ACYFAR PORTFOLIO

Reflection Paper Presented

to the Accountancy Department

In Partial Fulfilment

of the Course Requirement

in ACYFAR 3

Roaring, Geoffrey Ivan, L.

K34
 ACYFAR 3 topics are surprisingly easier to understand but trickier due to different
concepts that are needed to put in mind whenever solving, identifying, classifying certain
financial information that are required in the company’s financial statements as well as the
notes associated with it. It covered correlated and challenging topics starting from
Investment Property, NCAHS and Discontinued Operation, Agriculture, Intangibles, Current
Liabilities, Bonds and Notes, and lastly Lease Accounting which focuses on Lessor.
Nevertheless, learning all these topics really helped my journey makes sense because more
and more items continue to reveal themselves on how they are measured, classified, and
recorded in the financial statements.

Just like what I did in my previous critique papers, we will be using the same company
to critique which is the Basic Energy Corporation (BEC). I will be critiquing their latest
financial statements from them previous reporting period of January 1, 2019 to December
31, 2019. They follow the calendar approach of reporting since their last day falls on every
31st of December of each year which is the last day of the year as well. BEC is engaged in the
development and exploration, acquisition, operation & maintenance of various sources of
energy including ancillary services as mentioned in their sustainability report.

BEC focuses on exploring energy resources so it means numerous investments are

necessary for them in order to push through with their operations. We will be critiquing first
their investment properties in order to see how it went on their corporation and how they
were able to maximize each investment properties especially that PPEs are significant in
their overall business operation.

INVESTMENT PROPERTIES

PPE and Investment Properties are almost alike however the latter has a distinct
characteristic that draw the line to the former. Investment property is a property but not all
property, only land, building, or a part of a building or both held by the owner or by the lessee
as a right-of-use-asset (ROUA) to earn rentals or for capital appreciation or both.
Additionally, it should be a real or immovable property to be considered an investment
property. If a property fails to meet the certain qualifications to be considered as investment
property, it may be considered as either PPE, Inventor, or Owner-occupied property.
 It is important to note that BEC follows a consolidated approach of preparing the
financial statements because it may o may not the identification and recording of certain
investment properties. According to IAS 40, Intercompany rentals are considered
Investment Property when and only when the company or the corporation follows a
Separate Financial Statements, else, it will be classified as Owner-occupied Property (OOP)
such as when the company or corporation follows a Consolidated Financial Statements. Upon
checking the latest financial statement of BEC, it appropriately followed the Standards since
they did not recognize such intercompany rentals due to the reason of following a
consolidated approach in preparing the financial statements.

BEC has numerous investment properties listed in the financial statements and they
carefully noted all of it the notes including all of the changes that occurred on the time of
reporting period. Investment properties, consisting of parcel of land owned by the Group are
measured initially at cost, including transaction cost as mentioned in BEC’s Summary of
Significant Accounting Policies. It coincides with IAS 40 because according to it the initial
recognition of Investment Properties should be measured at initial cost including transaction
costs. BEC did not include start-up costs, abnormal waste, or initial operating losses incurred
before the investment property achieves the planned level of occupancy which is what the
Standards actually requires for the corporations to follow.

Since there is an initial measurement, subsequent measurement should be followed

too, it is where the fair value model or cost model enters the group chat. BEC’s Investment
Properties are stated at fair value which reflects market conditions at the reporting date.
Gains or losses arising from changes in fair values of investment properties are included in
the Consolidated statement of income in the year in which they arise. Apparently, IAS 40
requires exactly the same approach on recording Investment Properties subsequently and
BEC adhered to it perfectly. It is notable to that they have disclosed the which model is used
because it actually one of the disclosures of Investment Property and it can really be found
on the Summary of Significant Accounting Policies of BEC.

