ACC 103 | Conceptual Framework & Accounting Standards

Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

Lesson Title: PFRS 15 Revenue from Contracts with Customers; PFRS 16 Materials:
Leases; PFRS 17 Insurance Contracts Calculator, reviewer notebook,
textbook
Lesson Objectives:
At the end of this module, I should be able to: References:
1. State the five steps in the recognition of revenue. Millan, Zeus Vernon B.,
2. State the timing of revenue recognition and its measurement. Conceptual Framework & Accounting
3. Identify a lease. Standards,
4. Describe the general recognition and recognition exemption relating Bandolin Enterprise, Baguio City, 2019
to the accounting for leases by a lease. https://www.cpdbox.com
5. State the scope and applicability of PFRS 17.

Productivity Tip:
Follow a School-Like Schedule
The easiest way to mimic the focus and productivity that you have in school is by working on the same schedule you
would when you are in school. Similarly, to how you spend consecutive periods in different subjects during the school
day, you can set a schedule for yourself that has you spend a certain number of consecutive hours studying each subject
every day.

A. LESSON PREVIEW/REVIEW
Let’s begin your 24th day in this subject by activating your prior knowledge through answering the pre-test as your first
activity today. Do not worry if you answer the questions incorrectly, that only means you do not have prior knowledge of
the subject. (Distribute Activity Sheet 1 (AS-1). Activity 1 is good for 10 minutes only.

Activity 24-1: Pre-test (10 min.)

Student Name: __________________________________________ Date: ________
Instructions: Encircle the letter of the best answer to each questions.

1. Arrange the following steps of revenue recognition in accordance with PFRS 15.
I. Identify the performance obligations in the contract
II. Recognize revenue when (or as) the entity satisfies a performance obligation
III. Determine the transaction price
IV. Identify the contract with the customer
V. Allocate the transaction price to the performance obligations in the contract
a. IV, I, V, III, II c. III, IV, I, V, II
b. IV, I, III, V, II d. IV, III, I, V, II

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

2. Certain criteria must be met before a contract with a customer is accounted for under PFRS 15. Which of the following
precludes a contract from being accounted for under PFRS 15?
a. The consideration is collected in advanced.
b. The contract is made orally.
c. The contract does not result to a change in the risk, timing or amount of the entity’s future cash flows.
d. The contract is neither oral nor written but rather implied by the entity’s business practices.
3. On January 1, 20x1, Entity X enters into a 3-year lease of equipment for an annual rent of ₱100,000 payable at the
end of each year. The equipment has a remaining useful life of 10 years. The interest rate implicit in the lease is 10%
while the lessee’s incremental borrowing rate is 12%. Entity X uses the straight-line method of depreciation. The
relevant present value factors are as follows:
- PV of an ordinary annuity of ₱1 @10%, n=3………… 2.48685
- PV of an ordinary annuity of ₱1 @12%, n=3………… 2.40183

How much is the lease liability to be recognized by Entity X on initial recognition?

a. 240,183 c. 252,314
b. 248,685 d. 0

4. Assume the lease in problem #1 above qualifies for accounting under the recognition exemption under PFRS 16.
Which of the following statements is correct?
a. Entity X recognizes annual depreciation of ₱80,061 on the right-of-use asset.
b. Entity X recognizes a lease liability of ₱252,314 at the lease commencement date.
c. Entity X recognizes a lease liability of ₱200,000 at the lease commencement date.
d. Entity X recognizes lease expense of ₱100,000 in the first year of the lease.

5. How does Entity B account for the insurance contract with Entity A?
a. General model
b. Premium Allocation Approach
c. a or b
d. Not accounted for under PFRS 17

(After 10 minutes)
Self-Check of Activity 24-1. (Teacher will write the answers on the board.)
How did you fair so far? Again, do not worry if you answered some or all incorrectly. Let us proceed to the next
set of activities.

B. MICRO-LECTURE (15 min.)

 Guide to the Teacher’s Discussion (based on the results of Pre-Test)
 Student Engagement - Quality of questioning
 Teacher asks questions to probe and deepen students understanding or uncover misconceptions
 Teacher assists students in clarifying and assessing their thinking with one another.

