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PFRS for SMEs


Overview:
PFRS for SMEs were adopted on October 13, 2009 by the Philippine Financial Reporting Standards Council (FRSC) from the International Financial Reporting Standards (IFRS) for Small and Medium-sized Entities issued by the International Accounting Standards Board (IASB). Prior to October 13, 2009, companies that qualified as non-publicly accountable entities (or NPAEs) under Philippine Accounting Standards (PAS) 101, Financial Reporting Standards for Non-publicly Accountable Entities, were permitted to apply the applicable financial reporting standards effective as of December 31, 2004, instead of full PFRSs. The Philippine Exchange Commission En Banc in its meeting of December 3, 2009 resolved to adopt the Philippine Financial Reporting Standards for Small and Medium-sized Entities (PFRS for SMEs) as part of its rules and regulations. The PFRS for SMEs is the first set of international accounting requirements developed specifically for small and medium-sized entities (SMEs). It has been prepared on PFRS foundations but is a stand-alone product that is separate from the full set of Philippine Financial Reporting Standards (IFRSs). The PFRS for SMEs has simplifications that reflect the needs of users of SMEs' financial statements and cost-benefit considerations. Compared with full PFRSs, it is less complex in a number of ways:

Topics not relevant to SMEs are omitted. Where full PFRSs allow accounting policy choices, the PFRS for SMEs allows only the easier

option.

Many of the principles for recognizing and measuring assets, liabilities, income and expenses in full PFRSs are simplified. Significantly fewer disclosures are required. And the standard has been written in clear, easily translatable language. To further reduce the reporting burden for SMEs, revisions to the PFRS will be limited to once every three years. It is suitable for all entities except those whose securities are publicly traded and financial institutions such as banks and insurance companies. The 230-page standard is a result of a five-year development process with extensive consultation of SMEs worldwide. Accompanying the standard is implementation guidance consisting of illustrative financial statements and a presentation and disclosure checklist. The PFRS for SMEs is available for any jurisdiction to adopt whether or not it has adopted the full PFRSs. It is

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Summary:
Section 1: Small and Medium-sized Entities The PFRS for SMEs defines small and medium-sized entities as entities that: (a) (b) do not have public accountability; and publish general purpose financial statements for external users.

An entity has public accountability if: It files, or it is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; or

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it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks. Section 2: Concepts and Pervasive Principles

Objective of SMEs' financial statements: To provide information about financial position, performance, cash flows .Also shows results of stewardship of management over resources Qualitative characteristics: (understandability, relevance, materiality, reliability, substance over form, prudence, completeness, comparability, timeliness, balance between benefit and cost) Definitions:
o o o o

Asset: Resource with future economic benefits Liability: Present obligation arising from past events, result in outflow of resources Income: Inflows of resources that increase equity, other than owner investments Expenses: Outflows of resources that decrease equity, other than owner withdrawals

Three items of other comprehensive income (OCI) in the PFRS for SMEs:
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Some foreign exchange gains and losses relating to a net investment in a foreign operation (see Section 30) Some changes in fair values of hedging instruments in a hedge of variable interest rate risk of a recognized financial instrument, foreign exchange risk or commodity price risk in a firm commitment or highly probable forecast transaction, or a net investment in a foreign operation (see Section 12) (Note that hedge accounting is optional) Some actuarial gains and losses (see Section 28) (Note that reporting actuarial gains and losses in OCI is optional)

Basic recognition concept: An item that meets the definition of an asset, liability, income, or expense is recognized in the financial statements if:
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it is probable that future benefits associated with the item will flow to or from the entity, and the item has a cost or value that can be measured reliably

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Basic measurement concepts
o o o o o

Historical cost and fair value are described Basic financial assets and liabilities are generally measured at amortized cost Other financial assets and liabilities are generally measured at fair value through profit or loss Non-financial assets are generally measured using a cost-based measure Non-financial liabilities are generally measured at settlement amount

Offsetting of assets and liabilities or of income and expenses is prohibited unless expressly required or permitted
Section 3: Financial Statement Presentation

Fair presentation: presumed to result if the PFRS for SMEs is followed (may be a need for supplemental disclosures) State compliance with PFRS for SMEs only if the financial statements comply in full Does include 'true and fair override' but this should be 'extremely rare' PFRS for SMEs presumes the reporting entity is a going concern SMEs shall present a complete set of financial statements at least annually At least one year comparative prior period financial statements and note data Presentation and classification of items should be consistent from one period to the next o Must justify and disclose any change in presentation or classification of items in financial statements Materiality: an omission or misstatement is material if it could influence economic Complete set of financial statements: o Statement of financial position o Either a single statement of comprehensive income, or two statements: an income statement and a statement of comprehensive income o Statement of changes in equity o Statement of cash flows o Notes If the only changes to equity arise from profit or loss, payment of dividends, corrections of errors, and changes in accounting policy, an entity may present a single (combined) statement of income and retained earnings instead of the separate statements of comprehensive income and of changes in equity (see Section 6) An entity may present only an income statement (no statement of comprehensive income) if it has no items of other comprehensive income (OCI) The only OCI items under the PFRS for SMEs are: Some foreign exchange gains and losses relating to a net investment in a foreign operation (see Section 30)

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o

Some changes in fair values of hedging instruments in a hedge of variable interest rate risk of a recognized financial instrument, foreign exchange risk or commodity price risk in a firm commitment or highly probable forecast transaction, or a net investment in a foreign operation (see Section 12) Some actuarial gains and losses (see Section 28)

Section 4 Statement of Financial Position


May still be called 'balance sheet' Current/non-current split is not required if the entity concludes that a liquidity approach produces more relevant information Some minimum line items required. These include: o Cash and equivalents o Receivables o Financial assets o Inventories o Property, plant, and equipment o Investment property at fair value o Intangible assets o Biological assets at cost o Biological assets at fair value o Investment in associates o Investment in joint ventures o Payables o Financial liabilities o Current tax assets and liabilities o Deferred tax assets and liabilities o Provisions o Non-controlling interest o Equity of owners of parent And some required items may be presented in the statement or in the notes o Categories of property, plant, and equipment o Info about assets with binding sale agreements o Categories of receivables o Categories of inventories o Categories of payables o Employee benefit obligations o Classes of equity, including OCI and reserves o Details about share capital Sequencing, format, and titles are not mandated

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Section 5 Statement of Comprehensive Income and Income Statement

One-statement or two-statement approach either a single statement of comprehensive income, or two statements: an income statement and a statement of comprehensive income Must segregate discontinued operations Must present 'profit or loss' subtotal if the entity has any items of other comprehensive income Bottom line ('profit or loss' in the income statement and 'total comprehensive income' in the statement of comprehensive income) is before allocating those amounts to noncontrolling interest and owners of the parent No item may be labeled 'extraordinary' o But unusual items can be separately presented o Expenses may be presented by nature (depreciation, purchases of materials, transport costs, employee benefits, etc) or by function (cost of sales, distribution costs, administrative costs, etc) either on face of the statement of comprehensive income (or income statement) or in the notes Single statement of comprehensive income:
o o o o o

