Week 10 Cfas

CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS
Lecture Aid
By: Zeus Vernon B. Millan
1
PAS 36 Impairment of Assets
Learning Competencies
• State the core principle of PAS 36.

• Account for the impairment of individual assets
and cash-generating units.
• Account for the reversal of impairment.
FAR PART 1B: Zeus Vernon B. Millan

Core Principle
• If the carrying amount of an asset is greater than its
recoverable amount, the asset is impaired. The excess
is impairment loss.

Computation of Impairment loss
Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx
• Recoverable amount is the amount to be recovered through

use or sale of an asset. It is the higher of an asset’s:
a. Fair value less costs of disposal, and
b. Value in use
Value in use is the present value of the future cash flows

expected to be derived from an asset or cash-generating unit.

Identifying an asset that may be impaired
• An entity shall assess at the end of each reporting period

whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall
estimate the recoverable amount of the asset.
• If there is no indication that an asset may be impaired,

an entity is not required to estimate the recoverable
amount of the asset.

Indications of impairment
I. External sources of information
a. Significant decline in the asset’s value more than what is expected as a result of
passage of time of normal use.
b. Significant changes in technological, market, economic or legal environment
in which the entity operates or in the market to which an asset is dedicated.
c. Increase in market interest rates or other market rates of return on
investments which are likely to affect discount rates used in calculating asset’s
value in use and decrease asset’s recoverable amount materially.
d. Carrying amount of the net assets is more than its market capitalization.
II. Internal sources of information

a. Evidence of obsolescence or physical damage
b. Significant change with adverse effect to the entity has taken place or will take
place, which will affect expected use of asset, e.g., discontinuance, disposal,
restructuring plans.
c. Evidence is available from internal reporting that indicates that the economic
performance of an asset is, or will be, worse than expected.
Required testing for impairment
• The following assets are required to be tested for

impairment at least annually, whether or not there are
indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination

Measuring recoverable amount
• Recoverable amount is the higher of the asset’s fair

value less costs of disposal and value in use.
• However, if there is no reason to believe that an asset’s
value in use materially exceeds its fair value less costs of
disposal, the asset’s fair value less costs of disposal may
be used as its recoverable amount. This will often be the
case for an asset that is held for disposal.

Value in use
• Value in use is the present value of the future cash flows
expected to be derived from an asset or cash-generating unit.
üAny residual value of the asset and disposal costs
should be included in estimating future cash inflows and
outflows.
üCash flow projections shall cover a maximum period of 5
years.
üProjections beyond 5 years are extrapolated.
üThe discount rate to be used shall be a pre-tax rate

Value in use - continuation
& When making estimates of future cash flows for purposes of
computing value in use:
Exclude cash flows arising Include cash flows arising
from: from:
1. Future restructurings not 1. Revenues to be derived

yet committed from the continuing use of
2. Improving or enhancing the asset
the asset’s performance 2. Day-to-day costs of using
3. Income taxes the asset
4. Financing activities 3. Any residual value of the
asset and disposal costs
Recognizing and measuring an impairment loss
• Impairment loss is recognized in profit or loss, unless

the asset is carried at revalued amount, in which case
revaluation surplus is decreased first and any excess is
recognized in profit or loss. The decrease in the
revaluation surplus is recognized in other
comprehensive income.

Depreciation after impairment
• After the recognition of an impairment loss, the

depreciation (amortization) charge for the asset shall be
adjusted in future periods to allocate the asset’s revised
carrying amount, less its residual value (if any), on a
systematic basis over its remaining useful life.

Cash-generating unit (CGU)
• Cash-generating unit (CGU) is the smallest

identifiable group of assets that generates cash
inflows that are largely independent of the cash
inflows from other assets or groups of assets.

Impairment of individual assets included in a
CGU
• Assets whose recoverable amount can be determined
reliably are tested for impairment individually.
• Assets whose recoverable amount cannot be determined
reliably (e.g., assets that do not generate their own cash
flows) are included in a CGU. The CGU is the one tested
for impairment.