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

 Teacher encourage student to answer another student’s question to probe for deeper thinking.
 Guide questions:
 Define a lease.
 Define insurance. (let the first student who answered the first question, to call one of his/her classmate) (*
Student talk is predominantly student-to-student. Talks reflects discipline-specific knowledge and ways of
thinking)

TEACHER’S DISCUSSION

PFRS 15 Revenue from Contracts with Customers

PFRS 15 sets the principles to apply when reporting about:

 the nature;
 the amount;
 the timing; and
 the uncertainty

of revenue and cash flows from a contract with a customer.

Let me stress “a customer” here. If you have a contract with party other than a customer, then PFRS 15 does not apply.

Sometimes, it’s quite difficult to determine whether you deal with a customer or simply with a collaborating party (e.g.
some mutual development projects with other entities), therefore take care!

Also, be aware that there are some exclusions from PFRS 15, namely:

 Leases (PAS 17 or PFRS 16)

 Financial instruments and other rights and obligations within the scope of PFRS 9 (PAS 39), PFRS 10, PFRS 11, PAS
27, PAS 28;
 Insurance contracts (PFRS 4) and
 Non-monetary exchanges between entities within the same business to facilitate sales.

We need to apply PFRS 15 for periods starting from 1 January 2018 or later.

5 steps to recognize revenue under PFRS 15

The main aim of PFRS 15 is to recognize revenue in a way that shows the transfer of goods/services promised to
customers in an amount reflecting the expected consideration in return for those goods or services.

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

It seems understandable and very easy at first sight, and it truly is in many cases. So why is PFRS 15 so extensive?

Well, because many situations are not straightforward and entities recognize revenues differently in these cases, for
example:

 Buy 1+get 1 free;

 Buy monthly prepaid plan + get handset for free;
 Earn loyalty points and cash them out/receive free goods later on;
 Get bonuses for delivery on time; etc.

To make it systematic, PFRS 15 requires application of 5 step model for revenue recognition.

The 5 steps are shown in the following picture:

Let’s describe them a bit.

Step 1: Identify the contract with the customer

A contract is an agreement between 2 parties that creates enforceable rights and obligations (PFRS 15, Appendix A).

You need to apply PFRS 15 to all contracts that have the following 5 attributes (PFRS 15.9):

1. Parties to the contract has approved it and are committed to perform;

2. Each party’s rights to the goods/services transferred are identified;
3. The payment terms are identified;
4. The contract has a commercial substance; and
5. It is probable that an entity will collect the consideration – here, you need to evaluate the customer’s ability and
intention to pay.

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

So, if the contract does not meet all 5 criteria, then you don’t apply PFRS 15, but some other standard.

Therefore, be careful about intragroup transactions, as they often lack a commercial substance (as these companies often
transfer inventories and other items at prices different than the market).

PFRS 15 provides a guidance about contract combinations and contract modifications, too.

Contract combination happens when you need to account for two or more contract as for 1 contract and not separately.
PFRS 15 sets the criteria for combined accounting.

Contract modification is the change in the contract’s scope, price or both. In other words, when you add certain goods or
services, or you provide some additional discount, you are effectively dealing with the contract modification.

PFRS 15 sets different accounting methods for individual contract modification, depending on certain conditions.

Step 2: Identify the performance obligations in the contract

Performance obligation is any good or service that contract promises to transfer to the customer.

It can be either (PFRS 15 App. A)

 A single good or service, or their bundle that is distinct; or

 A series of distinct goods or services that are substantially the same and have the same pattern of transfer.

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

An essential characteristic of a performance obligation is the word “distinct”. Simply said, distinct means separable, or
separately identifiable, and PFRS 15 sets criteria that you must assess in order to determine whether the performance
obligation is distinct or not.

Let me say that this is extremely important and you must do it right.

The reason is that in further steps, you will account for distinct performance obligations and their revenues separately, in
line with their allocated transaction price, and if you fail in the correct identification of distinct performance obligations,
then the whole contract accounting will be wrong.

Let me also add that the performance obligations can be both explicit (e.g. written in the contract) and implicit (e.g.
implied by some customary practices).

Also, if there’s no transfer to customer, then there’s no performance obligation. For example, imagine you construct a
building for your client. Before you actually start, you build a small mobile toilet for your workers. As this will not be
delivered to your customer, it is not a separate performance obligation.