IAS 40 requires numerous disclosures that needs to be presented in the notes to

financial statements of a certain company or corporation. It obliges company or corporations
to assign whether fair value or cost model value is used in subsequently measuring the
Investment Properties, and if fair value model is used, whether property interests held under
operating leases are classified and accounted for as investment property. It also marks the
distinction between investment property from Owner-Occupied Property (OOP) and from
property held for sale and a lot more of disclosures which talks about the assumptions,
valuations, and restrictions. Nevertheless, BEC has completely listed all of it on the notes to
financial statements and they do not incur any problems towards the disclosure requirement
of IAS 40. BEC classifies its land as Investment Property or Owner-Occupied Property (OOP)
based on its current intentions where it will be used. When the land is held for capital
appreciation or when management is still undecided as to its future use, it is classified as
investment property. Land which is held for rent are classified as investment property also
as cited in the Significant Accounting Judgments, Estimates and Assumptions of BEC’s
financial statements. It carefully abides the correct classifications of Investment Properties
however it is noticeable that BEC did not provide on their notes the exact type of lease they
use to rent their land whether it is under operating lease or financial lease because it can
make a great difference since properties under through finance lease are not considered
Investment Properties, only properties under operating lease. However, it does not end if
the property is under finance lease because if BEC leased it through finance, but the lessee
earns through operating lease, then it will fall under Investment Properties.

If there is recognition, there should also be derecognition because certain

circumstances can lead to disposal of investment properties and if it happens, Standards
should be followed. An Investment Property should be derecognized on disposal or when the
investment property is permanently withdrawn from use and no future economic benefits
are expected from its disposal according to IAS 40. On the other hand, BEC derecognized
Investment Properties when either they have been disposed or when the investment is
permanently withdrawn from use and no future economic benefit is expected from its
disposal as cited in the notes to financial statements. It matches to the derecognition
provided on IAS 40 and not only it but also the recording of any gains or losses from
derecognition of an investment property. BEC recognizes it on their consolidated statement
of income in the year of retirement or disposal which is congruent to how the Standards
requires the company or a corporation to record gain or loss on disposal. The gain or loss on
disposal is the difference between the net disposal proceeds and the carrying amount of the
asset and recognized in profit or loss as mentioned in IAS 40.

From the current reporting period which 2019, there are no disposal recorded
however there is a fair value adjustment of Php 13,829,000 making the total Investment
Properties of BEC to Php 174,708,000. As mentioned in the notes, BEC uses fair value model
that is why they engaged an independent firm of appraiser to determine the fair values of
their properties both from the previous and latest reporting period, 2018 and 2019
respectively. The loss on Sale of Investment Property is recorded in the BEC’s Consolidated
Statements of Income under Expenses and Charges wherein it amounted to a total of Php 10,
728,788. On the other hand, Fair Value adjustment on Investment Properties can also be
found under the Consolidated Statements of Income wherein BEC gained a total of Php
13,829,000 which is significantly lower to the previous reporting period that amounted to
Php 21,394,000. The Investment Properties of BEC are mainly land since the business thrives
on development and exploration, acquisition, operation & maintenance of various sources of
energy including ancillary services.

According to Sensitivity Analysis to Significant Changes in Unobservable Inputs

within Level 3 of the Hierarchy of BEC, significant increases (decreases) in price per square
meter in isolation would result in a significantly higher (lower) fair value measurement. It is
the approach they use in order to determine the necessary fair values of each Investment
Properties.

Overall, Basic Energy Corporation provided a complete, accurate, detailed, and

organized information and disclosures to all the Investment Properties they possess. It is
well written, recorded, and accounted under its Consolidated Financial Statements. There is
just one thing that BEC forgot to disclose whether the rentals are under operating lease or
finance lease because we need to make sure that it is properly classified in the end.
Nonetheless, BEC perfected all the requirements issued by IAS 4O making the presentation
of Investment Properties more comprehensive, understandable, and helpful to the future
investors especially lessee who are prospecting to rent on their land. BEC provided an
organized and detailed explanation of what happened and what is going to happen and how
the Investment Properties operate under them. Surely, investors will not have a hard time
understanding it to come up with certain decisions for the company to progress more.

