CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

Lesson 13 PFRS 10 Consolidated Financial Statements

PFRS 11 Joint Arrangements
PFRS 12 Disclosures of Interests in Other Entities
Lesson Objectives:
1. State the core principle under PFRS 10, PRFS 11 and PFRS 12
2. Apply the standards on consolidated financial statements, joint arrangements and disclosures of interests in
other entities and fair value measurements
3. Describe the procedures and reporting requirements of PFRS 10, PFRS 11 and PFRS 12.
Discussion:
Lesson 13.1 - PFRS 10: Consolidated Financial Statements
PFRS 10 prescribes the preparation and presentation of consolidated financial statements. Consolidated
financial statements of a group in which assets, liabilities, equity, income, expenses and cash flows of the
parent and its subsidiaries are presented as a single economic entity.

- Parent entities are required to prepare consolidated financial statements except –

o It is a subsidiary of another entity and all its other owners do not object to its non-
presentation of consolidated financial statements.
o Its debt or equity instruments are not traded in a public market
o Its ultimate parent produces consolidated financial statements that are available for
public use and comply with PFRSs.
- Control is the basis for consolidation wherein parent should possess. It exists if the following
are present:
o Power over the investee – it is when the investor has existing rights that give it the current
ability to direct the investee’s relevant activities.
Examples:

 Establishing operating and capital decisions of the investee, including

budgets
 Appointing and remunerating an investee’s key management personnel
and terminating their services of employment.
o Exposure or rights to variable return from the investee – if its returns from its
involvement with the investee vary depending on the investee’s performance.
o Ability to the affect returns through use of power – it provides a link between power
and variable returns.
- Accounting requirements:
o Reporting dates and uniform accounting policies – parent and subsidiaries shall have
the same reporting date and accounting policies.
o Consolidated period – begins from the date the investor obtains control of the investee
and ceases when the investor loses control of the investee.
o Measurement:
 Income and expenses of subsidiary are based on the amounts of the assets and
liabilities recognized in the consolidated financial statements at acquisition
date.
 Investment in subsidiaries are accounted for in the parent’s separate financial
statements either –
  At cost – this is the required basis of initial measurement which is
equal to the value assigned to the consideration transferred at the
acquisition date and subsequently measured at that amount unless it is
impaired.
 In accordance with PFRS 9 – investment in subsidiary is initially
measured equal to the value assigned to the consideration transferred at
the acquisition date and subsequently measured at fair value.
 Using the equity method – investment in subsidiary is initially
measured equal to the value assigned to the consideration transferred at
the acquisition date and subsequently increased or decreased for the
investor’s share in the changes in the investee’s equity.
- Non-controlling interest (NCI) is equity in a subsidiary not attributable, directly or indirectly,
to a parent.
o NCI in the net assets is presented in the consolidated statement of financial position
within equity, separately from the equity of the owners of the parent.
o The profit or loss and each component of other comprehensive income in the
consolidated statements are attributed to owners of the parent and NCI
- Preparation of consolidated financial statements:
o By combining the financial statements of parent and its subsidiaries line by line by
adding together similar items of assets, liabilities, equity, income and expenses.
o Steps involved in the consolidation procedures in the preparation of statement of
financial position at acquisition date:
 Eliminate the “Investment in subsidiary” account which requires
 Measuring the identifiable assets acquired and liabilities assumed in the
business combination at their acquisition-date fair values.
 Recognizing the goodwill from the business combination.
 Eliminating the subsidiary’s pre-combination equity accounts and
replacing them with the non-controlling interest.
 Add line by line, similar items of assets and liabilities of the combining
constituents. The subsidiary’s assets and liabilities are included in the
consolidated financial statements at 100% of their amounts irrespective of the
interest acquired by the parent.

Enrichment Activity:
1. Refer to the downloaded audited financial statements of Meralco Group of companies for the actual
presentation of consolidated financial statements in reference to PFRS 10.
2. Answer problem 1 and 2 on page 576 - 577
3. As supplemental information, choose and watch at least one among the various discussions/lectures on
PFRS/IFRS 10 in YouTube.

Lesson 13.2 - PFRS 11: Joint Arrangements

Joint Arrangement- (JArr) -under PFRS 11, is an arrangement of which two or more parties have joint control.
Moreover, it can either be: a) Joint Operation or b) Joint Venture.
Characteristics of JArr:
1. Parties are bound by contractual arrangement
2. This arrangement gives two or more of those parties joint control of the arrangement
  Contractual arrangement - ensures that no single party is in position to control the activity
unilaterally
 Joint Control - is a contractually agreed sharing of control of an arrangement, which (exist
only when decision about the relevant activities require the unanimous consent of the parties
sharing control as per PFRS 11.

Regular Joint Control Significant Control

Investment Influence

No power to Obtained by an The power to Power to

participate investor through participate in the Govern the
nor control in Contractual agreement Financial and financial and operating
the financial with other investors. operating policy policies of an economic
or operating decisions of activity so as to
activity of the The financial and an economic activity obtain benefits from it.
entity. operating decisions but is not control
Relating to joint or joint control over
Arrangement activities policies
Requires consent of
each joint operators
or venturers.

