CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

LEARNING MODULES

PHILIPPINE FINANCIAL
LESSON 3 REPORTING STANDARDS
LEARNING OBJECTIVE
Discuss the Philippine financial reporting standards.

CFAS LECTURE SERIES

This section presents the simplified notes, standards digests, and other relevant information for the
Conceptual Framework and Accounting Standards included in the syllabus of the 2022 Licensure Examination
for Certified Public Accountants. The information you will learn in this discussion will be helpful in your quest
to become a CPA in the future.

PFRS 1 First-time Adoption of Philippine Financial Reporting Standards

The first PFRS financial statements are the first annual financial statements in which an entity adopts
PFRSs, by explicit and unreserved compliance with PFRSs. The financial statements are considered first PFRS
financial statements if:

 The previous financial statements:

 were prepared following other reporting standards not consistent with the PFRSs; or
 did not contain an explicit and unreserved statement of compliance with PFRSs; or
 contained a clear and direct statement of compliance with some, but not all, PFRSs; or
 were prepared using some, but not all, applicable PFRSs; or
 prepared under PFRSs but were used for internal reporting purposes only; or
 did not contain a complete set of financial statements as required under PAS 1.
 The entity did not present financial statements in previous periods.

PFRS 1 is applied only once. An entity presenting its first PFRS financial statements is called a first-time
adopter. The standard requires an entity to prepare and present an opening PFRS statement of financial
position at the date of transition to PFRSs (the beginning of the earliest period for which an entity offers
complete comparative information under PFRSs in its first PFRS financial statements or the starting date of
the application of the PFRSs). The entity selects its accounting policies based on the latest versions of PFRSs
as of the current reporting date. The established policies are then applied to all financial statements
presented together with the first PFRS financial statements.

In general, PFRS 1 requires retrospective application of the accounting policies selected by the first-time
adopter in which an entity to do the following in its opening PFRS statement of financial position:
 recognize all assets and liabilities whose recognition is required by PFRSs;
 ignore items as assets or liabilities if PFRSs do not permit such recognition;
 reclassify items recognized under previous GAAP that have different classifications under PFRSs;
and

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 apply PFRSs in measuring all recognized assets and liabilities.

However, a first-time adopter is exempted from complying with the retrospective application requirement of
PFRS 1 if:
 the cost of compliance exceeds the expected benefits; or
 the retrospective application requires management judgments about past conditions after the
outcome of a particular transaction is already known.

The first PFRS financial statements shall include at least one year of comparative information.

PFRS 2 Share-based Payment

PFRS 2 prescribes the accounting standards for shared based payments through (a) equity-settlement (an
entity issues its shares of stocks or share options for the goods or services acquired instead of cash), or (b)
cash-settlement (an entity incurs an obligation to pay cash at an amount that is based on the fair value of
equity instruments for the acquired goods or services; or (c) a choice between equity-settlement and cash-
settlement. An equity instrument is a contract that evidences a residual interest in an entity's assets after
deducting its liabilities.

An entity shall recognize in profit or loss and financial position the effects of share-based payment
transactions, including expenses associated with transactions in which share options are granted to
employees. Goods and services received in share-based payment transactions are recognized when the
goods or services are received. If the goods or services received do not qualify as assets, an entity shall
identify them as expenses.

The entity shall recognize a corresponding increase in equity upon receipt of the goods or services in an
equity-settled share-based payment transaction or a liability in a cash-settled share-based payment
transaction.

If an entity acquired goods and services from non-employees, such goods and services should be measured
first using their fair values at the measurement date. Otherwise, an entity shall use the fair value of the
equity instruments granted at the measurement date if not available. On the other hand, if an entity acquired
goods and services from their employees or others providing similar services, an entity shall measure these
goods and services first using the fair value of the equity instruments granted at the grant date, otherwise if
unavailable, an entity shall use the intrinsic value.

The equity instrument granted is the right, whether conditional or unconditional, to an equity instrument of
the entity conferred by another party under a share-based payment arrangement.

The measurement date is when the fair value of the equity instruments granted is measured under PFRS 2.
The date when the entity receives the good or service shall be the measurement date for those transactions
with non-employees. In contrast, the grant date shall be the measurement date for those transactions with
employees and others providing similar services. The grant date is when the entity and the counterparty
agree to a share-based payment arrangement. The entity and the counterparty have a shared understanding
of the terms and conditions of the agreement.

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The intrinsic value is the difference between the fair value of the shares to which the counterparty has the
conditional or unconditional right to subscribe or the right to receive and the subscription price (if any) that
the counterparty is required to pay for those shares.

A share-based compensation plan is an arrangement whereby an employee is given compensation in return

for services rendered in the form of the entity’s equity instruments or cash based on the fair value of the
entity’s equity instruments or a choice of settlement between equity instruments and cash.

Share option is a contract that gives the holder the right, but not the obligation, to subscribe to the entity’s
shares at a fixed or determinable price for a specified period. Some share options given to employees may
not require any subscription price, meaning shares will be issued to the employees in consideration merely
for services rendered. In this manner, the employee share option is considered as a transaction with an
employee. Thus, the services received (salaries expense) shall be measured using the order of priority set
forth for those transactions involving employees.

Under the equity-settled share-based compensation plans, salaries expense shall be recognized in full with a
corresponding increase in equity at grant date if the share options granted vest immediately. If the share
options granted do not vest until the employee completes a specified period of service, the entity shall
recognize the related compensation expense as the employee over the vesting period renders the services.
Generally, an entity shall presume that the share options vest immediately unless there is evidence to the
contrary.

A cash-settled share-based payment transaction is when an entity acquires goods or services and incurs an
obligation to pay cash at an amount based on the fair value of equity instruments. The goods or services
received and the liability incurred on cash-settled share-based payment transactions are measured at the
liability's fair value. At the end of each reporting period and even on the settlement date, the liability shall be
re-measured to fair value. Changes in fair value are recognized in profit or loss.

The most common form of a cash-settled share-based payment transaction is the share appreciation rights
(a form of compensation given to an employee whereby the employee is entitled to future cash payment
(rather than an equity instrument), based on the increase in the entity’s share price from a specified level
over a specified period). The liability for the future cash payment on share appreciation rights shall be
measured, initially and at the end of each reporting period until settled, at the fair value of the share
appreciation rights. Changes in fair value are recognized in profit or loss.

Under the cash-settled share-based compensation plans, the entity shall recognize the related compensation
expense on the services received in full with a corresponding increase in liability at the grant date if the
share appreciation rights granted vest immediately. If the share options granted do not vest until the
employee completes a specified period of service, an entity shall recognize the services received and a
liability to pay for them, as the employee renders service during that period.