Allocating goodwill to CGU’s
• For purposes of impairment testing, goodwill acquired in

a business combination shall be allocated to each of
the acquirer’s CGU in the year of business combination.

Impairment loss for a CGU
• The impairment loss on a CGU shall be allocated

1. First, to any goodwill allocated to the CGU
2. Then, to the other assets of the unit pro rata on the basis
of the carrying amount of each asset in the unit.

Reversal of Impairment loss
Recoverable amount on date of
d reversal
CA if no IL had been recognized

c
previously
b CA on date of reversal
• (d) – (c) = Reversal of impairment loss recognized in other

comprehensive income
• (c) – (b) = Reversal of impairment loss recognized in profit or
loss

BREAK
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 18
&
Lecture Aid
19
PAS 37 Provisions, Contingent Liabilities and
Contingent Assets
• State the recognition criteria for provisions.

• Differentiate the accounting requirements
for a provision, a contingent liability and a
contingent asset.
• Describe the measurement of a provision.
Conceptual Framework & Acctg.

20
Standards (by: Zeus Vernon B. Millan)
Provisions
• A provision is a liability of uncertain timing or amount.
• Provisions differ from other liabilities because of the
uncertainty about the timing or amount of expenditure
required in settlement. Unlike for other liabilities, provisions
must be estimated. Although, some other liabilities are also
estimated, their uncertainty is generally much less than for
provisions.
• Other liabilities, such as accruals, are reported as part of
“Trade and other payables” whereas provisions are reported
separately.

21
Provision vs. Contingent liability

22
Recognition of provisions
• A provision is recognized when all of the following conditions are

met:
1. The entity has a present obligation (legal or constructive) as a
result of a past event;
2. It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
3. A reliable estimate can be made of the amount of the obligation.

23
24
Measurement

25
Present value
• Where the effect of the time value of money is material,

the amount of a provision shall be the present value of
the expenditures expected to be required to settle the
obligation.

26
Expected disposal of assets
• Gains from the expected disposal of assets shall not be

taken into account in measuring a provision. Gains shall
be recognized only when the assets are actually disposed
of.

27
Reimbursements
• Where some or all of the expenditure required in settling a

provision is expected to be reimbursed by another party, the
reimbursement is recognized only when it is virtually
certain that reimbursement will be received if the entity
settles the obligation.
• The reimbursement shall be treated as a separate asset.
• In the statement of profit or loss and other comprehensive
income, the expense relating to a provision may be presented
net of the amount recognized for a reimbursement.

28
Changes in provisions
• Provisions shall be reviewed at the end of each reporting

period and adjusted to reflect the current best estimate.
• If it is no longer probable that an outflow of resources

embodying economic benefits will be required to settle
the obligation, the provision shall be reversed.

29
Product warranties and guarantees
• If a customer has the option to purchase a warranty

separately (for example, because the warranty is priced or
negotiated separately), the warranty is accounted for in accordance
with PFRS 15 Revenue from Contracts with Customers.
• If a customer does not have the option to purchase a warranty

separately, the warranty is accounted for in accordance with PAS 37
Provisions, Contingent Liabilities and Contingent Assets unless the
promised warranty provides the customer with a service in addition
to the assurance that the product complies with agreed-upon
specifications.

30
Liability for premiums
• A customer option to acquire additional goods or

services for free or at a discount is accounted for under
PFRS 15 if the option provides the customer a
material right that the customer would not receive
without entering into that contract.
• A customer option that does not provide the customer
with a material right is not accounted for under PFRS 15;
and therefore, accounted for in accordance with PAS 37.

31
Guarantee for indebtedness of others
• A provision for the guarantee for indebtedness of others

is recognized when it becomes probable that the entity
will be held liable for the guarantee, such as when the
original debtor defaults on the loan.

32
Contingent assets

33
BREAK
&
Lecture Aid
35
PAS 38 Intangible Assets
Learning Objectives
• Define an intangible asset.

• State the initial measurement of intangible assets
that are (a) externally acquired and (b) internally
generated.
• State the subsequent measurement of intangible
assets that (a) have finite useful life and (b)
indefinite useful life.