Revenue Expenses, showing separately: finance costs profit or loss from associates and jointly controlled entities tax expense discontinued operations) Profit or loss (may omit if no OCI) Items of other comprehensive income Total comprehensive income (may label Profit or Loss if no OCI) of income and comprehensive income:

Separate statements Income Statement:


o

Bottom line is profit or loss (as above)

Statement of Comprehensive Income:


o o o

Begins with profit or loss Shows each item of other comprehensive income Bottom line is Total Comprehensive Income

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Section 6: Statement of Changes in Equity and Statement of Comprehensive Income and Retained Earnings

Shows all changes to equity including o total comprehensive income o owners' investments o dividends o owners' withdrawals of capital o treasury share transactions Can omit the statement of changes in equity if the entity has no owner investments or withdrawals other than dividends and elects to present a combined statement of comprehensive income and retained earnings

Section 7 Statement of Cash Flows

Presents information about an entity's changes in cash and cash equivalents for a period o Cash equivalents are short-term, highly liquid investments (expected to be converted to cash in three months) held to meet short-term cash needs rather than for investment or other purposes Cash flows are classified as operating, investing, and financing cash flows Option to use the indirect method or the direct method to present operating cash flows Interest paid and interest and dividends received may be operating, investing, or financing Dividends paid may be operating or investing Income tax cash flows are operating unless specifically identified with investing or financing activities Separate disclosure is required of some non-cash investing and financing transactions (for example, acquisition of assets by issue of debt) Reconciliation of components of cash

Section 8 Notes to the Financial Statements

Notes are normally in this sequence: o Basis of preparation (ie PFRS for SMEs) o Summary of significant accounting policies, including Information about judgments Information about key sources of estimation uncertainty o Supporting information for items in financial statements o Other disclosures Comparative prior period amounts are required by Section 3 (unless another section allows omission of prior period amounts)

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Section 9 Consolidated and Separate Financial Statements

Consolidated financial statements are required when a parent company controls another entity (a subsidiary). Control: Power to govern financial and operating policies to obtain benefits More than 50% of voting power: control presumed Control exists when entity owns less than 50% but has power to govern by agreement or statute, or power to appoint majority of the board, or power to cast majority of votes at board meetings Control can be achieved by currently exercisable options that, if exercised, would result in control A subsidiary is not excluded from consolidation because: o Investor is a venture capital organization o Subsidiary's business activities are dissimilar to those of parent or other subs o Subsidiary operates in a jurisdiction that imposes restrictions on transferring cash or other assets out of the jurisdiction However, consolidated financial statements are not required, even if a parent-subsidiary relationship exists if: o Subsidiary was acquired with intent to dispose within one year o Parent itself is a subsidiary and its parent or ultimate parent uses PFRSs or PFRS for SMEs Must consolidate all controlled special-purpose entities (SPEs) Consolidation procedures: o Eliminate intracompany transactions and balances o Uniform reporting date unless impracticable o Uniform accounting policies o Non-controlling interest is presented as part of equity o Losses are allocated to a subsidiary even if non-controlling interest goes negative Guidance on separate financial statements (but they are not required). o In a parent's separate financial statements, it may account for subsidiaries, associates, and joint ventures that are not held for sale at cost or fair value through profit and loss. Guidance on combined financial statements (but they are not required) If investor loses control but continues to hold some investment: o If the subsidiary becomes an associate, follow Section 14 o If the subsidiary becomes a jointly controlled entity, follow Section 15 o If investment does not qualify as an associate or jointly controlled entity, treat it as a financial asset under Sections 11 and 12

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Section 10 Accounting Policies, Estimates and Errors

If the PFRS for SMEs addresses an issue, the entity must follow the PFRS for SMEs If the PFRS for SMEs does not address an issue: o Choose policy that results in the most relevant and reliable information o Try to analogize from standards in the PFRS for SMEs o Or use the concepts and pervasive principles in Section 2 o Entity may look to guidance in full PFRSs (but not required) Change in accounting policy: o If mandated, follow the transition guidance as mandated o If voluntary, retrospective Change in accounting estimate: prospective Correction of prior period error: restate prior periods if practicable

Section 11 Basic Financial Instruments

PFRS for SMEs has two sections on financial instruments: o Section 11 on Basic Financial Instruments o Section 12 on Other FI Transactions Option to follow IAS 39 instead of sections 11 and 12 Even if PAS 39 is followed, make Section 11 and 12 disclosures (not PFRS 7 disclosures) Essentially, Section 11 is an amortized historical cost model o Except for equity investments with quoted price or readily determinable fair value. These are measured at fair value through profit or loss. Scope of Section 11 includes: o Cash o Demand and fixed deposits o Commercial paper and bills o Accounts and notes receivable and payable o Debt instruments where returns to the holder are fixed or referenced to an observable rate o Investments in nonconvertible and non-puttable ordinary and preference shares o Most commitments to receive a loan Initial measurement: o Basic financial assets and financial liabilities are initially measured at the transaction price (including transaction costs except in the initial measurement of financial assets and liabilities that are measured at fair value through profit or loss) unless the arrangement constitutes, in effect, a financing transaction. A financing transaction may be indicated in relation to the sale of goods or services, for example, if payment is deferred beyond normal business terms or is financed at a rate of interest that is not a market rate. If the arrangement constitutes a financing transaction, measure the financial asset or financial liability at the

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present value of the future payments discounted at a market rate of interest for a similar debt instrument. Measurement subsequent to initial recognition: o Debt instruments at amortized cost using the effective interest method o Debt instruments that are classified as current assets or current liabilities are measured at the undiscounted amount of the cash or other consideration expected to be paid or received (ie net of impairment) unless the arrangement constitutes, in effect, a financing transaction. If the arrangement constitutes a financing transaction, the entity shall measure the debt instrument at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. o Investments in non-convertible preference shares and non-puttable ordinary or preference shares: if the shares are publicly traded or their fair value can otherwise be measured reliably, measure at fair value with changes in fair value recognized in profit or loss measure all other such investments at cost less impairment Must test all amortized cost instruments for impairment or uncollectibility Previously recognized impairment is reversed if an event occurring after the impairment was first recognized causes the original impairment loss to decrease Guidance is provided on determining fair values of financial instruments o The most reliable is a quoted price in an active market o When a quoted price is not available the most recent transaction price provides evidence of fair value o If there is no active market or recent market transactions, a valuation technique may be used Guidance is provided on the effective interest method Derecognize a financial asset when: o the contractual rights to the cash flows from the financial asset expire or are settled; o the entity transfers to another party all of the significant risks and rewards relating to the financial asset; or o the entity, despite having retained some significant risks and rewards relating to the financial asset, has transferred the ability to sell the asset in its entirety to an unrelated third party who is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer. Derecognize a financial liability when the obligation is discharged, cancelled, or expires Disclosures: o Categories of financial instruments o Details of debt and other instruments o Details of derecognitions o Collateral
o