Moreover, if the counterparty has the right to choose settlement between cash (or other assets) or equity
instruments, the entity has granted a compound instrument. For transactions with non-employees, the equity
component is computed as the difference between the fair value of goods or services received and the fair
value of the debt component at the date the goods or services are received. For transactions with employees
and others providing similar services , the entity shall measure the fair value of the compound instrument and
its components as follows:

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• If the fair value of one settlement alternative is the same as the other, the fair value of the equity
component is zero, Hence, the fair value of the compound financial instrument is the same as the
fair value of the debt component.
• If the fair values of the settlement alternatives differ, the fair value of the equity component will be
greater than zero, in which case, the fair value of the compound financial instrument will be greater
than the fair value of the debt component.

Furthermore, if the entity has the right to choose between cash (or other assets) or equity instruments, the
entity has not granted a compound instrument. In such a case, the entity shall determine whether it has a
present obligation to settle in cash and account for the share-based payment transaction accordingly.

If the entity has a present obligation to settle in cash, it shall account for the transaction as a cash-settled
share-based payment transaction. If the entity has no present obligation to pay in cash, it shall account for
the transaction as an equity-settled share-based payment transaction.

PFRS 3 Business Combinations

PFRS 3 prescribes the accounting procedure for business combinations (a transaction or other event in
which an acquirer obtains control of one or more businesses).

An investor controls an investee when the investor is exposed or has rights to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the investee.
Control is normally presumed to exist when the ownership interest acquired in the voting rights of the
acquiree is more than 50% (or 51% or more). Control may exist even if the acquirer holds less than 50%
interest in the voting rights of acquiree, such as in the following cases:
 The acquirer has the power to appoint or remove the majority of the board of directors of the
acquiree; or
 The acquirer has the power to cast the majority of votes at board meetings or equivalent bodies
within the acquiree; or
 The acquirer has power over more than half of the voting rights of the acquiree because of an
agreement with other investors; or
 The acquirer has the power to control the financial and operating policies because of a law or a
contract.

Business combinations are accounted for using the acquisition method, which requires (a) identification of
the acquirer, (b) determination of the acquisition date, and (c) the recognition and measurement of
goodwill.

The acquirer is the entity that obtains control of the acquiree. The acquiree is the business that the
acquirer obtains control of in a business combination. The acquirer is usually the entity that:
 transfers cash or other assets and incurs liabilities;
 issues its equity interests (except in reverse acquisitions );
 receives the most significant portion of the voting rights;
 has the ability to elect or appoint or to remove a majority ;
 dominates the management of the combined entity;
 significantly larger of the combining entities; and
 initiated the combination.

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The acquisition date is the date on which the acquirer obtains control of the acquiree.

In recognizing and measuring the goodwill, it requires the recognition of the (a) consideration transferred,
(b) non-controlling interest in the acquiree, (c) previously held equity interest in the acquiree, and (d)
identifiable assets acquired and liabilities assumed on the business combination.

consideration transferred + non-controlling interest in the acquiree + previously

Goodwill =
held equity interest in the acquiree - fair value of net identifiable assets acquired

When the resulting amount is negative, then it is negative goodwill which is also known as gain on a bargain
purchase. The acquirer shall recognize the goodwill as an asset on the acquisition date while the gain on
bargain purchase as a gain in profit or loss.

The consideration transferred in a business combination is measured at fair value, e.g., cash, other assets, a
business or a subsidiary of the acquirer, contingent consideration, ordinary or preference equity
instruments, options, warrants, and member interests of mutual entities.

When an entity incurs acquisition-related costs to effect a business combination, an entity shall recognize
such costs as expenses in the periods in which they are incurred, except for the costs to issue debt
securities measured at amortized cost, which shall be included in the initial measurement of the resulting
financial liability and costs to issue equity securities which are accounted first as a deduction from share
premium or retained earnings if the share premium is insufficient,

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent. It is
measured either at fair value or its proportionate share of the acquiree’s identifiable net assets.

Previously held equity interest in the acquiree pertains to any interest held by the acquirer before the
business combination.

The acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree on the acquisition date. Any unidentifiable asset of
the acquiree (e.g., any recorded goodwill by the acquiree) shall not be recognized. The identifiable assets
acquired and the liabilities assumed are measured at their acquisition-date fair values.

PFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations

PFRS 5 prescribes the accounting treatment for noncurrent assets held for sale and discontinued operations.
A noncurrent asset is presented in the classified statement of financial position as a current asset only when
it qualifies to be classified as “held for sale” following this standard. This standard shall apply to property,
plant, and equipment, investment property measured under the cost model, investments in associate or
subsidiary or joint venture, and intangible assets.

A noncurrent asset (or disposal group) is classified as held for sale or held for distribution to owners if it will
recover its carrying amount principally through a sale transaction rather than through continuing use. A
noncurrent asset (or disposal group) is classified as “held for sale” if all of the following conditions are met:
 The asset or disposal group is available for immediate sale in its present condition subject only
to terms that are usual and customary;

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 The sale is highly probable (i.e., significantly more likely than not);
 Management is committed to a plan to sell the asset;
 An active program to locate a buyer has been initiated;
 The sale price is reasonable to its current fair value;
 The sale is expected to be completed within one year; and
 It is unlikely that the entity will withdraw the plan of sale.

However, an extension of the period required to complete a sale beyond the one-year requirement does not
preclude an asset (or disposal group) from being classified as held for sale if the delay is attributable to
events or circumstances beyond the entity’s control. There is sufficient evidence that the entity remains
committed to selling the asset (or disposal group).

When the criteria for classification as held for sale are met after the reporting period, an entity shall not
classify a noncurrent asset (or disposal group) as held for sale in those financial statements when issued.

When an entity has noncurrent assets that are to be abandoned, these assets shall not be classified as held
for sale a noncurrent asset (or disposal group) since the asset’s carrying amount will be recovered through
continuing use rather than principally through a sale. Moreover, an entity shall not account for a noncurrent
asset that has been temporarily taken out of service as if it had been abandoned.

An entity shall measure these noncurrent assets held for sale at the lower of carrying amount and fair
value less cost to sell. A write-down to fair value less cost to sell, and related reversal thereof is
recognized in profit or loss. The reversal of impairment is recognized as gain to the extent of cumulative
impairment loss recognized.

The related depreciation or amortization ceases during the period an asset is classified as held for sale.
However, when a noncurrent asset ends to be classified as held for sale, an entity shall measure this asset at
the lower of its carrying amount before it was classified as held for sale, adjusted for any depreciation,
amortization, or revaluation that would have been recognized had the asset not been classified as held for
sale, and the recoverable amount at the date of the subsequent decision not to sell.