Less than 20% Contractually agreed 20% to 50% 51% to 100%

PFRS 9 PFRS 11 or PAS 28 PAS 28 PFRS 3 and PFRS 10

Investment in Joint Operation Joint Investment in Investment in

FVPL or FVOCI Venture Associate Subsidiary

At Fair value Recognize Equity method Equity Method* Consolidation

Equity *not applicable when
Own A,L R and entity prepares
method separate financial
Ex plus share in statement.
The AL R and It shall account for
Ex in the Joint Investments in
Operation. associates, joint
A-asset venture and
subsidiaries at:
L-Liablity a. COST
R-Revenue b)FAIR VALUE
Ex-Expense (PFRS 9)

Joint Operations:
1. There is contractual arrangement and joint control
2. There is no separate vehicle- "always JO"
3,"If there is separate vehicle and the arrangement confers the party:
"right to all economic benefits and assume all obligations" – JO

Joint Venture:
1. There is contractual arrangement and joint control
2. *If there is separate vehicle and the arrangement confers the party:
"right to the Net Asset of the vehicle" -JV
JOINT OPERATION:
The Joint operator recognize its own Asset, Liability, Revenue and Expenses in addition to which, the operator
shall also recognize its SHARE of any assets held and liabilities incurred by the joint operation as well as the
revenues and expenses of the latter.
Hence, the operator shall report the following:

Asset Own asset held Share of any assets held by joint

Operation

Liability Own liability incurred Share of any liability incurred

jointly

Revenue Revenue earned Share of the revenue earned by

joint operation
independently

Expenses Expenses incurred Share of any expenses incurred

by joint operation
independently

Transaction between Operator and Joint Operation:

Any gain or loss in the contribution of asset shall be recognized by the operator to the extent of the interest of
the other party. There is gain or loss because the contributor-operator carries the assets contributed at BOOK
VALUE while the other operators shall recognize the said asset at FAIR VALUE.) Hence, the difference in
valuation of assets results to gain or loss.
Accounting Treatment:
1. By unincorporated Joint Operation
2. Partnership in nature
Format in determining the Income or (loss) of Joint Operation:
Joint Operation
-Merchandise Contribution Merchandise Withdrawal
-Purchase and Freight In Purchase Returns, discounts and
-Sales returns, discount and allowances
Allowances Sales and other items of income Unsold
-Expenses (paid by operator Merchandise (Ending Inventory)
or from JO-cash)
Debit balance (Loss) Profit- Credit Balance

Format in determining cash receipt or cash payment:

Investment in Joint Operation

Contribution/ Investment Sales and other income collected

Cost/Expense paid for JO Withdrawals of Contribution/UM
Share in Profit for JO Share in loss of JO

(Receivable) Receipt Payment (Payable)

Capital of Operator
Receivable from Operator for Contribution/ Investment
collections on sales
Withdrawals of Cost Expense paid for JO
Contribution/UM
Share in Loss of JO Share in profit for JO

(Payable) Debit Credit (Receipt)

Joint Venture:

 Equity Method shall be applied in accounting for the "Investment in Joint Venture Account (InJoVA)"
 Percentage share in the net income (loss) of the Joint venture
 InJoVA will increase:
-when there is share in profit

 InJoVA will decrease:

-when there is share in losses and
-when the venturer received dividend from the joint venture

 Downstream unrealized profit or gain on sale - " Full recognition"

 Upstream unrealized profit or gain on sale- " percentage recognition % share onlv"
Comparing FULL PFRS and PFRS for SMEs

Criteria: FULL PFRS PFRS for SMEs

1. As to form to its Form: 2 Forms of 3 Forms of Joint Venture:

Joint Arrangement (Full) Joint I. J.Co Jointly Controlled
Joint Venture (SME) Arrangement: Operation]
I. J.CA [Jointly Controlled
A. Joint Asset]
Operation Ill.J.CE Jointly Controlled
B. Joint Entities]
Ventures Note: the J.CE has similar
treatment with joint venture
As discussed under PFRS 11.
above under In J.CO, the venturer uses
PFRS 11 its own asset and incurs
paragraph own liabilities and expenses
14.15.16 Lastly, in J.CA, the venturer
has joint ownership of the
assets contributed or acquired for join venture
purposes

2. As to the Accounting Under 3 methods:

policy: paragraph 24 1. Cost Model:
Joint Venture (Full) of PFRS 11. [ Cost less Impairment
Jointly Controlled Entities Joint venture 2. Equity Method
(SME) shall be 3. Fair Value Method:
accounted for [change in Fair Value shall be
using EQUITY recognized in Profit or Loss
Method in (PL)]
accordance
with IAS 28
1.Cost Less I/L With Dividend Transaction Share in profit
Impairment Income =no Cost treated = no effect in
loss (I/L) effect in as Direct investment
investment Attributable
Cost

2.FV [change in FV [ change Transaction Share in profit

FV=PL]
FV=PLI Dividend cost treated = no effect in
Equity Income =no as Expense investment
Without effect in
Impairment investment
loss (I/L)

3. Equity With Dividend Transaction Share in profit

Impairment income Cost treated increases the
loss (I/L) reduces the as Direct investment
investment Attributable
Cost

Enrichment Activity:

1. Answer problem 1 and 2 on page 588 - 589.

2. Refer to the downloaded audited financial statements of Meralco Group of companies for the
actual presentation in the financial statements in reference to PFRS 11.
3. As supplemental information, choose and watch at least one among the various
discussions/lectures on PFRS/IFRS 11 in YouTube.