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o o

Defaults and breaches on loans payable Items of income and expense

Section 12 Additional Financial Instruments Issues

Financial instruments not covered by Section 11 (and, therefore, are within Section 12) are measured at fair value through profit or loss. This includes: o Investments in convertible and puttable ordinary and preference shares o Options, forwards, swaps, and other derivatives o Financial assets that would otherwise be in Section 11 but that have 'exotic' provisions that could cause gain/loss to the holder or issuer Hedge accounting involves matching the gains and losses on a hedging instrument and hedged item. o It is allowed only for the following kinds of risks: interest rate risk of a debt instrument measured at amortized cost foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction price risk of a commodity that it holds or in a firm commitment or highly probable forecast transaction to purchase or sell a commodity foreign exchange risk in a net investment in a foreign operation. o Section 12 defines the type of hedging instrument required for hedge accounting. o Hedges must be documented up front to qualify for hedge accounting o Section 12 provides guidance for measuring assessing effectiveness o Special disclosures are required

Section 13 Inventories

Inventories include assets for sale in the ordinary course of business, being produced for sale, or to be consumed in production Measured at the lower cost and estimated selling price less costs to complete and sell Cost is determined using: o specific identification is required for large items o option to choose FIFO or weighted average for others o LIFO is not permitted Inventory cost includes costs to purchase, costs of conversion, and costs to bring the asset to present location and condition Inventory cost excludes abnormal waste and storage, administrative, and selling costs If a production process creates joint products and/or by-products, the costs are allocated on a consistent and rational basis A manufacturer allocates fixed production overheads to inventories based on normal capacity

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Standard costing, retail method, and most recent purchase price may be used only if the result approximates actual cost Impairment write down to net realizable value (selling price less costs to complete and sell see Section 27)

Section 14 Investments in Associates

Associates are investments where significant influence exists. Significant influence is defined as the power to participate in the financial and operating policy decisions of the associate but where there is neither control nor joint control over those policies. Presumption that significant influence exists if investor owns 20% or more of the voting shares. Option to use: o Cost-impairment model (except if there is a published quotation then must use fair value through profit or loss) o Equity method (investor recognizes its share of profit or loss of the associate detailed guidance is provided) o Fair value through profit or loss Investments in associates are always classified as non-current assets

Section 15 Investments in Joint Ventures

For investments in jointly controlled entities, there is an option for the venturer to use: o Cost model (except if there is a published quotation then must use fair value through profit or loss) o Equity method (using the guidance in Section 14) o Fair value through profit or loss Proportionate consolidation is prohibited For jointly controlled operations, the venturer should recognize assets that it controls and liabilities it incurs as well as its share of income earned and expenses that are incurred For jointly controlled assets, the venturer should recognize its share of the assets and liabilities it incurs as well as income it earns and expenses that are incurred

Section 16 Investment Property


Investment property is investments in land, buildings (or part of a building), and some property interests in finance leases held to earn rentals or for capital appreciation or both Property interests that are held under an operating lease may be classified as an investment property provided the property would otherwise have met the definition of an investment property Mixed use property must be separated between investment and operating property

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If fair value can be measured reliably without undue cost or effort, use the fair value through profit or loss model Otherwise, an entity must treat investment property as property, plant and equipment using Section 17

Section 17 Property, Plant and Equipment


Historical cost-depreciation-impairment model only The revaluation model (as in PAS 16) is not permitted Section 17 applies to most investment property as well (but if fair value of investment property can be measured reliably without undue cost or effort then the fair value model in Section 16 applies) Section 17 applies to property held for sale there is no special section on assets held for sale. Holding for sale is an indicator of possible impairment. Measurement is initially at cost, including costs to get the property ready for its intended use Subsequent to acquisition, the entity uses the cost-depreciation-impairment model, which recognizes depreciation and impairment of the carrying amount The carrying amount of an asset, less estimated residual value, is depreciated over the asset's anticipated useful life. The method of depreciation shall be the method that best reflects the consumption of the asset's benefits over its life. Separate significant components should be depreciated separately. Component depreciation only if major parts of an item of PP&E have 'significantly different patterns of consumption of economic benefits' Review useful life, residual value, and depreciation rate only if there is a significant change in the asset or how it is used. Any adjustment is a change in estimate (prospective). Impairment testing and reversal follow Section 27

Section 18 Intangible Assets other than Goodwill

No recognition of internally generated intangible assets. Therefore: o Charge all research and development costs to expense o Charge the following items to expense when incurred: Costs of internally generated brands, logos, and masthead, start-up costs, training costs, advertising, and relocating of a division or entity Amortization model for intangibles that are purchased separately, acquired in a business combination, acquired by grant, and acquired by exchange of other assets Amortize over useful life. If the entity is unable to estimate useful life, then use 10 years. Review useful life, residual value, and depreciation rate only if there is a significant change in the asset or how it is used. Any adjustment is a change in estimate (prospective) Impairment testing follow Section 27

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Any revaluation of intangible assets is prohibited

Section 19 Business Combinations and Goodwill


Section does not apply to combinations of entities under common control Acquisition (purchase) method. Under this method: o An acquirer must always be identified o The cost of the business combination is measured. Cost is the fair value of assets given, liabilities incurred or assumed, and equity instruments issued, plus costs directly attributable to the combination o At the acquisition date, the cost is allocated to the assets acquired and liabilities and provisions for contingent liabilities assumed. The identifiable assets acquired and liabilities and provisions for contingent liabilities assumed are measured at their fair values. Any difference between cost and amounts allocated to identifiable assets and liabilities (including provisions) is recognized as goodwill or so-called 'negative goodwill'. All goodwill must be amortized. If the entity is unable to estimate useful life, then use 10 years. 'Negative goodwill' first reassess original accounting. If that is ok, then immediate credit to profit or loss Impairment testing of goodwill follow Section 27 Reversal of goodwill impairment is not permitted

Section 20 Leases

Scope includes arrangements that contain a lease [IFRIC 4] Leases are classified as either finance leases or operating leases. o Finance leases result in substantially all the risks and rewards incidental to ownership being transferred between the parties, while operating leases do not. o Substantially all risks and rewards of ownership are presumed transferred if: the lease transfers ownership of the asset to the lessee by the end of the lease term the lessee has a 'bargain purchase option' the lease term is for the major part of the economic life of the asset even if title is not transferred at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset the leased assets are of such a specialized nature that only the lessee can use them without major modifications the lessee bears the lessor losses if cancelled a secondary rental period at below market rates

