materials or supplies to be
consumed in the production process or in the rendering of services.

Objective of PAS 2

is to prescribe the accounting treatment for inventories. It provides

guidance for determining the cost of inventories and for subsequently recognizing
an expense, including any write- down to net realizable value. It also provides
guidance on the cost formulas that are used to assign costs to inventories.

SCOPE
Inventories include assets held for sale in the ordinary course of
business (finished goods), assets in the production process for sale in the ordinary
course of business (work in process), and materials and supplies that are
consumed in production (raw materials

Inventories encompasses goods purchased and held for resale for example,

 Merchandise purchased by a retailer and held for resale.

 Land and other property held for resale by a subdivision entity and real
estate developer.

Classes of Inventories

Inventories are broadly classified into two, namely inventories of a trading

concern and inventories of manufacturing concern.

A trading concern is one that buys and sells goods in the same form purchased.

The term "Merchandise inventory" is generally applied to goods held by a trading

concern.

A manufacturing concern is one that buys goods which are altered or converted
into another form before they are made available for sale.
The inventories of a manufacturing concern are:

• Finished goods

• Goods in process

• Raw materials

• Factory or manufacturing supplies

Three (3) Inventory Accounts

 Raw Materials – Goods and materials on hand not yet placed into
production.
 Work in Process Inventory – unfinished products or goods still under the
production process. The cost of these units also comprises the direct labor
cost applied and the manufacturing overhead cost.

Finished goods Inventory – includes completed but unsold unit on hand.

Goods Included in Inventory

1. Goods in Transit - merchandise that remains in transit at the end of the fiscal
period. Proper accounting of these goods depends on who has the control over
the goods. The passage of title rule is applicable in this situation.

The Following shipping terms essential in identifying the legal title over the
goods:
 FOB Shipping point - passes to buyer the moment the seller delivers the
good to the common carrier, who acts as an agent for the buyer.
 FOB destination - passes to the buyer only when it receives the goods
from the common carrier.
 Free alongside (FAS) - transferred from the seller to the buyer at a named
port alongside the vessel designated by the buyer
 Cost, insurance, and freight (CIF)- the buyers agree to pay all the cost of
goods, insurance cost, and freight.

Freight Terms
  Freight collect - means that the carrier will collect the cost of transporting
the goods to the buyer.
 Freight prepaid - means that the seller already pays the freight cost on
the good shipped.

2. Consigned goods - goods under consignment arrangement. For example, under

this arrangement, a company (the consignor) ships various art merchandise to another
company (the consignee), who acts as an agent in selling the consigned goods. These
goods remain the property of the consignor.

3 Segregated goods - specifically ordered or manufactured goods based on the

customer’s preference. These goods, once completed, shall be considered sold and
excluded from the inventory of the seller.

4 Conditional sale and installment sale - already passed to the buyer.

5 Good sold with buyback agreement - goods are still part of the inventory of
the seller.

6 Goods sold with refund offers - returns are predictable, goods are excluded
from the inventories of the seller. If not, retained as part of the inventory

Cost of Inventories

The Cost of Inventories Shall Comprises:

COST OF INVENTORIES
Shall be measured at the lower of cost and net realizable value. The cost of
inventories shall comprise all costs of purchase, costs of conversion, and other
costs incurred in bringing the inventories to their present location and condition.

 Cost of Purchase - These include purchase price, import duties and

other taxes (other than those subsequently recoverable by he entity
from the taxing authorities), and transport, handling and other costs
directly attributable to the acquisition of finished goods , materials, and
services. Trade discounts, rebates and other similar items are
deducted in determining costs of purchase.
 Cost of Conversion - directly are related to the units of product on,
such as direct labor. Also, these includes a systematic allocation of
 fixed and variable production overheads are those indirect cost of
production that relatively constant regardless of the volume of
production, such as depreciation and maintenance of factory buildings
and equipment, right of use assets used in the production process ,and
the cost of factory of management and administration. Variable
production overheads are those indirect costs of production that vary
directly, or nearly directly, with the volume of production such as
indirect materials and indirect labor.
 Other costs - are cost included in the cost of inventories only to the
extent that they are incurred in bringing the inventories to their present
location and condition.

Example of cost Excluded from the costs of inventories

 Abnormal amounts of wasted materials, labor or other production costs.

 Storage costs, unless are necessary in the production process before a further
production stage.
 Administrative overheads that do not contribute to bringing inventories to their
present location and condition; and
 Selling costs.

Cost Formulas

PAS 2, paragraph 25, expressly, provides that the cost of inventories shall be
determined by using either:

• Firsth in, first out

• Weighted average

First in, first out (FIFO)

The rule is “First come, first sold"

In other words the FIFO is in accordance with the ordinary merchandising

procedure that tje goods are sold in the order they are purchased.

Weighted Average
 The cost of the of the beginning inventory plus the totalcost of purchases during
the period is divided by the total units purchased plus those in the beginning
inventory to get a weighted average unit cost.

Last In, First Out (LIFO)

The LIFO method assumes that the goods last purchased are first sold and
consequently the goods remaining inthe inventory at the end of the period are
those first purchased or produced.

Specific Identification

PAS 2 , paragraph 23, provides that this method is appropriate for inventories
that are segregated for a specific project and inventories that are not ordinarily
interchangeable.

Measurement of Inventory

PAS 2, Paragraph 9, provides that inventories shall be measured at the lower of

cost and net realizable value.

Net Realizable Value

Net realizable value or NRV is the estimated selling price in the ordinary course of
business less than the estimated cost of completion and the estimated cost of
disposal.

Accounting for Inventory Write Down

The write down of inventory tp net realizable value is accounted for using the
allowance method.

Allowance Method

PAS 2, paragraph 36, requires disclosure of the amount of any inventory write
down and the amount of any reversal of inventory write down.

Philippine Accounting Standard #7

Statement of Cashflows

A statement of cashflows in a componentbof financial statements summarizing

the operating, investing and financing activities of an entity.

Objective of PAS 7

To require the provision of information about the historical changes in the

cash and cash equivalents of an entity by means of a statement of cash
flows that classifies cash flows during the period from operating,
investing, and financing activities.

SCOPE

Prepare a statement of cash flows in accordance with the requirements

of this Standard, and shall present it as an integral part of its Financial
Statements for each period for which FS are presented

Philippine accounting Standards7 (PAS7) or statements of cash flows (IAS

7) is the standards that provides guidance in preparing the statements of
cash flows.

 Statements of Cash Flows – this is the financial statements that provide

information to users with a basis to assess the ability of the entity to f an
generate cash and cash equivalents and the needs of the entity to utilize those
cash flows. The economic decisions that are taken by users require an
evaluation of the ability of an entity to generate cash and cash equivalent and the
timing and certainty of their generation.

Cash and Cash Equivalents

 Cash – it comprises cash on hand and demand comprises

  Cash Equivalent – these are short term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.

Cash equivalents - are held to meet short term cash for commitments rather than
investment for other purposes. Therefore, an investments normally qualifies as a cash
equivalent only when it has a short maturity of, say , three (3) months or less from the
date of acquisition.

PAS 7, paragraph 7 provides that an investment normally qualifies as a cash

equivalent only when it has a short maturity of three months or less from date of
acquisitions.

Different Activities in the Statements of Cash Flows

 Operating Activities – these are principal revenue producing activities of an

entity. Therefore, cash flows from operating activities generally result from the
transactions and other events that enter the determination of profit or loss.
 Investing Activities – activities in which expenditures have been made for
resources intended to generate future income and cash flows. Only expenditures
that result in a recognized asset in the statement of financial position are eligible
for classification as investing activities.
 Financing Activities – are activities where the company gets its funds, such as
investment of providers of capital to the entity.
 Trading activities- PAS 7, paragraph 15 provided that cash flows arising
from the purchase and sale of dealing or tradung securities are classified as
operating activities.
Reporting
An entity shall report cash flows from operating activities using either:

 Direct Method – whereby major classes of gross cash receipts and gross cash
payments are disclosed.
 Indirect Method – whereby profit or loss is adjusted for the effects of transactions
of non -cash nature, any deferrals or accruals of past of future operating cash
receipts or payments, and items of income or expense associated with investing
or financing cash flows.
 In other words financing activities are the cash flows that result from
transactions:
1. Between entity and the owners - equity financing
2. Between the entity and the creditors - debt financing

 Non cash  transactions

PAS 7, paragraph 43 provides that investing and financing transactions that

do not require use of cash or cash equivalents shall be excluded from the
statement of cash flows.

Interest

PAS 7, paragraph 33, provides that interest paid and interest received shall
be classified as operating cash flows because such items enter into the
determination of net income or lose.

Dividends

PAS 7, paragraph 33 providesthat dividend received shal be classified as

operating cash flows because it enters into the determination of net
income 

PAS 7, paragraph 34 provides that dividend paid shall be clssified as

financing cash flows because it is a cost of obtaining financial resources.

Income Taxes

PAS 7, paragraph 35 provides that cash flpos arising from income taxes shall
be seperately disclosed as cashflows from operating acyivities u less they
can be specially identified with investing and financing activities.

 Philippine Accounting Standard #8

Accounting Policies, Estimate and Errors

Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entry in  preparing financial statements.

Accounting policies are essential for a proper understanding of the information

contained in the financial statements.
Objective of PAS 8

This standard purport to enhance and maintain the reliability and

comparability of financial statements by providing guidelines for the
selection and application of accounting policy, treatment of change in
accounting policy and accounting estimates along with the guidance for the
correction of errors. It also provides the related disclosure requirements
required by the entity.

SCOPE

The requirements of this standard are applicable for the selection and
application of accounting policy, treatment of change in accounting policy
and accounting estimates along with the accounting for the correction of
errors related to previous periods.

Change in Accounting Policy

Once selected, accounting policies must be applied consistently for similar

transactions and events.

A change in accounting policy shall be made only when:

• Required by an accounting standard

• The change will result in more relevant and faithfully represented information
about the financial position, financial performance and cash flows of the entity.
How to report a change in accounting policy.

A change in accounting policy is required by a standard or an interpretation shall

be applied in accordance with the transitional provisions therein.

Retrospective application

Retrospective application means that any resulting adjustments from the change
in accounting policy shall be reported as an adjustment to the opening of retained
earnings.

Absence of accounting standard

PAS 8, paragraph 10 provides that in the absence of an accounting standard that

specifically applies to a transaction or event, management shall use judgment in
selecting and applying an accounting policy that result in information that is
relevant to the economic decision making needs of users and faithfully
represented.

Accounting Estimate

A change in accounting estimate is a normal recurring correction or adjustments

of an asset or liability which is the natural result of the use of an estimate.

An estimate may need revision if changes occur regarding the circumstances on

which the estimate was based or as a result of new information, more experience
or subsequent development.

How To Report Change in Accounting Estimate

The effect of a change in accounting estimate shall be recognized currently and

prospectively by including it in income or loss of :
1. The period of change if the change affects that period only.
2. The period of change and future periods if the change affects both.
A change in an accounting estimates shall not be accounted for by restating
amounts reported in the financial statements of prior periods.

Prior Period Errors

Prior period errors are omissions and misstatement in the financial statements for
one or more periods arising from a failure to use or misuse if reliable information.

Errors nay occur as a result of mathematical mistakes, mistakes in applyinh

accounting policies, misinterpretation of facts, fraud or oversight.

How to Treat Prior Period Errors

Prior period errors shall be corrected retrospectively by adjusting the opening

balance of retained earnings and affected assets and liabilities.

If comparative statements are presented the financial statements of the prior

periods shall br restated so as to reflect the retroactive application odlf the prior
period errors as a retrospective restatement. 

APPLICATION
When PFRS specifically applies to a transactions ,other event, or condition,
the accounting policy or policies applied to that item shall be determined by
applying the PFRS. In the absence of a PFRS that specifically applies to a
transactions, other event, or condition ,the management shall use its judgement
in developing and applying an accounting policy that results in information that is:
a. Relevant to the economic decision- making needs of users ;and
b. Reliable, in that financial statements.
 i. represents faithfully the financial position, financial performance, and cash flows
of entity
ii. Reflect the economic substance of transactions, other events and conditions,
and not merely the legal form.

Philippine Accounting Standard #10

Objective of PAS 10

As part of the business world, it is normal that some events may take place after
the reporting period, but before the date of authorization of financial statements
for issue, and which might reflect some information that needs to be considered
before the financial statements are authorized for issue.

This Standard provides guidance for the accounting treatment of the events,

which take place after the reporting period, but before the date of authorization
of financial statements for issue, related disclosure requirements, and in what
circumstances: 
(a) The entity will adjust its financial statements before issuance, and 
(b) When only disclosures are required for these events

SCOPE

The requirements of this standard are applicable to account for Events after Reporting
Period and related disclosures.

Recognition & Measurement

1. Adjusting Events:
The entity is required to account for the adjusting events by adjusting their potential
financial impacts in financial statements before these are finalized and issued.

Application Examples:
Following are the examples of adjusting events, for which entity is required to adjust its
financial statements before issuance:
 The receipt of information regarding the bankruptcy of a customer after the
reporting date, which was stated as receivable at year end, provides evidence that
 the debt has become irrecoverable and the entity should adjust the value of
receivable reported in statement of financial position.
 Reduction in Net realizable Value of Inventory after the reporting date, stated at
cost at year end, indicated from the sale of inventory at low selling price after the
reporting date, provides evidence that the value of inventory has fallen down and
entity needs to adjust the value of inventory included in statement of financial
position.
 The receipt of information after the reporting date, confirming that the asset is
impaired existed at the reporting date.
 The determination of purchase/selling price of an asset after the reporting date,
bought or sold during the current year.
 The settlement of a court case after the reporting date, which was initiated during
the current year, will provides evidence that entity has an obligation at year end
therefore, entity should adjust the financial statements accordingly.
 The identification of a fraud, or any error after the reporting date.

2. Non-adjusting Events:
In respect of non-adjusting events, no adjustment is required in financial statements
instead IAS 10 requires such events to be disclosed in the notes to accounts if these
are considered to be material, otherwise these will be ignored.

Application Examples:
(a) Any loss which arises after the reporting date because of natural disasters such as
fire or flood. 
(b) Any sale or purchase of asset after the reporting date. 
(c) Sale or discontinuation of a business line after the reporting date. 
(d) Fall in value of investment after the reporting date. 
(e) Dividend declared after the reporting date 
(f)  Any business acquisition after the reporting date. 
(g) The commencement of a court case due to the events which take place after the
reporting date. 
(i) Any changes in the tax rates/laws after the reporting date, applicable to previous year

Note: 
If an event takes place after the date of authorization of financial statements, it
will be neither adjusting nor non-adjusting instead it will be outside the scope of
IAS 10.
Going Concern
PAS 10 requires, if an event occurs after the reporting date but before the date of
authorization of financial statements for issue and it materially/severally affects
the going concern status of the entity the such event will always be treated
as adjusting event irrespective of the definition it satisfy. 
For such event, the entity will prepare its financial statements on break-up basis.

Disclosures
PAS 10 requires the entity to disclose the following:
 The date of authorization of financial statements and related authority.
 For Non-adjusting events the entity should disclose
 The nature of such event and
 Its financial impact
 
Events After the Reporting Period

PAS 10, paragraph, defines events after the reporting period as those events
whether favorable or unfavorable that occur between the end of reporting period
and the  date on which the financial statements are authorized for issue.

Types of Events After Reporting Period

1. Adjusting events after the reporting period are those that provide evidence of
conditions that exist at the end of reporting period
2. Non adjusting events after reporting period are those that are indicative of
conditions that arise after the end of reporting period.
Financial statements authorized for issue

Financial statements are authorized for issue when the board of directors reviews
the financial statement and authorizes them issue.

In some cases, an entity is required to submit to the shareholders for approval

after financial statement have been issued.

In such cases, the financial statements are authorized for issue on the date of
issue by the board of directors and not on the date when shareholders approve
the financial statements.

Philippine Accounting Standards #11

Construction contracts

Objective of PAS 11

The objective of IAS 11 is to prescribe the accounting treatment of revenue

and costs associated with construction contracts.

Definition
A construction contract is a contract specifically negotiated for the construc-
tion of an asset or a group of interrelated assets. [IPAS 11.3]
Under IAS 11, if a contract covers two or more assets,

The construction of each asset should be accounted for separately if

(a) separate proposals were submitted for each asset,
(b) portions of the contract relating to each asset were negotiated separately, and
(c) costs and revenues of each asset can be measured. Otherwise, the contract should
be accounted for in its entirety.

Two or more contracts should be accounted for as a single contract if they were
negotiated together and the work is interrelated.

If a contract gives the customer an option to order one or more additional assets, con-
struction of each additional asset should be accounted for as a separate contract if
either
(a) the additional asset differs significantly from the original asset(s) or
(b) the price of the additional asset is separately negotiated.
What is included in contract revenue and costs?
Contract revenue should include the amount agreed in the initial contract, plus revenue
from alternations in the original contract work, plus claims and incentive payments that
(a) are expected to be collected and
(b) that can be measured reliably.

Contract costs should include costs that relate directly to the specific contract,
plus costs that are attributable to the contractor's general contracting activity to
the extent that they can be reasonably allocated to the contract, plus such other
costs that can be specifically charged to the customer under the terms of the
contract. [PAS 11.16]
 Accounting

If the outcome of a construction contract can be estimated reliably, revenue

and costs should be recognized in proportion to the stage of completion of
contract activity. This is known as the percentage of completion method of
completion method of accounting.

Disclosure

o amount of contract revenue recognized

o method used to determine revenue.
o method used to determine stage of completion; [IAS 11.39(c)] and
o for contracts in progress at balance sheet date: [IAS 11.40]
o aggregate costs incurred and recognized profit
o amount of advances received
o amount of retentions

Presentation

 The gross amount due from customers for contract work should be shown as an
asset
 The gross amount due to customers for contract work should be shown as a
liability.

Philippine Accounting Standard #12

Objective of PAS 12  

 Tthis Standard is to prescribe the accounting treatment for income taxes. The principal iss
ue in accountingfor income taxes is how to account for the current and future tax c
onsequences of:

(a)the future recovery (settlement) of the carrying amount of ass
its  (liabilities) that are recognized in an entity’ statement of financial position; and

(b)transactions and other events of the current period that are recognised in an entity’s fi
nancial statements.

SCOPES

•PAS 12 applies to accounting for income taxes or taxes that are based on taxable
profits. •Income taxes include all domestic and foreign income taxes.

Income Taxes

Deferred tax accounting is applicable to all entities, whether public or nin public

entities.
A public entity us an entity:
• whose equity and debt securities are traded in a stock exchange or over the
counter market.
• Whose equity or debt securities are registered with securities and exchange
commission is preparation for sale of the securities.

Accounting Income
Accounting income or financial income is the net income for the period  before
deducting income tax expense.

Taxable Income
Taxable income is the income for the period determined in accordance with the
rules established by the taxation authorities upon which income taxes are payable
or recoverable.

Difference Between Accounting And Taxable Income

Differences between accounting income and taxable  income arise. Such
differences may br classified into two, namely:
1. Permanent differences
2. Temporary differences

Permanent Differences

Permanent differences Are items of revenue and expense which are included in
either accounting income or taxable income but will never be included in the
other. 

Actually, permanent differences pertain to nontaxable revenue and

nondeductible expense.

Temporary Differences

Temporary differences are items of income

and expenses which are included in both accounting income and taxable income
but at different time period.

Temporary differences give rise either to a deferred tax liability or deferred tax
asset.

Deferred Tax Liability

PAS 12 paragraph 15, provides that a deferred tax liability shall be recognized for
all taxable temporary differences

deferred tax liability is the amount of income tax  payable  in future period with
respect to a taxable temporary difference.

Taxable temporary difference is the temporary difference that will result in the
future taxable amount in determining taxable income of future periods.
A deferred tax liability arises when accounting income is higher than taxable
income because of future taxable amount.
Deferred Tax Assets

PAS 12, paragraph 24, provides that a deferred tax assets shall be recognized for
all deductible temporary difference and operating loss carry forward when it is
probable that taxable income will be  available against which the deferred tax
assets can be used.

Operating loss carry forward is an excess of tax deductions over gross income in a
year that may be carried forward to reduce taxable income in a future year.

In other words, a deferred tax assets is the deferred tax consequence attributable
to a future deductible amount and operating loss carry forward.

A deferred tax assets arises when taxable income is higher than accounting
income because f future deductible amount.

Current Tax Liability and Current Tax Assets

A current tax liability  is the current tax expense or the amount of income  tax
actually payable. This is classified as current liability.
Actually, a current tax assets is a prepaid income and shall be classified as current
assets.
a current tax liability or current tax assets shall be measured using the tax rate has
been enacted effective at the end of the reporting period.
Measurement of Deferred Tax Assets or Liability
A deferred tax liability or deferred tax assets shall be measured using the tax rate
that has been enacted by the end of the reporting period and expected to apply
to the period when the assets is realized or liability is settled.
PAS 12, paragraph 70, provides that deferred tax liability is presented as
noncurrent liability and deferred tax assets is presented as noncurrent assets

Philippine Accounting Standard #16

Property, Plant And Equipment

Property, plant and equipment are tangible assets that are held for use in
production or supplu of goods or services, for rental to others, or for administrative
purposes and are expected to be used during more than one period.

Objective of PAS 16

Is to prescribe the accounting treatment for property, plant, and equipment.

The principal issues are the recognition of assets, the determination of their
carrying amounts, and the depreciation charges and impairment losses to be
recognized in relation to them.

SCOPE

PAS 16 applies to the accounting for property, plant and equipment, except
where another standard requires or permits differing accounting treatments, for
example:
 assets classified as held for sale in accordance with  Non-current Assets
Held for Sale and Discontinued Operations
 biological assets related to agricultural activity accounted for
under (PAS41) Agriculture 
 exploration and evaluation assets recognized in accordance with  Explo-
ration for and Evaluation of Mineral Resources
 mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources.
 The standard does apply to property, plant, and equipment used to develop
or maintain the last three categories of assets. [IAS 16.3]
 The cost model in IAS 16 also applies to investment property accounted for
using the cost model under (PAS 40 Investment Property.
 The standard does apply to bearer plants, but it does not apply to the
produce on bearer plants.
Note: Bearer plants were brought into the scope of IAS 16 by Agriculture: Bearer
Plants (Amendments to IAS 16 and IAS 41), which applies to annual periods
beginning on or after 1 January 2016.

Recognition

 Items of property, plant, and equipment should be recognized as

assets when it is probable that: [IAS 16.7]
 it is probable that the future economic benefits associated with the asset will
flow to the entity, and
 the cost of the asset can be measured reliably.
This recognition principle is applied to all property, plant, and equipment
costs at the time they are incurred. These costs include costs incurred
initially to acquire or construct an item of property, plant and equipment and
costs incurred subsequently to add to, replace part of, or service it.

PAS 16 does not prescribe the unit of measure for recognition – what con-
stitutes an item of property, plant, and equipment.

Note, however, that if the cost model is used (see below) each part of
an item of property, plant, and equipment with a cost that is signifi-
cant in relation to the total cost of the item must be depreciated sepa-
rately.

PAS 16 recognizes that parts of some items of property, plant, and

equipment may require replacement at regular intervals. The carrying
amount of an item of property, plant, and equipment will include the cost of
replacing the part of such an item when that cost is incurred if the recogni-
tion criteria (future benefits and measurement reliability) are met. The
carrying amount of those parts that are replaced is derecognized in accor-
dance with the derecognition.