36
Intangible assets
• An intangible asset is an identifiable non-monetary asset
without physical substance.
• Goodwill acquired in a business combination is outside

the scope of PAS 38 because it is unidentifiable.
Goodwill is accounted for under PFRS 3 Business
Combinations and PAS 36 Impairment of Assets.

37
Essential criteria in the definition of intangible
assets
1. Identifiability – separable or arises from contractual

rights
2. Control – power to obtain (or restrict others from
obtaining) the economic benefits from an asset.
3. Future economic benefits – may include revenue
from the sale of products or services, cost savings, or
other benefits resulting from the use of the asset by the
entity.
38
Recognition
An intangible asset shall be recognized if management can

demonstrate that:
1. The item meets the definition of intangible asset;
2. It is probable that the expected future economic
benefits will flow to the entity; and
3. The cost of the asset can be measured reliably.

39
Initial measurement
An intangible asset shall be measured initially at cost.

Measurement of cost depends on how the intangible asset is
acquired. Intangible assets may be acquired through:
1. Separate acquisition
2. Acquisition as part of a business combination
3. Acquisition by way of a government grant
4. Exchanges of assets
5. Internal generation

40
Separate acquisition
The cost of a separately acquired intangible asset

comprises:
1. Its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade
discounts and rebates; and
2. Any directly attributable cost of preparing the asset for
its intended use.

41
Acquisition as part of a business combination
• The cost of intangible asset acquired in a business

combination is its fair value at the acquisition date.

42
Acquisition by way of a government grant
Intangible assets acquired by way of government grant may

be recorded at either:
1. fair value
2. alternatively, at nominal amount or zero, plus direct
costs incurred in preparing the asset for its intended use

43
Exchanges of assets
• If the exchange has commercial substance, the intangible asset is initially
recognized using the following order of priority:
a. Fair value of the asset Given up (Plus cash Paid or minus cash received)
b. Fair value of the asset Received
c. Carrying amount of the asset Given up (Plus cash Paid or minus cash
received)
• If the exchange has lacks commercial substance, the intangible asset is initially
recognized using (c) above.
• An exchange transaction has a commercial substance if the expected

future cash flows from the asset received significantly differ from those of the
asset given up.
44
Internally generated intangible assets
The costs of self-creating an intangible asset are classified into:
a. Research costs – include costs of searching new knowledge
and identifying and selecting possible alternatives.
b. Development costs – include costs of designing from selected
alternative and using knowledge gained from research.
• If an entity cannot identify in which phase a cost is incurred, the cost

is regarded as incurred in research phase.

45
R&D Costs
1. Costs incurred in research phase are expensed immediately.
2. Costs incurred in development phase are expensed
immediately, unless they meet all of the following conditions for
capitalization:
(1) Technical feasibility,
(2) Intention to complete,
(3) Ability to use or sell,
(4) Probable economic benefits,
(5) Availability of adequate resources, and
(6) Measured reliably.

46
R&D Costs (continuation)
The following are not R&D expenses but rather regular expenses.
a. Costs incurred during commercial production:
i. Trouble-shooting during commercial production
ii. Periodic or routine design changes to existing products
iii. Modification of design for a specific customer
iv. Design, construction and operation of plant that is feasible for
commercial production
v. Engineering follow through in an early phase of commercial production
vi. Quality control during commercial production
b. Advertising and other marketing expenses
c. Training costs
(HINT: R&D expense relates to something that is still in the process of being invented. It
does not relate to periodic changes to an existing product . The following terms generally
indicate that a cost is not an R&D expense: ‘commercial,’ ‘customer,’ ‘advertising’ and
‘market’.) Conceptual Framework & Acctg.
47
Items of PPE used in R&D activities
• If the item of PPE can be used in various R&D activities or other

purposes, the cost of the PPE is capitalized and depreciated. The
amount of depreciation is included as R&D expense.
• If the item of PPE is can only be used on one specific R&D
project, the cost of the PPE is expensed immediately in its
entirety as R&D expense.