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the residual value risk is borne by the lessee. Lessees finance leases: o The rights and obligations are to be recognized as assets and liabilities at fair value, or, if lower, the present value of the minimum lease payments. Any direct costs of the lessee are added to the asset amount recognized. Subsequently, payments are to be split between a finance charge and reduction of the liability. The asset should be depreciated either over the useful life or the lease term. Lessees operating leases: o Payments are to be recognized as an expense on the straight line basis, unless payments are structured to increase in line with expected general inflation or another systematic basis is better representative of the time pattern of the user's benefit. Lessors finance leases: o The rights are to be recognized as assets held, i.e. as a receivable at an amount equal to the net investment in the lease. The net investment in a lease is the lessor's gross investment in the lease (including unguaranteed residual value) discounted at the interest rate implicit in the lease. o For finance leases other than those involving manufacturer or dealer lessors, initial direct costs are included in the initial measurement of the finance lease receivable and reduce the amount of income recognized over the lease term. o If there is an indication that the estimated unguaranteed residual value used in computing the lessor's gross investment in the lease has changed significantly, the income allocation over the lease term is revised, and any reduction in respect of amounts accrued is recognized immediately in profit or loss. Lessors finance leases by a manufacturer or dealer: o A finance lease of an asset by a manufacturer or dealer lessor gives rise to two types of income: profit or loss equivalent to the profit or loss resulting from an outright sale of the asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts; and finance income over the lease term. o The sales revenue recognized at the commencement of the lease term by a manufacturer or dealer lessor is the fair value of the asset or, if lower, the present value of the minimum lease payments accruing to the lessor, computed at a market rate of interest. o The cost of sale recognized at the commencement of the lease term is the cost, or carrying amount if different, of the leased property less the present value of the unguaranteed residual value. The difference between the sales revenue and the cost of sale is the selling profit, which is recognized in accordance with the entity's policy for outright sales. o If artificially low rates of interest are quoted, selling profit shall be restricted to that which would apply if a market rate of interest were charged. Costs incurred

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by manufacturer or dealer lessors in connection with negotiating and arranging a lease shall be recognized as an expense when the selling profit is recognized. Lessors operating leases: o Lessors retain the assets on their balance sheet and payments are to be recognized as income on the straight line basis, unless payments are structured to increase in line with expected general inflation or another systematic basis is better representative of the time pattern of the user's benefit. Sale and leaseback: o If a sale and leaseback results in a finance lease, the seller should not recognize any excess as a profit, but recognize the excess over the lease term o If a sale and leaseback results in an operating lease, and the transaction was at fair value, the seller shall recognize any profits immediately.
o

Section 21 Provisions and Contingencies

Provisions: o Provisions are recognized only when (a) there is a present obligation as a result of a past event, (b) it is probable that the entity will be required to transfer economic benefits, and (c) the amount can be estimated reliably o The obligation may arise due to contract or law or when there is a constructive obligation due to valid expectations having been created from past events. However, these do not include any future actions that may create an expectation. Nor can expected future losses be recognized as provisions. o Initially recognized at the best possible estimate at the reporting date. This value should take into any time value of money if this is considered material. When all or part of a provision may be reimbursed by a third party, the reimbursement is to be recognized separately only when it is virtually certain payment will be received. o Subsequently, provisions are to be reviewed at each reporting date and adjusted to meet the best current estimate. Any adjustments are recognized in profit and loss while any unwinding of discounts is to be treated as a finance cost. Must accrue provisions for (examples): o Onerous contracts o Warranties o Restructuring if legal or constructive obligation to restructure o Sales refunds May NOT accrue provisions for (example): o Future operating losses, no matter how probable o Possible future restructuring (plan but not yet a legal or constructive obligation) Contingent liabilities: o These are not recognized as liabilities

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Unless remote, disclose an estimate of the financial effect, indications of the uncertainties relating to timing or amount, and the possibility of reimbursement Contingent assets: o These are not recognized as assets. o Disclose a description of the nature and the financial effect.
o

Section 22 Liabilities and Equity Guidance on classifying an instrument as liability or equity An instrument is a liability if the issuer could be required to pay cash Puttable financial instruments are only recognized as equity if it has all of the following features: o The holder is entitled to a pro rata share of the entity's net assets in the event of liquidation. o The instrument is the most subordinate class. o All financial instruments in the most subordinate class have identical features. o Apart from the puttable features the instrument includes no other financial instrument features. o The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the change in the value of the entity. Members' shares in co-operative entities and similar instruments are only classified as equity if the entity has an unconditional right to refuse redemption of the members' shares or the redemption is unconditionally prohibited by local law, regulation or the entity's governing charter. If the entity could not refuse redemption, the members' shares are classified as liabilities. Covers some material not covered by full PFRSs, including: o Original issuance of shares and other equity instruments. Shares are only recognized as equity when another party is obliged to provide cash or other resources in exchange for the instruments. The instruments are measured at the fair value of cash or resources received, net of direct costs of issuing the equity instruments, unless the time value of money is significant in which case initial measurement is at the present value amount. When shares are issued before the cash or other resources are received, the amount receivable is presented as an offset to equity in the statement of financial position and not as an asset. Any shares subscribed for which no cash is received are not recognized as equity before the shares are issued. o sales of options, rights and warrants o stock dividends and stock splits these do not result in changes to total equity but, rather, reclassification of amounts within equity. 'Split accounting' is required to account for issuance of convertible instruments o Proceeds on services: issue of Use convertible and other compound method financial Recognition - sale of the percentage of completion if instruments the outcomeare split between liability component equity component. The liability is measured of the transaction can be estimated reliably. and Otherwise use the cost-recovery method.

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at its fair value, and the residual amount is the equity component. The liability is subsequently measured using the effective interest rate, with the original issue discount amortized as added interest expense. o A comprehensive example of split accounting is included Treasury shares (an entity's own shares that are reacquired) are measured at the fair value of the consideration paid and are deducted from the equity. No gain or loss is recognized on subsequent resale of treasury shares. Minority interest changes that do not affect control do not result in a gain or loss being recognized in profit and loss. They are equity transactions between the entity and its owners. Dividends paid in the form of distribution of assets other than cash are recognized when the entity has an obligation to distribute the non-cash assets. The dividend liability is measured at the fair value of the assets to be distributed.
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Section 23 Revenue

Revenue results from the sale of goods, services being rendered, construction contracts income by the contractor and the use by others of your assets Some types of revenue are excluded from this section and dealt with elsewhere: o leases (section 20) o dividends from equity accounted entities (section 14 and 15) o changes in fair value of financial instruments (section 11 and 12) o initial recognition and subsequent re-measurement of biological assets (section 34) and initial recognition of agricultural produce (section 34) Principle for measurement of revenue is the fair value of the consideration received or receivable, taking into account any possible trade discounts or rebates, including volume rebates and prompt settlement discounts If payment is deferred beyond normal payment terms, there is a financing component to the transaction. In that case, revenue is measured at the present value of all future receipts. The difference is recognized as interest revenue. Recognition - sale of goods: An entity shall recognize revenue from the sale of goods when all the following conditions are satisfied: (a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods. (b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold. (c) the amount of revenue can be measured reliably. (d) it is probable that the economic benefits associated with the transaction will flow to the entity. (e) the costs incurred or to be incurred in respect of the transaction can be measured o For employees where shares only vest after a specific period of service has been reliably. completed, recognize the expense as the service is rendered.