A discontinued operation is a component of an entity that either has been disposed of or is classified as
held for sale, and usually represents a major line of business or geographical area of operations, is part of a
single coordinated plan to dispose of a separate major line of business or geographical locaion of operations,
or is a subsidiary acquired exclusively with a view to resale. A component of an entity comprises operations
and cash flows that can be distinguished, operationally and for financial reporting purposes, from the rest of
the entity. It can be a cash-generating unit or a group of cash-generating units.

The results of operations of the discontinued operations, including impairment losses and actual gain on
disposal, are presented as a single amount, net of tax, after profit or loss from continuing operations. If a
component of an entity qualified as discontinued operation during the year, all of its results of operations,
before and after the classification date, shall be classified as discontinued operations.

The costs or adjustments directly associated with the decision to dispose of a component should be
recognized and shown as part of discontinued operations, e.g., severance pay or employee termination costs,
additional pension costs, employee relocation expenses, and future rentals on long-term leases.

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When a component of an entity is classified as a discontinued operation in the current year, an entity shall
represent the disclosures for prior periods presented in the financial statements so that the disclosures
relate to all operations that have been discontinued by the reporting period for the latest period presented.

If the criteria for classification as discontinued operation are met after the reporting period but before the
financial statements are authorized for issue, the entity shall disclose the information in the notes as a non-
adjusting event after the reporting period.

The cessation of classification as the discontinued operation is accounted for retrospectively. The cessation
of classification as held for sale (noncurrent assets and disposal groups that are not components of an
entity) is accounted for prospectively.

Noncurrent assets held for sale and assets and liabilities of disposal groups are presented as current assets
(current liabilities) but separately from the other assets and liabilities in the statement of financial position.
An entity shall not offset the assets and liabilities of a disposal group.

PFRS 6 Exploration for and Evaluation of Mineral Resources

PFRS 6 provides the accounting for expenditures on exploration and evaluation of mineral resources.

Exploration for and evaluation of mineral resources is the search for mineral resources, including
minerals, oil, natural gas, and similar non-regenerative resources after the entity has obtained legal rights to
explore in a specific area, as well as the determination of the technical feasibility and commercial viability of
extracting the mineral resource. These are expenditures incurred by an entity in connection with the
exploration for and evaluation of mineral resources before the technical feasibility, and commercial viability
of extracting a mineral resource are demonstrable.

PFRS 6 permits entities to develop their accounting policy for exploration and evaluation assets resulting in
relevant and reliable information based entirely on management’s judgment and without the need to consider
the hierarchy of standards in PAS 8. It means that the entity may recognize exploration and evaluation
expenditures as expenses or assets depending on the entity’s accounting policy.

If the entity opts to capitalize exploration and evaluation expenditures as assets, it shall measure them at
cost. Subsequently, an entity shall measure the exploration and evaluation assets using the cost model or the
revaluation model.

PFRS 7 Financial Instruments: Disclosures

PFRS 7 prescribes the disclosure requirements for financial instruments. The disclosures are broadly
classified into the following two main categories: the significance of financial instruments to the entity’s
financial position and performance, the nature and extent of risks arising from financial instruments to which
the entity is exposed, and how the entity manages those risks.

An entity is required to separately disclose the carrying amounts of each of the categories of financial assets
and financial liabilities under PFRS 9. If an entity has reclassified financial assets, it shall disclose the date of
reclassification, an explanation of the change in business model, and the amount reclassified between
categories. When an entity has offset financial assets and financial liabilities, it shall disclose the gross

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amounts of those assets and liabilities, the amounts offset, the net amounts presented in the statement of
financial position, and a description of the related legal right to offset.

An entity is required to disclose separately the income, expense, gains, or losses arising from the different
classifications of financial instruments under PFRS 9. Moreover, an entity shall disclose the fair value of each
class of financial assets and financial liabilities to compare with the carrying amount.

The standard also requires entities to disclose the nature and extent of risks arising from financial
instruments, which include the credit risk (the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation), liquidity risk (the risk that an entity
will encounter difficulty in meeting obligations associated with financial liabilities), and the market risk (the
risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices). The market risk comprises the following three types of risk: currency risk (the risk
associated with fluctuations in foreign exchange rates, interest rate risk (the risk associated with changes
in market interest rates), and other price risks (the risk associated with fluctuations in market prices
other than those arising from interest rate risk or currency risk). Lastly, the entity shall provide qualitative
and quantitative disclosures for each type of the risks required by PFRS 7 to be disclosed.

PFRS 8 Operating Segments

PFRS 8 prescribes an entity to disclose the information needed to evaluate the nature and financial effects of
the business activities in which it engages and the economic environments in which it operates. It applies to
the separate, individual, and consolidated financial statements of an entity that is publicly listed or in the
process of enlisting publicly. An unlisted entity that chooses to apply PFRS 8 shall comply with all of the
requirements of PFRS 8; otherwise, it shall not describe the information as segment information. If a
financial report contains both the consolidated and separate financial statements of a parent within the
scope of PFRS 8, segment information is required only in the consolidated financial statements.

An operating segment is a component of an entity that engages in business activities from which it may
earn revenues and incur expenses (including revenues and expenses relating to transactions with other
components of the same entity), whose operating results are regularly reviewed by the entity’s chief
operating decision-maker to make decisions about resources to be allocated to the segment and assess its
performance, and for which discrete financial information is available.

A component of an entity comprises operations and cash flows that can be distinguished, operationally and
for financial reporting purposes, from the rest of the entity. It can be a cash-generating unit or a group of
cash-generating units.

An entity shall report information separately about each operating segment that management uses in making
decisions about operating matters or those which result from aggregating two or more of those segments;
and qualifies under the quantitative thresholds.

PFRS 8 adopts a management approach to identifying reportable segments. Under the management
approach, operating segments are determined based on internal reports reviewed by the entity’s chief
operating decision-maker to allocate resources to the segment and assess its performance.

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Two or more operating segments may be aggregated into a single operating segment if the segments have
similar economic characteristics , and the segments are identical in each of the following respects:
 nature of the products and services;
 nature of the production processes;
 type or class of customer for their products and services;
 the methods used to distribute their products or provide their services; and
 nature of the regulatory environment, if applicable, e.g., banking, insurance, or public utilities.

An entity shall report separately information about an operating segment that meets any of the following
quantitative thresholds:
1. The segment’s revenue is at least 10% of the total revenues (external and internal);
2. The segment’s assets is at least 10% of the total assets (external and internal, e.g., intersegment
receivables)
3. The segments profit or loss is at least 10% of the greater, in the absolute amount of:
a. the combined reported profit of all operating segments that did not report a loss and
b. the combined reported loss of all operating segments reported a loss.