Also, continued operation of an item of property, plant, and equipment (for

example, an aircraft) may require regular major inspections for faults re-
gardless of whether parts of the item are replaced. When each major in-
spection is performed, its cost is recognized in the carrying amount of the
item of property, plant, and equipment as a replacement if the recognition
criteria are satisfied. If necessary, the estimated cost of a future similar in-
spection may be used as an indication of what the cost of the existing in-
spection component was when the item was acquired or constructed.

Measurement at Recognition

An item of property, plant and equipment that qualifies for recognition as an

asset shall be measured at cost

Cost is the amount of cash or cash equivalent paid and the fair value of the other 
consideration given to acquire an asset at the time of acquisition or construction.

Acquisition on A Cash Basis

The cost of an item of property, plant and equipment is the cash price equivalent
at the recognition date.

Acquisition on Account

When an asset is acquired on account subject to a cash discount, the cost of the
asset s equal to the invoice price minus the discount, regardless of whether the
discount is taken or not.

Acquisition on Installment Basis

When payment for item of property, plant and equipment is deferred beyond
normal credit terms, the cost is the cash price equivalent.

In other words, if an asset is offered at a cash price and at installment price and is
purchased at the installment price, the asset shall be recorded at cash price.

The excess of the installment price over the cash price is treated as an interest to
be amortized over the credit period.

Issuance of Share Capital

Philippine GAAP provides that if shares are issued for consideration other than
actual cash, the proceeds shall be measured by the fair value of the consideration
received.

Accordingly when a property is acquired through the issuance of share capital, the
property shall be measured at an amount equal to the following in order of
priority:

a. Fair value of the property received

b. Fair value of the share capital
c. Par value or stated value of the share capital.

Issuance of bonds payable

PFRS 9, paragraph 5.1.1, provides that asset acquired by issuing bonds payable is
measured in the following order:

a. Fair value of bonds payable

b. Fair value of assets received
c. Face value of bonds payable

Exchange

PAS 16, paragraph 24, provides that the cost of an item of property, plant and
equipment acquired in exchange for a nonmonetary asset or a combination of
monetary and nonmonetary asset is measured at fair value plus any cash
payment.

However, the exchange is recognized at carrying amount if the exchange

transaction lacks commercial substance.

Definition of commercial substance

Commercial substance is a new notion and is defined as the event or transactions

causing the cash flow of the entity to change significantly from cashflows of the
asset transferred.

Constructions
The cost of self-constructed asset is determined using the same principles as for
an acquired asset.

The cost of self-constructed property, plant and equipment includes:

1. Direct cost of materials

2. Direct cost of labor
3. Indirect cost and incremental overhead specifically identifiable or
traceable to the constructions.

PAS 16, paragraph 22, provides that the cost of an adnormal amount of wasted
material, labor or overheard incurred in the production of self-constructed asset is
not include in the cost of the asset.

Derecognition

Derecognition means that the cost of the property, plant and equipment together
with the related accumulated depreciation shall be removed from the statement
of financial position.

PAS 16, paragraph 67, provides that the carrying amount of an item of property,
plant and equipment shall be recognized on disposal or when no future economic
benefits are expected from the use or disposal.

The gain or loss from the derecognition of an item of the property, plant and
equipment shall be determined as the difference between the net disposal
proceeds and the carrying amount of the item.

Fully depreciated property

A property is said to be fully depreciated when the carrying amount is equal to

zero or the carrying is equal to the residual value.

The cost of fully depreciated asset remaining in service and the related
accumulated depreciation ordinarily shall not be removed from the accounts.
However, entities are encouraged but not require to disclose fully depreciated
property.

Concept of depreciation

Depreciation is defined as the systematic allocation of the depreciable amount

of an asset over the useful life.

Depreciation is not so much a matter of valuation.

Depreciation is a matter of cost allocation in recognition of the exhaustion of the

useful life of an item of property, plant and equipment.

The objective of depreciation is to have each period benefiting from the use of the
asset bear an equitable share of the asset cost.

Depreciation in the financial statements

Depreciation is an expense.

Depreciation may be a part of the cost of goods manufactured or an operating

expense.

The depreciation amount of an asset shall be recognized as expense unless it is

included in the carrying amount of another asset.

Depreciation period

The depreciable amount of an asset shall be allocated on a systematic basis over

the useful life.

Depreciation of an asset begins when it is available for use, meaning, when the
asset is in the location and the condition necessary for the intended use by
management.

Depreciation ceases when the asset is derecognized

Therefore, depreciation does not cease when the asset becomes idle temporarily.
Temporary idle activity does not preclude depreciating the asset as future
economic benefits are consumed not only through usage but also through the
wear and tear and obsolescence.

Factors of depreciation

In order to properly compute the amount of depreciation, three factors are

necessary, namely depreciable amount, residual value and useful life.

Depreciable amount

Depreciable amount is the cost of asset or other amount substituted for cost less
the residual value.

Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated separately.

The entity also depreciates separately the remainder of the item and the
remainder consist of the parts of the item that are individually not significant,

Residual value

Residual value is the estimated met amount currently obtainable if the asset is at
the end of the useful life.

The residual value of an asset shall be reviewed at least at each financial year-end
and if expectation differs from the previous estimate, the change shall be
accounted for as a change in an accounting estimate.

The residual value of an asset may increase to an amount equal to or greater than
the carrying amount.

If it does, the depreciation charge is zero unless and until the residual value
subsequently decreases to an amount below the carrying amount.

Useful life
Useful life either the period over which an asset is expected to be available for
use by the entity, or the number of production or similar units expected to be
obtained from the asset by the entity.

Factors in determining useful life

a. Expected usage of the asset – Usage is assessed by reference to the asset’s

expected capacity or physical output.
b. Expected physical wear and tear - This depends on the operational factors
such as the number of shifts the asset is used the repair and maintenance
program and the care and maintenance of the asset while idle.
c. Technical and commercial obsolescence – This arises from changes or
improvements in production, or change in the market demand for the
product output of the asset.
d. Legal limits for the use of the asset, such as the expiry date of the related
lease.

Depreciation method

The depreciation method shall reflect the pattern in which the future economic
benefits from the asset are expected to be consumed by the entity.

The depreciation method shall be reviewed at least at every year-end.

If there has been significant change in the expected pattern of economic benefits,
the method shall be changed to reflect the changed pattern.

Such change shall be accounted for as change in accounting estimate.

A variety of depreciation methods can be used.

Depreciation methods include straight line, production method and diminishing

balance method.

Straight line method

Under the straight line method, the annual depreciation charge is calculated by
allocating the depreciable amount equally over the number of years of useful life.
In other words, straight line depreciation is a constant charge over the useful life
of the asset.

The straight line method is adopted when the principal cause of depreciation is
passage of time.

The straight line approach considers as depreciation as a function of time rather

than as function of usage.

Production method

The production or output method assumes that depreciation is more a function of

use rather than passage of time.

The useful life of the asset is considered in terms of the output is produces or he
number of hours it works.

Thus, depreciation is related to the estimated production capability of the asset

and is expressed in a rate per unit of output or per hour of use.

The production method is adopted if the principal cause of depreciation is usage.

Diminishing balance or accelerated methods

The diminishing balance or accelerated methods provide higher depreciation in

the earlier years and lower depreciation in the later years of the useful life of the
asset.

Thus, these methods result in descreasing depreciation charge over the useful life.

The accelerated depreciation is on the philosophy that new assets are generally
capable of producing more revenue in the earlier years than in the later years.

The accelerated methods include sum of years’ digits method and double
declining balance method.

Disclosure
Information about each class of property, plant and equipment
For each class of property, plant, and equipment, disclose
  basis for measuring carrying amount
 depreciation method(s) used
 useful lives or depreciation rates
 gross carrying amount and accumulated depreciation and impairment
losses
 reconciliation of the carrying amount at the beginning and the end of the
period, showing:
 additions
 disposals
 acquisitions through business combinations
 revaluation increases or decreases
 impairment losses
 reversals of impairment losses
 depreciation
 net foreign exchange differences on translation
 other movements

Additional Disclosures
The following disclosures are also required:

 restrictions on title and items pledged as security for liabilities

 expenditures to construct property, plant, and equipment during the
period
 contractual commitments to acquire property, plant, and equipment
 compensation from third parties for items of property, plant, and
equipment that were impaired, lost or given up that is included in profit
or loss.
 IAS 16 also encourages, but does not require, several additional disclosures.

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain addi-
tional disclosures are required:
 the effective date of the revaluation
 whether an independent valuer was involved
  for each revalued class of property, the carrying amount that would have
been recognized had the assets been carried under the cost model
 the revaluation surplus, including changes during the period and any re-
strictions on the distribution of the balance to shareholders.

Philippine Accounting Standards #17

LEASES

Objective of PAS 17

To prescribe, for lessees and lessors, the appropriate accounting policies and
disclosures to apply in relation to finance and operating leases.

SCOPE

PAS 17 applies to all leases other than lease agreements for minerals, oil, natural
gas, and similar regenerative resources and licensing agreements for films, videos,
plays, manuscripts, patents, copyrights, and similar items.

However, IAS 17 does not apply as the basis of measurement for the following
leased assets: [IAS 17.2]
 property held by lessees that is accounted for as investment property for
which the lessee uses the fair value model set out in IAS 40
 investment property provided by lessors under operating leases (see IAS
40)
 biological assets held by lessees under finance leases (see IAS 41)
 biological assets provided by lessors under operating leases (see IAS 41)
 Classification of leases
A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incident to ownership. All other leases are classified as operating leases.
Classification is made at the inception of the lease. [IAS 17.4]
Whether a lease is a finance lease, or an operating lease depends on the
substance of the transaction rather than the form. Situations that would normally
lead to a lease being classified as a finance lease include the following:
 the lease transfers ownership of the asset to the lessee by the end of the
lease term
 the lessee has the option to purchase the asset at a price which is
expected to be sufficiently lower than fair value at the date the option
becomes exercisable that, at the inception of the lease, it is reasonably
certain that the option will be exercised
 the lease term is for the major part of the economic life of the asset, even
if title is not transferred
 at the inception of the lease, the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset
 the lease assets are of a specialized nature such that only the lessee can
use them without major modifications being made

Other situations that might also lead to classification as a finance lease are:

 if the lessee is entitled to cancel the lease, the lessor's losses associated
with the cancellation are borne by the lessee
 gains or losses from fluctuations in the fair value of the residual fall to the
lessee (for example, by means of a rebate of lease payments)
 the lessee has the ability to continue to lease for a secondary period at a
rent that is substantially lower than market rent

Accounting by lessees
The following principles should be applied in the financial statements of lessees:
 at commencement of the lease term, finance leases should be recorded
as an asset and a liability at the lower of the fair value of the asset and
the present value of the minimum lease payments (discounted at the
 interest rate implicit in the lease, if practicable, or else at the entity's in-
cremental borrowing rate) [IAS 17.20]
 finance lease payments should be apportioned between the finance
charge and the reduction of the outstanding liability (the finance charge
to be allocated so as to produce a constant periodic rate of interest on
the remaining balance of the liability) [IAS 17.25]
 the depreciation policy for assets held under finance leases should be
consistent with that for owned assets. If there is no reasonable certainty
that the lessee will obtain ownership at the end of the lease – the asset
should be depreciated over the shorter of the lease term or the life of the
asset [IAS 17.27]
 for operating leases, the lease payments should be recognized as an
expense in the income statement over the lease term on a straight-line
basis, unless another systematic basis is more representative of the time
pattern of the user's benefit [IAS 17.33]
 Incentives for the agreement of a new or renewed operating lease should
be recognized by the lessee as a reduction of the rental expense over the
lease term, irrespective of the incentive's nature or form, or the timing of
payments.
Accounting by lessors
The following principles should be applied in the financial statements of lessors:
 at commencement of the lease term, the lessor should record a finance
lease in the balance sheet as a receivable, at an amount equal to the net
investment in the lease [IAS 17.36]
 the lessor should recognize finance income based on a pattern reflecting
a constant periodic rate of return on the lessor's net investment out-
standing in respect of the finance lease
 assets held for operating leases should be presented in the balance sheet
of the lessor according to the nature of the asset. Lease income should be
recognized over the lease term on a straight-line basis, unless another
systematic basis is more representative of the time pattern in which use
benefit is derived from the leased asset is diminished
Incentives for the agreement of a new or renewed operating lease should be
recognized by the lessor as a reduction of the rental income over the lease term,
irrespective of the incentive's nature or form, or the timing of payments.

Sale and leaseback transactions

For a sale and leaseback transaction that results in a finance lease, any excess of
proceeds over the carrying amount is deferred and amortized over the lease
term.

For a transaction that results in an operating lease:

 if the transaction is clearly carried out at fair value - the profit or loss
should be recognized immediately
 if the sale price is below fair value - profit or loss should be recognized
immediately, except if a loss is compensated for by future rentals at
below market price, the loss should be amortized over the period of use
 if the sale price is above fair value - the excess over fair value should be
deferred and amortized over the period of use
 if the fair value at the time of the transaction is less than the carrying
amount – a loss equal to the difference should be recognized immedi-
ately

Disclosure: lessees – finance leases

 carrying amount of assets
 reconciliation between total minimum lease payments and their present
value
 amounts of minimum lease payments at balance sheet date and the
present value thereof, for:
 the next year
 years 2 through 5 combined
 beyond five years
 contingent rent recognized as an expense
  total future minimum sublease income under noncancelable subleases
 general description of significant leasing arrangements, including contin-
gent rent provisions, renewal or purchase options, and restrictions
imposed on dividends, borrowings, or further leasing

Disclosure: lessees – operating leases

 amounts of minimum lease payments at balance sheet date under
noncancelable operating leases for:
 the next year
 years 2 through 5 combined
 beyond five years
 total future minimum sublease income under noncancelable subleases
 lease and sublease payments recognized in income for the period
 contingent rent recognized as an expense
 general description of significant leasing arrangements, including contin-
gent rent provisions, renewal or purchase options, and restrictions
imposed on dividends, borrowings, or further leasing

Disclosure: lessors – finance leases

 reconciliation between gross investment in the lease and the present
value of minimum lease payments.
 gross investment and present value of minimum lease payments receiv-
able for:
 the next year
 years 2 through 5 combined
 beyond five years
 unearned finance income
 unguaranteed residual values
 accumulated allowance for uncollectible lease payments receivable
  contingent rent recognized in income
 general description of significant leasing arrangements
 Disclosure: lessors – operating leases [IAS 17.56]
 amounts of minimum lease payments at balance sheet date under
noncancelable operating leases in the aggregate and for:
 the next year
 years 2 through 5 combined
 beyond five years
 contingent rent recognized as in income
 general description of significant leasing arrangements

Philippine Accounting Standards #18

Objective of PAS 18

The objective of IAS 18 is to prescribe the accounting treatment for revenue

arising from certain types of transactions and events.

SCOPE

When to recognized and how to measure revenue

Key definition
Revenue
 The gross inflow of economic benefits (cash, receivables, other assets) arising
from the ordinary operating activities of an entity (such as sales of goods, sales of
services, interest, royalties, and dividends).

Measurement of revenue
Revenue should be measured at the fair value of the consideration received or re-
ceivable. [IAS 18.9] An exchange for goods or services of a similar nature and
value is not regarded as a transaction that generates revenue. However,
exchanges for dissimilar items are regarded as generating revenue.
If the inflow of cash or cash equivalents is deferred, the fair value of the consider-
ation receivable is less than the nominal amount of cash and cash equivalents to
be received, and discounting is appropriate. This would occur, for instance, if the
seller is providing interest-free credit to the buyer or is charging a below-market
rate of interest. Interest must be imputed based on market rates.

Recognition of revenue
Recognition, as defined in the IASB Framework, means incorporating an item that
meets the definition of revenue (above) in the income statement when it meets
the following criteria:
 it is probable that any future economic benefit associated with the item
of revenue will flow to the entity, and
 the amount of revenue can be measured with reliability
PAS 18 provides guidance for recognizing the following specific categories of
revenue:

Sale of goods
Revenue arising from the sale of goods should be recognized when all of the
following criteria have been satisfied:
 the seller has transferred to the buyer the significant risks and rewards of
ownership
 the seller retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over the
goods sold
 the amount of revenue can be measured reliably
 it is probable that the economic benefits associated with the transaction
will flow to the seller, and
 the costs incurred or to be incurred in respect of the transaction can be
measured reliably
Rendering of services
For revenue arising from the rendering of services, provided that all of the
following criteria are met, revenue should be recognized by reference to the stage
of completion of the transaction at the balance sheet date (the percentage-of-
completion method):
 the amount of revenue can be measured reliably.
 it is probable that the economic benefits will flow to the seller.
 the stage of completion at the balance sheet date can be measured
reliably; and
 the costs incurred, or to be incurred, in respect of the transaction can be
measured reliably.

When the above criteria are not met, revenue arising from the rendering of
services should be recognized only to the extent of the expenses recognized that
are recoverable (a "cost-recovery approach".

Interest, royalties, and dividends

For interest, royalties and dividends, if it is probable that the economic benefits
will flow to the enterprise and the amount of revenue can be measured reliably,
revenue should be recognized as follows: [IAS 18.29-30]
 interest: using the effective interest method as set out in IAS 39
 royalties: on an accrual’s basis in accordance with the substance of the
relevant agreement
 dividends: when the shareholder's right to receive payment is established
 Disclosure [IAS 18.35]
 accounting policy for recognizing revenue
 amount of each of the following types of revenue:
 sale of goods
 rendering of services
 interest
 royalties
 dividends
  within each of the above categories, the amount of revenue from
exchanges of goods or service

Implementation guidance
Appendix A to PAS 18 provides illustrative examples of how the above principles
apply to certain transactions.

Philippine Accounting Standard #19

Employee Benefits

Employee benefits are all forms of consideration given by an entity in exchange

for services rendered by employees or for the termination of employees.

For the purpose of this standard employees include directors and other
management personnel. The employee benefits include:

a. Short-term employee benefits

b. Postemployment benefits
c. Other long-term employee benefits
d. Termination benefits

Short-term employee benefits

Short- term employee benefits are employee benefits other than termination
benefits which are expected to be settled wholly within twelve months after the
end of annual reporting period in which the employees render the related service.

Short-term employee benefits include the following:

a. Salaries, wages and social security contributions

b. Short-term compensated or paid absences
c. Profit sharing and bonuses payable within twelve months.
d. Nonmonetary benefits, such as medical care, housing, car and free or
subsidized goods.
Recognition and measurement

Accounting for short-term employee benefits is fairly straight forward because

there are no actuarial assumptions.

There is no requirement to discount future benefits because such benefits are all,
by definition, payable no later than twelve months after the end of the current
reporting period.

There is no possibility of actuarial gain or loss because short-term employee

benefits are measured on an undiscounted basis.

Accounting procedures

The rules for short-term employee benefits are essentially an application of basic
accounting principles and practice.

a. Unpaid short-term employee benefits at the end of the accounting period

shall be recognized as accrued expense.
b. Any short-term benefits paid in advance shall be recognized as a
prepayment.

Short-term compensated or paid absences

An entity may pay employees for various reason such as vacation, sickness and
short-term disability, maternity or paternity and military services.

Entitlement to paid absences falls into two, namely accumulating and

nonaccumulating absences.

Accumulating absences are carried forward and can be used in future period if the
period’s entitlement is not used in full.

Accumulating paid absences may be either:

a. Vesting – meaning, employee are entitled to a cash payment for unused

entitlement on leaving the entity.
Vested benefits are employee benefits that are not conditional on future
employment.

b. Nonvesting- meaning, employee benefits are not entitled to a cash

payment for unused entitlement on leaving the entity

Nonaccumulating paid absences are not carried forward

Profit-sharing and bonus payments

An entity recognizes the expected cost of profit-sharing and bonus payments
when, and only when, it has a legal or constructive obligation to make such
payments as a result of past events and a reliable estimate of the expected obliga-
tion can be made.

Postemployment benefits

Postemployment benefits are employee benefits other than termination benefits

and short-term employee benefits which are payable after completion of
employment.

Postemployment benefits include:

a. Retirement benefits, such as pensions and lump sum payments on

retirement
b. Postemployment life insurance
c. Postemployment medical care.

Most postemployment benefit plans are formal arrangements between an

employer entity and the employees.

These plans are usually established as part of the remuneration package for the
employees.

Some postemployment benefit plans are informal as evidenced only by the

entity’s practice to pay postemployment benefits.
Postemployment benefit plans are classified as either defined contribution plan or
defined plan.

Types of post-employment benefit plans

Post-employment benefit plans - are informal or formal arrangements where an
entity provides post-employment benefits to one or more employees, e.g. retire-
ment benefits (pensions or lump sum payments), life insurance and medical care.

The accounting treatment for a post-employment benefit plan depends on the

economic substance of the plan and results in the plan being classified as either a
defined contribution plan or a defined benefit plan:

 Defined contribution plans - Under a defined contribution plan, the

entity pays fixed contributions into a fund but has no legal or constructive
obligation to make further payments if the fund does not have sufficient
assets to pay all of the employees' entitlements to post-employment
benefits. The entity's obligation is therefore effectively limited to the
amount it agrees to contribute to the fund and effectively place actuarial
and investment risk on the employee

 Defined benefit plans -  these are post-employment benefit plans other

than a defined contribution plans. These plans create an obligation on the
entity to provide agreed benefits to current and past employees and ef-
fectively places actuarial and investment risk on the entity.
Defined contribution plans
For defined contribution plans, the amount recognized in the period is the contri-
bution payable in exchange for service rendered by employees during the period.

Contributions to a defined contribution plan which are not expected to be wholly

settled within 12 months after the end of the annual reporting period in which the
employee renders the related service are discounted to their present value.

Defined benefit plans

Basic requirements
An entity is required to recognize the net defined benefit liability or asset in its
statement of financial position. [IAS 19(2011).63] However, the measurement of a
net defined benefit asset is the lower of any surplus in the fund and the 'asset
ceiling' (i.e. the present value of any economic benefits available in the form of
refunds from the plan or reductions in future contributions to the plan).
Measurement
The measurement of a net defined benefit liability or assets requires the applica-
tion of an actuarial valuation method, the attribution of benefits to periods of
service, and the use of actuarial assumptions. [IAS 19(2011).66] The fair value of
any plan assets is deducted from the present value of the defined benefit obliga-
tion in determining the net deficit or surplus.

The determination of the net defined benefit liability (or asset) - is carried out
with sufficient regularity such that the amounts recognized in the financial state-
ments do not differ materially from those that would be determined at end of the
reporting period.