Step 3: Determine the transaction price

The transaction price is the amount of consideration than 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 (PFRS 15 Appendix A).

That’t the definition from the standard and in other words, it’s what you expect to receive from your customer in return for
your supplies.

Attention – it’s NOT always the price set in the contract. It is you expectation of what your receive.

It means that you need to estimate the transaction price.

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

How?

First, you need to take the price stated in the contract as some basis (if applicable).

Then, you need to take some items into account, such as:

 Variable consideration – are there some bonuses or discounts, for example, performance bonus?
 Constraining estimates in variable consideration – you should include variable consideration (e.g. bonus) in the
transaction price only when it’s highly probable that you can keep it (this is a big simplification);
 Significant financing component – if your clients will pay you with delay, do the payments reflect the time value
of money?
 Non-cash consideration – do you receive some non-cash items from your customer in return for your goods or
services?
 Consideration payable to a customer – do you provide some vouchers or coupons to your customers?
 And other factors.

Step 4: Allocate the transaction price to the performance obligations

Once you have identified the contract‘s performace obligations and determined the transaction price, you need to split the
transaction price and allocate it to the individual performance obligations.

The general rule is to do it based on their relative stand-alone selling prices, but there are 2 exceptions when you
allocate in a different way:

1. When allocating discounts, and

2. When allocating considerations with variable amounts.

A stand-alone selling price is a price at which an entity would sell a promised good or a service separately to the
customer (not in the bundle).

The best way to determine a stand-alone selling price is simply to take observable selling prices and if these are not
available, then you need to estimate them. PFRS 15 suggest a few methods for estimating stand-alone selling prices, such
as adjusted market assessment approach, etc.

If this seems to theoretical, let me point you to this article. It illustrates all steps on a very simple telecom example.

Step 5 Recognize revenue when (or as) the entity satisfies a performance obligation

A performance obligation is satisfied (and revenue is recognized) when a promised good or service is transferred to a
customer. This happens when control is passed.

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

A performance obligation can be satisfied either:

 Over time – in this case, control is passed to the customer over some period of time (e.g. contract term); or
 At the point of time – in this case, control is retained by the supplier until it is transferred at some moment.

PFRS 15 sets a few criteria when you should recognize revenue over time. In all other cases, revenue is recognized at the
point of time.

Except for these 5 steps, PFRS 15 arranges a few other areas, such as…

Contract costs

PFRS 15 provides a guidance about two types of costs related to the contract:

1. Costs to obtain a contract

Those are the incremental costs to obtain a contract. In other words, these costs would not have been incurred
without an effort to obtain a contract – for example, legal fees, sales commissions and similar.These costs are not
expensed in profit or loss, but instead, they are recognized as an asset if they are expected to be recovered (the
exception is the contract costs related to the contracts for less then 12 months).
2. Costs to fulfill a contractIf these costs are within the scope of PAS 2, PAS 16, PAS 38, then you should treat them
in line with the appropriate standard.If not, then you should capitalize them only if certain criteria are met.

When and how to implement PFRS 15

As I’ve written above, you have to apply PFRS 15 mandatorily for all periods starting on 1 January 2018 or later (earlier
adoption is permitted).

Be careful, because you should present comparative figures, too – so in practice, you need to present the results for the
periods starting on 1 January 2017, too.

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

As the requirements of PFRS 15 are very extensive and demanding, PFRS 15 permits 2 methods of adoption:

1. Full retrospective adoption

Under this approach, you need to apply PFRS 15 fully to all prior reporting periods, with some exceptions.
2. Modified retrospective adoption
Under this approach, comparative figures remain as they were reported under the previous standards and you
recognize the cumulative effect of PFRS 15 adoption as a one-off adjustment to the opening equity at the initial
application date.

PFRS 16 Leases

The objective of the standard PFRS 16 Leases is to specify the rules for recognition, measurement, presentation and
disclosure of leases.But, why is there a new lease standard when we had an older PAS 17 Leases?

The main reason is that under PAS 17, lessees were still able to hide certain liabilities resulting from leases and simply not
present them on the face of the financial statements.I’m talking about operating leases, especially those with non-
cancellable terms.