However, the total external revenue reported by reportable segments shall at least 75% of the entity’s
external revenue.

Meanwhile, an entity shall provide disclosure of a major customer (a single external customer providing
revenues of 10% or more of an entity’s revenues). Moreover, an entity shall provide the following additional
disclosures:
 Entity-wide disclosures apply to all entities subject to PFRS 8, including those entities with a single
reportable segment.
 Revenues from external customers attributed to the entity’s country of domicile and attributed to
all foreign countries in total from which the entity derives revenues.
 Noncurrent assets other than financial instruments, deferred tax assets, post-employment benefit
assets, and rights arising under insurance contracts located in the entity’s country of domicile and
located in all foreign countries in total in which the entity holds assets.

PFRS 9 Financial Instruments

PFRS 9 prescribes accounting standards in the classification and measurement of financial assets and
financial liabilities.

A financial asset is an asset that is (a) cash, (b) equity instrument of another entity, and (c) a contractual
right to receive cash or another financial asset or to exchange financial assets or financial liabilities with
another entity under conditions that are potentially favorable to the entity. On the other hand, a financial
liability is any liability that is (a) a contractual obligation to deliver cash or another financial asset to another
entity; or (b) a contractual obligation to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavorable to the entity.
Financial assets are initially recognized only when the entity becomes a party to the contractual provisions of
the instrument. Subsequently, an entity shall classify financial assets as measured at (a) amortized cost, (b)
fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVPL). An entity
shall base the classification of the financial assets on (a) the entity’s business model for managing the
financial assets and (b) the contractual cash flow characteristics of the financial asset.

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A business model refers to how an entity manages its financial assets to generate cash flows which can be:
a. Hold to collect business model – an entity shall hold a particular financial asset to collect the
contractual cash flows over the instrument’s life.
b. Hold to collect and sell business model – an entity shall hold the financial asset to collect the
contractual cash flows and sell them to realize the fair value gains whenever an opportunity arises.

The contractual cash flow characteristic shall be determined using the SPPI test, which means that the
contractual terms give rise on specified dates the cash flows that are solely payments of principal and
interest (SPPI) on the principal amount outstanding.

A financial asset shall be measured at amortized cost if the entity employs the “hold to collect” business
model and the contractual cash flows are solely payments of principal and interest (SPPI). Meanwhile, a
financial asset is measured at FVOCI if the entity employs the “hold to collect and sell” business model
and the contractual cash flows are SPPI. An entity shall measure a financial asset at FVPL if both the
business model and the cash flow characteristics are not defined.

Only debt instruments can be classified under the Amortized Cost or FVOCI (mandatory) measurement
categories. The equity instruments are measured at FVPL unless the entity makes an irrevocable election
on initial recognition to measure them at FVOCI. A debt instrument that is not measured at amortized cost
or FVOCI is measured at FVPL.

The classification of financial assets can be done using the following decision tree:

Are cash flows solely payments for

FVPL
principal and interest (SPPI)? No

Yes

Is the business model “hold to

amortized cost
collect”? Yes

No

Is the business model “hold to collect

FVOCI
and sell”? Yes

Exceptions:
No 1. Election to measure the investments
in equity securities at FVOCI
2. Option to designate financial assets
FVPL as FVPL

Moreover, the following summarized table will help you in classifying investment.

Classification of Composition Statement of Initial Subsequent Statement of comprehensive income

investment financial position measurement measurement
1. FVPL debt or equity current asset fair value fair value changes in fair value recognized in P/L
securities
2. FVOCI (election) equity securities current or fair value plus fair value changes in fair value recognized in OCI
noncurrent asset transaction costs (without recycling)
3. FVOCI (mandatory) debt securities current or fair value plus fair value  changes in fair value recognized in
noncurrent asset transaction costs OCI (with recycling)

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 interest income computed using the

effective interest method recognized
in P/L
 impairment gains/losses recognized
in P/L (with offset to OCI)
4. Amortized cost debt securities current or fair value plus amortized cost  interest income computed using the
noncurrent asset transaction costs less impairment effective interest method recognized
allowance in P/L
 impairment gains/losses recognized
in P/L

After initial recognition, financial assets are reclassified only when the entity changes its business model for
managing financial assets. The reclassification date is the first day of the first reporting period following
the change in the business model that results in an entity reclassifying financial assets. Only debt
instruments can be reclassified. Equity instruments (e.g., investments in shares of stocks) cannot be
reclassified. Financial assets cannot be reclassified into or out of the “designated at FVPL” and “FVOCI -
election” classifications.

The initial measurement is fair value at reclassification date, except for a reclassification from FVOCI to
amortized cost in which the fair value on reclassification date is adjusted for the cumulative balance of gains
and losses previously recognized in OCI. The impairment requirements of PFRS 9 apply equally to debt-type
financial assets that are measured either at amortized cost or at FVOCI. Impairment gains or losses on debt
instruments measured at FVOCI are recognized in profit or loss. However, the loss allowance shall be
recognized in other comprehensive income and shall not reduce the carrying amount of the financial asset in
the statement of financial position. Lastly, dividends received from equity securities measured at FVPL or
FVOCI (except share dividend) are recognized as dividend revenue.

PFRS 10 Consolidated Financial Statements

PFRS 10 prescribes the principles in the preparation and presentation of consolidated financial statements.

Consolidated financial statements are the financial statements of a group (a parent and its subsidiaries)
in which the assets, liabilities, equity, income, expenses, and cash flows of the parent (an entity that controls
one or more entities) and its subsidiaries (an entity that is controlled by another entity) are presented as
those of a single economic entity.

A parent entity is required to present consolidated financial statements, except when all of the following
conditions are met:
 The parent is a subsidiary of another entity, and all its other owners do not object to the parent not
presenting consolidated financial statements;
 The parent’s debt or equity instruments are not traded in a public market (or being processed for
such purpose); and
 The parent’s ultimate or any intermediate parent produces consolidated financial statements
available for public use and comply with PFRSs.

PFRS 10 stresses the importance of existing control from a parent to its investee as the primary basis for
consolidation. Control exists if the investor has the (a) power over the investee, (b) exposure, or rights, to
variable returns from its involvement with the investee; and (c) the ability to use its power over the
investee to affect the amount of the investor’s returns.

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An investor has the power over an investee when the investor has existing rights that give it the current
ability to direct the investee’s relevant activities (activities of the investee that significantly affect the
investee’s returns). A power arises from rights, and it may be obtained directly from the voting rights
conferred by shareholdings. However, power may also occur from other sources, such as contractual
arrangements.

An investor is exposed or has a right to variable returns if its returns from its involvement with the investee
vary depending on the investee’s performance.