NCAHS AND DISCONTINUED OPERATION

Apparently, BEC does not have any Noncurrent Asset Held for Sale (NCAHS) from the
recent reporting period. One of possible reasons is that because since they are a huge
corporation that focuses more on energy discovery, exploration, and acquisition there are
not much Noncurrent Assets can be held for sale. It is just usually Investment Properties
which is why they have a lot of it. Upon checking the Current Asset portion of their
Consolidated Statements of Financial Position, it does not include any noncurrent asset held
for sale because it is where it should be accounted. Additionally, upon critiquing all their
notes, we have seen zero statements regarding NCAHS, same with the previous reporting
period of 2018. The requirements provided by IFRS 5 in order for Noncurrent Asset (NCA)
to be classified as held for sale are the carrying amount will be recovered in a sake
transaction (rather than continuing use) since it is for sale. It should also be available for
immediate sale which is why it is treated as a current asset because it is expected to be sold
in the current period which coincides with the last requirement that the sale is highly
probable as mentioned in paragraph 7 of IFRS 5. It will be reverted to NCA when one of the
requirements are not met or if the current period ended and the NCAHS are still not sold
within the current period. However, if the criteria are met after the reporting period but
before the authorization of the financial statement for issue, the entity shall make the
appropriate disclosures. So, in the context of BEC, they could still record NCA as held for sale
before June 29, 2020 if they have an NCAHS on their respective business operations.

Discontinued Operations is a component of an entity that either has been disposed of

or is classified as held for sale, and at the same time: (1) represents a separate major line of
business or geographical area of operations, (2) is a part of a plan to dispose it off, (3) is a
subsidiary acquire exclusively with a view to resale, and lastly (4) a Cash Generating Unit
(CGU). Apparently, since BEC did not have any noncurrent asset held for sale, we just looked
for any disposal made by BEC that is considered a discontinued operation. Upon checking
the Consolidated Financial Statements, there is a total of Php 138,895, 505 disposed land but
it was still in 2018 so it is not considered super relevant anymore. According to BEC, last
2018 they have sold a land located at San Fabian, Pangasinan which they used for energy
exploration for a consideration of Php 125.22 million wherein a portion of which is still
outstanding as of December 31, 2019 and 2019 lodged under Receivables. Nonetheless,
those are all the necessary information that can be correlated to NCAHS and Discontinued
Operations in the context of Basic Energy Corporation.

INTANGIBLE ASSETS

IAS 38 prescribes the accounting treatment for intangible assets except: (1)
intangible assets that are within the scope of another Standard such as inventories, income
taxes, leases, employee benefits, etc., (2) financial assets as defined in IAS 32 Financial
Instruments: Presentation, (3) the recognition and measurement of exploration and
evaluation assets, and lastly the one that is more applicable to BEC (4) expenditure on the
development on the development and extraction of minerals, oil, natural gas and similar non-
regenerative resources. Since BEC focused on energy exploration and apparently, energy is
an intangible asset, but IAS 38 does not cover it since all the exploration costs would be under
the Standards of IFRS 6 Exploration for and Evaluation of Mineral Resources. Some examples
of Intangible Assets are patent, software, research and development and the likes.

Upon assessing the latest reporting period, no intangible assets can be found on their
Consolidated Financial Statements however we are pretty sure that it will come in handy in
the future since their business thrives in researching, developing energy which is an
intangible asset. IAS 38 can be used on their research and development, not really on the
energy they cultivate because again, it should fall under IFRS 6. But all the research and
development or event patent in the future should follow IAS 38. BEC should mind the
appropriate scope, definition, recognition, derecognition, presentation to the financial
statements, and notes when they record and account intangible assets in the future.

Intangible assets shall be measured initially at cost and only be recognized if, and only
if: (1) it is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity; and (2) the cost of the asset can be measured reliably.
Nonetheless, knowing BEC they will surely abide and follow the requirements of the
Standards just like what they have done to the previous items in their Consolidated Financial
Statements.

AGRICULTURE

Basic Energy Corporation is apparently a corporation that focuses on exploration,

acquisition, and development of energy which they turn in to electricity. Unfortunately, they
do not have any agricultural operations that we can critique whether they successfully
followed the Standards presented in IAS 41 which is all about Agriculture. The only related
agricultural thing we have seen on the Statements presented by BEC is that the Company and
its subsidiaries own parcels of land located in Tanay, Rizal with a total are of 35,000 square
meters, near the town proper with good roads and is suitable for residential housing
development or for an agricultural farm project. It means BEC is still planning to transform
one of their lands to an agricultural farm project as cited on their Annual Report to Securities
and Exchange Commission (SEC). As of now it is still just a plan, however, if they full invest
on that agricultural farm project, IAS 41 can really be used to organized and maintain the
overall structure of the Consolidated Financial Statements.