Under the new standard, lessees will need to show all the leases right in their statement of financial position instead of
hiding them in the notes to the financial statements.

What is a lease under PFRS 16?

A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in
exchange for consideration (PFRS16, par.9).

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

This definition of lease is much broader than under the old PAS 17 and you must assess all your contracts for potential
lease elements.

You should carefully look at:

 Can the asset be identified? E.g. is it physically distinct?

 Can the customer decide about the asset’s use?
 Can the customer get the economic benefit from the use of that asset?
 Can the supplier substitute the asset during the period of use?

If the answer to these questions is YES, then it’s probable that your contract contains a lease.

As I wrote in my article about comparison of PFRS 16 and PAS 17, the impact of this new broader definition can be quite
big, because some service contracts (with payments recognized directly in profit or loss) can now be considered as lease
contracts (with necessity to recognize right-of-use asset and lease liability).

Under PFRS 16, you need to separate lease and non-lease components in the contract.

For example, if you rent a warehouse and rental payments include the fees for cleaning services, then you should separate
these payments between the lease payments and service payments and account for these elements separately.

However, lessee can optionally choose not to separate these elements, but account for the whole contract as a lease (this
applies for the whole class of assets).

Accounting for leases by lessees

Warning: Lessees do NOT classify the leases as finance or operating anymore!

No classification!

Instead, lessees account for all the leases in the same way.

Initial recognition

At lease commencement, a lessee accounts for two elements:

1. Right-of-use assetInitially, a right-of-use asset is measured in the amount of the lease liability and initial direct
costs.Then it is adjusted by the lease payments made before or on commencement date, lease incentives received,
and any estimate of dismantling and restoration costs (remember PAS 37).
2. Lease liabilityThe lease liability is in fact all payments not paid at the commencement date discounted to present
value using the interest rate implicit in the lease (or incremental borrowing rate if the previous one cannot be

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 ACC 103 | Conceptual Framework & Accounting Standards
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Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

set).These payments may include fixed payments, variable payments, payments under residual value guarantees,
purchase price if purchase option will be exercised, etc.

Let me outline the journal entries for you:

1. Lessee takes an asset under the lease:

o Debit Right-of-use asset
o Credit Lease liability (in the amount of the lease liability)
2. Lessee pays the legal fees for negotiating the contract:
o Debit Right-of-use asset
o Credit Suppliers (Bank account, Cash, whatever is applicable)
3. The estimated cost of removal, discounted to present value (lessee will need to remove an asset and restore
the site after the end of the lease term):
o Debit Right-of-use asset
o Credit Provision for asset removal (under PAS 37)

Subsequent measurement

After commencement date, lessee needs to take care about both elements recognized initially:

1. Right-of-use asset
Normally, a lessee needs to measure the right-of-use asset using a cost model under PAS 16 Property, Plant and
Equipment.It basically means to depreciate the asset over the lease term:
o Debit Profit or loss – Depreciation charge
o Credit Accumulated depreciation of right-of-use asset
However, the lessee can apply also PAS 40 Investment Property (if the right-of –use asset is an investment
property and fair value model is applied), or using revaluation model under PAS 16 (if right-of-use asset relates to
the class of PPE accounted for by revaluation model).

2. Lease liability
A lessee needs to recognize an interest on the lease liability:
o Debit Profit or loss – Interest expense
o Credit Lease liability
Also, the lease payments are recognized as a reduction of the lease liability:

o Debit Lease liability

o Credit Bank account (cash)

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 ACC 103 | Conceptual Framework & Accounting Standards
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Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

If there is a change in the lease term, lease payments, discount rate or anything else, then the lease liability must
be re-measured to reflect all the changes.

Is this too complicated? Exemptions exist!

If you got this far in reading this article, maybe you find it overcomplicated, especially for “small” operating leases.

Here’s the good news:

You do NOT need to account for all leases like described above.

PFRS 16 permits two exemptions (PFRS 16, par. 5 and following):

1. Leases with the lease term of 12 months or less with no purchase option (applied to the whole class of assets)
2. Leases where underlying asset has a low value when new (applied on one-by-one basis)

So, if you enter into the contract for the lease of PC, or you rent a car for 4 months, then you don’t need to bother with
accounting for the right-of-use asset and the lease liability.