The present value of an entity's defined benefit obligations - related service

costs is determined using the 'projected unit credit method', which sees each
period of service as giving rise to an additional unit of benefit entitlement and
measures each unit separately in building up the final obligation.
[IAS 19(2011).67-68] This requires an entity to attribute benefit to the current
period (to determine current service cost) and the current and prior periods (to
determine the present value of defined benefit obligations). Benefit is attributed
to periods of service using the plan's benefit formula, unless an employee's
service in later years will lead to a materially higher of benefit than in earlier
years, in which case a straight-line basis is used [IAS 19(2011).70]
Actuarial assumptions used in measurement
The overall actuarial assumptions used must be unbiased and mutually compati-
ble and represent the best estimate of the variables determining the ultimate
post-employment benefit cost.
 Financial assumptions must be based on market expectations at the end
of the reporting period [IAS 19(2011).80]
 Mortality assumptions are determined by reference to the best estimate
of the mortality of plan members during and after employment
[IAS 19(2011).81]
  The discount rate used is determined by reference to market yields at the
end of the reporting period on high quality corporate bonds, or where
there is no deep market in such bonds, by reference to market yields on
government bonds. Currencies and terms of bond yields used must be
consistent with the currency and estimated term of the obligation being
discounted [IAS 19(2011).83]
 Assumptions about expected salaries and benefits reflect the terms of the
plan, future salary increases, any limits on the employer's share of cost,
contributions from employees or third parties*, and estimated future
changes in state benefits that impact benefits payable [IAS 19(2011).87]
 Medical cost assumptions incorporate future changes resulting from
inflation and specific changes in medical costs [IAS 19(2011).96]
 Updated actuarial assumptions must be used to determine the current
service cost and net interest for the remainder of the annual reporting
period after a plan amendment, curtailment or settlement when an entity
remeasures its net defined benefit liability (asset) [IAS 19(2011).122A]*
Past service cost - is the term used to describe the change in a defined benefit
obligation for employee service in prior periods, arising as a result of changes
to plan arrangements in the current period (i.e. plan amendments introducing
or changing benefits payable, or curtailments which significantly reduce the
number of covered employees) .

Past service cost may be either positive (where benefits are introduced or
improved) or negative (where existing benefits are reduced). Past service cost
is recognized as an expense at the earlier of the date when a plan amendment
or curtailment occurs and the date when an entity recognizes any termination
benefits, or related restructuring costs under IAS  37  Provisions, Contingent Li-
abilities and Contingent Assets. [IAS  19(2011).103]
Other guidance
IAS 19 also provides guidance in relation to:
 when an entity should recognize a reimbursement of expenditure to
settle a defined benefit obligation [IAS 19(2011).116-119]
 when it is appropriate to offset an asset relating to one plan against a
liability relating to another plan [IAS 19(2011).131-132]
  accounting for multi-employer plans by individual employers
[IAS 19(2011).32-39]
 defined benefit plans sharing risks between entities under common
control [IAS 19.40-42]
 entities participating in state plans [IAS 19(2011).43-45]
 insurance premiums paid to fund post-employment benefit plans
[IAS 19(2011).46-49]
 Disclosures about defined benefit plans
 IAS 19(2011) sets the following disclosure objectives in relation to defined
benefit plans [IAS 19(2011).135]:
 an explanation of the characteristics of an entity's defined benefit plans,
and the associated risks
 identification and explanation of the amounts arising in the financial
statements from defined benefit plans
 a description of how defined benefit plans may affect the amount, timing
and uncertainty of the entity's future cash flows.

Other long-term employee benefits

The term “other long term employee benefits” is a residual definition

Other long term employee benefits are all employee benefits other than short-
term employee benefits, postemployment benefits and termination benefits.

In other words, other long-term employee benefits are employee benefits which
are not expected to be settled wholly within twelve months after the end of
annual reporting period in which the employees render the related service.

Examples of other long-term employee benefits

a. Long-term paid absences such as long service or sabbatical leave

b. Jubilee or other long service
c. Long-term disability benefits
d. Profit sharing and bonuses
e. Deferred compensation
Termination benefits

Termination benefits are employee benefits provided in exchange for the

termination of an employee’s employment as a result of either:

a. An entity’s decision to terminate an employee’s employment before

the normal retirement date
b. An employee’s decision to accept an offer of benefits in exchange for
the termination of employment

Philippine Accounting Standard #20

Accounting for government grant and disclosure of government assistance

Objective of PAS 20

The objective of IAS 20 is to prescribe the accounting for, and disclosure of, gov-
ernment grants and other forms of government assistance.

SCOPE
IAS 20 applies to all government grants and other forms of government
assistance. However, it does not cover government assistance that is provided in
the form of benefits in determining taxable income. It does not cover government
grants covered by PAS 41 Agriculture, either. The benefit of a government loan at
a below-market rate of interest is treated as a government grant. [IAS 20.10A]

Government grant

PAS 20, paragraph 3, defines government grant as assistance by government in

the form of transfer of resources to an entity In return for part or future
compliance with certain conditions relating to the operating activities of the
entity.

Recognition and measurement

Government grant shall be recognized when there is reasonable assurance that:

a. An entity will comply with the conditions attaching to the grant.

 b. The grant will be received.

Government grant shall not be recognized on a cash basis as this is not consistent
with generally accepted accounting practice.

Classification of government grant

a. Grant related to asset

This government grant whose primary condition is that an entity qualifying for the
grant shall purchase, construct or otherwise acquire long-term asset

b. Grant related income

By residual definition, this is government grant other than grant related to asset.

Non-monetary grants, such as land or other resources, are usually accounted for
at fair value, although recording both the asset and the grant at a nominal
amount is also permitted. Even if there are no conditions attached to the assis-
tance specifically relating to the operating activities of the entity (other than the
requirement to operate in certain regions or industry sectors), such grants should
not be credited to equity.

A grant receivable - as compensation for costs already incurred or for immediate

financial support, with no future related costs, should be recognized as income in
the period in which it is receivable.

A grant relating to assets may be presented in one of two ways:

 as deferred income, or
 by deducting the grant from the asset's carrying amount.
 A grant relating to income may be reported separately as 'other income' or
deducted from the related expense.
If a grant becomes repayable, it should be treated as a change in estimate. Where
the original grant related to income, the repayment should be applied first against
any related unamortized deferred credit, and any excess should be dealt with as
an expense. Where the original grant related to an asset, the repayment should
be treated as increasing the carrying amount of the asset or reducing the deferred
income balance. The cumulative depreciation which would have been charged had
the grant not been received should be charged as an expense.

Accounting for government

Government grant shall be recognized as income on a systematic basis over the

periods in which an entity recognizes as expenses the related cost for which an
entity recognizes as expenses the related cost for which the grant is intended to
compensate.

In other words, the grant is taken to income over one or more periods in which the
related cost is incurred.

Government assistance

Government assistance is action by government designed to provide an economic

benefit specific to an entity or range of entities qualifying under certain criteria.

The essence of government assistance is that no value can be reasonably placed

upon it. Examples of government assistance are:

a. Free technical or marketing advice

b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the
entity’s sales.

Government assistant does not include the following indirect benefits or benefits
not specific to an entity:

a. Infrastructure in development areas such as improvement to the general

transport and communication network.
b. Imposition of trading constraints on competitors.
c. Improved facilities such as irrigation for the benefit of an entire local
community.

Disclosure about government grant

 a. The accounting policy adopted for government gran , including the method
of presentation in the financial statements.
b. The nature and extent of government grant recognized in the financial
statements and an indication of other forms of government assistance from
which the entity has directly benefited.
c. Unfulfilled conditions and other contingencies attaching to government
assistance that has been recognized.

Government assistance
Government grants do not include government assistance whose value cannot be
reasonably measured, such as technical or marketing advice.

Philippine accounting standards #21

The Effects of Changes in Foreign Exchange Rate

Objective of PAS 21

To prescribe how to include foreign currency transactions and foreign operations

in the financial statements of an entity and how to translate financial statements
into a presentation currency. The principal issues are which exchange rate(s) to
use and how to report the effects of changes in exchange rates in the financial
statements.

SCOPE

Translating the results and financial position of foreign operation that are
included in the financial statements of the entity by consolidation or the equity
method; and translating an entity’s results and financial position into a
presentation currency

Key definitions
Functional currency -  the currency of the primary economic environment in
which the entity operates. (The term 'functional currency' was used in the 2003
revision of IAS 21 in place of 'measurement currency' but with essentially the
same meaning.)

Presentation currency -  the currency in which financial statements are

presented.

Exchange difference -  the difference resulting from translating a given number of

units of one currency into another currency at different exchange rates.

Foreign operation - a subsidiary, associate, joint venture, or branch whose activi-

ties are based in a country or currency other than that of the reporting entity.
Basic steps for translating foreign currency amounts into the functional currency
1. the reporting entity determines its functional currency
2. the entity translates all foreign currency items into its functional currency
3. the entity reports the effects of such translation in accordance with paragraphs
20-37 [reporting foreign currency transactions in the functional currency] and 50
[reporting the tax effects of exchange differences].
Foreign currency transactions

A foreign currency transaction should be recorded initially at the rate of exchange

at the date of the transaction (use of averages is permitted if they are a reason-
able approximation of actual).

At each subsequent balance sheet date:

 foreign currency monetary amounts should be reported using the closing
rate
 non-monetary items carried at historical cost should be reported using
the exchange rate at the date of the transaction
 non-monetary items carried at fair value should be reported at the rate
that existed when the fair values were determined
Presentation currency using the following procedures:

 assets and liabilities for each balance sheet presented (including compar-
atives) are translated at the closing rate at the date of that balance sheet.
 This would include any goodwill 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
[IAS 21.47];
 income and expenses for each income statement (including compara-
tives) are translated at exchange rates at the dates of the transactions;
and
 all resulting exchange differences are recognized in other comprehensive
income.

Disposal of a foreign operation

When a foreign operation is disposed of, the cumulative amount of the exchange
differences recognized in other comprehensive income and accumulated 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.

Disclosure

 The amount of exchange differences recognized in profit or loss

(excluding differences arising on financial instruments measured at fair
value through profit or loss.
 Net exchange differences recognized in other comprehensive income and
accumulated in a separate component of equity, and a 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 sig-
nificant foreign operation and the reason.

When an entity presents its financial statements in a currency that is different

from its functional currency, it may describe those financial statements as
complying with IFRS only if they comply with all the requirements of each applica-
ble Standard (including PAS 21) and each applicable Interpretation.

Convenience translations

 Sometimes, an entity displays its financial statements or other financial in-

formation in a currency that is different from either its functional currency
or its presentation currency simply by translating all amounts at end-of-pe-
riod exchange rates. This is sometimes called a convenience translation. A
result of making a convenience translation is that the resulting financial in-
formation does not comply with all IFRS, particularly IAS 21. In this case, the
following disclosures are required:
 Clearly identify the information as supplementary information to distin-
guish it from the information that complies with IFRS
 Disclose the currency in which the supplementary information is
displayed
 Disclose the entity's functional currency and the method of translation
used to determine the supplementary in.

Philippine Accounting Standard #23

Objective of PAS 23

To prescribe the accounting treatment for borrowing costs. Borrowing costs

include interest on bank overdrafts and borrowings, finance charges on finance
leases and exchange differences on foreign currency borrowings where they are
regarded as an adjustment to interest costs.

SCOPE
Two types of assets that would otherwise be qualifying assets are excluded from
the scope of IAS 23:
 qualifying assets measured at fair value, such as biological assets
accounted for under IAS 41 Agriculture
  inventories that are manufactured, or otherwise produced, in large quan-
tities on a repetitive basis and that take a substantial period to get ready
for sale (for example, maturing whisky)
 qualifying assets measured at fair value, such as biological assets
accounted for under IAS 41 Agriculture
 inventories that are manufactured, or otherwise produced, in large quan-
tities on a repetitive basis and that take a substantial period to get ready
for sale (for example, maturing whisky)

Borrowing cost

Under PAS 23, paragraph 6 borrowing costs are defined as interest and other cost
that an entity incurs in connection with borrowing of funds.

Paragraph 6 provides that borrowing cost specifically include:

a. Interest expense calculated using the effective interest method.

b. Finance charge with respect to a finance lease.
c. Exchange difference arising from foreign currency borrowing to the extent
that is regarded as an adjustment to interest cost.

Qualifying asset

A qualifying asset is an asset that necessarily takes a substantial period of time to

get ready for the intended use or sale.

Examples include the following:

a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property

Excluded from capitalization

PAS 23 does not require capitalization of borrowing cost relating to the following:

a. Asset measured at fair value, such as biological asset

 b. Inventory that is manufactured in large quantity on a repetitive basis, such
as maturing whisky even if it takes a substantial period of time to get ready
for sale.
c. Asset is ready for the intended use or sale when acquired.

Accounting for borrowing cost

PAS 23, paragraph 8, mandates the following rules on borrowing cost.

1. If the borrowing is directly attributable to the acquisition, construction or

production of the qualifying asset, the borrowing cost is required to be
capitalized as cost of the asset.

In other words, the capitalization of borrowing cost is mandatory for a

qualifying asset.

Borrowing cost can be capitalized when the asset is qualifying asset and it is
probable that the borrowing cost will result to future economic benefit and
the cost can be measured reliably.

2. All other borrowing shall be expensed as incurred.

In other words if the borrowing is not directly attributable to s qualifying

asset, the borrowing cost us expensed immediately.

Accounting treatment
Recognition
Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset form part of the cost of that asset and, therefore,
should be capitalized. Other borrowing costs are recognized as an expense.

Measurement
Where funds are borrowed specifically, costs eligible for capitalization are the
actual costs incurred less any income earned on the temporary investment of
such borrowings. Where funds are part of a general pool, the eligible amount is
determined by applying a capitalization rate to the expenditure on that asset. The
capitalization rate will be the weighted average of the borrowing costs applicable
to the general pool.

Capitalizations should commence when expenditures are being incurred,

borrowing costs are being incurred and activities that are necessary to prepare
the asset for its intended use or sale are in progress (may include some activities
prior to commencement of physical production).

Asset financed by specific borrowing

PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the
purpose of acquiring a qualifying asset, the amount of the capitalized borrowing
cost is the actual borrowing cost incurred during the period less any investment
income from the temporary investment of those borrowings.

Commencement of capitalization

The capitalization of borrowing cost as part of the cost of a qualifying asset shall
commence when the following three conditions are present.

a. When the entity incurs expenditures for the asset.

b. When the entity incurs borrowing cost
c. When the entity undertakes activities that are necessary to prepare the
asset for the intended use or sale.

Suspension of capitalization

Capitalization of borrowing cost shall be suspended during extended periods in

which active development is interrupted.

Capitalization of borrowing cost is not also suspended when a temporary delay is

a necessary part of the process of getting an asset ready for its intended use or
sale.

For example, capitalization continues during the extended period that high water
levels delay the construction of the bridge, if such high water levels are common
during the construction period in the geographical region method.
Cessation of capitalization

Capitalization of borrowing cost shall cease when substantially all the activities
necessary to prepare the qualifying asset for the intended use or sale are
complete.

An asset is normal ready for the intended use or sale when the physical
construction of the asset is complete even though routine administrative work
might still continue.

Disclosures related to borrowing cost

a. The amount of borrowing cost capitalized during the period

b. The capitalization rate used to determine the amount of borrowing cost
eligible for capitalization.

Segregation of asset that are “qualifying assets” from other asset in the statement
of financial position is not required to be disclosed.

Philippine Accounting Standard #24

Objective of PAS 24

To ensure that an entity's financial statements contain the disclosures necessary

to draw attention to the possibility that its financial position and profit or loss may
have been affected by the existence of related parties and by transactions and
outstanding balances with such parties.
SCOPE

This standard requires s disclosures of related part relationships ,transactions, and

outstanding balances, including commitments ,in the consolidated and separates
financial statements.

Related party disclosure

Related party

Related party – parties are considered to be related of one party has:

 a. The ability to control the other party
b. The ability to exercise significant influence over the door party.
c. Joint control over the reporting entity.

Control is the power over the investee or the power to govern the financial and
operating policies of an entity so as to obtain benefits.

Control is ownership directly or indirectly through subsidiaries of more than half

of the voting power of an entity.

Significant influence is the power to participate in the financial and operating

policy decision of an entity, but not control of those policies.

Significant influences may be gained by share ownership of 20% or more.

Beyond the mere 20% threshold of ownership, the existence of significant is

usually evidenced by the following factors:

a. Representation in the board of directors

b. Participation in policy making process
c. Material transactions between the investors and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information

Joint control is the contractually agreed sharing of control over an economic

activity.

Examples of related parties

1. Affiliates – meaning the parent, the subsidiary and fellow subsidiaries.

2. Associates – meaning the entities over which one party exercises
significant influence
3. Venture – includes the subsidiary or subsidiaries of the joint ventures.
4. Key management personnel – are those persons having authority and
responsibility for planning, directing and controlling the activities
 5. 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.

Close family members of an individual include:

a. The individual’s spouse and children

b. Children of the individual’s spouse
c. Dependents of the individual spouse or the individual’s spouse.
6. Individuals - owning directly or indirectly an interest in the voting power
of the reporting entity that gives them significant influence over the
entity, and close family members of such individuals.
7. Postemployment benefit plan for the benefits of the employee.

Examples of related party transactions

A related party transaction is a transfer of resources or obligations between

related parties, regardless of whether a price is charged.

PAS 24, paragraph 20, provides the following examples of the related party
disclosure:

1. Purchase and sale of goods

2. Purchase and sale of property and other asset
3. Rendering or receiving services
4. Leases
5. Transfer of research and development
6. License agreement
7. Finance arrangements, including loans and equity contributions in cash or
in kind
8. Guarantee and collateral
9. Settlement of liabilities on behalf of the entity or by the entity on behalf of
other party.

Related party disclosure

 PAS 24, paragraph 12, requires disclosure of related party relationships where
control exist irrespective of whether there have been transactions between those
related parties.

In other words, relationships between parents and subsidiaries shall be disclosed

regardless of whether there have been transactions between those related
parties.

An entity shall disclosed the name of the entity’s parent and of different, the
ultimate controlling.

Disclosure of related party transactions

PAS 24, paragraph 17, provides that if there have been transactions between
related parties, an entity shall disclose the nature of the related party
relationships as well as information about the transactions and outstanding of the
financial statements.

As a minimum, the disclosures of related party transactions shall include:

a. The amount the transactions

b. The amount of the outstanding balance, terms and conditions, whether
secured or unsecured, and the nature of considerations to be provided.
c. The allowance for doubtful accounts related to the outstanding balance
d. The doubtful accounts expense recognized during the period in respect of
amount due from related parties.

Key management personnel compensation

PAS 24, paragraph 16, provides that an entity shall disclose key management
personnel compensation in total and for each of the following categories

a. Short-term employee benefits

b. Postemployment benefits, for example, retirement pensions
c. Other long-term benefits
d. Termination benefits
 e. Share based payment transactions, for example, share options

Disclosure

Relationships between parents and subsidiaries. 

Regardless of whether there have been transactions between a parent and a sub-
sidiary, an entity must disclose the name of its parent and, if different, the
ultimate controlling party. If neither the entity's parent nor the ultimate control-
ling party produces financial statements available for public use, the name of the
next most senior parent that does so must also be disclosed

Management compensation.
 Disclose key management personnel compensation in total and for each of the
following categories:
 short-term employee benefits
 post-employment benefits
 other long-term benefits
 termination benefits
 share-based payment benefits
 
Related party transactions.
 If there have been transactions between related parties, disclose the nature of
the related party relationship as well as information about the transactions and
outstanding balances necessary for an understanding of the potential effect of the
relationship on the financial statements. These disclosure would be made sepa-
rately for each category of related parties and would include:
 the amount of the transactions
 the amount of outstanding balances, including terms and conditions and
guarantees
 provisions for doubtful debts related to the amount of outstanding
balances
 expense recognized during the period in respect of bad or doubtful debts
due from related parties
Related party disclosure not required

PAS 24, paragraph 3, requires a disclosure of related party transactions and

outstanding balance in the separate financial statement of a parent, subsidiary,
associates or venturer.

However, paragraph 4 provides that intragroup related party transactions and

outstanding balances are eliminated in the preparation of consolidated financial
statements of the group.

Unrelated parties

Unrelated parties include:

1. Two entities simply because they have a director or key management

personnel in common.
2. Providers of finance, trade unions, public utilities and government agencies
in the course of their normal dealings with an entity by virtue only of those
dealings.
3. A single customer, supplier, franchiser or general agent with whom an
entity transacts a significant volume of business merely by virtue of the
resulting economic dependence.
4. Two venturers simply because they share joint control over a joint venture.
Philippine Accounting Standard #26

Objective of PAS 26

To specify measurement and disclosure principles for the reports of retirement

benefit plans. All plans should include in their reports a statement of changes in
net assets available for benefits, a summary of significant accounting policies and
a description of the plan and the effect of any changes in the plan during the
period.

SCOPE

 Applies to financial financial statement benefit plan were such financial

statements are prepared.
 Accounting and reporting by a retirement benefit plan to all participants as
a group.
 Does not deal with reports to individual participants about their
retirements benefits right
 Complements PAS19 on retirement benefits
 Does not deal with other forms of employment benefits
Accounting Reporting by Retirement Benefit Plans
The objective of PAS 26 is to specify measurement and disclosure principles for
the reports of retirement benefit plans. All plans should include in their reports a
statement of changes in net assets available for benefits, a summary of significant
accounting policies and a description of the plan and the effect of any changes in
the plan during the period.

Key definitions

Retirement benefit plan: An arrangement by which an entity provides benefits

(annual income or lump sum) to employees after they terminate from service.

Defined contribution plan: A retirement benefit plan by which benefits to

employees are based on the amount of funds contributed to the plan plus
investment earnings thereon.
Defined benefit plan: A retirement benefit plan by which employees receive
benefits based on a formula usually linked to employee earnings.

Defined contribution plans

The report of a defined contribution plan should contain a statement of net assets
available for benefits and a description of the funding policy.

Defined benefit plans

The report of a defined benefit plan should contain either:

a statement that shows the net assets available for benefits, the actuarial present
value of promised retirement benefits (distinguishing between vested benefits
and non-vested benefits) and the resulting excess or deficit; or a statement of net
assets available for benefits, including either a note disclosing the actuarial
present value of promised retirement benefits (distinguishing between vested
benefits and non-vested benefits) or a reference to this information in an
accompanying actuarial report.

If an actuarial valuation has not been prepared at the date of the report of a
defined benefit plan, the most recent valuation should be used as a base and the
date of the valuation disclosed. The actuarial present value of promised
retirement benefits should be based on the benefits promised under the terms of
the plan on service rendered to date, using either current salary levels or
projected salary levels, with disclosure of the basis used. The effect of any
changes in actuarial assumptions that have had a significant effect on the
actuarial present value of promised retirement benefits should also be disclosed.

The report should explain the relationship between the actuarial present value of
promised retirement benefits and the net assets available for benefits, and the
policy for the funding of promised benefits.
Retirement benefit plan investments should be carried at fair value. For
marketable securities, fair value means market value. If fair values cannot be
estimated for certain retirement benefit plan investments, disclosure should be
made of the reason why fair value is not used.

Disclosure

Statement of net assets available for benefit, showing:

 assets at the end of the period

 basis of valuation
 details of any single investment exceeding 5% of net assets or 5% of any
category of investment
 details of investment in the employer
 liabilities other than the actuarial present value of plan benefits

Statement of changes in net assets available for benefits, showing:

 employer contributions
 employee contributions
 investment income
 other income
 benefits paid
 administrative expenses
 other expenses
 income taxes
 profit or loss on disposal of investments
 changes in fair value of investments
 transfers to/from other plans
Description of funding policy Other details about the plan Summary of significant
accounting policies Description of the plan and of the effect of any changes in the
plan during the period Disclosures for defined benefit plans:

Actuarial present value of promised benefit obligations description of actuarial

assumptions description of the method used to calculate the actuarial present
value of promised benefit obligations

Philippine Accounting Standard #27

Separate financial statements

Objective of PAS 27

 has the objective of setting standards to be applied in accounting for investments

in subsidiaries, jointly ventures, and associates when an entity elects, or is
required by local regulations, to present separate (non-consolidated) financial
statements.