The investor’s ability to use its power to affect its returns from its involvement with the investee provides
the link between power and variable returns. Only if this ability is present and the power and exposure, or
right, to variable returns does the investor obtain control over the investee.

Consolidated financial statements shall be prepared using uniform accounting policies. The financial
statements of the parent and its subsidiaries used in preparing consolidated financial statements shall have
the same reporting dates. (The maximum difference in reporting dates is three months.) Consolidation
begins when the investor obtains control of the investee and ceases when the investor loses control of the
investee.

The subsidiary's income and expenses are based on the amounts of the assets and liabilities recognized in the
consolidated financial statements at the acquisition date. Investments in subsidiaries are accounted for in
the parent’s separate financial statements either (a) at cost, (b) following PFRS 9, or (c) using the equity
method.

Non-controlling interests (NCI) shall be presented in the consolidated statement of financial position within
equity, separately from the equity of the owners of the parent. It consists of (a) the amount determined at the
acquisition date using PFRS 3 and (b) the NCI’s share of changes in equity since the acquisition date.

The profit or loss and each component of other comprehensive income in the consolidated statement of profit
or loss and other comprehensive income shall be attributed to the (a) owners of the parent and (b) NCI.

Consolidated financial statements are prepared by combining the parent's financial statements and its
subsidiaries line by line by aggregating similar items of assets, liabilities, equity, income, and expenses.

PFRS 11 Joint Arrangements

PFRS 11 prescribes the principles for financial reporting by all parties to a joint arrangement (which two or
more parties have joint control). The essential elements of a joint arrangement are (a) the parties are bound
by a contractual arrangement and (b) the contractual arrangement gives two or more of those parties joint
control of the arrangement. Joint control is the contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require the unanimous consent of the parties
sharing control.

Joint arrangements are classified into (a) joint operation (a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the assets and obligations for the liabilities , relating to
the arrangement, and these parties are called joint operators) and (b) joint venture (a joint arrangement
whereby the parties that have joint control of the arrangement have rights to the net assets of the
arrangement and these parties are called joint venturers ).
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A joint operator shall recognize concerning its interest in a joint operation: (a) its assets, including its share
of any assets held jointly; (b) its liabilities, including its share of any liabilities incurred jointly; (c) its revenue
from the sale of its share of the output arising from the joint operation; (d) its share of the revenue from the
sale of the output by the joint operation; and (e) its expenses, including its share of any expenses incurred
jointly.

Separate accounting records may or may not be required for the joint operation itself, and financial
statements may or may not be prepared for the joint operation. However, the joint operators may prepare
the management accounts to assess the performance of the joint operation.

When an entity acquires an interest in a joint operation whose activity constitutes a business, it shall account
for its share as a business combination.

When the entity determines that it has an interest in a joint venture, the entity recognizes that the interest is
an investment and accounted for it using the equity method under PAS 28. Under the equity method, the
investment is initially recognized at cost and subsequently adjusted for the investor’s share in the changes in
the equity of the investee, which consists of the investor’s share in the investee’s (a) profit or loss, (b)
dividends declared, (c) results of discontinued operations, and (d) other comprehensive income.

However, in the separate financial statements, the investments are accounted for either at cost or fair value
under PFRS 9 or using the equity method.

PFRS 12 Disclosure of Interests in Other Entities

The objective of PFRS 12 is to prescribe the minimum disclosure requirements for an entity’s interests in
other entities , particularly (a) the nature of and risks associated with those interests and (b) the effects of
those interests on the entity’s financial statements.

Interest in another entity refers to involvement that exposes an entity to the variability of returns from the
performance of another entity. It is evidenced by the holding of equity or debt instruments or other forms of
involvement, such as funding, liquidity support, credit enhancement, and guarantees. It includes how an entity
obtains control, joint control, or significant influence over another entity. An entity does not necessarily have
an interest in another entity solely because of a typical customer-supplier relationship.

PFRS 12 applies to entities that have an interest in a subsidiary, joint arrangement; associate; or
unconsolidated structured entity. It does not apply to an interest in another entity that is accounted for
following PFRS 9.

An entity shall provide the following minimum disclosures under PFRS 12 the significant judgments and
assumptions in determining the existence of control, joint control, or significant influence over an investee or
the type of a joint arrangement.

When an entity is an investment entity, the standard prescribes the following disclosures:
 Significant judgment and assumptions in determining as an investment entity;
 Changes in the investment entity status;
 The total fair value of the subsidiaries that cease to be consolidated as of the date of change of
status; and

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 The total gain or loss and the line item in which that gain or loss is recognized, if not presented
separately.

If an entity has an interest in a subsidiary, PFRS 12 also requires the following disclosures:
• The composition of the group.
 Name of the subsidiary, its principal place of business, and country of incorporation.
 Interests or voting rights held by non-controlling interest (NCI).
 Profit or loss allocated to NCI during the period.
 NCI in net assets as of the end of the period.
 Dividends paid to NCI.
 Summary of the subsidiary’s assets, liabilities, profit or loss, and cash flows.
• Significant restrictions on the entity’s ability to access assets and settle liabilities of the group.
• Changes in ownership interest that result and do not result in a loss of control.
• Any difference in reporting period with the subsidiary.

When an entity has material interests in joint arrangements and associates, the standard further requires
the following disclosures:
 Name of the joint arrangement or associate, its principal place of business, and country of
incorporation;
 Nature of relationship;
 Ownership interest;
 Measurement of the investment (i.e., equity method or fair value);
 The fair value of the investment, if the equity method is used and there is a quoted market price for
the investment;
 Dividends received from the joint venture or associate; and
 Summarized financial information about the joint venture or associate, including the current and
noncurrent assets and liabilities, revenue and profit or loss, and other comprehensive income and
total comprehensive income.

Lastly, when an entity has an interest in an unconsolidated structured entity, PFRS 12 sets out the following
disclosures:
 The qualitative and quantitative information of such interest;
 Summarized presentation on the carrying amount of the assets and liabilities and the related line
items in the statement of financial position, the best estimate of the entity’s maximum exposure to
loss; and the comparison of both the carrying amounts and the maximum exposure to loss from
those entities;
 The type and amount of any support provided to the unconsolidated structured entity and the
reasons thereof; and
 Any current intentions to give any support to the related unconsolidated structured entity.

PFRS 13 Fair Value Measurement

PFRS 13 applies to the fair value measurement and related disclosures of an asset, liability, or equity when
other PFRSs require measurement at fair value or fair value less costs to sell. Fair value 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. It is based on the market price of the asset in a principal market or
the most advantageous market.

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Fair value is computed by getting the market price less the transportation costs. The market price used in
measuring the fair value is not adjusted for any transaction costs but is adjusted for any transportation
costs.