Lesson 13.3 PFRS 12 Disclosures of Interests in Other Entities

PFRS 12 prescribes the minimum disclosure requirements for an entity’s interests in other entities as to the
nature of and risks associated with and those interests and effects of those interests on the entity’s financial
statements.

- Interest in another entity refers to the involvement that exposes as entity to variability of
returns from the performance of another entity.
o Evidenced by the holding of equity or debt instruments.
o Include the means by which an entity obtains control, joint control or significance
influence over another entity
- Minimum disclosures under PFRS 12
o Significant judgments and assumptions in determining the following -
 Existence of control, joint control or significant influence over an
investee.
  Type of joint arrangement when the arrangement has been structured
through a separate vehicle.
o Investment entity status, wherein the entity:
 Obtains funds from one or more investors for the purpose of providing
investment management services.
 Commits to its investors that the purpose is to invest funds solely for
returns from capital appreciation, investment income or both.
 Measures and evaluates the performance of all its investments on a fair
value basis.
o Interests in subsidiaries
 The composition of the group
 Name of subsidiary, 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 reporting period
 Dividends paid to NCI
 Summary of the subsidiary’s assets, liabilities, profit or loss and
cash flows
 The nature and extent of significant restrictions on the entity’s ability to
access assets and settle liabilities of the group
 The effects of changes in ownership interest that result or do not result in a
loss of control.
 If a subsidiary uses a different reporting period, the entity should disclose
the fact and the reason thereof.
o Interests in joint arrangements and associates
 Name of the joint arrangement or associate, its principal place of
business and country of incorporation
 Nature of entity’s relationship with the joint arrangement or
associate
 Ownership interest, participating share or voting rights held by the
entity
 Measurement of the investment (equity or fair value)
 If equity method is used, disclose the fair value of the investment
(if there is a quoted price)
 Dividends received from the joint venture or associate
 Summarized financial information about the joint venture or
associate
o Current and non-current assets
o Current and non-current liabilities
o Revenue
o Profit or loss from continuing operations
o Post-tax profit or loss from discontinued operations
o Other comprehensive income
o Total comprehensive income
 For a material joint venture, the amounts of the following:
o Cash and cash equivalents
o Current and non-current financial liabilities (excluding trade
and other payables and provisions)
o Depreciation and amortization
o Interest income and interest expense
 o Income tax expense or benefit
 If investments are not individually material, the following can be
disclosed in aggregate and separately:
o Carrying amount of all individually immaterial investments
that are accounted for using the equity method
o Profit or loss from continuing operations
o Post-tax profit or loss from discontinued operations
o Other comprehensive income
o Total comprehensive income
 Nature and extent of any significant restrictions on the ability of
joint ventures and associates to transfer funds to the entity
 If a joint venture or associate uses a different reporting period, the
entity should disclose the fact and the reason thereof.
 Unrecognized share of losses of a joint venture or associate
 Commitments relating to joint ventures
 Contingent liabilities relating to joint ventures and associates unless
the probability of loss is remote.
o Interests in unconsolidated structured entities
 Qualitative and quantitative information about the interest in an
unconsolidated structured entity including the name, purpose, size and
activities of the structured entity and how it is financed.
 Summary of the following in tabular format
 Carrying amount of the assets and liabilities recognized in the
entity’s financial statements relating its interest in unconsolidated
structured entities
 The line items in the statement of financial position in which those
asses and liabilities are recognized
 The best estimate of the entity’s maximum exposure to loss, how
the estimate is determined and the reason if such loss cannot be
quantified.
 Comparison of the carrying amounts of the assets and liabilities that
relate to its interests in unconsolidated structured entities and the
entity’s maximum exposure to loss.
 If during the reporting period the entity has provided financial or other
support, the entity should disclose the following:
 The type and amount of support provided including the situations
the entity assisted the structured entity in obtaining the financial
support
 The reasons for providing the support.
 Any current intentions to provide financial or other support, including
intention to assist in obtaining financial support.

Enrichment Activity:

1. Answer problem 1 and 2 on page 597.

2. Refer to the downloaded audited financial statements of Meralco Group of companies for the
actual presentation in the financial statements in reference to PFRS 12.

3. As supplemental information, choose and watch at least one among the various
discussions/lectures on PFRS/IFRS 12 in YouTube.