48
Items not recognized as intangible assets
• The cost of internally generated brands, mastheads,

publishing titles, customer lists, goodwill and items
similar in substance are expensed when incurred.

49
Subsequent expenditure
• Subsequent expenditures on an intangible asset are

generally recognized as expense.

50
Reinstatement of costs in subsequent period
• Expenditure on an intangible item that was initially

recognized as an expense shall not be recognized as part
of the cost of an intangible asset at a later date.

51
Measurement after recognition
• After initial recognition, an entity shall choose as its

accounting policy either the
a. Cost model, or
b. Revaluation model – applicable only if the intangible
asset has an active market.

52
Amortization
• Intangible assets with finite useful life are amortized

over the shorter of the asset’s useful life and legal life.
• Intangible assets with indefinite useful life are not
amortized but tested for impairment at least annually.
• The default method of amortization is the straight line
method.

53
BREAK
&
Lecture Aid
55
PAS 40 Investment Property
• Define an investment property.
• State the initial and subsequent measurements of
investment property.
• Apply the fair value model of accounting for

56
Investment property
• Investment property is “property (land or a building –
or a part of a building – or both) held (by the owner or
by the lessee under finance lease) to earn rentals or
for capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or
for administrative purposes; or
b. sale in the ordinary course of business.”
(PAS 40)

57
Investment property vs. PPE
Investment property Owner-occupied property

• Held to earn rentals or for • Held for use in the production
capital appreciation or both. or supply of goods or services
or for administrative purposes.
• Generates cash flows largely • Generates cash flows in
independently of the other conjunction with the other
assets held by an entity assets held by an entity.
• Includes only land and • May include assets other than
building land and building
• Accounted for under PAS 40 • Accounted for under PAS 16

58
Examples of investment property
a. Land held for long-term capital appreciation rather than for
short-term sale in the ordinary course of business.
b. Land held for a currently undetermined future use.
c. A building owned by the entity (or held by the entity under a
finance lease) and leased out under one or more operating
leases.
d. A building that is vacant but is held to be leased out under one or
more operating leases.
e. Property that is being constructed or developed for future use as
59
Examples of items that are not investment property
a. Property intended for sale in the ordinary course of business or
property acquired exclusively with a view to subsequent disposal
in the near future or for development and resale.
b. Property being constructed or developed on behalf of third
parties (PFRS 15 Revenue from Contracts with Customers).
c. Owner-occupied property (PAS 16) and owner-occupied property
awaiting disposal.
d. Property that is leased to another entity under a finance lease.

60
Property that is partly investment property and
partly owner-occupied
• If the portions could be sold separately (or leased out separately
under a finance lease), an entity accounts for the portions separately.
The portion being rented out under operating lease is classified as
investment property and the portion used as owner-occupied is
classified as property, plant, and equipment.
• If the portions could not be sold separately, the property is

investment property only if an insignificant portion is held for
use in the production or supply of goods or services or for
administrative purposes. If the owner-occupied portion is significant,
the entire property is classified as property, plant, and equipment.

61
Ancillary services to occupants
• When ancillary services are provided to the occupants of

a property held, the property is classified as investment
property if the services are insignificant to the
arrangement as a whole.

62
Measurement
• Initial: Cost
• Subsequent: Either the Cost model or Fair value

model

63
• The following are excluded from the cost of
investment property and are expensed
immediately:
a. Start-up costs (unless they are necessary to bring the
property to the condition necessary for it to be capable of
operating in the manner intended by management)
b. Operating losses incurred before the investment property
achieves the planned level of occupancy
c. Abnormal amounts of wasted material, labor or other
resources incurred in constructing or developing the
property

64
Change in accounting policy
• A change from the cost model to the fair value is

accounted for prospectively.
• A change from the fair value model to the cost model is
not permitted.

65
Determining fair value
• PAS 40 requires all entities to determine the fair value

of investment property whether it uses the cost model or
fair value model. Fair values determined are used for
measurement and disclosure purposes if the entity
uses the fair value model and for disclosure purposes
only if the entity uses the cost model.