You can simply account for all payments made directly in profit or loss on a straight-line (or other systematic) basis.

Accounting for leases by lessors

Nothing much changed in accounting for leases by lessors, so I guess you already are familiar with what follows.

Classification of leases

Unlike lessees, lessors need to classify the lease first, before they start accounting.

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

There are 2 types of leases defined in PFRS 16:

1. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an
underlying asset.
2. An operating lease is a lease other than a finance lease.

PFRS 16 (PFRS 16, par. 63) outlines examples of situations that would normally lead to a lease being classified as a
finance lease (and they are almost carbon copy from older PAS 17):

1. The lease transfers ownership of the asset to the lessee by the end of the lease term.
2. The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair
value at the date of the option exercisability. It is reasonably certain, at the inception of the lease, that the option
will be exercised.
3. The lease term is for the major part of the economic life of the asset even if the title is not transferred.
4. At the inception of the lease the present value of the lease payments amounts to at least substantially all of the
fair value of the leased asset.
5. The leased assets are of such a specialized nature that only the lessee can use them without major modifications.

Accounting for finance lease by lessors

Initial Recognition

At the commencement of the lease term, lessor should recognize lease receivable in his statement of financial position.
The amount of the receivable should be equal to the net investment in the lease.

Net investment in the lease equals to the payments not paid at the commencement date discounted to present value
(exactly the same as described in lessee’s accounting) plus the initial direct costs.

The journal entry is as follows:

 Debit Lease receivable

 Credit PPE (underlying asset)

Subsequent Measurement

The lessor should recognize:

1. A finance income on the lease receivable:

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

o Debit Lease receivable

o Credit Profit or loss – Finance income
2. A reduction of the lease receivable by the cash received:
o Debit Bank account (Cash)
o Credit Lease receivable
Finance income shall be recognized based on a pattern reflecting constant periodic rate of return on the lessor’s net
investment in the lease.

PFRS 16 then also specifies accounting for manufacturer or dealer lessors.

Accounting for operating lease by lessors

Lessor keeps recognizing the leased asset in his statement of financial position.

Lease income from operating leases shall be recognized as an income on a straight-line basis over the lease term,
unless another systematic basis is more appropriate.

Here you can see that the accounting for operating leases is asymmetrical: both lessees and lessors recognize an asset in
their financial statements (it’s a bit controversial and there were huge debates around).

Sale and Leaseback transactions

A sale and leaseback transaction involves the sale of an asset and the leasing the same asset back.

In this situation, a seller becomes a lessee and a buyer becomes a lessor. This is illustrated in the following scheme:

Accounting treatment of sale and leaseback transactions depends on the whether the transfer of an asset is a
sale under PFRS 15 Revenue from contracts with customers.

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 ACC 103 | Conceptual Framework & Accounting Standards
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Section: ____________ Schedule: ___________________________________ Date: _____________

1. If a transfer is a sale:
o The seller (lessee) accounts for the right-of-use asset at the proportion of the previous carrying
amount related to the right-of-use retained. Gain or loss is recognized only to the extend related to the
rights transferred. (PFRS 16, par.100)
o The buyer (lessor) accounts for a purchase of an asset under applicable standards and for the lease under
PFRS 16.
2. If a transfer is NOT a sale:
o The seller (lessee) keeps recognizing transferred asset and accounts for the cash received as for a financial
liability under PFRS 9 Financial Instruments.
o The buyer recognizes a financial asset under PFRS 9 amounting to the cash paid.

PFRS 17 Insurance Contracts

Objective
PFRS 17 Insurance Contracts establishes the principles for the recognition, measurement, presentation and disclosure of
Insurance contracts within the scope of the Standard. The objective of PFRS 17 is to ensure that an entity provides relevant
information that faithfully represents those contracts. This information gives a basis for users of financial statements to
assess the effect that insurance contracts have on the entity's financial position, financial performance and cash flows.
[PFRS 17:1]
Scope
An entity shall apply PFRS 17 Insurance Contracts to: [PFRS 17:3]
 Insurance contracts, including reinsurance contracts, it issues;
 Reinsurance contracts it holds; and
 Investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.
Some contracts meet the definition of an insurance contract but have as their primary purpose the provision of services for
a fixed fee. Such issued contracts are in the scope of the standard, unless an entity chooses to apply to them PFRS
15 Revenue from Contracts with Customers and provided the following conditions are met: [PFRS 17:8]
 (a) the entity does not reflect an assessment of the risk associated with an individual customer in setting the price of the
contract with that customer;
 (b) the contract compensates the customer by providing a service, rather than by making cash payments to the customer;
and
 (c) the insurance risk transferred by the contract arises primarily from the customer’s use of services rather than from
uncertainty over the cost of those services.