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Recognition - construction contracts: Use the percentage of completion method if the outcome of the contract can be estimated reliably. Otherwise use the cost-recovery method. Recognition - interest: Interest shall be recognized using the effective interest method as described in Section 11 Recognition - royalties: Royalties shall be recognized on an accrual basis in accordance with the substance of the relevant agreement. Recognition - dividends: Dividends shall be recognized when the shareholder's right to receive payment is established. Appendix of examples of revenue recognition under the principles in Section 23 o Award credits or other customer loyalty plan awards need to be accounted for separately. The fair value of such awards reduces the amount of revenue initially recognized and, instead, is recognized when awards are redeemed.

Section 24 Government Grants


This section does not apply to any 'grants' in the form of income tax benefits All grants are measured at the fair value of the asset received or receivable Recognition as income: o Grants without future performance conditions are recognized in profit or loss when proceeds are receivable o If there are performance conditions, the grant is recognized in profit or loss only when the conditions are met

Section 25 Borrowing Costs


Borrowing costs are interest and other costs arising on an entity's financial liabilities and finance lease obligations All borrowing costs are charged to expense when incurred none are capitalized

Section 26 Share-based Payment


Basic principle: all share-based payment must be recognized Equity-settled: o Transactions with other than employees are recorded at the fair value of the goods and services received, if these can be estimated reliably o Transactions with employees or where the fair value of goods and services received cannot be reliably measured are measured with reference to the fair value of the equity instruments granted Cash-settled: o Liability is measured at fair value on grant date and at each reporting date and settlement date, with each adjustment through profit or loss.

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Share-based payment with cash alternatives: o Account for all such transactions as cash settled, unless the entity has a past practice of settling by issuing equity instruments or the option has no commercial substance because the cash settlement amount bears no relationship to, and is likely to be lower in value than, the fair value of the equity instrument. Fair value of equity instruments granted: o (a) Observable market price if available o (b) If no observable price, use entity-specific market data such as a recent share transaction or valuation of the entity o (c) If (a) and (b) are impracticable, directors must use their judgment to estimate fair value Certain government-mandated plans provide for equity investors (such as employees) to acquire equity without providing goods or services that can be specifically identified (or by providing goods or services that are clearly less than the fair value of the equity instruments granted). These are equity-settled share-based payment transactions within the scope of this section.

Section 27 Impairment of Assets

Inventories write down, in profit or loss, to lower of cost and selling price less costs to complete and sell, if below carrying amount. When the circumstances that led to the impairment no longer exist, the impairment is reversed through profit or loss. Other assets write down, in profit or loss, to recoverable amount, if below carrying amount. When the circumstances that led to the impairment no longer exist, the impairment is reversed through profit or loss. Recoverable amount is the greater of fair value less costs to sell and value in use If recoverable amount of an individual asset cannot be determined, measure recoverable amount of that asset's cash generating unit If an impairment indicator exists, the entity should review the useful life and the depreciation methods even though an impairment may not be recognized Simplified guidance on computing impairment of goodwill when goodwill cannot be allocated to cash generating units

Section 28 Employee Benefits

Short-term benefits: o Measured at an undiscounted rate and recognized as the services are rendered. o Other costs such as annual leave are recognized as a liability as services are rendered and expensed when the leave is taken or used. o Bonus payments are only recognized when an obligation exists and the amount can be reliably estimated. Post-Employment Benefits Defined Contribution Plans:

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Contributions are recognized as a liability or an expense when the contributions are made or due. Post-Employment Benefits Defined benefit plans o Recognize a liability based on the net of present value of defined benefit obligations less the fair value of any plan assets at balance sheet date. o The projected unit credit method is only used when it could be applied without undue cost or effort. o Otherwise, en entity can simplify its calculation: Ignore estimated future salary increases Ignore future service of current employees (assume closure of plan) Ignore possible future in-service mortality o Plan introductions, changes, curtailments, settlements: Immediate recognition (no deferrals) o For group plans, consolidated amount may be allocated to parent and subsidiaries on a reasonable basis o Actuarial gains and losses may be recognized in profit or loss or as an item of other comprehensive income but... No deferral of actuarial gains or losses, including no corridor approach All past service cost is recognized immediately in profit or loss Other Long-Term benefits: o The entity shall recognize a liability at the present value of the benefit obligation less any fair value of plan assets. Termination benefits: o These are recognized in profit and loss immediately as there are no future economic benefits to the entity.
o

Section 29 Income Tax


Requires a temporary difference approach, similar to PAS 12 Current tax: o Recognize a current tax liability if the current tax payable exceeds the current tax paid at that point in time. Recognize a current tax asset when current tax paid exceeds current tax payable or the entity has carried a loss forward from the prior year and this can be used to recover current tax in the current year. o Current tax assets and liabilities for current and prior periods are measured at the actual amount that is owed or the entity owes using the applicable tax rates enacted or substantively enacted at the reporting date. The measurement must include the effect of the possible outcomes of a review by the tax authorities. Deferred tax: o If an asset or liability is expected to affect taxable profit if it recovered or settled for its carrying amount, then a deferred tax asset or liability is recognized

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If the entity expects to recover an asset through sale, and capital gains tax is zero, then no deferred tax is recognized, because recovery is not expected to affect taxable profit o Temporary difference arises if the tax basis of such assets or liabilities is different from carrying amount o Tax basis assumes recovery by sale. Exception: No deferred tax on unremitted earnings of foreign subsidiaries and jointly controlled entities o Recognize deferred tax assets in full, with a valuation allowance o Criterion is that realization is probable (more likely than not) o Take uncertainty into account in measuring all current and deferred taxes assume tax authorities will examine reported amounts and have full knowledge of all relevant information o Deferred taxes are all presented as non-current Recognition of changes in current or deferred tax must be allocated to the related components of profit or loss, other comprehensive income and equity.
o