66
Fair value model
• After initial recognition, an entity that chooses the fair value model
shall measure all of its investment property at fair value, except in
cases where the exemptions under PAS 40 applies.
• Changes in fair values are recognized in profit or loss.
• Depreciable assets classified as investment property measured
under fair value model are not depreciated.
• If the fair value of an item of investment property cannot be
determined reliably on initial recognition, such item is
subsequently measured under the cost model.

67
Cost model
• After initial recognition, an entity that chooses the cost model

shall measure all of its investment property at cost less any
accumulated depreciation and impairment losses in
accordance with PAS 16 Property, plant, and equipment.

68
Transfers
• Transfers to, or from, investment property shall be made when, and
only when, there is a change in use, evidenced by:
a. Commencement of owner-occupation, for a transfer from investment
property to owner-occupied property;
b. Commencement of development with a view to sale, for a transfer
from investment property to inventories;
c. End of owner-occupation, for a transfer from owner-occupied property
to investment property; or
d. Commencement of an operating lease to another party, for a transfer
from inventories to investment property.

69
BREAK
&
Lecture Aid
71
PAS 41 Agriculture
Learning Objectives
• Differentiate the following: biological assets, bearer
plants, agricultural produce and inventory.
• State the initial and subsequent measurement of
biological assets and agricultural produce.
• State the accounting for government grants that are
within the scope of PAS 41.

72
Scope
PAS 41 is applied to account for the following when they

relate to agricultural activity:
a. Biological assets, except for bearer plants.
b. Agricultural produce at the point of harvest; and
c. Unconditional government grants related to a biological
asset measured at its fair value less cost to sell

73
Scope - continuation
PAS 41 does not apply to the following:
a. Land (PAS 16 PPE and PAS 40 Investment Property)
b. Bearer plants related to agricultural activity (PAS 16). However,
PAS 41 applies to the produce on those bearer plants.
c. Government grants related to bearer plants (PAS 20 Acctg. for
Gov’t. Grants and Disclosure of Gov’t. Assistance).
d. Intangible assets (PAS 38 Intangible Assets).
• PAS 41 is applied to agricultural produce at the point of

harvest. After the point of harvest, PAS 2 Inventories or other
applicable standard is applied.
74
& Nature of asset Type of asset
• Living animal or plant Biological asset (PAS 41)
However, bearer plants are
classified as Property, Plant
and Equipment (PAS 16)
• Unprocessed harvested Agricultural produce
product (PAS 41)
• Processed harvested Inventory (PAS 2)

product

75
MOOOO!!!
LIVE COW - BIOLOGICAL ASSET

INVENTORY
INVENTORY
CARCASS - AGRICULTURAL PRODUCE INVENTORY

76
Consumable vs. Bearer biological assets
Biological assets are either consumable or bearer.
a. Consumable - those that are to be harvested as agricultural
produce or sold as biological assets. Ex. Timber
b. Bearer - those other than consumable biological assets. Ex.
Fruit tree
• PAS 41 applies to both consumable and bearer animals.

However, PAS 41 only to consumable plants but not to
bearer plants.

77
MAIZE PLANT – ANNUAL CROP
(CONSUMMABLE – PAS 41)
MANGO TREE
(BEARER PLANT – PAS 16)

78
Agricultural activity
• PAS 41 applies to biological assets, agricultural
produce and gov’t. grants only when they relate
to agricultural activity.
• Agricultural activity is the management by
an entity of the biological transformation of
biological assets for sale, into agricultural
produce, or into additional biological assets.

79
Common features of agricultural activity
a. Capability to change – Living animals and plants are capable of
biological transformation.
b. Management of change – Management facilitates biological
transformation by enhancing, or at least stabilizing, conditions
necessary for the process to take place.
• Harvesting from unmanaged sources is not agricultural
activity.
c. Measurement of change – The change in quality or quantity

brought about by biological transformation is measured and
monitored as a routine management function.