SCOPE

PAS 27 covers accounting for investments in subsidiaries, joint ventures and

associates in a separate financial statement. Preparation of separate financial
statements is not required by IAS 27. It is the local law that usually requires
entities to prepare separate financial statements. Separate financial statements
are those financial statements in which investments in subsidiaries, joint ventures
and associates and accounted either at cost, in accordance with IFRS 9 or using
the equity method.

When an entity does not have investments in subsidiaries, joint ventures or

associates, it does not prepare separate financial statements as defined by, such
financial statements are often labelled as ‘individual’ or ‘standalone’ financial
statements.
Separate Financial Statement

PAS 27 has the objective of setting standards to be applied in accounting for

investments in subsidiaries, jointly ventures, and associates when an entity elects,
or is required by local regulations, to present separate (non-consolidated)
financial statements.

Key definitons

Consolidated financial statements- Financial statements of a group in which the

assets, liabilities, equity, income, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity

Separate financial statements - Financial statements presented by a parent (i.e.

an investor with control of a subsidiary), an investor with joint control of, or
significant influence over, an investee, in which the investments are accounted for
at cost or in accordance with IFRS 9 Financial Instruments.

Preparation of separate financial statements

Requirement for separate financial statements

PAS 27 does not mandate which entities produce separate financial statements
available for public use. It applies when an entity prepares separate financial
statements that comply with International Financial Reporting Standards.

Financial statements in which the equity method is applied are not separate
financial statements. Similarly, the financial statements of an entity that does not
have a subsidiary, associate or joint venturer's interest in a joint venture are not
separate financial statements.

Investment entities
If a parent investment entity is required, in accordance with IFRS 10, to measure
its investment in a subsidiary at fair value through profit or loss in accordance
with IFRS 9 or IAS 39, it is required to also account for its investment in a
subsidiary in the same way in its separate financial statements.

When a parent ceases to be an investment entity, the entity can account for an
investment in a subsidiary at cost (based on fair value at the date of change or
status) or in accordance with IFRS 9. When an entity becomes an investment
entity, it accounts for an investment in a subsidiary at fair value through profit or
loss in accordance with IFRS 9.

Consolidated Financial Statements presents separate financial statements as its

only financial statements.
[Note: The investment entity consolidation exemption was introduced into IFRS
10 by Investment Entities, issued on 31 October 2012 and effective for annual
periods beginning on or after 1 January 2014.]

Choice of accounting method

When an entity prepares separate financial statements, investments in sub-
sidiaries, associates, and jointly controlled entities are accounted for either:
 at cost, or
 in accordance with IFRS 9 Financial Instruments (or IAS 39Financial Instru-
ments: Recognition and Measurement for entities that have not yet
adopted IFRS 9), or
 using the equity method as decribed in IAS 28 Investments in Associates
and Joint Ventures. [See the amendment information below.]
 The entity applies the same accounting for each category of investments.
Investments that are accounted for at cost and classified as held for sale in
accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations are accounted for in accordance with that IFRS. Investments
carried at cost should be measured at the lower of their carrying amount
and fair value less costs to sell. The measurement of investments
accounted for in accordance with IFRS 9 is not changed in such circum-
stances.
  If an entity elects, in accordance with IAS 28 (as amended in 2011), to
measure its investments in associates or joint ventures at fair value through
profit or loss in accordance with IFRS 9, it shall also account for those in-
vestments in the same way in its separate financial statements.

Investment entities
[Note: The investment entity consolidation exemption was introduced into IFRS
10 by Investment Entities, issued on 31 October 2012 and effective for annual
periods beginning on or after 1 January 2014.]

Specified accounting applies in separate financial statements when a parent

reorganizes the structure of its group by establishing a new entity as its parent
in a manner satisfying the following criteria.

 the new parent obtains control of the original parent by issuing equity in-
struments in exchange for existing equity instruments of the original
parent
 the assets and liabilities of the new group and the original group are the
same immediately before and after the reorganization, and
 the owners of the original parent before the reorganization have the
same absolute and relative interests in the net assets of the original
group and the new group immediately before and after the
reorganization.
 Where these criteria are met, and the new parent accounts for its invest-
ment in the original parent at cost, the new parent measures the carrying
amount of its share of the equity items shown in the separate financial
statements of the original parent at the date of the reorganization.
 The above requirements:
 apply to the establishment of an intermediate parent within a group, as
well as establishment of a new ultimate parent of a group
 apply to an entity that is not a parent entity and establishes a parent in a
manner that satisfies the above criteria
  apply only where the criteria above are satisfied and do not apply to
other types of reorganizations or for common control transactions more
broadly.

Recognition of dividends

An entity recognises a dividend from a subsidiary, joint venture or associate in

profit or loss in its separate financial statements when its right to receive the
dividend in established.

Group reorganizations

Specified accounting applies in separate financial statements when a parent

reorganizes the structure of its group by establishing a new entity as its parent in
a manner satisfying the following criteria: [IAS 27(2011).13]

 the new parent obtains control of the original parent by issuing equity
instruments in exchange for existing equity instruments of the original
parent

 the assets and liabilities of the new group and the original group are the
same immediately before and after the reorganization, and

 the owners of the original parent before the reorganizations have the same
absolute and relative interests in the net assets of the original group and
the new group immediately before and after the reorganization

Disclosure

When a parent, in accordance with paragraph 4(a) of IFRS 10, elects not to
prepare consolidated financial statements and instead prepares separate financial
statements, it shall disclose in those separate financial statements: [IAS
27(2011).16]
  the fact that the financial statements are separate financial statements;
that the exemption from consolidation has been used; the name and
principal place of business (and country of incorporation if different) of the
entity whose consolidated financial statements that comply with IFRS have
been produced for public use; and the address where those consolidated
financial statements are obtainable,
 a list of significant investments in subsidiaries, jointly controlled entities,
and associates, including the name, principal place of business (and country
of incorporation if different), proportion of ownership interest and, if
different, proportion of voting rights,
 and a description of the method used to account for the foregoing
investments.

Applicability and early adoption

IAS 27 (as amended in 2011) is applicable to annual reporting periods beginning

on or after 1 January 2013. [IAS 27(2011).18]
An entity may apply IAS 27 (as amended in 2011) to an earlier accounting
period, but if doing so it must disclose the fact that is has early adopted the
standard and also apply: [IAS 27(2011).18]
o IFRS 10 Consolidated Financial Statements
o IFRS 11 Joint Arrangements
o IFRS 12 Disclosure of Interests in Other Entities
o IAS 28 Investments in Associates and Joint Ventures (as amended in
2011).

The amendments to IAS 27 (2011) made by Investment Entities are applicable to

annual reporting periods beginning on or after 1 January 2014 and special transi-
tional provisions apply.
Equity Method in Separate Financial Statements (Amendments to IAS 27), issued
in August 2014, amended paragraphs 4–7, 10, 11B and 12. An entity shall apply
those amendments for annual periods beginning on or after 1 January 2016 retro-
spectively in accordance with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. Earlier application is permitted. If an entity applies those
amendments for an earlier period, it shall disclose that fact. [IAS 27(2011).18A-
18J].

Philippine Accounting Standard #28

Investment in associates

Objective of PAS 28

Application of the equity method of accounting the ultimate or any

intermediate parent of the parent produces financial statements available for
public use that comply with IFRSs, in which subsidiaries are consolidated or are
measured at fair value through profit or loss in accordance with IFRS 10.
SCOPE
IAS 28 applies to all investments in which an investor has significant influence but
not control or joint control except for investments held by a venture capital
organization, mutual fund, unit trust, and similar entity that are designated under
IAS 39 to be at fair value with fair value changes recognized in profit or loss.

Associates

Associates is simply defined as an entity over which investors has significant

influence.

Significance influence is the power to participate in the financial and operating

policy decisions of the associates but not control or joint control over those
policies.

The assessment of significant influence is a matter of judgment.

However, PAS 28, paragraph 5, provides practical guidance to assist management

in making such assessment.

If the investor holds, directly or indirectly through the subsidiaries, 20% or more
of the voting power of the investee, it is presumed that the investor has
significance influence, unless it can be clearly demonstrated that this is not the
case.

Conversely, if the investor holds, directly or indirectly through subsidiaries, less

than 20% of the voting power of the investee, it is presumed that the investor
does not have the significance influence, unless such influences can be clearly
demonstrated.

Beyond the mere 20% threshold of ownership, PAS 28, paragraph 6, provides that
the existence of significant influence I usually evidenced by the following:

a. Representation in the board members

b. Participation In the policy making process
c. Material transaction between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information

Measurement in investment associates

The investment is associate is measured using the equity method of accounting.

The equity method is based on the economic relationship between the investors
and the investee.

The investor and the investee are viewed as a single economic unit. The investor
and the investee are one and the same.

The equity method is applicable when the investor has a significance influence
over the investee.

Accounting procedures equity method

a. The investment is initially recognized at cost.

b. The carrying amount is increased by the investor’s share of the profit of the
investee and decrease by the investor’s share of the loss of the investee.

The investor’s share of the profit or loss of the investee is recognized as

investment income.
 c. Dividends receive from an entity investee reduce the carrying amount of
the investment.
d. Note that the investment must be ordinary shares

If the investment is a preference share the equity method is not

appropriate regardless of the percentage because the preference share is a
nonvoting equity.

e. Technically, if the investor has significant influence over the investee, the
investee is said to be an associate.

Accordingly, under the equity method the investment in ordinance shares

should be appropriately describe as investment in associates.

f. The investment in associates accounted for using the equity method shall
be reported as noncurrent asset.

Excess of cost over carrying

An accounting problem arises if the investor pays more or less for an investment
than the carrying amount of underlying net assets.

For example, if the earning potential of the investment is abnormally high the
current value if the investee’s net assets is frequently higher than the carrying
amount.

If the investors pays more than the carrying amount of the net asset acquired, the
difference is commonly known as “excess of cost over carrying amount” and may
be attributed to the following:

a. Undervaluation of the investee’s assets, such as building land and

inventory.
b. Goodwill
If the assets of the are fairly valued the excess of cost over carrying amount of
the underlying net assets is attributable to goodwill.

If the excess is attributable to undervaluation of depreciable asset, it is amortized

over the remaining life of the depreciable asset.

If the excess is attributable to undervaluation of land, it is not amortized because

the land is nondepreciable.

The amount is expensed when the land is sold.

Applying the equity method of accounting

Basic principle
 Under the equity method of accounting, an equity investment is initially recorded
at cost and is subsequently adjusted to reflect the investor's share of the net
profit or loss of the associate.

Distributions and other adjustments to carrying amount. 

Distributions received from the investee reduce the carrying amount of the in-
vestment. Adjustments to the carrying amount may also be required arising from
changes in the investee's other comprehensive income that have not been
included in profit or loss (for example, revaluations).

Potential voting rights.

 Although potential voting rights are considered in deciding whether significant
influence exists, the investor's share of profit or loss of the investee and of
changes in the investee's equity is determined on the basis of present ownership
interests. It should not reflect the possible exercise or conversion of potential
voting rights.

Implicit goodwill and fair value adjustments. 

On acquisition of the investment in an associate, any difference (whether positive
or negative) between the cost of acquisition and the investor's share of the fair
values of the net identifiable assets of the associate is accounted for like goodwill
in accordance with IFRS 3 Business Combinations. Appropriate adjustments to the
investor's share of the profits or losses after acquisition are made to account for
additional depreciation or amortization of the associate's depreciable or
amortizable assets based on the excess of their fair values over their carrying
amounts at the time the investment was acquired.

Impairment loss

If there is an indication that an investment in associate may be impaired, an

impairment loss shall be recognized whenever the carrying amount of the
investment in associate exceeds recoverable amount.

The recoverable amount is measured higher between fair value less cost of
disposal and value in use.

Fair value is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date.

Value in use is the present value of the estimated future cash flows expected to
arise from the continuing use of an asset and from the ultimate disposal.

The recoverable amount of an investment in associate is assessed for each

individual associate.

Investee with cumulative preference share

When an associate has outstanding cumulative preference shares, the investors

shall compute its shares of earnings or losses after deducting the preference
dividends, whether or not such dividends are declared.

Investee with noncumulative preference shares

When an associates has outstanding noncumulative preference shares, the

investor shall compute its share of earnings after deducting the preference
dividends only declared.

Discontinuance of equity method

PAS 28, paragraph 22, provides that an investors shall discontinue the use of the
equity method from the date that it cease to have significant influence over an
associate.
Consequently, the investor shall account for the investment as follows:

a. Financial asset at fair value through profit or loss.

b. Financial asset at fair value through other comprehensive income.
c. Nonmarkeble investment at cost or investment in unquoted equity
instrument.

PAS 28, basis for conclusion 18, requires an investor that continues to have
significant influence over an associate to apply the equity method even if the
associate is operating under severe long-term restrictions that significantly impair
the ability to transfer funds to the investor.

Significant influence must be lost before the equity method ceases to be

applicable.

Date of associate's financial statements

of any significant transactions or events occurring between the accounting period
ends. However, the difference between the reporting date of the associate and
that of the investor cannot be longer than three months.
In applying the equity method, the investor should use the financial statements of
the associate as of the same date as the financial statements of the investor
unless it is impracticable to do so. [IAS 28.24] If it is impracticable, the most
recent available financial statements of the associate should be used, with adjust-
ments made for the effects

Associate's accounting policies. 

If the associate uses accounting policies that differ from those of the investor, the
associate's financial statements should be adjusted to reflect the investor's
accounting policies for the purpose of applying the equity method.

Losses in excess of investment

 If an investor's share of losses of an associate equal or exceeds its "interest in the
associate", the investor discontinues recognizing its share of further losses. The
"interest in an associate" is the carrying amount of the investment in the
associate under the equity method together with any long-term interests that, in
substance, form part of the investor's net investment in the associate. [IAS 28.29]
After the investor's interest is reduced to zero, additional losses are recognized by
a provision (liability) only to the extent that the investor has incurred legal or con-
structive obligations or made payments on behalf of the associate. If the associate
subsequently reports profits, the investor resumes recognizing its share of those
profits only after its share of the profits equals the share of losses not recognized.

Partial disposals of associates. 

If an investor loses significant influence over an associate, it derecognizes that
associate and recognizes in profit or loss the difference between the sum of the
proceeds received and any retained interest, and the carrying amount of the in-
vestment in the associate at the date significant influence is lost.

Separate financial statements of the investor

Equity accounting is required in the separate financial statements of the investor
even if consolidated accounts are not required, for example, because the investor
has no subsidiaries. But equity accounting is not required where the investor
would be exempt from preparing consolidated financial statements under IAS 27.
In that circumstance, instead of equity accounting, the parent would account for
the investment either
(a) at cost or
(b) in accordance with IAS 39.

Measurement after loss of significant influence

PAS 28, paragraph 22, provides that on the date the significance influence is lost,
the investors shall measured any retained investment in associate at fair value.

The fair value of the investment at the date it ceases to be an associate shall be
regarded as the fair value on initial recognition as a financial asset.

Disclosure

The following disclosures are required:

 fair value of investments in associates for which there are published price
quotations
  summarized financial information of associates, including the aggregated
amounts of assets, liabilities, revenues, and profit or loss
 explanations when investments of less than 20% are accounted for by the
equity method or when investments of more than 20% are not accounted
for by the equity method
 use of a reporting date of the financial statements of an associate that is
different from that of the investor
 nature and extent of any significant restrictions on the ability of associ-
ates to transfer funds to the investor in the form of cash dividends, or
repayment of loans or advances
 unrecognized share of losses of an associate, both for the period and cu-
mulatively, if an investor has discontinued recognition of its share of
losses of an associate
 explanation of any associate is not accounted for using the equity method
 summarized financial information of associates, either individually or in
groups, that are not accounted for using the equity method, including the
amounts of total assets, total liabilities, revenues, and profit or loss
 The following disclosures relating to contingent liabilities are also required:
[IAS 28.40]
 investor's share of the contingent liabilities of an associate incurred
jointly with other investors
 contingent liabilities that arise because the investor is severally liable for
all or part of the liabilities of the associate

Venture capital organizations, mutual funds, and other similar entities must
provide disclosures about nature and extent of any significant restrictions on
transfer of funds by associates.

Presentation

 Equity method investments must be classified as non-current assets.

  The investor's share of the profit or loss of equity method investments,
and the carrying amount of those investments, must be separately
disclosed.
 The investor's share of any discontinuing operations of such associates is
also separately disclosed.
 The investor's share of changes recognized directly in the associate's
other comprehensive income are also recognized in other comprehensive
income by the investor, with disclosure in the statement of changes in
equity as required by IAS 1 Presentation of Financial Statements.

Philippine Accounting Standard #29

Financial reporting in hyperinflationary economy

Objective of PAS 29
To establish specific standards for entities reporting in the currency of a hyperin-
flationary economy, so that the financial information provided is meaningful.
SCOPE
Shall be applied to the financial statements ,of any entity whose functional
currency is the currency of a hyperinflationary economy.

Restatement of financial statements

The basic principle in IAS 29 is that the financial statements of an entity that
reports in the currency of a hyperinflationary economy should be stated in terms
of the measuring unit current at the balance sheet date. Comparative figures for
prior period(s) should be restated into the same current measuring unit.

Restatements are made by applying a general price index.

Items such as monetary items that are already stated at the measuring unit at the
balance sheet date are not restated. Other items are restated based on the
change in the general price index between the date those items were acquired or
incurred and the balance sheet date.

A gain or loss the net monetary position is included in net income. It should be
disclosed separately.
The restated amount - non-monetary item is reduced, in accordance with appro-
priate IFRSs, when it exceeds its the recoverable amount.

Hyperinflation

PAS 29on financial reporting in a hyperinflationary economy does not establish

an absolute rate at which hyperinflationary is deemed to arise.

Hyperinflation is a matter of judgment

Hyperinflation is indicated by characteristics of the economic environment of a

country which include but are not limited to the following:

a. The general population prefers to keep its wealth in nonmonetary assets or

in relatively stable foreign currency.
b. The general population regards monetary amounts not on terms of local
currency but in terms of relatively stable foreign currency.
c. Sales and purchase 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.
d. Interest rate, wages and prices are linked to a price index
e. The cumulative rate over 3 years is approaching or exceeds 100%.

Financial reporting in hyperinflationary economy

PAS 29, paragraph 8, provides that the financial statements of an entity that
reports in the currency of a hyperinflationary economy, whether they are based
on historical cost approach or a current cost approach, shall be stated in terms of
the measuring unit current at the end of reporting period.

presentation of the information is required under PAS 29 as a supplement to

unrestated, financial statements is not permitted.

Constant peso accounting

Constant peso accounting is the restatement of conventional or historical financial
statements in terms of the current purchasing power of the peso through the use
of index number.

Constant peso accounting is also known purchasing power or price level

accounting.

The traditional concept of preparing financial statements based on historical cost

is known as nominal peso accounting.

Monetary items

PAS 29 defines monetary items as money held an asset and liabilities to be

received or paid in fixed or determinable amount of money.

The essential feature of a monetary item is a right to receive or an obligation to

deliver a fixed or determinable amount of money.

Nonmonetary items

Nonmonetary items, by the process of exclusion. May be defined as those items

cannot be classified as monetary.

These items are so called nonmonetary because their peso amounts reported in
the financial statements differ from the amounts that are ultimately realizable or
payable.

General price index

The index number used for restatement is known as general price index
constructed by government like the Bangko Sentral ng Pilipinas.

Such as index is designed to show how much the overall level of price in the
economy has changed over time.

An increase in the general price index means that the purchasing power of money
has decreased.

This is popularly known as inflation.

A decrease in the general price index means that the purchasing power of money
has increased.

This is known as deflation.

Gain or loss on purchasing power

Purchasing power means the goods and services that money can buy.

In a period of inflation or rising prices, a purchasing power loss is incurred on

monetary assets and purchasing power gain is realized on monetary liabilities.

In a period of deflation or falling prices, a purchasing power gain is realized on

monetary asset and a purchasing power loss is incurred on monetary liabilities.

Disclosure
 Gain or loss on monetary items [IAS 29.9]
 The fact that financial statements and other prior period data have been
restated for changes in the general purchasing power of the reporting
currency [IAS 29.39]
 Whether the financial statements are based on an historical cost or
current cost approach [IAS 29.39]
 Identity and level of the price index at the balance sheet date and moves
during the current and previous reporting period [IAS 29.39]
Countries with three-year cumulative inflation rates exceeding 100%:
 Argentina
 South Sudan
 Sudan
 Venezuela
 Zimbabwe
 Countries with projected three-year cumulative inflation rates exceeding
100%:
 Islamic Republic of Iran
 Countries where the three-year cumulative inflation rates had exceeded
100% in recent years:
  There are no countries in this category for this period.
 Countries with recent three-year cumulative inflation rates exceeding
100% after a spike in inflation in a discrete period:
 Angola
 Suriname
Countries with projected three-year cumulative inflation rates between 70%
and 100% or with a significant (25% or more) increase in inflation during the
current period.
 Democratic Republic of Congo
 Liberia
 Yemen
The IPTF also notes that there may be additional countries with three-year cumu-
lative inflation rates exceeding 100% or that should be monitored which are not
included in the analysis as the necessary data is not available. An example cited is
Syria.

Philippine Accounting Standards #31

Interest in Joint Ventures

Objective of PAS 31
Sets out the accounting for an entity's interests in various forms of joint ventures:
jointly controlled operations, jointly controlled assets, and jointly controlled
entities. The standard permits jointly controlled entities to be accounted for using
either the equity method or by proportionate consolidation.
SCOPE
PAS 31 applies to accounting for all interests in joint ventures and the reporting of
joint venture assets, liabilities, income, and expenses in the financial statements
of ventures and investors, regardless of the structures or forms under which the
joint venture activities take place, except for investments held by a venture
capital organisation, mutual fund, unit trust, and similar entity that (by election or
requirement) are accounted for as under PAS 39 at fair value with fair value
changes recognized in profit or loss.]
Key definitions

Joint venture - a contractual arrangement whereby two or more parties

undertake an economic activity that is subject to joint control.

Venture -  a party to a joint venture and has joint control over that joint venture.
Investor in a joint venture -  a party to a joint venture and does not have joint
control over that joint venture

Control - the power to govern the financial and operating policies of an activity so
as to obtain benefits from it.

Joint control -  the contractually agreed sharing of control over an economic

activity. Joint control exists only when the strategic financial and operating
decisions relating to the activity require the unanimous consent of the ventures.
Jointly controlled operations
Jointly controlled operations involve the use of assets and other resources of the
venturers rather than the establishment of a separate entity. Each venturer uses
its own assets, incurs its own expenses and liabilities, and raises its own finance.
[IAS 31.13]
PAS 31 requires that the venture should recognize in its financial statements the
assets that it controls, the liabilities that it incurs, the expenses that it incurs, and
its share of the income from the sale of goods or services by the joint venture.

Jointly controlled assets

Jointly controlled assets involve the joint control, and often the joint ownership,
of assets dedicated to the joint venture. Each venture may take a share of the
output from the assets and each bears a share of the expenses incurred. ]

PAS 31 requires - that the venturer should recognized in its financial statements
its share of the joint assets, any liabilities that it has incurred directly and its share
of any liabilities incurred jointly with the other venturers, income from the sale or
use of its share of the output of the joint venture, its share of expenses incurred
by the joint venture and expenses incurred directly in respect of its interest in the
joint venture.
Jointly controlled entities
A jointly controlled entity - is a corporation, partnership, or other entity in which
two or more venturers have an interest, under a contractual arrangement that es-
tablishes joint control over the entity.