BEC should properly analyze the scope, definition, recognition, derecognition,

valuation, presentation, and appropriate disclosures of biological assets, agricultural
produce, and government grants associated with agricultural activities in order to
successfully follow all the required prescriptions to be done in Accounting for Agriculture.
BEC should properly determine whether the plants, animals, and the likes they invest on the
land to make it an agricultural fam is a biological asset or an agricultural produce especially
that it will be new to their Consolidated Financial Statements.

Apart from the land in Tanay, Rizal, BEC is also looking to convert the parcels of land
they own located at Bolinao, Pangasinan with an aggregate gross are of about 426,361 square
meters, larger than the one in Tanay, Rizal, to be converted into an agro-industrial land
development. It is important to distinct PPE and Agriculture because they are not alike. The
land used for agricultural activities will not fall under IAS 41 but rather on IAS 16 which
covers PPE. Although BEC currently does not have any Agricultural activity, they should be
able to note IAS 41 since they are planning to convert their lands to become an agricultural
farmland in the near future. Just like on how they were able to record Investment Properties
correctly and completely, BEC should also learn beforehand the scope, definition,
recognition, valuation, presentation, and all the necessary disclosures when it comes to
Agriculture through IAS 41.

LIABILITIES: CURRENT & NONCURRENT

Liability is something a person or company owes, usually a sum of money. Liabilities

are settled over time through the transfer of economic benefits including money, goods, or
services as mentioned by Hayes (2020). Some common examples include loans, accounts
payable, notes payable, mortgages, deferred revenues, bonds, warranties, and accrued
expenses. Furthermore, liabilities are classified between two categories: current and
noncurrent. It will be further classified through the proposed amendments that will take
effect on or after January 1, 2023 which clarify that a liability is classified as non-current if
an entity expects, and has the discretion, to refinance or roll over an obligation for at least
twelve months after the reporting period. A liability is current when: (1) it is expected to be
settled in normal operating cycle, (2) it is help primarily for the purpose of trading, (3) it is
due to be settled within twelve months after the end of the financial reporting period, or (4)
there is no unconditional right to defer the settlement of the liability for at least 12 months
after the end of the financial reporting period, else, liabilities will be considered as
noncurrent as cited on the Summary of Significant Accounting Policies of BEC.

Liabilities, just like when we critiqued assets of BEC, is measured through its fair
value as disclosed in the financial statements wherein BEC follows the fair value hierarchy
according to three levels: quoted market price, directly or indirectly observable valuation
techniques, and unobservable valuation techniques which is what the Standard requires.

In the context of BEC’s Consolidated Financial Statements, the corporation recorded

total liabilities of Php 42,845,533 wherein Php 20,343,874 came from total Current
Liabilities and the remaining Php 22,501,759 came from total Noncurrent Liabilities. Current
liabilities consist of Accounts Payable and accrued expenses, loan payable, dividends
payable, and income tax payable while Accrued retirement benefits and deferred income tax
liabilities constitute Noncurrent liabilities. It is presented on the Consolidated Statements of
Financial Position of BEC which is the requirement of the Standards.

Furthermore, the breakdown of liabilities either Current or Noncurrent as properly

and completely presented in the Notes. The total Accounts Payable and Accrued Expenses
increased in significantly large amount from Php 7,793l,553 in 2018 to Php 19,455,160 on
2019 which is the latest reporting period. It should be taken into consideration by their
management on what are the internal and external factors that made their accounts payable
and accrued expenses increase in such a great amount. BEC also clarified that the payables
consist of short-term and noninterest-bearing trade payables to its local suppliers with an
average credit term of 30 days. The total of Php 19,455,160 also includes Withholding Tax
Payables of Php 711,910 and Government Payables of Php 223,406 wherein generally
payable within 30 days as well.

Moreover, Loans Payable which are also a part of Current Liabilities is properly and
completely disclosed in the notes wherein BEC discussed that the loan actually started last
November 29, 2017. The Parent company obtained an unsecured short-term loan amounting
to Php 50,000,000 from a local bank which was renewed for another three months on
October 31, 2018. On the first month of the latest reporting period, January 31, 2019, the
Parent company partially paid the principal amount to Php 20,000,000 and renews the
remaining balance amounting to Php 30,000,000 for another four months and was fully paid
just last year 2019, 31st of May. BEC also disclosed the annual fixed interest rate of 8.125%.