80
Recognition
A biological asset or agricultural produce is recognized when:
a. the entity controls the asset as a result of past events;
b. it is probable that future economic benefits associated with the
asset will flow to the entity; and
c. the fair value or cost of the asset can be measured reliably.

81
Measurement
• A biological asset shall be measured on initial recognition and at

the end of each reporting period at its fair value less costs to
sell.
• Agricultural produce harvested from an entity’s biological assets

shall be measured at its fair value less costs to sell at the
point of harvest. Such measurement is the cost at that date when
applying PAS 2 Inventories or another applicable standard.

82
Measurement - continuation
• A biological asset is measured at cost less accumulated

depreciation and accumulated impairment loss if the fair
value of the biological asset cannot be measured reliably on
initial recognition.

83
Definitions
• 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.
• Costs to sell are the incremental costs directly attributable to the
disposal of an asset, excluding finance costs and income taxes (e.g.,
Commissions to brokers, Levies by regulatory agencies and commodity
exchanges, and Transfer taxes and duties)
• Costs to sell do not include transport costs, advertising costs, income
taxes, and interest expense.
• If location is a characteristic of the biological asset, the price in the
principal (or most advantageous) market shall be adjusted for the
transport costs.

84
Gains and losses
• A gain or loss arising on initial recognition of a
biological asset at fair value less costs to sell and from
a change in fair value less costs to sell of a biological
asset shall be included in profit or loss for the period
in which it arises.

85
Government Grants
Nature of government grant Accounting procedure
F Government grant (a) is ü Recognize income equal to fair
unconditional and (b) relates to value of the grant when the
biological asset measured at grant becomes receivable.
FVLCS
F Government grant is conditional ü Recognize income only when

condition is met.
F Government grant relates to ü Account for the grant under PAS
biological asset measured at 20
cost
F Government grant is conditional ü Recognize income using
but a portion of the grant is straight-line method
retained according to the time
that has elapsed
86
Encouraged disclosures
Disclosure of the following information is encouraged but not required:
1) Disclosure of consumable and bearer biological assets.
2) Disclosure of mature and immature biological assets.
a. Mature biological assets are those that have attained harvestable
specifications or are able to sustain regular harvests.
b. Immature biological assets are those that have not yet attained
harvestable specifications or are not yet able to sustain regular harvests.
3) Disclosure of breakdown of total “Gain (loss) from changes in

FVLCS” during the period attributable to price change and
physical change

87
BREAK
&
Lecture Aid
89
PFRS 1 First-time Adoption of Philippine
Financial Reporting Standards
Learning Objectives
• Describe who a “first-time adopter” is and
what the “first PFRS financial statements” are.
• Describe the general requirements of PFRS 1.

90
First PFRS financial statements
• First PFRS financial statements are “the first annual

financial statements in which an entity adopts PFRSs, by
an explicit and unreserved statement of compliance with
PFRSs.” (PFRS 1.3)

91
• Financial statements are considered “First PFRS financial
statements” if the previous financial statements:
a. were prepared in accordance with other reporting standards not
consistent with the PFRSs; or
b. did not contain an explicit and unreserved statement of
compliance with PFRSs; or
c. contained an explicit and unreserved statement of compliance
with some, but not all, PFRSs; or
d. were prepared using some, but not all, applicable PFRSs; or
e. prepared in accordance with PFRSs but were used for internal
reporting purposes only; or
f. did not contain a complete set of financial statements as
required under PAS 1 Presentation of Financial Statements.
g. The entity did not present financial statements in previous
periods.

92
• PFRS 1 is applied only once.
• An entity presenting its first PFRS financial statements is called a
“first-time adopter.”

93
Recognition and measurement
• PFRS 1 requires an entity to prepare and present an opening

PFRS statement of financial position at the date of
transition to PFRSs.
• The date to transition to PFRSs is the beginning of the earliest
period for which an entity presents full comparative information
under PFRSs in its first PFRS financial statements. The application
of the PFRSs starts on this date.

94
Accounting policies
• The entity selects its accounting policies based on the latest

versions of PFRSs as at the current reporting date. The selected
polices are then applied to all financial statements presented
together with the first PFRS financial statements.