Each venturer usually contributes cash or other resources to the jointly controlled
entity. Those contributions are included in the accounting records of the venturer
and recognized in the venturer's financial statements as an investment in the
jointly controlled entity. [IAS 31.29]

PAS 31 allows two treatments of accounting for an investment in jointly con-

trolled entities – except as noted below:
 proportionate consolidation [IAS 31.30]
 equity method of accounting [IAS 31.38]
 Proportionate consolidation or equity method are not required in the
following exceptional circumstances: [IAS 31.1-2]
 An investment in a jointly controlled entity that is held by a venture
capital organisation or mutual fund (or similar entity) and that upon initial
recognition is designated as held for trading under IAS 39. Under IAS 39,
those investments are measured at fair value with fair value changes
recognized in profit or loss.
 The interest is classified as held for sale in accordance with IFRS 5.
 A parent that is exempted from preparing consolidated financial state-
ments by paragraph 10 of IAS 27 may prepare separate financial state-
ments as its primary financial statements. In those separate statements,
the investment in the jointly controlled entity may be accounted for by
the cost method or under IAS 39.

An investor in a jointly controlled entity need not use proportionate

consolidation or the equity method if all of the following four condi-
tions are met:
 1. the venturer is itself a wholly-owned subsidiary, or is a partially-owned
subsidiary of another entity and its other owners, including those not
otherwise entitled to vote, have been informed about, and do not object
to, the venturer not applying proportionate consolidation or the equity
method;
2. the venturer's debt or equity instruments are not traded in a public
market.
3. the venturer did not file, nor is it in the process of filing, its financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in a
public market; and
4. the ultimate or any intermediate parent of the venturer produces con-
solidated financial statements available for public use that comply with
International Financial Reporting Standards

Proportionate consolidation
Under proportionate consolidation, the balance sheet of the venturer includes its
share of the assets that it controls jointly and its share of the liabilities for which it
is jointly responsible. The income statement of the venturer includes its share of
the income and expenses of the jointly controlled entity.

PAS 31 allows for the use of two different reporting formats for presenting pro-
portionate consolidation:
 The venturer may combine its share of each of the assets, liabilities,
income and expenses of the jointly controlled entity with the similar items,
line by line, in its financial statements; or
 The venturer may include separate line items for its share of the assets, lia-
bilities, income and expenses of the jointly controlled entity in its financial
statements.
 Equity method
 Procedures for applying the equity method are the same as those described
in IAS 28 Investments in Associates.
  Separate financial statements of the venturer
 In the separate financial statements of the venturer, its interests in the joint
venture should be: [IAS 31.46]
 accounted for at cost; or
 accounted for under IAS 39 Financial Instruments: Recognition and Measure-
ment.

Transactions between a venturer and a joint venture

If a venturer contributes or sells an asset to a jointly controlled entity, while the
assets are retained by the joint venture, provided that the venturer has trans-
ferred the risks and rewards of ownership, it should recognized only the propor-
tion of the gain attributable to the other venturers. The venturer should
recognized the full amount of any loss incurred when the contribution or sale
provides evidence of a reduction in the net realizable value of current assets or an
impairment loss.

The requirements for recognition of gains and losses apply equally to non-mone-
tary contributions unless the gain or loss cannot be measured, or the other
venturers contribute similar assets. Unrealized gains or losses should be elimi-
nated against the underlying assets (proportionate consolidation) or against the
investment (equity method).
When a venturer purchases assets from a jointly controlled entity, it should not
recognize its share of the gain until it resells the asset to an independent party.
Losses should be recognized when they represent a reduction in the net realizable
value of current assets or an impairment loss.

Financial statements of an investor

An investor in a joint venture who does not have joint control should report its
interest in a joint venture in its consolidated financial statements either:
o in accordance with IAS 28 Investments in Associates – only if the investor
has significant influence in the joint venture; or
o in accordance with IAS 39 Financial Instruments: Recognition and Mea-
surement.
Partial disposals of joint ventures
If an investor loses joint control of a jointly controlled entity, it derecognizes that
investment and recognizes in profit or loss the difference between the sum of the
proceeds received and any retained interest, and the carrying amount of the in-
vestment in the jointly controlled entity at the date when joint control is lost.

Disclosure

A venturer is required to disclose:

 Information about contingent liabilities relating to its interest in a joint
venture. [IAS 31.54]
 Information about commitments relating to its interests in joint ventures.
[IAS 31.55]
 A listing and description of interests in significant joint ventures and the
proportion of ownership interest held in jointly controlled entities. A
venturer that recognizes its interests in jointly controlled entities using
the line-by-line reporting format for proportionate consolidation or the
equity method shall disclose the aggregate amounts of each of current
assets, long-term assets, current liabilities, long-term liabilities, income,
and expenses related to its interests in joint ventures. [IAS 31.56]
 The method it uses to recognize its interests in jointly controlled entities.
[IAS 31.57]
 Venture capital organizations or mutual funds that account for their
interests in jointly controlled entities in accordance with IAS 39 must make
the disclosures required by IAS 31.55-56. [IAS 31.1]

Philippine Accounting Standard #32

Financial instruments – presentation

Objective of PAS 32
The stated objective of PAS 32 is to establish principles for presenting financial in-
struments as liabilities or equity and for offsetting financial assets and liabilities.
PAS 32 addresses this in a number of ways:
 clarifying the classification of a financial instrument issued by an entity as
a liability or as equity
 prescribing the accounting for treasury shares (an entity's own repur-
chased shares)
 prescribing strict conditions under which assets and liabilities may be
offset in the balance sheet
 IAS 32 is a companion to IAS 39 Financial Instruments: Recognition and
Measurement and IFRS 9 Financial Instruments. IAS 39 and IFRS 9 deal with
initial recognition of financial assets and liabilities, measurement subse-
quent to initial recognition, impairment, derecognition, and hedge
accounting. IAS 39 was progressively replaced by IFRS 9 as the IASB
completed the various phases of its financial instruments project.

SCOPE

PAS 32 applies in presenting and disclosing information about all types of

financial instruments with the following exceptions:
 interests in subsidiaries, associates and joint ventures that are accounted
for under IAS 27 Consolidated and Separate Financial State-
ments, IAS 28 Investments in Associates or IAS 31 Interests in Joint
Ventures (or, for annual periods beginning on or after 1 January
2013, IFRS 10 Consolidated Financial Statements, IAS 27 Separate
Financial Statement sand IAS 28 Investments in Associates and Joint
Ventures). However, IAS 32 applies to all derivatives on interests in sub-
sidiaries, associates, or joint ventures.
 employers' rights and obligations under employee benefit plans
(see IAS 19 Employee Benefits)
 insurance contracts(see IFRS 4 Insurance Contracts). However, IAS 32
applies to derivatives that are embedded in insurance contracts if they
are required to be accounted separately by IAS 39
 financial instruments that are within the scope of IFRS 4 because they
contain a discretionary participation feature are only exempt from
applying paragraphs 15-32 and AG25-35 (analyzing debt and equity com-
ponents) but are subject to all other IAS 32 requirements
  contracts and obligations under share-based payment transactions
(see IFRS 2 Share-based Payment) with the following exceptions:
 this standard applies to contracts within the scope of IAS 32.8-10
(see below)
 paragraphs 33-34 apply when accounting for treasury shares
purchased, sold, issued or cancelled by employee share option
plans or similar arrangements

Financial instruments

PAS 32, paragraph 11, defines a financial instruments as any contract that gives
rise to both a financial asset of one entity and a financial liability or equity
instruments of another entity.

Thus, the term “financial instruments” encompasses a financial asset, a financial

liability and an equity instrument.

Characteristics of a financial instruments

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 instruments of another party.

Examples of financial instruments

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 the
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 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 is a financial asset of the lender or creditor as note
receivable.
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.

Equity instruments

The definition of an equity instruments is very brief and succinct. It reflects the
basic accounting equation that equity equals asset minus liability.

An equity instruments is any contract that evidences a residual interest in the

assets of an entity after deducting all of the liabilities.

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 a detachable or non-detachable.

Detachable warrants can be traded separately from the bond and non-detachable
warrants cannot be traded separately.

PAS 32 does not differentiate whether the equity component is detachable or

non-detachable.

Whether detachable or non-detachable, the warrants have a value and therefore

shall be accounted for separately.

Convertible bonds

An entity frequently makes its bond issue more attractive 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 right to convert their bondholdings into share
capital of the issuing entity within a specified period of time.

Convertible bonds are not conceived as compound financial instruments.

Accordingly, the issuances of convertible bonds shall be accounted for 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.

Fair value:
 the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction.
The definition of financial instrument used in IAS 32 is the same as that in IAS 39.

Puttable instrument: a financial instrument that gives the holder the right to put
the instrument back to the issuer for cash or another financial asset or is auto-
matically put back to the issuer on occurrence of an uncertain future event or the
death or retirement of the instrument holder.
Classification as liability or equity
The fundamental principle of IAS 32 is that a financial instrument should be classi-
fied as either a financial liability or an equity instrument according to the
substance of the contract, not its legal form, and the definitions of financial
liability and equity instrument. Two exceptions from this principle are certain
puttable instruments meeting specific criteria and certain obligations arising on
liquidation (see below). The entity must make the decision at the time the instru-
ment is initially recognized. The classification is not subsequently changed based
on changed circumstances.

A financial instrument is an equity instrument only if

i. the instrument includes no contractual obligation to deliver
cash or another financial asset to another entity and
ii. if the instrument will or may be settled in the issuer's own
equity instruments, it is either:
  a non-derivative that includes no contractual obligation for the issuer to
deliver a variable number of its own equity instruments; or
 a derivative that will be settled only by the issuer exchanging a fixed
amount of cash or another financial asset for a fixed number of its own
equity instruments.
Illustration – preference shares
If an entity issues preference (preferred) shares that pay a fixed rate of dividend
and that have a mandatory redemption feature at a future date, the substance is
that they are a contractual obligation to deliver cash and, therefore, should be
recognized as a liability. [IAS 32.18(a)] In contrast, preference shares that do not
have a fixed maturity, and where the issuer does not have a contractual obliga-
tion to make any payment are equity. In this example even though both instru-
ments are legally termed preference 66shares they have different contractual
terms and one is a financial liability while the other is equity.

Illustration – issuance of fixed monetary amount of equity instruments

A contractual right or obligation to receive or deliver a number of its own shares
or other equity instruments that varies so that the fair value of the entity's own
equity instruments to be received or delivered equals the fixed monetary amount
of the contractual right or obligation is a financial liability.

Illustration – one party has a choice over how an instrument is settled

When a derivative financial instrument gives one party a choice over how it is
settled (for instance, the issuer or the holder can choose settlement net in cash or
by exchanging shares for cash), it is a financial asset or a financial liability unless
all of the settlement alternatives would result in it being an equity instrument.
[IAS 32.26]

Contingent settlement provisions

If, as a result of contingent settlement provisions, the issuer does not have an un-
conditional right to avoid settlement by delivery of cash or other financial instru-
ment (or otherwise to settle in a way that it would be a financial liability)

The instrument is a financial liability of the issuer, unless:

 the contingent settlement provision is not genuine or
  the issuer can only be required to settle the obligation in the event of the
issuer's liquidation or
 the instrument has all the features and meets the conditions of IAS
32.16A and 16B for puttable instruments [IAS 32.25]

Puttable instruments and obligations arising on liquidation

In February 2008, the IASB amended IAS 32 and IAS 1 Presentation of Financial
Statements with respect to the balance sheet classification of puttable financial
instruments and obligations arising only on liquidation. As a result of the amend-
ments, some financial instruments that currently meet the definition of a financial
liability will be classified as equity because they represent the residual interest in
the net assets of the entity.

Classifications of rights issues

In October 2009, the IASB issued an amendment to IAS 32 on the classification of
rights issues. For rights issues offered for a fixed amount of foreign currency
current practice appears to require such issues to be accounted for as derivative
liabilities. The amendment states that if such rights are issued pro rata to an
entity's all existing shareholders in the same class for a fixed amount of currency,
they should be classified as equity regardless of the currency in which the exercise
price is denominated.

Compound financial instruments

Some financial instruments – sometimes called compound instruments – have
both a liability and an equity component from the issuer's perspective. In that
case, IAS 32 requires that the component parts be accounted for and presented
separately according to their substance based on the definitions of liability and
equity. The split is made at issuance and not revised for subsequent changes in
market interest rates, share prices, or other event that changes the likelihood that
the conversion option will be exercised.

To illustrate,
a convertible bond contains two components. One is a financial liability, namely
the issuer's contractual obligation to pay cash, and the other is an equity instru-
ment, namely the holder's option to convert into common shares. Another
example is debt issued with detachable share purchase warrants.
When the initial carrying amount of a compound financial instrument is required
to be allocated to its equity and liability components, the equity component is
assigned the residual amount after deducting from the fair value of the instru-
ment as a whole the amount separately determined for the liability component.

Interest, dividends, gains, and losses relating to an instrument classified as a

liability should be reported in profit or loss. This means that dividend payments
on preferred shares classified as liabilities are treated as expenses. On the other
hand, distributions (such as dividends) to holders of a financial instrument classi-
fied as equity should be charged directly against equity, not against earnings.

Transaction costs of an equity transaction are deducted from equity. Transaction

costs related to an issue of a compound financial instrument are allocated to the
liability and equity components in proportion to the allocation of proceeds.
Treasury shares
The cost of an entity's own equity instruments that it has reacquired ('treasury
shares') is deducted from equity. Gain or loss is not recognized on the purchase,
sale, issue, or cancellation of treasury shares. Treasury shares may be acquired
and held by the entity or by other members of the consolidated group. Considera-
tion paid or received is recognized directly in equity. [IAS 32.33]
Offsetting
IAS 32 also prescribes rules for the offsetting of financial assets and financial liabil-
ities. It specifies that a financial asset and a financial liability should be offset, and
the net amount reported when, and only when, an entity:
 has a legally enforceable right to set off the amounts; and
 intends either to settle on a net basis, or to realize the asset and settle
the liability simultaneously.
Costs of issuing or reacquiring equity instruments
Costs of issuing or reacquiring equity instruments are accounted for as a
deduction from equity, net of any related income tax benefit.
The disclosures relating to treasury shares are in IAS 1 Presentation of Financial
Statements and IAS 24 Related Parties for share repurchases from related
parties. [IAS 32.34 and 39].

Philippine Accounting Standard #33

Earnings per share

Objective of PAS 33
To prescribe principles for determining and presenting earnings per share (EPS)
amounts to improve performance comparisons between different entities in the
same reporting period and between different reporting periods for the same
entity.

SCOPE
PAS 33 applies to entities whose securities are publicly traded or that are in the
process of issuing securities to the public. [IAS 33.2] Other entities that choose to
present EPS information If both parent and consolidated statements are
presented in a single report, EPS is required only for the consolidated statements.

Earnings per share

The earnings per share figure is the amount attributable to every ordinary share
outstanding during the period.

Thus, the earnings per share information pertains only to ordinary share.

Ordinary share is an equity instrument that is subordinate to all other classes of

equity instruments.

It is not necessary for preference share because there is a definite rate of return
for such share.

The computation of earnings per share requires two presentation of earnings per
share, namely:
Basic EPS
Basic EPS is calculated by dividing profit or loss attributable to ordinary equity
holders of the parent entity (the numerator) by the weighted average number of
ordinary shares outstanding (the denominator) during the period. [IAS 33.10]
The earnings numerators (profit or loss from continuing operations and net profit
or loss) used for the calculation should be after deducting all expenses including
taxes, minority interests, and preference dividends. [IAS 33.12]
The denominator (number of shares) is calculated by adjusting the shares in issue
at the beginning of the period by the number of shares bought back or issued
during the period, multiplied by a time-weighting factor. IAS 33 includes guidance
on appropriate recognition dates for shares issued in various circumstances. [IAS
33.20-21]
Contingently issuable shares are included in the basic EPS denominator when the
contingency has been met. [IAS 33.24]
Diluted EPS
Diluted EPS is calculated by adjusting the earnings and number of shares for the
effects of dilutive options and other dilutive potential ordinary shares. [IAS 33.31]
The effects of anti-dilutive potential ordinary shares are ignored in calculating
diluted EPS. [IAS 33.41]
The presentation of earnings per share is required for:

a. Entities whose ordinary shares are publicly traded

b. Entities t5hat are in the process of issuing ordinary shares or potential
ordinary shares in the public securities market.

In other words, publicly entities are required to present earnings per share.

Non public entities are not required but are encouraged to present earnings per
share.

Uses of earnings per share

a. It is determinant of the market price of ordinary share, thus indicating the

attractiveness of the ordinary share as an investment.
b. It is measure of performance of management in conducting operations.
c. It is the basis of dividend policy of an entity.
Dilution and anti-dilution

Potential ordinary share is a financial instruments or other contract that may

entitle the holder to ordinary shares.

Dilution arises when the inclusion of the potential ordinary shares decreases the
basic earnings per share or increases the basic loss per share. In this case the
potential ordinary shares are dilutive securities.

On the other hand, anti-dilution arises when the inclusion of the potential
ordinary. Shares increases basic earnings per share or decreases basic loss per
share.

In this case, the potential ordinary share are considered as anti-dilutive and
therefore ignored in computing diluted earnings per share.

Diluted earnings per share

The computation of the di8luted earnings per share is based on the “as if”
scenario related to the following potential ordinary shares:

a. “As if” the convertible bond payable is converted into ordinary share
b. “As if” the convertible preference share is converted into ordinary share
c. “As if” the share options and warrants are exercised.

Convertible bonds

The computation of the diluted earnings per share assumes that the bond
payable is converted into ordinary share.

Accordingly, adjustments shall be made both to net income and to the number of
ordinary shares outstanding.

The net income is adjusted by adding back to interest expense on the bond
payable, net of tax.

The number of ordinary shares outstanding increased by the number of ordinary

shares that would have been issued upon conversion of the bonds payable.
Convertible preference share

If there is a convertible preference share, the computation of diluted earnings per

share also assumes that the preference share is converted into ordinary share.

Accordingly, the net income is not reduced anymore by the amount of preference
dividend.

The number of ordinary shares outstanding is increased by the number of

ordinary shares that would have been issued upon conversion of the preference
share.

Options and warrants

Share options are granted to employees enabling them to acquire ordinary shares
of the entity at a specified price during a definite period of time.

Share warrants are granted to shareholders enabling them to acquire ordinary

shares of the entity at a specified price during a definite period of time.

By the definition, option and warrants have no cash yields but they derived their
value from the right to obtain ordinary share at a specified price that is usually
lower than the prevailing market price.

Options and warrants are dilutive if the exercise price or option price is less than
the average market price of the ordinary share.

Treasury share method

Options and warrants are included in the EPS computation through the treasury
share method.

However this does not imply that the entity has entered into a transactions to
purchase treasury stocks,

The treasury method is used to simplify the computation of incremental ordinary

shares that are assumed to be issued for no consideration as a result of options
and warrants.
 a. The options and warrants are assumed to be exercised at the beginning of
the current year or at the date they are issued during the current year.
b. The proceeds from the exercise of the options and warrants are assumed to
be used to acquire treasury shares at average market price.
c. The number of incremental ordinary shares is equal to the option shares
minus the assumed treasury shares acquired.

Disclosure
 If EPS is presented, the following disclosures are required: [IAS 33.70]
 the amounts used as the numerators in calculating basic and diluted EPS,
and a reconciliation of those amounts to profit or loss attributable to the
parent entity for the period
 the weighted average number of ordinary shares used as the denomina-
tor in calculating basic and diluted EPS, and a reconciliation of these de-
nominators to each other
 instruments (including contingently issuable shares) that could potentially
dilute basic EPS in the future, but were not included in the calculation of
diluted EPS because they are antidilutive for the period(s) presented
 a description of those ordinary share transactions or potential ordinary
share transactions that occur after the balance sheet date and that would
have changed significantly the number of ordinary shares or potential
ordinary shares outstanding at the end of the period if those transactions
had occurred before the end of the reporting period. Examples include
issues and redemptions of ordinary shares issued for cash, warrants and
options, conversions, and exercises [IAS 34.71]

An entity is permitted to disclose amounts per share other than profit or loss from
continuing operations, discontinued operations, and net profit or loss earnings per
share. Guidance for calculating and presenting such amounts is included in IAS
33.73 and 73A
Philippine Accounting Standard #34

Interim financial reporting

Objective of PAS 34
  To prescribe the minimum content of an interim financial report and to
prescribe the principles for recognition and measurement in financial state-
ments presented for an interim period.
SCOPE
To prescribe the minimum content of an interim financial report and to prescribe
the principles for recognition and measurement in financial statements presented
for an interim period.
Key definitions
Interim period:
 a financial reporting period shorter than a full financial year (most typically a
quarter or half-year).

Interim financial report: 

financial report that contains either a complete or condensed set of financial
statements for an interim period.
Matters left to local regulators
PAS 34 specifies the content of an interim financial report that is described as
conforming to International Financial Reporting Standards. However, PAS 34
does not mandate:

 which entities should publish interim financial reports,

 how frequently, or
 how soon after the end of an interim period.
 Such matters will be decided by national governments, securities regula-
tors, stock exchanges, and accountancy bodies. [IAS 34.1]
 However, the Standard encourages publicly-traded entities to provide
interim financial reports that conform to the recognition, measurement,
and disclosure principles set out in IAS 34, at least as of the end of the first
half of their financial year, such reports to be made available not later than
60 days after the end of the interim period. [IAS 34.1]
  Minimum content of an interim financial report
 The minimum components specified for an interim financial report are: [IAS
34.8]
 a condensed balance sheet (statement of financial position)
 either (a) a condensed statement of comprehensive income or (b) a
condensed statement of comprehensive income and a condensed income
statement
 a condensed statement of changes in equity
 a condensed statement of cash flows
selected explanatory notes.