Section 30 Foreign Currency Translation


Functional currency approach similar to that in PAS 21 An entity's functional currency, is the currency of the primary economic environment in which it operates It is a matter of fact, not an accounting policy choice o A change in functional currency is applied prospectively from the date of the change To record a foreign currency transaction in an entity's functional currency: o On initial recognition, record the transaction by applying the spot rate at the date of the transaction. An average rate may be used, unless there are significant fluctuations in the rate. o At reporting date, translate foreign currency monetary items using the closing rate. For non-monetary items measured at historical cost, use the exchange at the date of the transaction. For non-monetary items measured at fair value, use the exchange at the date when the fair value was determined. o For monetary and non-monetary item translations, gains or losses are recognized where they were initially recognized either in profit or loss, comprehensive income, or equity Exchange differences arising from a monetary item that forms part of the net investment in a foreign operation are recognized in equity and are not 'recycled' through profit or loss on disposal of the investment Goodwill arising on acquisition of a foreign operation is deemed to be an asset of the subsidiary, and translated at the closing rate at year end An entity may present its financial statements in a currency different from its functional currency (a 'presentation currency'). If the entity's functional currency is not

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hyperinflationary, translation of assets, liabilities, income, and expense from functional currency into presentation currency is done as follows:
o o o

Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position Income and expenses are translated at exchange rates at the dates of the transactions All resulting exchange differences are recognized in other comprehensive income.

Section 31 Hyperinflation

An entity must prepare general price-level adjusted financial statements when its functional currency is hyperinflationary PFRS for SMEs provides indicators of hyperinflation but not an absolute rate. One indicator is where cumulative inflation approaches or exceeds 100% over a 3 year period. In price-level adjusted financial statements, all amounts are stated in terms of the (hyperinflationary) presentation currency at the end of the reporting period. Comparative information and any information presented in respect of earlier periods must also be restated in the presentation currency. All assets and liabilities not recorded at the presentation currency at the end of the reporting period must be restated by applying the general price index (generally an index published by the government). All amounts in the statement of comprehensive income and statement of cash flows must also be recorded at the presentation currency at the end of the reporting period. These amounts are restated by applying the general price index from the dates when they were recorded. The gain or loss on translating the net monetary position is included in profit or loss. However, that gain or loss is adjusted for those assets and liabilities linked by agreement to changes in prices.

Section 32 Events after the End of the Reporting Period


Adjust financial statements to reflect adjusting events events after the balance sheet date that provide further evidence of conditions that existed at the end of the reporting period. Do not adjust for non-adjusting events events or conditions that arose after the end of the reporting period. For these, the entity must disclose the nature of event and an estimate of its financial effect. If an entity declares dividends after the reporting period, the entity shall not recognize those dividends as a liability at the end of the reporting period. That is a non-adjusting event.

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Section 33 Related Party Disclosures

Disclose parent-subsidiary relationships, including the name of the parent and (if any) the ultimate controlling party. Disclose key management personnel compensation in total for all key management. Compensation includes salaries, short-term benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payments. Key management personnel are persons responsible for planning, directing and controlling the activities of an entity, and include executive and non-executive directors. Disclose the following for transactions between related parties: o Nature of the relationship o Information about the transactions and outstanding balances necessary to understand the potential impact on the financial statements o Amount of the transaction o Provisions for uncollectible receivables o Any expense recognized during the period in respect of an amount owed by a related party Government departments and agencies are not related parties simply by virtue of their normal dealings with an entity

Section 34 Specialized Activities Agriculture:


If the fair value of a class of biological asset is readily determinable without undue cost or effort, use the fair value through profit or loss model. If the fair value is not readily determinable, or is determinable only with undue cost or effort, measure the biological assets at cost less and accumulated depreciation and impairment. At harvest, agricultural produce is must be measured at fair value less estimated costs to sell. Thereafter it is accounted for an inventory.

Extractive industries:

Not required to charge exploration costs to expense, but must test for impairment Expenditure on tangible or intangible assets used in extractive activities is accounted for under Section 17 Property, Plant and Equipment and Section 18 Intangible Assets other than Goodwill An obligation to dismantle or remove items or restore sites is accounted for using Section 17 and Section 21 Provisions and Contingencies.

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Service concession arrangements:

Guidance is provided on how the operator accounts for a service concession arrangement. The operator either recognizes a financial asset or an intangible asset depending on whether the grantor (government) has provided an unconditional guarantee of payment or not. A financial asset is recognized to the extent that the operator has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services. An intangible asset is recognized to the extent that the operator receives a right or license to charge users for the public service.

Section 35 Transition to the PFRS for SMEs

First-time adoption is the first set of financial statements in which the entity makes an explicit and unreserved statement of compliance with the PFRS for SMEs: '...in conformity with the International Financial Reporting Standard for Small and Mediumsized Entities'. Can be switching from: o National GAAP o Full IFRSs o Or never published General Purpose Financial Statements in the past Date of transition is beginning of earliest period presented Select accounting policies based on PFRS for SMEs at end of reporting period of firsttime adoption o Many accounting policy decisions depend on circumstances not 'free choice' o But some are pure 'free choice' Prepare current year and one prior year's financial statements using the PFRS for SMEs But there are many exceptions from restating specific items o Some exceptions are optional o Some exceptions are mandatory And a general exemption for impracticability All of the special exemptions in PFRS 1 are included in the PFRS for SMEs

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PFRS for SMEs Simplifications:
(1) Topics not relevant to SMEs omitted : Earnings per share Interim financial reporting Segment reporting Special accounting for assets held for sale Insurance Contracts Where full PFRSs allow accounting policy choices, the PFRS for SMEs allows only the easier option: (3) (4) All borrowing costs are expensed All research and development costs are expensed No option to revalue property, plant and equipment or intangibles Cost-depreciation model is used for investments in real estate unless fair value is readily available without undue cost or effort No fair value option for financial instruments No presentation requirement for government grant No corridor approach option for unrecognized actuarial gain or losses Many of the principles for recognizing and measuring assets, liabilities, income and expenses in full PFRSs are simplified: Goodwill is amortized Cost model is used for associates and joint ventures (rather than equity method) No available-for-sale or held-to-maturity classes of financial assets No corridor approach for actuarial gains and losses Significantly fewer disclosures are required : Roughly 10% of the number required by full PFRS (3,000 to 300 disclosure requirement) (5) Simplified redrafting

(2)

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Summary of key differences between IFRS for SMEs and full IFRS

PFRS for SMEs


Scope

Full PFRS

all entities not qualified to use PFRS for Per IASB Entities that does not have Public SMEs except for: accountability Cooperatives Do not published general purpose Entities with assets and liabilities financial statements for external users below the size criteria Pre need companies Per SEC Notice: a. Have total assets of between P3 million and P350 million or total liabilities of between P3 million and P250 million; b. Are not required to file financial statements under SRC Rule 68.1 c. Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market; d. Are not holders of secondary licenses issued by a regulatory agency, such as banks, investment houses, finance companies, insurance companies, securities brokers/dealers, mutual funds and pre-need companies; and e. Are not public utilities.