The standard provides the following hierarchy in determining the fair value of a particular asset, liability, or
equity:

Observable inputs that reflect quoted prices for identical Most reliable
Level 1
assets or liabilities in active markets.
Inputs other than quoted prices included in Level 1 are
Level 2 observable for the asset or liability either directly or
through corroboration with observable data.
Unobservable inputs (for example, an entity’s data or
Level 3 Least reliable
assumptions).

PFRS 14 Regulatory Deferral Accounts

PFRS 14 specifies the financial reporting requirements for regulatory deferral account balances arising from
the sale of goods or services subject to rate regulation. It is an optional standard that is available only to
first-time adopters. Existing PFRS users are prohibited from using this standard.

Regulatory deferral account balance refers to the balance of any expense (or income) account that would
not be recognized as an asset or a liability per other standards, but that qualifies for deferral because it is
included, or is expected to be included, by the rate regulator in establishing the rate(s) that can be charged
to customers.

Rate regulation is a framework for establishing the prices that can be charged to customers for goods or
services. That framework is subject to oversight and/or approval by a rate regulator. A rate regulator is an
authorized body empowered by statute or regulation to establish the rate or a range of rates that bind an
entity. The rate regulator may be a third-party body or a related party of the entity, including the entity’s
governing board if that body is required by statute or regulation to set rates both in the interest of the
customers and ensure the overall financial viability of the entity.

A first-time adopter continues to apply its previous GAAP to the recognition, measurement, impairment,
and derecognition of regulatory deferral account balances, except for changes in accounting policies and the
presentation of regulatory deferral accounts. An entity is prohibited from changing its accounting policy to
start recognizing regulatory deferral account balances.

PFRS 14 requires a presentation in the statement of financial position separate line items for the totals of
regulatory deferral account debit balances and regulatory deferral account credit balances, and they are
presented separately from the sub-totals of assets and liabilities that are presented per other standards.

The standard also requires a presentation in the statement of profit or loss and other comprehensive income
separate line items in other comprehensive income for the net movement of regulatory deferral account
balances that relate to items recognized in OCI, showing distinctions between those that will be and will not
be reclassified to profit or loss and in profit or loss for the remaining net movement of regulatory deferral
account balances, excluding movements that are not reflected in profit or loss.

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PFRS 15 Revenue from Contracts with Customers

PFRS 15 prescribes the principles in reporting the nature, amount, timing, and uncertainty of revenue and
cash flows from an entity’s contract with customers. It shall apply to contracts (an agreement between two
or more parties that creates enforceable rights and obligations that can be written, oral, or implied by an
entity’s customary business practice) wherein the counterparty is a customer (a party that has contracted
with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for
consideration). It shall not apply to (a) lease contracts (PAS 17), (b) insurance contracts (PFRS 4), (c)
financial instruments, and (d) non-monetary exchanges between entities in the same line of business to
facilitate sales to customers.

The conceptual framework defines income as increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants. Income encompasses revenue and gains,
while revenue is an income arising from an entity’s ordinary activities.

An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amoun t
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services.

PFRS 15 requires the following steps in recognizing revenue: (1) identify the contract with the customer, (2)
identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the
transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the
entity satisfies a performance obligation.

In identifying the contract with the customer, the standard requires the following conditions before such
contract shall be accounted for under this standard: (a) the contract must be approved, and the contracting
parties are committed to it, (b) rights and payment terms are identifiable; (c) the contract has
commercial substance, and (d) the consideration is probable of collection. No revenue is recognized if the
contract does not meet the criteria above. Any consideration received is recognized as a liability.

To identify the performance obligations in the contract, each promise in an agreement to transfer a
particular good or service is treated as a separate performance obligation. A good or service is distinct if
the customer can benefit from it, either on its own or together with other resources that are readily
available to the customer (e.g., the good or service is regularly sold separately) and the good or service is
individually identifiable (i.e., not an input to a combined output, does not significantly modify the other
promises, or not highly interrelated with the other promises). A good or service that is not distinct shall be
combined with the other promises in the contract. Combined promises are treated as a single performance
obligation.

The standard requires the entity to determine the transaction price because this is the amount at which
revenue will be measured. A transaction price is the amount of consideration to which an entity expects to
be entitled in exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties (e.g., some sales taxes). The consideration may include fixed amounts,
variable amounts, or both.

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The transaction price shall be allocated to each performance obligation identified in a contract based on the
relative stand-alone prices of the distinct goods or services promised to be transferred. The stand-alone
selling price is when a promised good or service can be sold separately to a customer. If the stand-alone
selling price is not directly observable, the entity shall estimate it using one or a combination of the
following methods:
• Adjusted market assessment approach – the entity evaluates the market in which it sells goods
or services and estimates the price that a customer in that market would be willing to pay for those
goods or services.
• Expected cost plus a margin approach – the entity forecasts the expected costs of satisfying a
performance obligation and then adds an appropriate margin for that good or service.
• Residual approach – the entity estimates the stand-alone selling price as the total transaction
price less the sum of the observable stand-alone selling prices of other goods or services promised
in the contract.

A performance obligation is satisfied when the control over a promised good or service is transferred to the
customer. Revenue is measured at the amount of the transaction price allocated to the satisfied
performance obligation.

When a performance obligation is satisfied over time, revenue is recognized over time as the entity
progresses towards the complete satisfaction of the obligation. A performance obligation is satisfied over
time if one of the following criteria is met:
a. The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
b. The entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhanced.
c. The entity’s performance does not create an asset with an alternative use to the entity, and the
entity has an enforceable right to payment for performance completed to date .

For each performance obligation satisfied over time, an entity shall recognize revenue over time by
measuring the progress towards complete satisfaction of that performance obligation using some
acceptable measurement methods such as output methods (e.g., surveys of work performed) and the input
methods (e.g., the relationship between costs incurred to date and total expected costs). If efforts or inputs
are expended evenly throughout the performance period, revenue may be recognized on a straight-line
basis. However, if the outcome of a performance obligation cannot be reasonably measured, revenue shall be
recognized only to the extent of costs incurred that are expected to be recovered.

When a performance obligation is not satisfied over time, it is presumed to be satisfied at a point in time. For
a satisfied performance obligation at a point in time, revenue is recognized when the performance obligation
is satisfied.
PFRS 15 describes contract costs to include the (a) incremental costs of obtaining a contract which is
recognized as an asset if they are recoverable and avoidable and as an expense, if their expected
amortization period is one year or less and (b) costs to fulfill a contract which are recognized as an asset if
they are (a) directly related to a contract, (b) generate or enhance resources, and (c) recoverable.