The periods to be covered by the interim financial statements are as follows:

 balance sheet (statement of financial position) as of the end of the
current interim period and a comparative balance sheet as of the end of
the immediately preceding financial year
 statement of comprehensive income (and income statement, if
presented) for the current interim period and cumulatively for the
current financial year to date, with comparative statements for the com-
parable interim periods (current and year-to-date) of the immediately
preceding financial year
 statement of changes in equity 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
 statement of cash flows 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
 If the company's business is highly seasonal, IAS 34 encourages disclosure
of financial information for the latest 12 months, and comparative informa-
tion for the prior 12-month period, in addition to the interim period
financial statements. [IAS 34.21]

Note disclosures
The explanatory notes required are designed to provide an explanation of events
and transactions that are significant to an understanding of the changes in
financial position and performance of the entity since the last annual reporting
date. IAS 34 states a presumption that anyone who reads an entity's interim
report will also have access to its most recent annual report. Consequently, IAS 34
avoids repeating annual disclosures in interim condensed reports. [IAS 34.15]
Examples of specific disclosure requirements of PAS 34

Examples of events and transactions for which disclosures are

required if they are significant;

 write-down of inventories
 recognition or reversal of an impairment loss
 reversal of provision for the costs of restructuring
 acquisitions and disposals of property, plant and equipment
 commitments for the purchase of property, plant and equipment
 litigation settlements
 corrections of prior period errors
 changes in business or economic circumstances affecting the fair value of
financial assets and liabilities
 unremedied loan defaults and breaches of loan agreements
 transfers between levels of the 'fair value hierarchy' or changes in the classifi-
cation of financial assets
 changes in contingent liabilities and contingent assets.
 Examples of other disclosures required [IAS 34.16A]
 changes in accounting policies
 explanation of any seasonality or cyclicality of interim operations
 unusual items affecting assets, liabilities, equity, net income or cash flows
 changes in estimates
 issues, repurchases and repayment of debt and equity securities
 dividends paid
 particular segment information (where IFRS 8 Operating Segments applies to
the entity)
 events after the end of the reporting period
 changes in the composition of the entity, such as business combinations,
 obtaining or losing control of subsidiaries, restructurings and discontinued op-
erations
 disclosures about the fair value of financial instruments

Accounting policies
The same accounting policies should be applied for interim reporting as are
applied in the entity's annual financial statements, except for accounting policy
changes made after the date of the most recent annual financial statements that
are to be reflected in the next annual financial statements. [IAS 34.28]
A key provision of IAS 34 is that an entity should use the same accounting policy
throughout a single financial year. If a decision is made to change a policy mid-
year, the change is implemented retrospectively, and previously reported interim
data is restated. [IAS 34.43]

Measurement
Measurements for interim reporting purposes should be made on a year-to-date
basis, so that the frequency of the entity's reporting does not affect the measure-
ment of its annual results. [IAS 34.28]
Several important measurement points:
 Revenues that are received seasonally, cyclically or occasionally within a
financial year should not be anticipated or deferred as of the interim
date, if anticipation or deferral would not be appropriate at the end of
the financial year. [IAS 34.37]
 Costs that are incurred unevenly during a financial year should be antici-
pated or deferred for interim reporting purposes if, and only if, it is also
appropriate to anticipate or defer that type of cost at the end of the
financial year. [IAS 34.39]
 Income tax expense should be recognized based on the best estimate of
the weighted average annual effective income tax rate expected for the
full financial year. [IAS 34 Appendix B12]
 An appendix to IAS 34 provides guidance for applying the basic recognition
and measurement principles at interim dates to various types of asset,
liability, income, and expense.
Materiality
In deciding how to recognize, measure, classify, or disclose an item for interim
financial reporting purposes, materiality is to be assessed in relation to the
interim period financial data, not forecast annual data. [IAS 34.23]
Disclosure in annual financial statements
If an estimate of an amount reported in an interim period is changed significantly
during the financial interim period in the financial year but a separate financial
report is not published for that period, the nature and amount of that change
must be disclosed in the notes to the annual financial statements. [IAS 34.26]

Philippine Accounting Standards #36

Impairment of losses

Objective of PAS 36

To ensure that assets are carried at no more than their recoverable amount, and
to define how recoverable amount is determined.

SCOPE
PAS 36 applies to all assets except:
 inventories
 assets arising from construction contracts
 deferred tax assets
 assets arising from employee benefits
 financial assets
 investment property carried at fair value
 agricultural assets carried at fair value
 insurance contract assets
 non-current assets held for sale

Therefore, PAS 36 applies to (among other assets):

 land
 buildings
  machinery and equipment
 investment property carried at cost
 intangible assets
 goodwill
 investments in subsidiaries, associates, and joint ventures carried at cost
 assets carried at revalued amounts under IAS 16 and IAS 38

Key definitions
Impairment loss:
 the amount by which the carrying amount of an asset or cash-generating unit
exceeds its recoverable amount

Carrying amount
 the amount at which an asset is recognized in the balance sheet after deducting
accumulated depreciation and accumulated impairment losses

Recoverable amount
higher of an asset's fair value less costs of disposal* (sometimes called net selling
price) and its value in use

* Prior to consequential amendments made by IFRS 13 Fair Value Measurement,

this was referred to as 'fair value less costs to sell'.

Fair value
 the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date
(see IFRS 13 Fair Value Measurement)

Value in use
 the present value of the future cash flows expected to be derived from an asset
or cash-generating unit
Identifying an asset that may be impaired
At the end of each reporting period, an entity is required to assess whether there
is any indication that an asset may be impaired (i.e. its carrying amount may be
higher than its recoverable amount). IAS 36 has a list of external and internal indi-
cators of impairment.

Asset in the current period;

 an intangible asset with an indefinite useful life
 an intangible asset not yet available for use
 goodwill acquired in a business combination
Indications of impairment
External sources:
 market value declines
 negative changes in technology, markets, economy, or laws
 increases in market interest rates
 net assets of the company higher than market capitalization
Internal sources:
 obsolescence or physical damage
 asset is idle, part of a restructuring or held for disposal
 worse economic performance than expected
 for investments in subsidiaries, joint ventures or associates, the carrying
amount is higher than the carrying amount of the investee's assets, or a
 dividend exceeds the total comprehensive income of the investee

These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication
that an asset may be impaired may indicate that the asset's useful life, deprecia-
tion method, or residual value may need to be reviewed and adjusted.
Determining recoverable amount
 If fair value less costs of disposal or value in use is more than carrying
amount, it is not necessary to calculate the other amount. The asset is
not impaired. [IAS 36.19]
 If fair value less costs of disposal cannot be determined, then recoverable
amount is value in use. [IAS 36.20]
 For assets to be disposed of, recoverable amount is fair value less costs of
disposal. [IAS 36.21]
 Fair value less costs of disposal
o Fair value is determined in accordance with IFRS 13 Fair Value Measure-
ment
o Costs of disposal are the direct added costs only (not existing costs or
overhead). [IAS 36.28]

Value in use
The calculation of value in use should reflect the following elements:
 an estimate of the future cash flows the entity expects to derive from the
asset
 expectations about possible variations in the amount or timing of those
future cash flows
 the time value of money, represented by the current market risk-free rate
of interest
 the price for bearing the uncertainty inherent in the asset
 other factors, such as illiquidity, that market participants would reflect in
pricing the future cash flows the entity expects to derive from the asset
Cash flow projections
Should be based on reasonable and supportable assumptions, the most recent
budgets and forecasts, and extrapolation for periods beyond budgeted projec-
tions. [IAS 36.33] IAS 36 presumes that budgets and forecasts should not go
beyond five years; for periods after five years, extrapolate from the earlier
budgets. [IAS 36.35] Management should assess the reasonableness of its as-
sumptions by examining the causes of differences between past cash flow projec-
tions and actual cash flows. [IAS 36.34]
Cash flow projections should relate to the asset in its current condition – future
restructurings to which the entity is not committed and expenditures to improve
or enhance the asset's performance should not be anticipated. [IAS 36.44]
Estimates of future cash flows should not include cash inflows or outflows from
financing activities, or income tax receipts or payments. [IAS 36.50]
Discount rate
In measuring value in use, the discount rate used should be the pre-tax rate that
reflects current market assessments of the time value of money and the risks
specific to the asset. [IAS 36.55]
The discount rate should not reflect risks for which future cash flows have been
adjusted and should equal the rate of return that investors would require if they
were to choose an investment that would generate cash flows equivalent to those
expected from the asset. [IAS 36.56]
For impairment of an individual asset or portfolio of assets, the discount rate is
the rate the entity would pay in a current market transaction to borrow money to
buy that specific asset or portfolio.
If a market-determined asset-specific rate is not available, a surrogate must be
used that reflects the time value of money over the asset's life as well as country
risk, currency risk, price risk, and cash flow risk.

The following would normally be considered: [IAS 36.57]

 the entity's own weighted average cost of capital
 the entity's incremental borrowing rate
 other market borrowing rates.
 Recognition of an impairment loss
 An impairment loss is recognized whenever recoverable amount is below
carrying amount. [IAS 36.59]
 The impairment loss is recognized as an expense (unless it relates to a
revalued asset where the impairment loss is treated as a revaluation
decrease). [IAS 36.60]
 Adjust depreciation for future periods. [IAS 36.63]
Cash-generating units
Recoverable amount should be determined for the individual asset, if possible.
[IAS 36.66]
If it is not possible to determine the recoverable amount (i.e. the higher of fair
value less costs of disposal and value in use) for the individual asset, then
determine recoverable amount for the asset's cash-generating unit (CGU). [IAS
36.66] The CGU is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or
groups of assets. [IAS 36.6]
Impairment of goodwill
Goodwill should be tested for impairment annually. [IAS 36.96]
To test for impairment, goodwill must be allocated to each of the acquirer's cash-
generating units, or groups of cash-generating units, that are expected to benefit
from the synergies of the combination, irrespective of whether other assets or lia-
bilities of the acquiree are assigned to those units or groups of units. Each unit or
group of units to which the goodwill is so allocated shall: [IAS 36.80]
 represent the lowest level within the entity at which the goodwill is
monitored for internal management purposes; and
 not be larger than an operating segment determined in accordance
with IFRS 8 Operating Segments.
 A cash-generating unit to which goodwill has been allocated shall be tested
for impairment at least annually by comparing the carrying amount of the
unit, including the goodwill, with the recoverable amount of the unit: [IAS
36.90]
 If the recoverable amount of the unit exceeds the carrying amount of the
unit, the unit and the goodwill allocated to that unit is not impaired
 If the carrying amount of the unit exceeds the recoverable amount of the
unit, the entity must recognize an impairment loss.
 The impairment loss is allocated to reduce the carrying amount of the
assets of the unit (group of units) in the following order: [IAS 36.104]
 first, reduce the carrying amount of any goodwill allocated to the cash-
generating unit (group of units); and
 then, reduce the carrying amounts of the other assets of the unit (group
of units) pro rata on the basis.

The carrying amount of an asset should not be reduced below the highest of;
 its fair value less costs of disposal (if measurable)
 its value in use (if measurable)
 zero.
 If the preceding rule is applied, further allocation of the impairment loss is
made pro rata to the other assets of the unit (group of units).
  Reversal of an impairment loss
 Same approach as for the identification of impaired assets: assess at each
balance sheet date whether there is an indication that an impairment loss
may have decreased. If so, calculate recoverable amount. [IAS 36.110]
 No reversal for unwinding of discount. [IAS 36.116]
 The increased carrying amount due to reversal should not be more than
what the depreciated historical cost would have been if the impairment
had not been recognized. [IAS 36.117]
 Reversal of an impairment loss is recognized in the profit or loss unless it
relates to a revalued asset [IAS 36.119]
 Adjust depreciation for future periods. [IAS 36.121]
 Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]
 Disclosure
 Disclosure by class of assets: [IAS 36.126]
 impairment losses recognized in profit or loss
 impairment losses reversed in profit or loss
 which line item(s) of the statement of comprehensive income
 impairment losses on revalued assets recognized in other comprehensive
income
 impairment losses on revalued assets reversed in other comprehensive
income
 Disclosure by reportable segment: [IAS 36.129]
 impairment losses recognized
 impairment losses reversed
Other disclosures:

If an individual impairment loss (reversal) is material disclose:

 events and circumstances resulting in the impairment loss
 amount of the loss or reversal
 individual asset: nature and segment to which it relates
 cash generating unit: description, amount of impairment loss (reversal)
by class of assets and segment
  if recoverable amount is fair value less costs of disposal, the level of the
fair value hierarchy (from IFRS 13 Fair Value Measurement) within which
the fair value measurement is categorized, the valuation techniques used
to measure fair value less costs of disposal and the key assumptions used
in the measurement of fair value measurements categorized within 'Level
2' and 'Level 3' of the fair value hierarchy*
 if recoverable amount has been determined on the basis of value in use,
or on the basis of fair value less costs of disposal using a present value
technique*, disclose the discount rate

* Amendments introduced by Recoverable Amount Disclosures for Non-Finan-

cial Assets, effective for annual periods beginning on or after 1 January 2014.

If impairment losses recognized (reversed) are material in aggregate to the

financial statements as a whole, disclose: [IAS 36.131]
 main classes of assets affected
 main events and circumstances

Disclose detailed information about the estimates used to measure recoverable

amounts of cash generating units containing goodwill or intangible assets with in-
definite useful lives. [IAS 36.134-35]
Philippine Accounting Standards #37

Provisions Contingent Liabilities

Objective of PAS 37

To ensure that appropriate recognition criteria and measurement bases are

applied to provisions, contingent liabilities and contingent assets and that
sufficient information is disclosed in the notes to the financial statements to
enable users to understand their nature, timing and amount. The key principle
established by the Standard is that a provision should be recognized only when
there is a liability i.e. a present obligation resulting from past events. The
Standard thus aims to ensure that only genuine obligations are dealt with in the
financial statements – planned future expenditure, even where authorized by the
board of directors or equivalent governing body, is excluded from recognition.

SCOPE

PAS 37 excludes obligations and contingencies arising from:

 financial instruments that are in the scope of IAS 39 Financial
Instruments: Recognition and Measurement (or IFRS 9 Financial
Instruments)
 non-onerous executory contracts
 insurance contracts (see IFRS 4 Insurance Contracts), but IAS 37 does
apply to other provisions, contingent liabilities and contingent assets of
an insurer
 items covered by another IFRS. For example, IAS 11Construction
Contracts applies to obligations arising under such contracts; IAS
12 Income Taxes applies to obligations for current or deferred income
taxes; IAS 17 Leases applies to lease obligations; and IAS 19 Employee
Benefits applies to pension and other employee benefit obligations.
Key definitions

Provision: a liability of uncertain timing or amount.

Liability:
 present obligation as a result of past events
 settlement is expected to result in an outflow of resources (payment)
 Contingent liability:
 a possible obligation depending on whether some uncertain future event
occurs, or
 a present obligation but payment is not probable, or the amount cannot
be measured reliably

Contingent asset:
 a possible asset that arises from 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 entity.
Recognition of a provision
An entity must recognize a provision if, and only if:
 a present obligation (legal or constructive) has arisen as a result of a past
event (the obligating event),
 payment is probable ('more likely than not'), and
 the amount can be estimated reliably.

An obligating event is an event that creates a legal or constructive obligation and,

therefore, results in an entity having no realistic alternative but to settle the
obligation.

A constructive obligation arises if past practice creates a valid expectation on the

part of a third party, for example, a retail store that has a long-standing policy of
allowing customers to return merchandise within, say, a 30-day period.

A possible obligation (a contingent liability) is disclosed but not accrued.

However, disclosure is not required if payment is remote. [IAS 37.86]
In rare cases, for example in a lawsuit, it may not be clear whether an entity has a
present obligation. In those cases, a past event is deemed to give rise to a present
obligation if, taking account of all available evidence, it is more likely than not that
a present obligation exists at the balance sheet date. A provision should be
recognized for that present obligation if the other recognition criteria described
above are met. If it is more likely than not that no present obligation exists, the
entity should disclose a contingent liability, unless the possibility of an outflow of
resources is remote.

Measurement of provisions
The amount recognised as a provision should be the best estimate of the
expenditure required to settle the present obligation at the balance sheet date,
that is, the amount that an entity would rationally pay to settle the obligation at
the balance sheet date or to transfer it to a third party.

This means:
 Provisions for one-off events (restructuring, environmental clean-up,
settlement of a lawsuit) are measured at the most likely amount. [IAS
37.40]
 Provisions for large populations of events (warranties, customer refunds)
are measured at a probability-weighted expected value. [IAS 37.39]
 Both measurements are at discounted present value using a pre-tax
discount rate that reflects the current market assessments of the time
value of money and the risks specific to the liability. [IAS 37.45 and 37.47]
 In reaching its best estimate, the entity should take into account the risks
and uncertainties that surround the underlying events. [IAS 37.42]
 If some or all of the expenditure required to settle a provision is expected
to be reimbursed by another party, the reimbursement should be
recognised as a separate asset, and not as a reduction of the required
provision, when, and only when, it is virtually certain that reimbursement
will be received if the entity settles the obligation. The amount recognised
should not exceed the amount of the provision.

In measuring a provision consider future events as follows:

 forecast reasonable changes in applying existing technology [IAS 37.49]
 ignore possible gains on sale of assets [IAS 37.51]
  consider changes in legislation only if virtually certain to be enacted [IAS
37.50]
 Remeasurement of provisions [IAS 37.59]
 Review and adjust provisions at each balance sheet date
 If an outflow no longer probable, provision is reversed.
Some examples of provisions
Circumstance Recognize a provision?

Restructuring by sale Only when the entity is committed to a sale, i.e. there is
of an operation a binding sale agreement [IAS 37.78]

Restructuring by Only when a detailed form plan is in place and the

closure or entity has started to implement the plan or announced
reorganization its main features to those affected. A Board decision is
insufficient [IAS 37.72, Appendix C, Examples 5A & 5B]

Warranty When an obligating event occurs (sale of product with a

warranty and probable warranty claims will be made)
[Appendix C, Example 1]

Land contamination A provision is recognised as contamination occurs for

any legal obligations of clean up, or for constructive
obligations if the company's published policy is to clean
up even if there is no legal requirement to do so (past
event is the contamination and public expectation
created by the company's policy) [Appendix C, Examples
2B]

Customer refunds Recognize a provision if the entity's established policy is

to give refunds (past event is the sale of the product
together with the customer's expectation, at time of
 purchase, that a refund would be available) [Appendix
C, Example 4]

Offshore oil rig must Recognize a provision for removal costs arising from the
be removed and sea construction of the the oil rig as it is constructed and
bed restored add to the cost of the asset.  Obligations arising from
the production of oil are recognised as the production
occurs [Appendix C, Example 3]

Abandoned A provision is recognised for the unavoidable lease

leasehold, four years payments [Appendix C, Example 8]
to run, no re-letting
possible

CPA firm must staff No provision is recognised (there is no obligation to

training for recent provide the training, recognize a liability if and when
changes in tax law the retraining occurs) [Appendix C, Example 7]

Major overhaul or No provision is recognised (no obligation) [Appendix C,

repairs Example 11]

Onerous (loss- Recognize a provision [IAS 37.66]

making) contract

Future operating No provision is recognised (no liability) [IAS 37.63]

losses

Restructurings
A restructuring is:
 sale or termination of a line of business
 closure of business locations
 changes in management structure
  fundamental reorganizations.

Restructuring provisions should be recognised as follows:

 Sale of operation: recognized a provision only after a binding sale
agreement [IAS 37.78]
 Closure or reorganization: recognize a provision only after a detailed
formal plan is adopted and has started being implemented, or announced
to those affected. A board decision of itself is insufficient.
 Future operating losses: provisions are not recognised for future
operating losses, even in a restructuring
 Restructuring provision on acquisition: recognize a provision only if there
is an obligation at acquisition date [IFRS 3.11]
 Restructuring provisions should include only direct expenditures necessarily
entailed by the restructuring, not costs that associated with the ongoing
activities of the entity. [IAS 37.80]
What is the debit entry?
When a provision (liability) is recognised, the debit entry for a provision is not
always an expense. Sometimes the provision may form part of the cost of the
asset. Examples: included in the cost of inventories, or an obligation for
environmental cleanup when a new mine is opened, or an offshore oil rig is
installed.

Use of provisions
Provisions should only be used for the purpose for which they were originally
recognised. They should be reviewed at each balance sheet date and adjusted to
reflect the current best estimate. If it is no longer probable that an outflow of
resources will be required to settle the obligation, the provision should be
reversed. [IAS 37.61]

Contingent liabilities
Since there is common ground as regards liabilities that are uncertain, IAS 37 also
deals with contingencies. It requires that entities should not recognize contingent
liabilities – but should disclose them, unless the possibility of an outflow of
economic resources is remote. [IAS 37.86]

Contingent assets
Contingent assets should not be recognised – but should be disclosed where an
inflow of economic benefits is probable. When the realization of income is
virtually certain, then the related asset is not a contingent asset and its
recognition is appropriate. [IAS 37.31-35]

Disclosures

Reconciliation for each class of provision:

 opening balance
 additions
 used (amounts charged against the provision)
 unused amounts reversed
 unwinding of the discount, or changes in discount rate
 closing balance
 A prior year reconciliation is not required. [IAS 37.84]
 For each class of provision, a brief description of: [IAS 37.85]
 nature
 timing
 uncertainties
 assumptions
 reimbursement, if any.

Philippine Accounting Standards #38

Intangible Assets
 Objective of PAS 38

To prescribe the accounting treatment for intangible assets that are not dealt
with specifically in another IFRS. The Standard requires an entity to recognize an
intangible asset if, and only if, certain criteria are met. The Standard also specifies
how to measure the carrying amount of intangible assets and requires certain dis-
closures regarding intangible assets. [IAS 38.1]
SCOPE

PAS 38 applies to all intangible assets other than:

 financial assets
 exploration and evaluation assets ( Exploration for and Evaluation of
Mineral Resources)
 expenditure on the development and extraction of minerals, oil, natural
gas, and similar resources
 intangible assets arising from insurance contracts issued by insurance
companies
 intangible assets covered by another IFRS, such as intangibles held for sale
( Non-current Assets Held for Sale and Discontinued Operations), deferred
tax assets ( Income Taxes), lease assets ( Leases), assets arising from
employee benefits ( Employee Benefits (2011)), and goodwill (Business
Combinations)

Key definitions
Intangible asset
 an identifiable non-monetary asset without physical substance. An asset is a
resource that is controlled by the entity as a result of past events (for example,
purchase or self-creation) and from which future economic benefits (inflows of
cash or other assets) are expected.

The three critical attributes of an intangible asset are:

o identifiability
o control (power to obtain benefits from the asset)
o future economic benefits (such as revenues or reduced future costs)

Identifiability
 an intangible asset is identifiable when it:
 is separable (capable of being separated and sold, transferred, licensed,
rented, or exchanged, either individually or together with a related
contract) or
 arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights
and obligations.

Examples of intangible assets

 patented technology, computer software, databases and trade secrets
 trademarks, trade dress, newspaper mastheads, internet domains
 video and audiovisual material (e.g. motion pictures, television
programmers)
 customer lists
 mortgage servicing rights
 licensing, royalty and standstill agreements
 import quotas
 franchise agreements
 customer and supplier relationships (including customer lists)
 marketing rights

Intangibles can be acquired:

 by separate purchase
 as part of a business combination
 by a government grant
 by exchange of assets
  by self-creation (internal generation)
Recognition
Recognition criteria.
PAS 38 requires an entity to recognize an intangible asset, whether purchased or
self-created (at cost) if, and only if:
 it is probable that the future economic benefits that are attributable to
the asset will flow to the entity; and
 the cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or
generated internally. IAS 38 includes additional recognition criteria for internally
generated intangible assets (see below).

The probability of future economic benefits must be based on reasonable and sup-
portable assumptions about conditions that will exist over the life of the asset.
[IAS 38.22] The probability recognition criterion is always considered to be
satisfied for intangible assets that are acquired separately or in a business combi-
nation.

If recognition criteria not met.

 If an intangible item does not meet both the definition of and the criteria for
recognition as an intangible asset, IAS 38 requires the expenditure on this item to
be recognised as an expense when it is incurred.

Business combinations
There is a presumption that the fair value (and therefore the cost) of an intangible
asset acquired in a business combination can be measured reliably. [IAS 38.35] An
expenditure (included in the cost of acquisition) on an intangible item that does
not meet both the definition of and recognition criteria for an intangible asset
should form part of the amount attributed to the goodwill recognised at the ac-
quisition date.