95
Retrospective application
• In general (but subject to some exceptions which will be discussed

momentarily), PFRS 1 requires retrospective application of the
accounting policies selected by the first-time adopter.

96
• PFRS 1 requires an entity to do the following in its opening PFRS
statement of financial position:
a. Recognize all assets and liabilities whose recognition is required
by PFRSs;
b. Not recognize items as assets or liabilities if PFRSs do not permit
such recognition;
c. Reclassify items recognized under previous GAAP that have
different classifications under PFRSs; and
d. Apply PFRSs in measuring all recognized assets and liabilities.
(PFRS 1.10)

97
Exceptions to the requirements of PFRS 1
• A first-time adopter is exempted from complying with the

“retrospective application” requirement of PFRS 1 if:
a. The cost of compliance exceeds the expected benefits.
b. Retrospective application requires management judgments about
past conditions after the outcome of a particular transaction is
already known.

98
Presentation and disclosure
• The first PFRS financial statements shall include at least one-year

comparative information.

99
&
Lecture Aid
100
BREAK
PFRS 2 Share-based Payments
Learning Objectives
• Define a share-based payment transaction.
• State the measurement basis for share-based
payment transactions with (a) non-employees and
(b) employees.
• Compute for the salaries expense on share-based
compensation plans.
• State the accounting for share-based transactions
with cash alternatives.
102
Scope of PFRS 2
1. Equity-settled share-based payment transaction – is a
transaction whereby an entity acquires goods or services and instead of
paying in cash the entity issues its own shares of stocks or share
options; or
2. Cash-settled share-based payment transaction – is a transaction

whereby an entity acquires goods or services and incurs an obligation
to pay cash at an amount that is based on the fair value of equity
instruments; or
3. Choice between equity-settled and cash-settled

103
• Equity instrument is a contract that evidences a
residual interest in the assets of an entity after
deducting all of its liabilities.

104
Core principle
• 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.

105
Recognition
• Goods and services received in share-based payment transactions
are recognized when the goods are received or as the services are
received. Goods or services received that do not qualify as
assets are recognized as expenses.
• The entity shall recognize:

a. A corresponding increase in equity if the goods or services were
received in an equity-settled share-based payment transaction,
or
b. A liability if the goods or services were acquired in a cash-
settled share-based payment transaction.

106
Equity-settled share-based payment transactions

107
• Equity instrument granted is the right (conditional or unconditional) to an
equity instrument of the entity conferred by the entity on another party
under a share-based payment arrangement.
• Measurement date is the date at which the fair value of the equity
instruments granted is measured for the purposes of PFRS 2.
a. For transactions with non-employees, the measurement date is the
date when the entity receives the good or service.
b. For transactions with employees and others providing similar
services, the measurement date is grant date.
• Grant date is the date at which the entity and the counterparty agree to a
share-based payment arrangement, being when the entity and the
counterparty have a shared understanding of the terms and conditions of
the arrangement.
108
• 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.

109
Share-based compensation plans
• 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 instrument and cash. Examples:
a. Employee share options (equity-settled)
b. Employee share appreciation rights (cash settled)
c. Compensation plans with a choice of settlement between (1)
and (2) above

110
Employee share option plans – equity settled
• 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 of
time. 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.

111
Measurement of compensation
• Since employee share option plan is a transaction with an

employee, the following order of priority shall be used to
measure the services received (salaries expense):
1. Fair value of equity instruments granted at grant date
2. Intrinsic value

112
Recognition of equity-settled share-based
compensation plans
1. If the share options granted vest immediately, salaries expense
shall be recognized in full with a corresponding increase in equity
at grant date.
2. 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 services are rendered by
the employee over the vesting period.
In the absence of evidence to the contrary, it shall be presumed that

the share options vest immediately.
113
Cash-settled share-based payment transactions
• A cash-settled share based payment transaction is one whereby an
entity acquires goods or services and incurs an obligation to pay
cash at an amount that is based on the fair value of equity
instruments.
• The goods or services acquired and the liability incurred on cash-

settled share-based payment transactions are measured at the fair
value of the liability.
• At the end of each reporting period and even on settlement date, the
liability shall be remeasured to fair value. Changes in fair value are
recognized in profit or loss.
114
Employee share appreciation rights (SARs) –
cash-settled
• A share appreciation right is 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 of
time.