A contract where either party has performed is presented in the statement of financial position as a contract
liability, contract asset, or receivable. A contract liability is an entity’s obligation to transfer goods or
services to a customer for which the entity has received consideration (or the amount is due) from the
customer. A contract asset is an entity’s right to consideration in exchange for goods or services that the
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entity has transferred to a customer when that right is conditioned on something other than the passage of
time. Lastly, a receivable is an entity’s right to consideration that is unconditional.

PFRS 16 Leases

PFRS 16 prescribes the accounting and disclosure requirements for leases. It applies to all leases, including
subleases except for those leases related to exploration for or usages of minerals and similar resources,
biological assets, service concession arrangements, intellectual property licenses, and lessee’s rights under
a licensing agreement.

A lease is a contract or part of a contract that conveys the right to use an identified asset for a period in
exchange for consideration. An entity has the right to control the use of an identified asset if it has both of
the following throughout use: (a) the right to obtain substantially all of the economic benefits from the
use of the identified asset and (b) the right to direct the use of the identified asset. The following decision
tree will help you identify a contract as a lease:

Is there an identified asset?

No

Yes

Does the customer have the right to

obtain all of the economic benefits No
from using the identified asset
throughout use substantially?
Contract is not (does not
contain) a lease.
Yes

Does the customer have the right to

direct the use of the identified asset No
throughout the service?

Yes

The contract is (contains) a lease.

An asset can be identified by being explicitly stated in the contract or by being implicitly specified when the
asset is made available for use by the customer. A portion of an asset can be identified if it is physically
distinct.

A customer does not have the right to use an identified asset if the supplier has the substantive right to
substitute the asset throughout use. A supplier’s right to substitute an asset is substantive if both of the
following conditions exist: (a) the supplier has the practical ability to substitute alternative assets throughout
use, and (b) the supplier would benefit economically from the exercise of its right to substitute the asset. The
customer has the right to direct how and for what purpose the asset is utilized throughout use.

A lessee recognizes both lease liability and right-of-use assets. A lessee recognizes lease payments as
expenses over the lease term using a straight-line or more appropriate basis.

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A lease liability is initially measured at the present value of the lease payments that are not yet paid as of the
commencement date. The lease payments may include: (a) the fixed future payments less any incentives
receivable, (b) variable lease payments linked to an index or rate at the commencement date, (c) amounts
expected to be payable under residual value guarantees, (d) the exercise price of a purchase option if the
exercise is reasonably certain, and (e) the termination penalties if termination is reasonably certain. The
lease payments shall be discounted using the interest rate implicit in the lease. Subsequently, the lease
liability shall be measured similar to an amortized cost financial liability using the effective interest method
wherein payments are apportioned to both interest and a reduction to lease liability.

A right-of-use asset is initially measured at a cost that comprises the initial amount of the lease liability, the
lease payments made to the lessor at or before commencement, initial direct costs, and estimated cost of
removing and/or restoring leased asset, less any lease incentives received. Subsequently, the right-of-use
asset shall be measured similar to a purchased asset which can be under the cost model, revaluation model,
or fair value model, as appropriate.

On the part of the lessor, a lease can be classified as (a) finance lease (a lease that transfers all the risks
and rewards incidental to ownership of an asset substantially. Title may or may not eventually be
transferred) and (b) operating lease (a lease other than a finance lease).

A lease is classified as a finance lease if any of the following conditions are met:
 Transfer of ownership;
 Bargain purchase option;
 The lease term is at least 75% of the useful life of the leased asset;
 Present value of minimum lease payments is at least 90% of the fair value of the leased asset at
the inception of the lease; and
 The leased asset is of specialized nature.

Lessors shall initially recognize assets from a finance lease as receivable measured at an amount equal to
the net investment in the lease. Net investment is computed using the present value of the lease payments
plus the present value of the unguaranteed residual value. Net investment is also calculated as the present
value of the gross investment (lease payments + unguaranteed residual value). The difference between the
gross investment and net investment is the unearned interest income.

On the other hand, accounting for operating leases is straightforward. The lessor recognizes the lease
payments as rent income on a straight-line basis over the lease term, unless another systematic basis is
more representative of the time pattern of the user’s benefit.

PFRS 17 Insurance Contracts

PFRS 17 prescribes the principles for the recognition, measurement, presentation, and disclosure of
insurance contracts by an insurer. It applies to insurance and reinsurance contracts issued by an insurer,
reinsurance contracts held by an insurer, and investment contracts with discretionary participation features
issued by an insurer.

An insurer (issuer of the insurance contract) is the party that has an obligation under an insurance contract
to compensate a policyholder if an insured event occurs (e.g., insurance company). An insurance contract is
a contract under which one party (the issuer) accepts significant insurance risk from another party (the
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policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured
event) adversely affects the policyholder. A policyholder is a party that has a right to compensation under
an insurance contract if an insured event occurs. An insured event is an uncertain future event covered by
an insurance contract and creates insurance risk.

The standard provides the following essential elements of an insurance contract:

a. Transfer of significant insurance risk – there is a transfer of significant insurance risk from the
insured (policyholder) to the insurer (insurance provider).
b. Payment from the insured (premium) – generally, the insured pays to a common fund from which
losses are paid. However, not all insurance contracts have explicit premiums (e.g., insurance cover
bundled with some credit card contracts).
c. Indemnification against loss – the insurer agrees to indemnify the insured or other beneficiaries
against loss or liability from specified events and circumstances (i.e., insured event) that may occur
or be discovered during a specified period.

Risk (uncertainty) is an essential element of an insurance contract. It refers to the possibility of loss or injury
when an uncertain future event occurs. Insurance risk is a risk, other than financial risk, transferred from
the holder of a contract to the issuer. A contract that transfers only an insignificant insurance risk is not an
insurance contract. A contract that exposes the issuer to financial risk is not an insurance contract unless it
exposes the issuer to significant insurance risk. Examples of insurance contracts include insurance against
theft or damage, insurance against product liability, professional liability, civil liability or legal expenses, life
insurance and prepaid funeral plans, life-contingent annuities and pensions, disability and medical cover,
surety bonds, fidelity bonds, performance bonds, and bid bonds, product warranties issued by another party
for goods sold by a manufacturer, dealer or retailer, title insurance, travel insurance, insurance swaps and
other contracts that require payment depending on changes in physical variables that are specific to a party
to the contract.

Insurance contracts can be (a) direct insurance contract – an insurance contract where the insurer
directly accepts risk from the insured and assumes the sole obligation to compensate the insured in case of
a loss event or (b) reinsurance contract – an insurance contract issued by one insurer (the reinsurer) to
compensate another insurer (the cedant) for losses on one or more contracts issued by the cedant. A
reinsurer refers to the party with an obligation under a reinsurance contract to compensate a cedant if an
insured event occurs, while a cedant is the policyholder under a reinsurance contract.