Reinstatement.
 The Standard also prohibits an entity from subsequently reinstating as an intangi-
ble asset, later, an expenditure that was originally charged to expense.
Initial recognition: research and development costs
 Charge all research cost to expense. [IAS 38.54]
 Development costs are capitalized only after technical and commercial
feasibility of the asset for sale or use have been established. This means
that the entity must intend and be able to complete the intangible asset
and either use it or sell it and be able to demonstrate how the asset will
generate future economic benefits. [IAS 38.57]

If an entity cannot distinguish the research phase of an internal project to create

an intangible asset from the development phase, the entity treats the expendi-
ture for that project as if it were incurred in the research phase only.
Initial recognition: in-process research and development acquired in a business
combination

A research and development project acquired in a business combination is recog-

nised as an asset at cost, even if a component is research. Subsequent expendi-
ture on that project is accounted for as any other research and development cost
(expensed except to the extent that the expenditure satisfies the criteria in IAS 38
for recognizing such expenditure as an intangible asset).

Initial recognition
internally generated brands, mastheads, titles, lists
Brands, mastheads, publishing titles, customer lists and items similar in substance
that are internally generated should not be recognised as assets.

Initial recognition: computer software

 Purchased: capitalize
 Operating system for hardware: include in hardware cost
 Internally developed (whether for use or sale): charge to expense until
technological feasibility, probable future benefits, intent and ability to
use or sell the software, resources to complete the software, and ability
to measure cost.
  Amortization: over useful life, based on pattern of benefits (straight-line
is the default).
 Initial recognition: certain other defined types of costs
 The following items must be charged to expense when incurred:
 internally generated goodwill
 start-up, pre-opening, and pre-operating costs
 training cost
 advertising and promotional cost, including mail order catalogues
 relocation costs
For this purpose, 'when incurred' means when the entity receives the related
goods or services. If the entity has made a prepayment for the above items, that
prepayment is recognised as an asset until the entity receives the related goods
or services.
Initial measurement
Measurement subsequent to acquisition: cost model and revaluation models
allowed
An entity must choose either the cost model or the revaluation model for each
class of intangible asset.

Cost model
 After initial recognition intangible assets should be carried at cost less accumu-
lated amortization and impairment losses. [IAS 38.74]

Revaluation model. 
Intangible assets may be carried at a revalued amount (based on fair value) less
any subsequent amortization and impairment losses only if fair value can be de-
termined by reference to an active market. [IAS 38.75] Such active markets are
expected to be uncommon for intangible assets. [IAS 38.78]

Examples where they might exist:

 production quotas
 fishing licenses
 taxi licenses
 Under the revaluation model, revaluation increases are recognised in other com-
prehensive income and accumulated in the "revaluation surplus" within equity
except to the extent that they reverse a revaluation decrease previously recog-
nised in profit and loss. If the revalued intangible has a finite life and is, therefore,
being amortized (see below) the revalued amount is amortized. [IAS 38.85]

Classification of intangible assets based on useful life

Intangible assets are classified as:
o Indefinite life: no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity.
o Finite life: a limited period of benefit to the entity.
Measurement subsequent to acquisition: intangible assets with finite lives
The cost less residual value of an intangible asset with a finite useful life should be
amortized on a systematic basis over that life: [IAS 38.97]
 The amortization method should reflect the pattern of benefits.
 If the pattern cannot be determined reliably, amortize by the straight-line
method.
 The amortization charge is recognised in profit or loss unless another IFRS
requires that it be included in the cost of another asset.
 The amortization period should be reviewed at least annually. [IAS
38.104]
 Expected future reductions in selling prices could be indicative of a higher
rate of consumption of the future economic benefits embodied in an asset.
[IAS 18.92]
 The standard contains a rebuttable presumption that a revenue-based
amortization method for intangible assets is inappropriate. However, there
are limited circumstances when the presumption can be overcome:
 The intangible asset is expressed as a measure of revenue; and
 it can be demonstrated that revenue and the consumption of economic
benefits of the intangible asset are highly correlated.

Note: The guidance on expected future reductions in selling prices and the clari-
fication regarding the revenue-based depreciation method were introduced
by Clarification of Acceptable Methods of Depreciation and Amortization, which
applies to annual periods beginning on or after 1 January 2016.

 
Examples where revenue based amortization may be appropriate

PAS 38 notes that in the circumstance in which the predominant limiting factor
that is inherent in an intangible asset is the achievement of a revenue threshold,
the revenue to be generated can be an appropriate basis for amortization of the
asset. The standard provides the following examples where revenue to be
generated  might be an appropriate basis for amortization:

 A concession to explore and extract gold from a gold mine which is

limited to a fixed amount of revenue generated from the extraction of
gold
o A right to operate a toll road that is based on a fixed amount of revenue
generation from cumulative tolls charged.

Measurement subsequent to acquisition: intangible assets with indefinite useful

lives
An intangible asset with an indefinite useful life should not be amortized.

Its useful life should be reviewed each reporting period to determine whether
events and circumstances continue to support an indefinite useful life assessment
for that asset. If they do not, the change in the useful life assessment from indefi-
nite to finite should be accounted for as a change in an accounting estimate.

Subsequent expenditure
Due to the nature of intangible assets, subsequent expenditure will only rarely
meet the criteria for being recognised in the carrying amount of an asset. [IAS
38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer
lists and similar items must always be recognised in profit or loss as incurred.
Disclosure

For each class of intangible asset, disclose:

 life or amortization rate
 amortization method
 gross carrying useful amount
 accumulated amortization and impairment losses
 line items in the income statement in which amortization is included
 reconciliation of the carrying amount at the beginning and the end of the
period showing:
 additions (business combinations separately)
 assets held for sale
 retirements and other disposals
 revaluations
 impairments
 reversals of impairments
 amortization
 foreign exchange differences
 other changes
 basis for determining that an intangible has an indefinite life
 description and carrying amount of individually material intangible assets
 certain special disclosures about intangible assets acquired by way of gov-
ernment grants
 information about intangible assets whose title is restricted
 contractual commitments to acquire intangible assets
 Additional disclosures are required about:
 intangible assets carried at revalued amounts [IAS 38.124]
 the amount of research and development expenditure recognised as an
expense in the current period [IAS 38.126]
Philippine accounting standards #39
 Financial Instruments Recognition and Measurements

Objective of PAS 39

To establish principles for recognizing and measuring financial assets , financial

liabilities and some contracts to buy or sell non-financial items. Requirements for
presenting information about financial instruments.
SCOPE

PAS 39 applies to all types of financial instruments except for the following;
o interests in subsidiaries, associates, and joint ventures accounted for
under IAS 27 Consolidated and Separate Financial Statements, IAS 28 Invest-
ments in Associates, or IAS 31 Interests in Joint Ventures (or, for periods
beginning on or after 1 January 2013, IFRS 10 Consolidated Financial State-
ments, IAS 27 Separate Financial Statements or IAS 28 Investments in Associ-
ates and Joint Ventures); however IAS 39 applies in cases where under those
standards such interests are to be accounted for under IAS 39. The standard
also applies to most derivatives on an interest in a subsidiary, associate, or
joint venture
o employers' rights and obligations under employee benefit plans to
which IAS 19 Employee Benefits applies
o forward contracts between an acquirer and selling shareholder to buy or
sell an acquiree that will result in a business combination at a future acquisi-
tion date
o rights and obligations under insurance contracts, except IAS 39 does
apply to financial instruments that take the form of an insurance (or reinsur-
ance) contract but that principally involve the transfer of financial risks and
derivatives embedded in insurance contracts
o financial instruments that meet the definition of own equity
under IAS 32 Financial Instruments: Presentation
o financial instruments, contracts and obligations under share-based
payment transactions to which IFRS 2 Share-based Payment applies
o rights to reimbursement payments to which IAS 37 Provisions, Contingent
Liabilities and Contingent Assets applies
 Leases
PAS 39 applies to lease receivables and payables only in limited respects:
o IAS 39 applies to lease receivables with respect to the derecognition and
impairment provisions
o IAS 39 applies to lease payables with respect to the derecognition provi-
sions
o IAS 39 applies to derivatives embedded in leases.

Financial guarantees
PAS 39 applies to financial guarantee contracts issued. However, if an issuer of
financial guarantee contracts has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting applicable to insurance
contracts, the issuer may elect to apply either IAS 39 or IFRS 4 Insurance
Contracts to such financial guarantee contracts. The issuer may make that
election contract by contract, but the election for each contract is irrevocable.
Accounting by the holder is excluded from the scope of IAS 39 and IFRS 4 (unless
the contract is a reinsurance contract). Therefore, paragraphs 10-12 of IAS
8 Accounting Policies, Changes in Accounting Estimates and Errors apply. Those
paragraphs specify criteria to use in developing an accounting policy if no IFRS
applies specifically to an item.

Loan commitments
Loan commitments are outside the scope of IAS 39 if they cannot be settled net in
cash or another financial instrument, they are not designated as financial liabili-
ties at fair value through profit or loss, and the entity does not have a past
practice of selling the loans that resulted from the commitment shortly after origi-
nation. An issuer of a commitment to provide a loan at a below-market interest
rate is required initially to recognize the commitment at its fair value; subse-
quently, the issuer will remeasure it at the higher of (a) the amount recognised
under IAS 37 and (b) the amount initially recognised less, where appropriate, cu-
mulative amortization recognised in accordance with IAS 18. An issuer of loan
commitments must apply IAS 37 to other loan commitments that are not within
the scope of IAS 39 (that is, those made at market or above). Loan commitments
are subject to the derecognition provisions of IAS 39. [IAS 39.4]
Contracts to buy or sell financial items
Contracts to buy or sell financial items are always within the scope of IAS 39
(unless one of the other exceptions applies).

Contracts to buy or sell non-financial items

Contracts to buy or sell non-financial items are within the scope of IAS 39 if they
can be settled net in cash or another financial asset and are not entered into and
held for the purpose of the receipt or delivery of a non-financial item in accor-
dance with the entity's expected purchase, sale, or usage requirements. Contracts
to buy or sell non-financial items are inside the scope if net settlement occurs.

The following situations constitute net settlement: [IAS 39.5-6]

 the terms of the contract permit either counterparty to settle net
 there is a past practice of net settling similar contracts
 there is a past practice, for similar contracts, of taking delivery of the un-
derlying and selling it within a short period after delivery to generate a
profit from short-term fluctuations in price, or from a dealer's margin, or
 the non-financial item is readily convertible to cash

Weather derivatives
Although contracts requiring payment based on climatic, geological, or other
physical variable were generally excluded from the original version of IAS 39, they
were added to the scope of the revised IAS 39 in December 2003 if they are not in
the scope of IFRS 4.

Definitions

IAS 39 incorporates the definitions of the following items from IAS 32Financial

Instruments: Presentation:

 financial instrument
 financial asset
 financial liability
  equity instrument.
Note: Where an entity applies IFRS 9 Financial Instruments prior to its mandatory
application date (1 January 2015), definitions of the following terms are also incor-
porated from IFRS 9: derecognition, derivative, fair value, financial guarantee
contract.  The definition of those terms outlined below (as relevant) are those
from IAS 39.

Common examples of financial instruments within the scope of

IAS 39

 cash
 demand and time deposits
 commercial paper
 accounts, notes, and loans receivable and payable
 debt and equity securities. These are financial instru-
ments from the perspectives of both the holder and the
issuer. This category includes investments in sub-
sidiaries, associates, and joint ventures
 asset backed securities such as collateralized mortgage
obligations, repurchase agreements, and securitized
packages of receivables
 derivatives, including options, rights, warrants, futures
contracts, forward contracts, and swaps.

A derivative is a financial instrument:

 Whose value changes in response to the change in an underlying variable
such as an interest rate, commodity or security price, or index;
 That requires no initial investment, or one that is smaller than would be
required for a contract with similar response to changes in market
factors; and
 That is settled at a future date. [IAS 39.9
 PAS 39 requires that an embedded derivative be separated from its host
contract and accounted for as a derivative when:
 the economic risks and characteristics of the embedded derivative are
not closely related to those of the host contract
 a separate instrument with the same terms as the embedded derivative
would meet the definition of a derivative, and
 the entire instrument is not measured at fair value with changes in fair
value recognised in the income statement
If an embedded derivative is separated, the host contract is accounted for under
the appropriate standard (for instance, under IAS 39 if the host is a financial in-
strument). Appendix A to IAS 39 provides examples of embedded derivatives that
are closely related to their hosts, and of those that are not.

Examples of embedded derivatives that are not closely related to their hosts
(and therefore must be separately accounted for) include:
 the equity conversion option in debt convertible to ordinary shares (from
the perspective of the holder only) [IAS 39.AG30(f)]
 commodity indexed interest or principal payments in host debt
contracts[IAS 39.AG30(e)]
 cap and floor options in host debt contracts that are in-the-money when
the instrument was issued [IAS 39.AG33(b)]
 leveraged inflation adjustments to lease payments [IAS 39.AG33(f)]
 currency derivatives in purchase or sale contracts for non-financial items
where the foreign currency is not that of either counterparty to the
contract, is not the currency in which the related good or service is
routinely denominated in commercial transactions around the world, and
is not the currency that is commonly used in such contracts in the
economic environment in which the transaction takes place. [IAS 39.
AG33(d)]

If PAS 39 requires that an embedded derivative be separated from its host

contract, but the entity is unable to measure the embedded derivative separately,
 the entire combined contract must be designated as a financial asset as at fair
value through profit or loss).
Classification as liability or equity
Since PAS 39 does not address accounting for equity instruments issued by the
reporting enterprise but it does deal with accounting for financial liabilities, classi-
fication of an instrument as liability or as equity is critical. IAS 32 Financial Instru-
ments: Presentation addresses the classification question.

Classification of financial assets

IAS 39 requires financial assets to be classified in one of the following cate-
gories:
 Financial assets at fair value through profit or loss
 Available-for-sale financial assets
 Loans and receivables
 Held-to-maturity investments
Those categories are used to determine how a particular financial asset is recog-
nised and measured in the financial statements.

Financial assets at fair value through profit or loss.

 This category has two subcategories:

o Designated. The first includes any financial asset that is designated on
initial recognition as one to be measured at fair value with fair value changes
in profit or loss.
o Held for trading. The second category includes financial assets that are
held for trading. All derivatives (except those designated hedging instruments)
and financial assets acquired or held for the purpose of selling in the short
term or for which there is a recent pattern of short-term profit taking are held
for trading. [IAS 39.9]

Available-for-sale financial assets (AFS) are any non-derivative financial assets

designated on initial recognition as available for sale or any other instruments
that are not classified as as
 (a) loans and receivables,
(b) held-to-maturity investments or
(c) financial assets at fair value through profit or loss.

Loans and receivables are non-derivative financial assets with fixed or deter-

minable payments that are not quoted in an active market, other than held for
trading or designated on initial recognition as assets at fair value through profit or
loss or as available-for-sale. Loans and receivables for which the holder may not
recover substantially all of its initial investment, other than because of credit de-
terioration, should be classified as available-for-sale.[IAS 39.9] Loans and receiv-
ables are measured at amortized cost. [IAS 39.46(a)]

Held-to-maturity investments are non-derivative financial assets with fixed or de-

terminable payments that an entity intends and is able to hold to maturity and
that do not meet the definition of loans and receivables and are not designated
on initial recognition as assets at fair value through profit or loss or as available
for sale. Held-to-maturity investments are measured at amortized cost. If an
entity sells a held-to-maturity investment other than in insignificant amounts or
as a consequence of a non-recurring, isolated event beyond its control that could
not be reasonably anticipated, all of its other held-to-maturity investments must
be reclassified as available-for-sale for the current and next two financial
reporting years. [IAS 39.9] Held-to-maturity investments are measured at
amortized cost. [IAS 39.46(b)]

Classification of financial liabilities

PAS 39 recognizes two classes of financial liabilities:

 Financial liabilities at fair value through profit or loss
 Other financial liabilities measured at amortized cost using the effective
interest method
 The category of financial liability at fair value through profit or loss has two
subcategories:
  Designated. a financial liability that is designated by the entity as a
liability at fair value through profit or loss upon initial recognition
 Held for trading. a financial liability classified as held for trading, such as
an obligation for securities borrowed in a short sale, which have to be
returned in the future
Initial recognition
PAS 39 requires recognition of a financial asset or a financial liability when, and
only when, the entity becomes a party to the contractual provisions of the instru-
ment, subject to the following provisions in respect of regular way purchases.
[IAS 39.14]

Regular way purchases or sales of a financial asset. A regular way purchase or

sale of financial assets is recognised and derecognized using either trade date or
settlement date accounting. [IAS 39.38] The method used is to be applied consis-
tently for all purchases and sales of financial assets that belong to the same
category of financial asset as defined in IAS 39 (note that for this purpose assets
held for trading form a different category from assets designated at fair value
through profit or loss). The choice of method is an accounting policy. [IAS 39.38]

PAS 39 requires that all financial assets and all financial liabilities be recognised on
the balance sheet. That includes all derivatives. Historically, in many parts of the
world, derivatives have not been recognised on company balance sheets. The
argument has been that at the time the derivative contract was entered, there
was no amount of cash or other assets paid. Zero cost justified non-recognition,
notwithstanding that as time passes and the value of the underlying variable
(rate, price, or index) changes, the derivative has a positive (asset) or negative
(liability) value.

Initial measurement
Initially, financial assets and liabilities should be measured at fair value (including
transaction costs, for assets and liabilities not measured at fair value through
profit or loss). [IAS 39.43]

Measurement subsequent to initial recognition

Subsequently, financial assets and liabilities (including derivatives) should be
measured at fair value, with the following exceptions:

 Loans and receivables, held-to-maturity investments, and non-derivative

financial liabilities should be measured at amortised cost using the
effective interest method.
 Investments in equity instruments with no reliable fair value measurement
(and derivatives indexed to such equity instruments) should be measured
at cost.
 Financial assets and liabilities that are designated as a hedged item or
hedging instrument are subject to measurement under the hedge
accounting requirements of the IAS 39.
 Financial liabilities that arise when a transfer of a financial asset does not
qualify for derecognition, or that are accounted for using the continuing-
involvement method, are subject to particular measurement require-
ments.
 Fair value is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm's length
transaction. [IAS 39.9] IAS 39 provides a hierarchy to be used in determin-
ing the fair value for a financial instrument: [IAS 39 Appendix A, paragraphs
AG69-82]
 Quoted market prices in an active market are the best evidence of fair
value and should be used, where they exist, to measure the financial in-
strument.
 If a market for a financial instrument is not active, an entity establishes
fair value by using a valuation technique that makes maximum use of
market inputs and includes recent arm's length market transactions,
reference to the current fair value of another instrument that is substan-
tially the same, discounted cash flow analysis, and option pricing models.
An acceptable valuation technique incorporates all factors that market
participants would consider in setting a price and is consistent with
accepted economic methodologies for pricing financial instruments.
 If there is no active market for an equity instrument and the range of rea-
sonable fair values is significant and these estimates cannot be made
 reliably, then an entity must measure the equity instrument at cost less
impairment.

Amortized cost is calculated using the effective interest method. The effective
interest rate is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument to the net carrying
amount of the financial asset or liability. Financial assets that are not carried at
fair value though profit and loss are subject to an impairment test. If expected life
cannot be determined reliably, then the contractual life is used.

PAS 39 fair value option

IAS 39 permits entities to designate, at the time of acquisition or issuance, any
financial asset or financial liability to be measured at fair value, with value
changes recognised in profit or loss. This option is available even if the financial
asset or financial liability would ordinarily, by its nature, be measured at
amortized cost – but only if fair value can be reliably measured.
In June 2005 the IASB issued its amendment to IAS 39 to restrict the use of the
option to designate any financial asset or any financial liability to be measured at
fair value through profit and loss (the fair value option). The revisions limit the
use of the option to those financial instruments that meet certain conditions:
[IAS 39.9]
 and its the fair value option designation eliminates or significantly
reduces an accounting mismatch, or
 a group of financial assets, financial liabilities or both is managed perfor-
mance is evaluated on a fair value basis by entity's management.

Once an instrument is put in the fair-value-through-profit-and-loss category, it

cannot be reclassified out with some exceptions. [IAS 39.50] In October 2008, the
IASB issued amendments to PAS 39. The amendments permit reclassification of
some financial instruments out of the fair-value-through-profit-or-loss category
(FVTPL) and out of the available-for-sale category – for more detail see
IAS 39.50(c). In the event of reclassification, additional disclosures are required
under IFRS 7 Financial Instruments: Disclosures. In March 2009 the IASB clarified
that reclassifications of financial assets under the October 2008 amendments (see
above): on reclassification of a financial asset out of the 'fair value through profit
or loss' category, all embedded derivatives have to be (re)assessed and, if
necessary, separately accounted for in financial statements.

IAS 39 available for sale option for loans and receivables

IAS 39 permits entities to designate, at the time of acquisition, any loan or receiv-
able as available for sale, in which case it is measured at fair value with changes in
fair value recognised in equity.

Impairment
A financial asset or group of assets is impaired, and impairment losses are recog-
nised, only if there is objective evidence as a result of one or more events that
occurred after the initial recognition of the asset. An entity is required to assess at
each balance sheet date whether there is any objective evidence of impairment. If
any such evidence exists, the entity is required to do a detailed impairment calcu-
lation to determine whether an impairment loss should be recognised. [IAS 39.58]
The amount of the loss is measured as the difference between the asset's carrying
amount and the present value of estimated cash flows discounted at the financial
asset's original effective interest rate. [IAS 39.63]
Assets that are individually assessed and for which no impairment exists are
grouped with financial assets with similar credit risk statistics and collectively
assessed for impairment. [IAS 39.64]
If, in a subsequent period, the amount of the impairment loss relating to a
financial asset carried at amortized cost or a debt instrument carried as available-
for-sale decreases due to an event occurring after the impairment was originally
recognised, the previously recognised impairment loss is reversed through profit
or loss. Impairments relating to investments in available-for-sale equity instru-
ments are not reversed through profit or loss. [IAS 39.65]

Financial guarantees
A financial guarantee contract is a contract that requires the issuer to make
specified payments to reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due. [IAS 39.9]
Under IAS 39 as amended, financial guarantee contracts are recognised:
 initially at fair value. If the financial guarantee contract was issued in a
stand-alone arm's length transaction to an unrelated party, its fair value
 at inception is likely to equal the consideration received, unless there is
evidence to the contrary.
 subsequently at the higher of

(i) the amount determined in accordance with IAS 37 Provisions,

Contingent Liabilities and Contingent Assets an
(ii) the amount initially recognised less, when appropriate, cumula-
tive amortization recognised in accordance with IAS 18 Revenue.
(If specified criteria are met, the issuer may use the fair value
option in IAS 39. Furthermore, different requirements continue
to apply in the specialized context of a 'failed' derecognition
transaction.)

Some credit-related guarantees do not, as a precondition for payment, require

that the holder is exposed to, and has incurred a loss on, the failure of the debtor
to make payments on the guaranteed asset when due. An example of such a
guarantee is a credit derivative that requires payments in response to changes in
a specified credit rating or credit index. These are derivatives and they must be
measured at fair value under IAS 39.