In terms of Noncurrent Liabilities, which entail Retirement Benefits and Income

Taxes, it is also appropriately disclosed on Notes 20 and 21, respectively. Accrued
Retirement Benefits amounted to Php 14,329,068 on 2019 which is 100% more from the
previous reporting period of Php 7,867,346 last 2018. According to the calculations provided
in the Notes, it amounted to that amount because of the actuarial loss recognized for the year
which amounted to Php 2,402,301 compared to the previous year’s Php 587,334.

BEC is a corporation that is engaged to petroleum operations in the Philippines which

makes them entitled to certain tax incentives under Presidential Decree No. 87, as amended.
According to the disclosure, the total Php 8,172,691 came from Share in cumulative
translation adjustment of Associates with a total of Php 5,119,525, Remeasurement effect of
accrued retirement benefits of Php 30,160, and Excess fair value of Net assets acquired over
cost of an associates of Php 3,023,007. Again, just like the disclosures presented towards the
other items, BEC is able to present the disclosures accurately, appropriately, and efficiently
with correct calculations towards the necessary information such as interest and rates per
payables. It will greatly help the potential investors whether it is alright to invest in Basic
Energy Corporation. Based on the latest reporting period, the ratio of Debt to Equity is 0.08:1
because if we are going to compare the previous reporting and current reporting period in
terms of liabilities, there is a significant decrease of payables associated with BEC from Php
83,681,487 on 2018 to Php 42,845,633 on 2019. The fulfillment loans payable from 2017
amounting to Php 50,000,000 really made a difference along with its taxes.

BEC correctly classified liabilities between current and noncurrent and provided a
concise, detailed, and appropriate information, data, calculations, and disclosure that are
required by the Standards especially IAS 1.

LEASES – LESSOR

IAS 17 governs all the required methodologies and approach, as well as disclosures
for lease accounting. ACYFAR 3 focuses only on the part of the Lessor so we will only tackle
that certain part. The two classifications of Leases are operating leases and finance leases as
cited in IAS 17. The former is the type of lease that does not transfer substantially all the
risks and rewards incidental to ownership while the latter is the type of leases that transfer
substantially all the risks and rewards incidental to ownership.

In the context of lessors, through operating lease, they present assets subject to
operating lease in their statements of financial position according to the nature of the asset.
On the other hand, lessors recognize assets held under a finance leases in their Statements
of Financial Position and present them as a receivable at an amount equal to the net
investment in the lease as mentioned in IAS 17.

BEC disclosed on the Sustainability Report that they do not have any operational sites
owned, leased, managed in, or adjacent to protected areas and areas of high biodiversity
since they are an energy exploration corporation. It means that as of the moment BEC does
not have any facilities leased out to lessee so we cannot really critique their Consolidated
Financial Statements in terms of Lease Accounting, particularly Lessor because they have
none. Nonetheless, BEC will surely follow IAS 17 in case they planned to lease out one of their
facilities because exploration and discovery of energy need constant changes in location so
maybe in the future, there are facilities already that could be leased out. BEC should just
follow all the required measurement, recognition, presentation, and disclosures as
mentioned in IAS 17.

The overall presentation and accounting of BEC towards the covered topics of
ACYFAR 3 is understandable, comparable, and consistent with the Standards associated per
items on the Consolidated Financial Statements. It is just that there are topics that are not
relevant to BEC such as Agriculture, Intangible Assets, and Lease. Nonetheless, Basic Energy
Corporation still did a great job even before from the topics covered in ACYFARs 1&2. They
have consistency and accountability for all the information with supported disclosures,
explanation and calculations that makes the overall Basic Energy Corporation’s Consolidated
Financial Statements comprehensive and precise.
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Basic Energy Corporation (2020). The consolidated financial statements basic energy
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Chen, J. (2020, September 30). Lease. Investopedia.
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Chu, L. (2020). Independent auditor’s report. In The consolidated financial statements basic
energy corporation and its subsidiaries (the Group). https://edge.pse.com.ph
Hayes, A. (2020, October 21). Liability.
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International Accounting Standards Board (2018). Conceptual framework. In International
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APPENDICES