Key definitions
[PFRS 17: Appendix A]
Insurance contract

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A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by
agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the
policyholder.
Portfolio of insurance contracts
Insurance contracts subject to similar risks and managed together.
Contractual service margin
A component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned
profit the entity will recognise as it provides services under the insurance contracts in the group.
Insurance risk
Risk, other than financial risk, transferred from the holders of a contract to the issuer.
Fulfilment cash flows
An explicit, unbPASed and probability-weighted estimate (i.e. expected value) of the present value of the future cash
outflows less the present value of the future cash inflows that will arise as the entity fulfils insurance contracts, including a
risk adjustment for non-financial risk.
Risk adjustment for non-financial risk
The compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows arising
from non-financial risk as the entity fulfils insurance contracts.
Separating components from an insurance contract
An insurance contract may contain one or more components that would be within the scope of another standard if they
were separate contracts. For example, an insurance contract may include an investment component or a service
component (or both). [PFRS 17:10]
The standard provides the criteria to determine when a non-insurance component is distinct from the host insurance
contract.
An entity shall: [PFRS 17:11-12]
 (a) Apply PFRS 9 Financial Instruments to determine whether there is an embedded derivative to be separated and, if there
is, how to account for such a derivative.
 (b) Separate from a host insurance contract an investment component if, and only if, that investment component is
distinct. The entity shall apply PFRS 9 to account for the separated investment component.
 (c) After performing the above steps, separate any promises to transfer distinct non-insurance goods or services. Such
promises are accounted under PFRS 15 Revenue from Contracts with Customers.

Level of aggregation
PFRS 17 requires entities to identify portfolios of insurance contracts, which comprises contracts that are subject to similar
risks and managed together. Contracts within a product line would be expected to have similar risks and hence would be
expected to be in the same portfolio if they are managed together. [PFRS 17:14]
Each portfolio of insurance contracts issues shall be divided into a minimum of: [PFRS 17:16]
 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

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 A group of the remaining contracts in the portfolio, if any.

An entity is not permitted to include contracts issued more than one year apart in the same group. [PFRS 17:22]
If contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the
entity's practical ability to set a different price or level of benefits for policyholders with different characteristics, the entity
may include those contracts in the same group. [PFRS 17:20]
Recognition
An entity shall recognise a group of insurance contracts it issues from the earliest of the following: [PFRS 17:25]
 (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.
Measurement
On initial recognition, an entity shall measure a group of insurance contracts at the total of: [PFRS 17:32]
 (a) the fulfilment cash flows (“FCF”), which comprise:
o (i) estimates of future cash flows;
o (ii) an adjustment to reflect the time value of money (“TVM”) and the financial risks associated with the
future cash flows; and
o (iii) a risk adjustment for non-financial risk
 (b) the contractual service margin (“CSM”).
An entity shall include all the future cash flows within the boundary of each contract in the group. The entity may estimate
the future cash flows at a higher level of aggregation and then allocate the resulting fulfilment cash flows to individual
groups of contracts. [PFRS 17:33]
The estimates of future cash flows shall be current, explicit, unbPASed, and reflect all the information available to the
entity without undue cost and effort about the amount, timing and uncertainty of those future cash flows. They should
reflect the perspective of the entity, provided that the estimates of any relevant market variables are consistent with
observable market prices. [PFRS 17:33]
Discount rates
The discount rates applied to the estimate of cash flows shall: [PFRS 17:36]
 (a) reflect the time value of money (TVM), the characteristics of the cash flows and the liquidity characteristics of the
insurance contracts;
 (b) be consistent with observable current market prices (if any) of those financial instruments whose cash flow
characteristics are consistent with those of the insurance contracts; and
 (c) exclude the effect of factors that influence such observable market prices but do not affect the future cash flows of the
insurance contracts.