Derecognition of a financial asset

The basic premise for the derecognition model in IAS 39 is to determine whether
the asset under consideration for derecognition is:
 an asset in its entirety or
 specifically identified cash flows from an asset or
 a fully proportionate share of the cash flows from an asset or
 a fully proportionate share of specifically identified cash flows from a
financial asset

The following three conditions:

 the entity has no obligation to pay amounts to the eventual recipient
unless it collects equivalent amounts on the original asset
  the entity is prohibited from selling or pledging the original asset (other
than as security to the eventual recipient),
 the entity has an obligation to remit those cash flows without material
delay
Once an entity has determined that the asset has been transferred, it then deter-
mines whether or not it has transferred substantially all of the risks and rewards
of ownership of the asset. If substantially all the risks and rewards have been
transferred, the asset is derecognized. If substantially all the risks and rewards
have been retained, derecognition of the asset is precluded. [IAS 39.20]

If the entity has neither retained nor transferred substantially all of the risks and
rewards of the asset, then the entity must assess whether it has relinquished
control of the asset or not. If the entity does not control the asset then derecogni-
tion is appropriate; however, if the entity has retained control of the asset, then
the entity continues to recognize the asset to the extent to which it has a continu-
ing involvement in the asset. [IAS 39.30]

Derecognition of a financial liability

A financial liability should be removed from the balance sheet when, and only
when, it is extinguished, that is, when the obligation specified in the contract is
either discharged or cancelled or expires. [IAS 39.39] Where there has been an
exchange between an existing borrower and lender of debt instruments with sub-
stantially different terms, or there has been a substantial modification of the
terms of an existing financial liability, this transaction is accounted for as an extin-
guishment of the original financial liability and the recognition of a new financial
liability. A gain or loss from extinguishment of the original financial liability is
recognised in profit or loss. [IAS 39.40-41]

Hedge accounting
PAS 39 permits hedge accounting under certain circumstances provided that the
hedging relationship is: [IAS 39.88]
 formally designated and documented, including the entity's risk manage-
ment objective and strategy for undertaking the hedge, identification of
the hedging instrument, the hedged item, the nature of the risk being
 hedged, and how the entity will assess the hedging instrument's effec-
tiveness and
 expected to be highly effective in achieving offsetting changes in fair
value or cash flows attributable to the hedged risk as designated and doc-
umented, and effectiveness can be reliably measured and
 assessed on an ongoing basis and determined to have been highly
effective
Hedging instruments
Hedging instrument is an instrument whose fair value or cash flows are expected
to offset changes in the fair value or cash flows of a designated hedged item.
[IAS 39.9]
All derivative contracts with an external counterparty may be designated as
hedging instruments except for some written options. A non-derivative financial
asset or liability may not be designated as a hedging instrument except as a hedge
of foreign currency risk. [IAS 39.72]
For hedge accounting purposes, only instruments that involve a party external to
the reporting entity can be designated as a hedging instrument. This applies to in-
tragroup transactions as well (with the exception of certain foreign currency
hedges of forecast intragroup transactions – see below). However, they may
qualify for hedge accounting in individual financial statements. [IAS 39.73]
Hedged items
Hedged item is an item that exposes the entity to risk of changes in fair value or
future cash flows and is designated as being hedged. [IAS 39.9]
A hedged item can be: [IAS  39.78-82]
 a single recognised asset or liability, firm commitment, highly probable
transaction or a net investment in a foreign operation
 a group of assets, liabilities, firm commitments, highly probable forecast
transactions or net investments in foreign operations with similar risk
characteristics
 a held-to-maturity investment for foreign currency or credit risk (but not
for interest risk or prepayment risk)
 a portion of the cash flows or fair value of a financial asset or financial
liability or
  a non-financial item for foreign currency risk only for all risks of the entire
item
 in a portfolio hedge of interest rate risk (Macro Hedge) only, a portion of
the portfolio of financial assets or financial liabilities that share the risk
being hedged

In April 2005, the IASB amended IAS 39 to permit the foreign currency risk of a
highly probable intragroup forecast transaction to qualify as the hedged item in a
cash flow hedge in consolidated financial statements – provided that the transac-
tion is denominated in a currency other than the functional currency of the entity
entering into that transaction and the foreign currency risk will affect consoli-
dated financial statements. [IAS 39.80]
In 30 July 2008, the IASB amended IAS 39 to clarify two hedge accounting issues:
 inflation in a financial hedged item
 a one-sided risk in a hedged item.

Effectiveness
IAS 39 requires hedge effectiveness to be assessed both prospectively and retro-
spectively. To qualify for hedge accounting at the inception of a hedge and, at a
minimum, at each reporting date, the changes in the fair value or cash flows of
the hedged item attributable to the hedged risk must be expected to be highly
effective in offsetting the changes in the fair value or cash flows of the hedging in-
strument on a prospective basis, and on a retrospective basis where actual results
are within a range of 80% to 125%.
All hedge ineffectiveness is recognised immediately in profit or loss (including in-
effectiveness within the 80% to 125% window).

Categories of hedges

A fair value hedge is a hedge of the exposure to changes in fair value of a recog-
nised asset or liability or a previously unrecognized firm commitment or an identi-
fied portion of such an asset, liability or firm commitment, that is attributable to a
particular risk and could affect profit or loss. [IAS 39.86(a)] The gain or loss from
the change in fair value of the hedging instrument is recognised immediately in
profit or loss. At the same time the carrying amount of the hedged item is
adjusted for the corresponding gain or loss with respect to the hedged risk, which
is also recognised immediately in net profit or loss. [IAS 39.89]

A cash flow hedge is a hedge of the exposure to variability in cash flows that

(i) is attributable to a particular risk associated with a recognised

asset or liability (such as all or some future interest payments on
variable rate debt) or a highly probable forecast transaction and
(ii) could affect profit or loss. [IAS 39.86(b)] The portion of the gain
or loss on the hedging instrument that is determined to be an
effective hedge is recognised in other comprehensive income.
[IAS 39.95]

If a hedge of a forecast transaction subsequently results in the recognition of a

financial asset or a financial liability, any gain or loss on the hedging instrument
that was previously recognised directly in equity is 'recycled' into profit or loss in
the same period(s) in which the financial asset or liability affects profit or loss.
[IAS 39.97]
If a hedge of a forecast transaction subsequently results in the recognition of a
non-financial asset or non-financial liability, then the entity has an accounting
policy option that must be applied to all such hedges of forecast transactions:
[IAS 39.98]
 Same accounting as for recognition of a financial asset or financial liability
– any gain or loss on the hedging instrument that was previously recog-
nised in other comprehensive income is 'recycled' into profit or loss in the
same period(s) in which the non-financial asset or liability affects profit or
loss.
 'Basis adjustment' of the acquired non-financial asset or liability – the
gain or loss on the hedging instrument that was previously recognised in
other comprehensive income is removed from equity and is included in
the initial cost or other carrying amount of the acquired non-financial
asset or liability.
  A hedge of a net investment in a foreign operation as defined in IAS
21 The Effects of Changes in Foreign Exchange Rates is accounted for
similarly to a cash flow hedge. [IAS 39.102]
 A hedge of the foreign currency risk of a firm commitment may be
accounted for as a fair value hedge or as a cash flow hedge.
 Discontinuation of hedge accounting
 Hedge accounting must be discontinued prospectively if: [IAS 39.91 and
39.101]
 the hedging instrument expires or is sold, terminated, or exercised
 the hedge no longer meets the hedge accounting criteria – for example it
is no longer effective
 for cash flow hedges the forecast transaction is no longer expected to
occur, or
 the entity revokes the hedge designation
In June 2013, the IASB amended IAS 39 to make it clear that there is no need to
discontinue hedge accounting if a hedging derivative is novated, provided certain
criteria are met. [IAS 39.91 and IAS 39.101]
For the purpose of measuring the carrying amount of the hedged item when fair
value hedge accounting ceases, a revised effective interest rate is calculated.
[IAS 39.BC35A]
If hedge accounting ceases for a cash flow hedge relationship because the
forecast transaction is no longer expected to occur, gains and losses deferred in
other comprehensive income must be taken to profit or loss immediately. If the
transaction is still expected to occur and the hedge relationship ceases, the
amounts accumulated in equity will be retained in equity until the hedged item
affects profit or loss. [IAS 39.101(c)]
If a hedged financial instrument that is measured at amortized cost has been
adjusted for the gain or loss attributable to the hedged risk in a fair value hedge,
this adjustment is amortized to profit or loss based on a recalculated effective
interest rate on this date such that the adjustment is fully amortized by the
maturity of the instrument. Amortization may begin as soon as an adjustment
exists and must begin no later than when the hedged item ceases to be adjusted
for changes in its fair value attributable to the risks being hedged.
Disclosure

In 2003 all disclosures about financial instruments were moved to IAS 32, so IAS
32 was renamed Financial Instruments: Disclosure and Presentation. In 2005, the
IASB issued IFRS 7 Financial Instruments: Disclosures to replace the disclosure
portions of IAS 32 effective 1 January 2007. IFRS 7 also superseded IAS 30 Disclo-
sures in the Financial Statements of Banks and Similar Financial Institutions.

Philippine accounting standards #40

Investment Property

Objective of PAS 40

This Standard deals with the accounting treatment of investment property and
provides guidance for the related disclosure requirements

SCOPE

 property held for use in the production or supply of goods or services or

for administrative purposes
 property held for sale in the ordinary course of business or in the process
of construction of development for such sale (IAS 2 Inventories)
 property being constructed or developed on behalf of third parties (IAS
11 Construction Contracts)

 owner-occupied property (IAS 16 Property, Plant and Equipment), including

property held for future use as owner-occupied property, property held for
future development and subsequent use as owner-occupied
 property, property occupied by employees and owner-occupied property
awaiting disposal
 property leased to another entity under a finance lease
  In May 2008, as part of its Annual improvements project, the IASB
expanded the scope of IAS 40 to include property under construction or de-
velopment for future use as an investment property. Such property previ-
ously fell within the scope of IAS 16.

Definitions

Examples of investment property: [IAS 40.8]

 land held for long-term capital appreciation
 land held for a currently undetermined future use
 building leased out under an operating lease
 vacant building held to be leased out under an operating lease
 property that is being constructed or developed for future use as invest-
ment property

Other classification issues

Property held under an operating lease. A property interest that is held by a

lessee under an operating lease may be classified and accounted for as invest-
ment property provided that:
 the rest of the definition of investment property is met
 the operating lease is accounted for as if it were a finance lease in accor-
dance with IAS 17 Leases
 the lessee uses the fair value model set out in this Standard for the asset
recognised

An entity may make the foregoing classification on a property-by-property basis.

Partial own use
 If the owner uses part of the property for its own use, and part to earn rentals or
for capital appreciation, and the portions can be sold or leased out separately,
they are accounted for separately. Therefore the part that is rented out is invest-
ment property. If the portions cannot be sold or leased out separately, the
property is investment property only if the owner-occupied portion is insignifi-
cant.

Ancillary services
 If the entity provides ancillary services to the occupants of a property held by the
entity, the appropriateness of classification as investment property is determined
by the significance of the services provided. If those services are a relatively in-
significant component of the arrangement (for instance, the building owner
supplies security and maintenance services to the lessees), then the entity may
treat the property as investment property. Where the services provided are more
significant (such as in the case of an owner-managed hotel), the property should
be classified as owner-occupied. [IAS 40.13]

Intracompany rentals
 Property rented to a parent, subsidiary, or fellow subsidiary is not investment
property in consolidated financial statements that include both the lessor and the
lessee, because the property is owner-occupied from the perspective of the
group. However, such property could qualify as investment property in the
separate financial statements of the lessor, if the definition of investment
property is otherwise met.

Recognition
Investment property should be recognised as an asset when it is probable that the
future economic benefits that are associated with the property will flow to the
entity, and the cost of the property can be reliably measured. [IAS 40.16]

Initial measurement
Investment property is initially measured at cost, including transaction costs. Such
cost should not include start-up costs, abnormal waste, or initial operating losses
incurred before the investment property achieves the planned level of occupancy.
[IAS 40.20 and 40.23]

Measurement subsequent to initial recognition

IAS 40 permits entities to choose between: [IAS 40.30]
 a fair value model, and
  a cost model.
 One method must be adopted for all of an entity's investment property.
Change is permitted only if this results in a more appropriate presentation.
IAS 40 notes that this is highly unlikely for a change from a fair value model
to a cost model.

Fair value model

Investment property is remeasured at fair value, which is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. [IAS 40.5] Gains or losses
arising from changes in the fair value of investment property must be included in
net profit or loss for the period in which it arises. [IAS 40.35]
Fair value should reflect the actual market state and circumstances as of the
balance sheet date. [IAS 40.38] The best evidence of fair value is normally given
by current prices on an active market for similar property in the same location
and condition and subject to similar lease and other contracts. [IAS 40.45] In the
absence of such information, the entity may consider current prices for properties
of a different nature or subject to different conditions, recent prices on less active
markets with adjustments to reflect changes in economic conditions, and dis-
counted cash flow projections based on reliable estimates of future cash flows.
[IAS 40.46]

There is a rebuttable presumption that the entity will be able to determine the
fair value of an investment property reliably on a continuing basis. However:
[IAS 40.53]
 If an entity determines that the fair value of an investment property
under construction is not reliably determinable but expects the fair value
of the property to be reliably determinable when construction is
complete, it measures that investment property under construction at
cost until either its fair value becomes reliably determinable or construc-
tion is completed.
 If an entity determines that the fair value of an investment property
(other than an investment property under construction) is not reliably de-
terminable on a continuing basis, the entity shall measure that invest-
ment property using the cost model in IAS 16. The residual value of the
 investment property shall be assumed to be zero. The entity shall apply
IAS 16 until disposal of the investment property.
Where a property has previously been measured at fair value, it should continue
to be measured at fair value until disposal, even if comparable market transac-
tions become less frequent or market prices become less readily available. [IAS
40.55]

Cost model
After initial recognition, investment property is accounted for in accordance with
the cost model as set out in IAS 16 Property, Plant and Equipment – cost less accu-
mulated depreciation and less accumulated impairment losses. [IAS 40.56]

Transfers to or from investment property classification

Transfers to, or from, investment property should only be made when there is a
change in use, evidenced by one or more of the following: [IAS 40.57 (note that
this list was changed from an exhaustive list to an non-exhaustive list of examples
by 

Transfers of Investment Property in December 2016 effective 1 January 2018) ]

 commencement of owner-occupation (transfer from investment property
to owner-occupied property)
 commencement of development with a view to sale (transfer from invest-
ment property to inventories)
 end of owner-occupation (transfer from owner-occupied property to in-
vestment property)
 commencement of an operating lease to another party (transfer from in-
ventories to investment property)
 end of construction or development (transfer from property in the course
of construction/development to investment property
 When an entity decides to sell an investment property without develop-
ment, the property is not reclassified as inventory but is dealt with as in-
vestment property until it is derecognized. [IAS 40.58]
The following rules apply for accounting for transfers between categories:
 for a transfer from investment property carried at fair value to owner-oc-
cupied property or inventories, the fair value at the change of use is the
'cost' of the property under its new classification [IAS 40.60]
 for a transfer from owner-occupied property to investment property
carried at fair value, IAS 16 should be applied up to the date of reclassifi-
cation. Any difference arising between the carrying amount under IAS 16
at that date and the fair value is dealt with as a revaluation under IAS 16
[IAS 40.61]
 for a transfer from inventories to investment property at fair value, any
difference between the fair value at the date of transfer and it previous
carrying amount should be recognised in profit or loss [IAS 40.63]
 when an entity completes construction/development of an investment
property that will be carried at fair value, any difference between the fair
value at the of transfer date and the previous carrying amount should be
recognised in profit or loss. [IAS 40.65]
When an entity uses the cost model for investment property, transfers between
categories do not change the carrying amount of the property transferred, and
they do not change the cost of the property for measurement or disclosure
purposes.

Disposal
An investment property should be derecognized on disposal or when the invest-
ment property is permanently withdrawn from use and no future economic
benefits are expected from its disposal. The gain or loss on disposal should be cal-
culated as the difference between the net disposal proceeds and the carrying
amount of the asset and should be recognised as income or expense in the
income statement. [IAS 40.66 and 40.69] Compensation from third parties is
recognised when it becomes receivable. [IAS 40.72]

Disclosure
Both Fair Value Model and Cost Model [IAS 40.75]
 whether the fair value or the cost model is used
 if the fair value model is used, whether property interests held under
operating leases are classified and accounted for as investment property
 if classification is difficult, the criteria to distinguish investment property
from owner-occupied property and from property held for sale
 the extent to which the fair value of investment property is based on a
valuation by a qualified independent valuer; if there has been no such
valuation, that fact must be disclosed
 the amounts recognised in profit or loss for:
 rental income from investment property
 direct operating expenses (including repairs and maintenance)
arising from investment property that generated rental income
during the period
 direct operating expenses (including repairs and maintenance)
arising from investment property that did not generate rental
income during the period
 the cumulative change in fair value recognised in profit or loss on
a sale from a pool of assets in which the cost model is used into a
pool in which the fair value model is used
 restrictions on the realizability of investment property or the remittance
of income and proceeds of disposal
 contractual obligations to purchase, construct, or develop investment
property or for repairs, maintenance or enhancements
 Additional Disclosures for the Fair Value Model [IAS 40.76]
 a reconciliation between the carrying amounts of investment property at
the beginning and end of the period, showing additions, disposals, fair
value adjustments, net foreign exchange differences, transfers to and
from inventories and owner-occupied property, and other changes [IAS
40.76]
 significant adjustments to an outside valuation (if any) [IAS 40.77]
 if an entity that otherwise uses the fair value model measures an item of
investment property using the cost model, certain additional disclosures
are required [IAS 40.78]
 Additional Disclosures for the Cost Model [IAS 40.79]
  the depreciation methods used
 the useful lives or the depreciation rates used
 the gross carrying amount and the accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the
period
 a reconciliation of the carrying amount of investment property at the
beginning and end of the period, showing additions, disposals, deprecia-
tion, impairment recognised or reversed, foreign exchange differences,
transfers to and from inventories and owner-occupied property, and
other changes
 the fair value of investment property. If the fair value of an item of invest-
ment property cannot be measured reliably, additional disclosures are
required, including, if possible, the range of estimates within which fair
value is highly likely to lie

Philippine accounting standards #41

AGRICULTURE

Objective of PAS 41
The objective of IAS 41 is to establish standards of accounting for agricultural
activity – the management of the biological transformation of biological assets
(living plants and animals) into agricultural produce (harvested product of the
entity's biological assets).

SCOPE
IAS 41 applies to biological assets with the exception of bearer plants, agricultural
produce at the point of harvest, and government grants related to these biologi-
cal assets. It does not apply to land related to agricultural activity, intangible
assets related to agricultural activity, government grants related to bearer plants,
and bearer plants. However, it does apply to produce growing on bearer plants.

Note: Bearer plants were excluded from the scope of IAS 41 by  Agriculture:
Bearer Plants (Amendments to IAS 16 and IAS 41), which applies to annual
periods beginning on or after 1 January 2016.

Key definitions

Biological A living animal or plant

asset

Bearer plant* 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,
and
c. has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales.

Agricultural The harvested product from biological assets

produce
 Costs to sell The incremental costs directly attributable to the disposal of
an asset, excluding finance costs and income taxes

* Definition included by Agriculture: Bearer Plants (Amendments to IAS 16 and

IAS 41), which applies to annual periods beginning on or after 1 January 2016.

Initial recognition
An entity recognizes a biological asset or agriculture produce only when the entity
controls the asset as a result of past events, it is probable that future economic
benefits will flow to the entity, and the fair value or cost of the asset can be
measured reliably. [IAS 41.10]

Measurement
Biological assets within the scope of IAS 41 are measured on initial recognition
and at subsequent reporting dates at fair value less estimated costs to sell, unless
fair value cannot be reliably measured. [IAS 41.12]

Agricultural produce is measured at fair value less estimated costs to sell at the
point of harvest. [IAS 41.13] Because harvested produce is a marketable
commodity, there is no 'measurement reliability' exception for produce.

The gain on initial recognition of biological assets at fair value less costs to sell,
and changes in fair value less costs to sell of biological assets during a period, are
included in profit or loss. [IAS 41.26]

A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce

at fair value less costs to sell are included in profit or loss for the period in which it
arises. [IAS 41.28]

All costs related to biological assets that are measured at fair value are recog-
nised as expenses when incurred, other than costs to purchase biological assets.
IAS 41 presumes that fair value can be reliably measured for most biological
assets. However, that presumption can be rebutted for a biological asset that, at
the time it is initially recognised, does not have a quoted market price in an active
market and for which alternative fair value measurements are determined to be
clearly unreliable. In such a case, the asset is measured at cost less accumulated
depreciation and impairment losses. But the entity must still measure all of its
other biological assets at fair value less costs to sell. If circumstances change and
fair value becomes reliably measurable, a switch to fair value less costs to sell is
required. [IAS 41.30]
Guidance on the determination of fair value is available in IFRS 13 Fair Value Mea-
surement.  IFRS 13 also requires disclosures about fair value measurements.

Other issues
The change in fair value of biological assets is part physical change (growth, etc)
and part unit price change. Separate disclosure of the two components is encour-
aged, not required. [IAS 41.51]

Agricultural produce is measured at fair value less costs to sell at harvest, and this
measurement is considered the cost of the produce at that time (for the purposes
of IAS 2 Inventories or any other applicable standard). [IAS 41.13]

Agricultural land is accounted for under IAS 16 Property, Plant and Equipment.

However, biological assets (other than bearer plants) that are physically attached
to land are measured as biological assets separate from the land.  In some cases,
the determination of the fair value less costs to sell of the biological asset can be
based on the fair value of the combined asset (land, improvements and biological
assets). [IAS 41.25]
Intangible assets relating to agricultural activity (for example, milk quotas) are
accounted for under IAS 38 Intangible Assets.

Government grants
Unconditional government grants received in respect of biological assets
measured at fair value less costs to sell are recognised in profit or loss when the
grant becomes receivable. [IAS 41.34]
If such a grant is conditional (including where the grant requires an entity not to
engage in certain agricultural activity), the entity recognizes the grant in profit or
loss only when the conditions have been met. [IAS 41.35]
Disclosure

Disclosure requirements in IAS 41 include:

 aggregate gain or loss from the initial recognition of biological assets and
agricultural produce and the change in fair value less costs to sell during
the period* [IAS 41.40]
 description of an entity's biological assets, by broad group [IAS 41.41]
 description of the nature of an entity's activities with each group of bio-
logical assets and non-financial measures or estimates of physical quanti-
ties of output during the period and assets on hand at the end of the
period [IAS 41.46]
 information about biological assets whose title is restricted or that are
pledged as security [IAS 41.49]
 commitments for development or acquisition of biological assets [IAS
41.49]
 financial risk management strategies [IAS 41.49]
 reconciliation of changes in the carrying amount of biological assets,
showing separately changes in value, purchases, sales, harvesting,
business combinations, and foreign exchange differences* [IAS 41.50]
 Separate and/or additional disclosures are required where biological
assets are measured at cost less accumulated depreciation [IAS
41.55]
 Disclosure of a quantified description of each group of biological assets, dis-
tinguishing between consumable and bearer assets or between mature and
immature assets, is encouraged but not required. [IAS 41.43]
 If fair value cannot be measured reliably, additional required disclosures
include: [IAS 41.54]
 description of the assets
 an explanation of why fair value cannot be reliably measured
 if possible, a range within which fair value is highly likely to lie
 depreciation method
  useful lives or depreciation rates
 gross carrying amount and the accumulated depreciation, beginning and
ending.
 If the fair value of biological assets previously measured at cost subse-
quently becomes available, certain additional disclosures are required. [IAS
41.56]
Disclosures relating to government grants include the nature and extent of
grants, unfulfilled conditions, and significant decreases expected in the level of
grants. [IAS 41.57]