Concepts pervasive principles

and Measurement bases: Items are usually accounted for at their historical cost. However, certain categories of financial instruments, investments in associates and joint ventures, investment property and agricultural assets are valued at fair value. All items other than those carried at fair value through profit or loss are subject to impairment.

The measurement bases include historical cost, current cost, realizable value and present value. The measurement basis most commonly adopted is historical cost. However, certain items are valued at fair value (for example, investment property, biological assets and certain categories of financial instrument).

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Qualitative characteristics: The principal qualitative characteristics that make the information provided in financial statements useful to users are understandability, relevance, materiality, reliability, substance over form, prudence, completeness, comparability, timeliness and achieving a balance between benefit and cost. The four qualitative characteristics under PFRS are understandability, relevance, reliability and comparability. Materiality is a sub characteristic of relevance. Substance over form, prudence and completeness are subcharacteristics of reliability.

Timeliness and balance between benefit Information is material if its omissions or and cost are defined as constraints on misstatement could influence the relevant and reliable information instead economic decisions of users made on the of as qualitative characteristics. basis of the financial statements. Materiality depends on the size of the omission or misstatement judged in the particular circumstances. Transition to The first-time adopter of the PFRS for PFRS for SMEs is an entity that presents its first SMEs/PFRS annual financial statements that conform with the PFRS for SMEs regardless of whether its previous accounting framework was full PFRS or another set of generally accepted accounting principles. The first-time adopter of PFRS is an entity that presents its first annual financial statements that conform to PFRS.

The mandatory exceptions are the same as in PFRS for SMEs; the optional exemptions are similar but not exactly the same as a result of differences First-time adoption requires full between the sections in the PFRS for retrospective application of the PFRS for SMEs and full PFRS. SMEs effective at the reporting date for an entitys first PFRS for SMEs financial statements. There are five mandatory exceptions, 12 optional exemptions and one general exemption to the requirement for retrospective application. The entity is not permitted to benefit more than once from the special first-time adoption measurement and restatement exemptions.

Mandatory exceptions: A first-time adopter does not change the In addition to the exceptions in PFRS for accounting that it followed previously for SMEs, full PFRS has a mandatory any of the following transactions: exception relating to assets classified as

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held for sale. Derecognition of financial assets and liabilities. Hedge accounting. Estimates. Discontinued operations. Measuring non-controlling interests. Optional exemptions: The following optional exemptions to the requirement for retrospective application are available for use, insofar as they are relevant to the entity: Business combinations. Share-based payment transactions. Fair value or revaluation as deemed cost for PPE, investment property or intangible assets. Cumulative translation differences. Separate financial statements. Compound financial instruments. Deferred income tax. A financial asset or an intangible asset accounted for in accordance with IFRIC 12. Extractive activities. Arrangements containing a lease. Decommissioning liabilities included in the cost of PPE.

Most of the exemptions in PFRS for SMEs are also applicable under full IFRS. There are additional exemptions such as borrowing costs and leases.

General exemption: The general exemption is on the ground of Not applicable. impracticability. Impracticable is defined in the glossary as being: When the entity cannot apply it after making every reasonable effort to do so.

Presentation financial statements

of In accordance with the PFRS for SMEs, an entity that has changes to equity during the periods for which financial statements are presented that arise only from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policy may present a single statement of income and retained earnings

The presentation simplification to present statement of income and retained earnings is not available to entities that report in accordance with full PFRSs.

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in place of the statement of comprehensive income and statement of changes in equity. The PFRS for SMEs does not have an equivalent requirement (ie in those circumstances an entity need not present a statement of financial position as at the beginning of the earliest comparative period). In accordance with full PFRSs, management includes a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements (see PAS 1 paragraph 10(f)).

The PFRS for SMEs does not require An entity that prepares its financial segment information to be presented in statements in compliance with full PFRS financial statements. must prepare segment information in accordance with PFRS 8 Operating Segments. The PFRS for SMEs does not require Similarly, some entities that prepare earnings per share to be presented in their financial statements in compliance financial statements. with full PFRS present earnings per share in accordance with PAS 33 Earnings per Share.

Statements of The PFRS for SMEs is drafted in plain financial position language and includes significantly less guidance on how to apply the principles. The PFRS for SMEs requires only two statements of financial position even in case of restatement or retrospective application Statement of Comprehensive Income and Income Statement The PFRS for SMEs has only three items of other comprehensive income (OCI) translating the financial statements of a foreign operation, some changes in fair values of hedging instruments and actuarial gains and losses of defined benefit plans. When financial statements are restated retrospectively full PFRSs require presentation of three statements of financial position. Full PFRSs have more items of comprehensive income (eg cumulative changes in the fair value of availablefor-sale financial assets and gains on the revaluation of property, plant and equipment and intangible assets).

Except for specified gains and losses on Full

PFRSs

require

reclassification

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hedging instruments (see Section 12 Other Financial Instrument Issues) the PFRS for SMEs does not permit reclassification. through profit or loss of some items of OCI (sometimes called recycling) when they become realized (eg those in respect of available-for-sale financial assets and the translation of foreign operations).

The PFRS for SMEs does not explicitly If the entity that applies full PFRSs require these additional disclosures of classifies its expenses by function, it is expenses by nature. also required to disclose information on the nature of expenses. Non -current asset held for sale and discontinued operations The PFRS for SMEs does not require separate presentation in the statement of financial position of non-current assets held for sale. However, paragraph 27.9 of the PFRS for SMEs identifies plans to discontinue or restructure the operation to which an asset belongs and plans to dispose of an asset before the previously expected date as internal sources of information that indicate that an asset may be impaired. The existence of such indicators compels the entity to perform an impairment test on the asset (ie compute its recoverable amount) (see paragraph 27.7). Paragraph 4.14 specifies disclosure requirements when, at the reporting date, an entity has a binding sale agreement for a major disposal of assets or a group of assets and liabilities. Full PFRSs (PFRS 5 Non-current Assets Held for Sale and Discontinued Operations) require a non-current asset held for sale (including the non-current assets of a discontinued operation) to be carried at the lower of its carrying amount and fair value less estimated costs to sell the asset. Full PFRSs also specify more detailed disclosures for discontinued operations.

Statement Changes Equity and Statement Income Retained Earnings Notes to financial statements

of On disposal of a foreign operation, the in PFRS for SMEs does not require reclassification through profit or loss of of any cumulative exchange differences that and were recognized previously in other comprehensive income. the The disclosure requirements in the PFRS for SMEs are substantially reduced when compared with the disclosure requirements in full PFRSs. The reasons for the reductions are of four principal types: (a) Some disclosures are not included

Full PFRS requires that reclassification to profit or loss of any cumulative foreign exchange difference recognized previously in other comprehensive income when there is disposal of foreign investment or net investment in foreign operations. More disclosure than PFRS for SMEs with approximately 3000 disclosure requirement including sensitivity analysis. For PFRS for SMEs, 300 disclosure or roughly 10% of the Full PFRSs disclosure requirement only.