An insurance contract may contain one or more non-insurance components (e.g., investment component
and/or service component) that need to be separated and accounted for under other standards. For this
purpose, an entity applies PFRS 9 to separate an embedded derivative or a distinct investment component
from a host insurance contract and applies PFRS 15 to allocate the cash flows to the separated components.

Insurance contracts are combined into portfolios. A portfolio consists of insurance contracts with similar
risks and managed together (e.g., contracts within a product line). Each portfolio is then further subdivided
into the following groups:
• a group of contracts that are onerous at initial recognition, if any;
• a group of contracts that at initial recognition have no significant possibility of becoming onerous
subsequently, if any; and
• a group of the remaining contracts in the portfolio, if any.

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PFRS 17 prescribes these measurement models: (a) general model, (b) premium allocation approach, and (c)
modifications to the general model for onerous contracts , reinsurance contracts held, and investment
contracts with discretionary participation features.

Under the general model, a group of insurance contracts initially measured at the total of the fulfillment cash
flows and the contractual service margin and is recognized from the earliest of the following:
a. the beginning of the coverage period of the group of contracts;
b. the date when the first payment from a policyholder in the group becomes due; and
c. for a group of onerous contracts, when the group becomes onerous.

Fulfillment cash flows comprise the following:

• Estimates of future cash flows , including all future cash flows within the boundary of each contract
in the group. Estimates may be determined at a higher level of aggregation and then allocated to
individual groups of contracts.
• Adjustment for the time value of money and financial risks (if financial risks are not included in the
estimates of future cash flows).
• Risk adjustment for non-financial risk.

The contractual service margin is the unearned profit in a group of insurance contracts that the entity
recognizes as it provides services in the future.

The carrying amount of a group of insurance contracts at the end of each reporting period is the sum of:
• the liability for remaining coverage comprising:
a. the fulfillment cash flows related to future service allocated to the group at that date;
b. the contractual service margin of the group at that date; and
• the liability for incurred claims, comprising the fulfillment cash flows related to past service
allocated to the group at that date.

An insurance contract is onerous if the total of its fulfillment cash flows, any previously recognized
acquisition cash flows, and any cash flows arising from the agreement at the initial recognition date is a net
outflow. The net outflow is recognized as a loss in profit or loss. This results in a carrying amount of the
liability for the group equal to the fulfillment cash flows and a zero contractual service margin. On
subsequent measurement, any excess net outflow for a group of insurance contracts that becomes onerous
or more onerous is recognized in profit or loss.

Under the premium allocation approach, PFRS 17 allows a simplified measurement of a group of insurance
contracts if, at the group’s inception, the entity reasonably expects that the simplification would result in an
approximation of the general model or the coverage period of each contract in the group is one year or less.
Under this approach, the liability is initially measured at:
• the premiums received at initial recognition, if any;
• minus any insurance acquisition cash flows at that date unless the entity chooses to recognize the
payments as an expense; and
• plus or minus any amount arising from the derecognition at that date of the asset or liability
recognized for insurance acquisition cash flows.

At the end of each subsequent reporting period, the carrying amount of the liability is the carrying amount at
the start of the reporting period:
• plus the premiums received in the period;

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• minus insurance acquisition cash flows, unless the entity chooses to recognize the payments as an
expense;
• plus any amounts relating to the amortization of insurance acquisition cash flows recognized as an
expense in the reporting period unless the entity chooses to recognize insurance acquisition cash
flows as an expense;
• plus any adjustment to a financing component;
• minus the amount recognized as insurance revenue for coverage provided in that period; and
• minus any investment component paid or transferred to the liability for incurred claims.

When an entity holds reinsurance contracts, future cash flows estimates include the risk of the reinsurer’s
non-performance. The risk adjustment for non-financial risk is determined so that it depicts the transfer of
risk from the holder of the reinsurance contract to the reinsurer. The contractual service margin is a net
gain or loss on purchasing the reinsurance rather than an unearned profit. Subsequently, changes in the
fulfillment cash flows resulting from changes in the reinsurer’s risk of non-performance do not adjust the
contractual service margin but instead recognized in profit or loss.

An insurance contract is derecognized when it is extinguished, i.e., when the obligation in the insurance
contract expires or is discharged or canceled, or the agreement is modified, and the modification meets any
of the conditions for derecognition.

The carrying amounts of the following groups are presented separately in the statement of financial position:
• insurance contracts issued that are assets;
• insurance contracts issued that are liabilities;
• reinsurance contracts held that are assets; and
• reinsurance contracts held that are liabilities.

Lastly, the amounts recognized in the statement(s) of profit or loss and other comprehensive income are
disaggregated into the following:
• insurance service result, comprising insurance revenue and insurance service expenses; and
• insurance finance income or expenses.

SUGGESTED READINGS
This section supplements the discussion of the topic as presented in each lesson. The suggested readings
provide you more learning opportunities to fully grasp the intended learning objectives. It is only optional to
those students who wish to expand their understanding regarding this topic.

1. Conceptual Framework and Accounting Standards (2019) by Millan, pp. 453-468, 473-487, 490-500, 502-
511, 515-518, 521-526, 529-537, 540-559, 562-575, 578-588, 591-596, 598-608, 611-615, 617-641,
646-679, 684-702.
2. PFRS (2018) by PICPA-Northern Metro Manila Chapter, pp. 514-546, 547-582, 583-626, 652-668, 669-
677, 678-728, 729-743, 744-898, 899-951, 952-976, 977-999, 1000-1041, 1042-1060, 1061-1114, 1115-
1157, 1158-1235.

SUGGESTED EXERCISES
This section provides suggested exercises for you to practice. The recommended problems and MCQ will give
you familiarity with the questions related to the topic. It is only optional to those who want to test their
acquired knowledge on this particular topic.
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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
LEARNING MODULES

1. Conceptual Framework and Accounting Standards (2019) by Millan, pp. 469-472, 488-489, 500-501, 512-
514, 519-520, 527-528, 537-539, 560-561, 576-577, 588-590, 597, 609-610, 616, 641-645, 681-683, 703-
705.

REFERENCES
1. IFRS. (2018). Conceptual framework project summary. www.ifrs.org.
2. Millan, Z. V. (2019). Conceptual framework and accounting standards 2019 edition . Bandolin Enterprises.
3. PICPA-Northern Metro Manila Chapter. (2018). PFRS.
4. Valix, C., Peralta, J., & Valix, C. A. (2020). Conceptual framework and accounting standards . GIC
Enterprises & Co., Inc.

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