Risk adjustment for non-financial risk

The estimate of the present value of the future cash flows is adjusted to reflect the compensation that the entity requires
for bearing the uncertainty about the amount and timing of future cash flows that arises from non-financial risk. [PFRS
17:37]

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 ACC 103 | Conceptual Framework & Accounting Standards
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Contractual service margin

The CSM represents the unearned profit of the group of insurance contracts that the entity will recognise as it provides
services in the future. This is measured on initial recognition of a group of insurance contracts at an amount that, unless
the group of contracts is onerous, results in no income or expenses arising from: [PFRS 17:38]

 (a) the initial recognition of an amount for the FCF;

 (b) the derecognition at that date of any asset or liability recognised for insurance acquisition cash flows; and
 (c) any cash flows arising from the contracts in the group at that date.
Subsequent measurement
On subsequent measurement, the carrying amount of a group of insurance contracts at the end of each reporting period
shall be the sum of: [PFRS 17:40]
 (a) the liability for remaining coverage comprising:
o (i) the FCF related to future services and;
o (ii) the CSM of the group at that date;
 (b) the liability for incurred claims, comprising the FCF related to past service allocated to the group at that date.
Onerous contracts
An insurance contract is onerous at initial recognition if the total of the FCF, any previously recognised acquisition cash
flows and any cash flows arising from the contract at that date is a net outflow. An entity shall recognise a loss in profit or
loss for the net outflow, resulting in the carrying amount of the liability for the group being equal to the FCF and the CSM
of the group being zero. [PFRS 17:47]
On subsequent measurement, if a group of insurance contracts becomes onerous (or more onerous), that excess shall be
recognised in profit or loss. Additionally, the CSM cannot increase and no revenue can be recognised, until the onerous
amount previously recognised has been reversed in profit or loss as part of a service expense. [PFRS 17:48-49]
Premium allocation approach
An entity may simplify the measurement of the liability for remaining coverage of a group of insurance contracts using the
Premium Allocation Approach (PAA) on the condition that, at the inception of the group: [PFRS 17:53]
 (a) the entity reasonably expects that this will be a reasonable approximation of the general model, or
 (b) the coverage period of each contract in the group is one year or less.
Where, at the inception of the group, an entity expects significant variances in the FCF during the period before a claim is
incurred, such contracts are not eligible to apply the PAA. [PFRS 17:54]
Using the PAA, the liability for remaining coverage shall be initially recognised as the premiums, if any, received at initial
recognition, minus any insurance acquisition cash flows. Subsequently the carrying amount of the liability is the carrying
amount at the start of the reporting period plus the premiums received in the period, minus insurance acquisition cash
flows, plus amortisation of acquisition cash flows, minus the amount recognised as insurance revenue for coverage
provided in that period, and minus any investment component paid or transferred to the liability for incurred claims. [PFRS
17:55]

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 ACC 103 | Conceptual Framework & Accounting Standards
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Section: ____________ Schedule: ___________________________________ Date: _____________

Practical expedients available under the PAA:

If insurance contracts in the group have a significant financing component, the liability for remaining coverage needs to
be discounted, however, this is not required if, at initial recognition, the entity expects that the time between providing
each part of the coverage and the due date of the related premium is no more than a year. [PFRS 17:56]
In applying PAA, an entity may choose to recognise any insurance acquisition cash flows as an expense when it incurs
those costs, provided that the coverage period at initial recognition is no more than a year. [PFRS 17:59a]
The simplifications arising from the PAA do not apply to the measurement of the group’s liability for incurred claims,
measured under the general model. However, there is no need to discount those cash flows if the balance is expected to
be paid or received in one year or less from the date the claims are incurred. [PFRS 17: 59b]
Investment contracts with a DPF
An investment contract with a DPF is a financial instrument and it does not include a transfer of significant insurance risk.
It is in the scope of the standard only if the issuer also issues insurance contracts. The requirements of the Standard are
modified for such investment contracts. [PFRS 17:71]
Reinsurance contracts held
The requirements of the standard are modified for reinsurance contracts held.
In estimating the present value of future expected cash flows for reinsurance contracts, entities use assumptions consistent
with those used for related direct insurance contracts. Additionally, estimates include the risk of reinsurer’s non-
performance. [PFRS 17:63]
The risk adjustment for non-financial risk is estimated to represent the transfer of risk from the holder of the reinsurance
contract to the reinsurer. [PFRS 17:64]
On initial recognition, the CSM is determined similarly to that of direct insurance contracts issued, except that the CSM
represents net gain or loss on purchasing reinsurance. On initial recognition, this net gain or loss is deferred, unless the
net loss relates to events that occurred before purchasing a reinsurance contract (in which case it is expensed
immediately). [PFRS 17:65]
Subsequently, reinsurance contracts held are accounted similarly to insurance contracts under the general model. Changes
in reinsurer’s risk of non-performance are reflected in profit or loss, and do not adjust the CSM. [PFRS 17:66-67]
Modification and derecognition
Modification of an insurance contract
If the terms of an insurance contract are modified, an entity shall derecognise the original contract and recognise the
modified contract as a new contract if there is a substantive modification, based on meeting any of the specified criteria.
[PFRS 17:72]
The modification is substantive if any of the following conditions are satisfied:
 (a) if, had the modified terms been included at contract’s inception, this would have led to:
o (i) exclusion from the Standard’s scope;
o (ii) unbundling of different embedded derivatives;
o (iii) redefinition of the contract boundary; or
o (iv) the reallocation to a different group of contracts; or
 (b) if the original contract met the definition of a direct par insurance contracts, but the modified contract no longer meets
that definition, or vice versa; or

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 (c) the entity originally applied the PAA, but the contract’s modifications made it no longer eligible for it.
Derecognition
An entity shall derecognise an insurance contract when it is extinguished, or if any of the conditions of a substantive
modification of an insurance contract are met. [PFRS 17:74]
Presentation in the statement of financial position
An entity shall present separately in the statement of financial position the carrying amount of groups of: [PFRS 17:78]
 (a) insurance contracts issued that are assets;
 (b) insurance contracts issued that are liabilities;
 (c) reinsurance contracts held that are assets; and
 (d) reinsurance contracts held that are liabilities.
Recognition and presentation in the statement(s) of financial performance
An entity shall disaggregate the amounts recognised in the statement(s) of financial performance into: [PFRS 17:80]
 (a) an insurance service result, comprising insurance revenue and insurance service expenses; and
 (b) insurance finance income or expenses.
Income or expenses from reinsurance contracts held shall be presented separately from the expenses or income from
insurance contracts issued.

Guided Practice.
Activity 24-2 (30 min.)
1. Answer Problem 1 (refer to pp. 641-642); Answer Problem 1 (refer to pp. 681-682); Answer Problem 1 (refer to pp. 708);
Millan, Conceptual Framework & Accounting Standards.

Seatwork is designed as performance task for students demonstrate thinking skills connected to the learning target.
Studentscost
-current applies concepts learned in the given task.

C. LESSON WRAP-UP
1) Thinking about Learning (5 mins)
Work tracker. Congratulations! You have finished the module for today! Shade the number of the module that you finished.
Period 1 Period 2 Period 3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

How do you feel today?

I feel (unsatisfactory/satisfactory/excellent) because _______________________________________________________________.

What are your challenges in learning the concepts in this module? If you do not have challenges, what is your best learning
for today?

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

__________________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________

What are the questions/thoughts you want to share to your teacher today?
__________________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________

ANSWER KEY

Activity 24-1.

1. B 2. C 3. B 4. D 3. C

Activity 24-2.

PROBLEM 1: MULTIPLE CHOICE (refer to pp. 641-642)

1. A
2. A
3. A
4. D
5. B

PROBLEM 1: MULTIPLE CHOICE (refer to pp. 681-682)

1. C
2. B
3. C
4. C
5. C

PROBLEM 1: MULTIPLE CHOICE (refer to pp. 708)

1. D
2. C
3. A
4. D
5. D
6. A

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 ACC 103 | Conceptual Framework & Accounting Standards
Teacher’s Guide Module #24

Name: ___________________________________________________________ Class number: _______

Section: ____________ Schedule: ___________________________________ Date: _____________

This document is the property of PHINMA EDUCATION