115
Measurement of compensation
• 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.

116
Recognition of cash-settled share-based
compensation plans
a. If the share appreciation rights granted vest immediately, the

entity shall recognize the related compensation expense on the
services received in full with a corresponding increase in
liability at grant date.
b. If the share options granted do not vest until the employee

completes a specified period of service, the entity shall recognize
the services received, and a liability to pay for them, as the
employee renders service during that period.

117
Share-based payment transactions with cash
alternatives
• 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.

118
alternatives (Continuation)
• 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:
a. If the fair value of one settlement alternative is the same as the other, the
fair value of the equity component is zero, and hence the fair value of the
compound financial instrument is the same as the fair value of the debt
component.
b. 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.

119
alternatives (Continuation)
• If the entity has the right to choose settlement between cash (or other
assets) or equity instruments, the entity has not granted a compound
instrument.
• In such case, the entity shall determine whether it has a present
obligation to settle in cash and shall 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 settle in cash, it shall account
for the transaction as an equity-settled share-based payment
transaction.

120
END OF THE
SEMESTER
(TENTATIVE)

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CONCEPTUAL FRAMEWORK

• State the core principle of PAS 36.

FAR PART 1B: Zeus Vernon B. Millan

FAR PART 1B: Zeus Vernon B. Millan

• Recoverable amount is the amount to be recovered through

Value in use is the present value of the future cash flows

FAR PART 1B: Zeus Vernon B. Millan

• An entity shall assess at the end of each reporting period

• If there is no indication that an asset may be impaired,

FAR PART 1B: Zeus Vernon B. Millan

II. Internal sources of information

• The following assets are required to be tested for

FAR PART 1B: Zeus Vernon B. Millan

• Recoverable amount is the higher of the asset’s fair

FAR PART 1B: Zeus Vernon B. Millan

FAR PART 1B: Zeus Vernon B. Millan

1. Future restructurings not 1. Revenues to be derived

• Impairment loss is recognized in profit or loss, unless

FAR PART 1B: Zeus Vernon B. Millan

• After the recognition of an impairment loss, the

FAR PART 1B: Zeus Vernon B. Millan

• Cash-generating unit (CGU) is the smallest

FAR PART 1B: Zeus Vernon B. Millan

FAR PART 1B: Zeus Vernon B. Millan

• For purposes of impairment testing, goodwill acquired in

FAR PART 1B: Zeus Vernon B. Millan

• The impairment loss on a CGU shall be allocated

FAR PART 1B: Zeus Vernon B. Millan

CA if no IL had been recognized

• (d) – (c) = Reversal of impairment loss recognized in other

FAR PART 1B: Zeus Vernon B. Millan

• State the recognition criteria for provisions.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• A provision is recognized when all of the following conditions are

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• Where the effect of the time value of money is material,

Conceptual Framework & Acctg.

• Gains from the expected disposal of assets shall not be

Conceptual Framework & Acctg.

• Where some or all of the expenditure required in settling a

Conceptual Framework & Acctg.

• Provisions shall be reviewed at the end of each reporting

• If it is no longer probable that an outflow of resources

Conceptual Framework & Acctg.

• If a customer has the option to purchase a warranty

• If a customer does not have the option to purchase a warranty

Conceptual Framework & Acctg.

• A customer option to acquire additional goods or

Conceptual Framework & Acctg.

• A provision for the guarantee for indebtedness of others

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• Define an intangible asset.

Conceptual Framework & Acctg.

• Goodwill acquired in a business combination is outside

Conceptual Framework & Acctg.

1. Identifiability – separable or arises from contractual

An intangible asset shall be recognized if management can

Conceptual Framework & Acctg.

An intangible asset shall be measured initially at cost.

Conceptual Framework & Acctg.