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because they relate to topics covered in full PFRSs that are omitted from the PFRS for SMEs. (b) Some disclosures are not included because they relate to recognition and measurement principles in full PFRSs that have been replaced by simplifications in the PFRS for SMEs. (c) Some disclosures are not included because they relate to options in full PFRSs that are not included in the PFRS for SMEs. (d) Some disclosures are not included on the basis of users needs or cost-benefit considerations. Statement cash flows of Operating cash flows may be presented by using either the direct method (gross cash receipts and payments) or the indirect method (adjusting net profit or loss for nonoperating and non-cash Transactions, and for changes in working capital). Same as PFRS for SMEs; however, PFRS allows certain cash flows to be reported on a net basis. In addition, the direct method is encouraged.

Cash flows from investing and financing Same as PFRS for SMEs; however, activities are reported separately gross PFRS allows certain cash flows to be (that is, gross cash receipts and gross cash reported on a net basis. payments). Selection of accounting policies and hierarchy of other guidance When PFRS for SMEs does not address a transaction, other event or condition, management uses its judgment in developing and applying an accounting policy that results in information that is relevant and reliable. If there is no relevant guidance, management considers the following sources, in descending order: The requirements and guidance in PFRS for SMEs on similar and related issues; and The definitions, recognition criteria and measurement concepts for assets, liabilities and income and expenses. Similar to PFRS for SMEs; however, management considers PFRS as a source of information (and not PFRS for SMEs). In addition, management may consider the most recent pronouncements of other standardsetting bodies, other accounting literature and accepted industry practices to the extent that these do not conflict with the concepts in PFRS. With regard to the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses, reference is made to the Framework.

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Management may also, but is not required to, consider full PFRS.

Consolidated and separate financial statements


Requirements to prepare consolidated financial statements Parent entities prepare consolidated financial statements that include all subsidiaries. An exemption applies to a parent entity that is itself a subsidiary and the immediate or ultimate parent produces consolidated financial statements that comply with full PFRS or with PFRS for SMEs. A subsidiary is not excluded from the consolidation because: The investor is a venture capital organization or similar entity. Its business activities are dissimilar from those of other entities within the consolidation. It operates in a jurisdiction that imposes restrictions on transferring cash or other assets out of the jurisdiction. An entity is exempt from consolidation when on acquisition there is evidence that control is intended to be temporary and this entity is the only existing subsidiary. Scope of consolidated financial statements PFRS for SMEs focuses on the concept of control in determining whether a parent/subsidiary relationship exists. All subsidiaries are consolidated. Control is presumed to exist when a parent owns, directly or indirectly, more than 50% of an entitys voting power. Control also exists when a parent owns half or less of the voting power but has legal or contractual rights to control the majority of the entitys voting power or board of directors, or power to govern the financial and operating policies. Control can also be achieved by having Exemption applies to a parent entity: That is itself wholly-owned or if the owners of the minority interests have been informed about and do not object to the parents not presenting consolidated financial statements. When the parents securities are not publicly traded and the parent is not in the process of issuing securities in public securities markets; and When the PFRS does not allow exclusion of a subsidiary from the consolidation for the same reasons given in PFRS for SMEs, except that it does not specifically mention the exclusion due to the restriction in the transfer of funds to the parent company.

An entity is exempt from consolidation for a subsidiary that was acquired with an intention to dispose of it in the near future (which is accounted for in accordance with PFRS 5). Same as PFRS for SMEs; in addition, PFRS provides extensive guidance on potential voting rights, which are assessed. Instruments that are currently exercisable or convertible are included in the assessment.

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convertible instruments that are currently exercisable. Reporting periods The consolidated financial statements of the parent and its subsidiaries are usually drawn up at the same reporting date unless it is impracticable to do so. Similar to PFRS for SMEs; in addition, full PFRS specifies the maximum difference of the reporting periods (three months) and the requirement to adjust for significant transactions that occur in the gap period.

Business combinations
Business An integrated set of activities and assets conducted and managed for the purpose of providing either a return to investors or lower costs or other economic benefits directly and proportionately to policyholders or participants. All business combinations are accounted for by applying the purchase method. The steps in applying the purchase method are: 1. Identify the acquirer; 2. Measure the cost of the business combination; and 3. Allocate the cost of the business combination to the identifiable assets acquired and liabilities and contingent liabilities assumed at the acquisition date. Same as PFRS for SMEs, except that the integrated set of activities and assets need only to be capable of being conducted and managed to qualify as a business. The accounting under PFRS 3 (revised) is not a cost-allocation model. The fair value of acquired assets and liabilities (with some exceptions) is compared to the fair value of the consideration to determine goodwill. PFRS 3 (revised) defines negative goodwill as bargain purchase. In addition, the step-based accounting for a business combination includes an additional step that consists of remeasuring the previously held equity interest in the acquiree at its fair value at the acquisition date. Gains or losses are recorded in profit or loss. Similar to PFRS for SMEs; however, PFRS 3 (revised) does not have a costallocation model. The fair value of consideration transferred excludes the transaction costs (which are expensed) and requires re-measurement of the previously held interest at fair value as part of the consideration.

Purchase accounting

Cost acquisition

of The cost of a business combination includes the fair value of assets given, liabilities incurred or assumed and equity instruments issued by the acquirer, in exchange for the control of the acquiree, plus any directly attributable costs.

Adjustments to Contingent consideration is included as Contingent consideration is recognized the cost of a part of the cost at the date of the initially at fair value as either a financial business acquisition if it is probable (that is, more liability or equity regardless of the

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combination contingent on future events (contingent consideration) likely than not) that the amount will be probability of payment. The probability paid and can be measured reliably. of payment is included in the fair value, which is deemed to be reliably If such adjustment is not recognized at the measurable. Financial liabilities are reacquisition date but becomes probable measured to fair value at each reporting afterwards, the additional consideration date. Changes in the fair value of adjusts the cost of the combination. contingent consideration that are not measurement period adjustments are recognized either in profit or loss or in other comprehensive income. Equityclassified contingent consideration is not re-measured at each reporting date; its settlement is accounted for within equity. the The acquirer recognizes separately the a acquirees identifiable assets, liabilities and contingent liabilities that existed at the date of acquisition. These assets and liabilities are generally recognized at fair value at the date of acquisition. Similar to PFRS for SMEs; however, the exception to fair value measurement also applies for reacquired rights (based on contractual terms), replacement of share-based payment awards (in accordance with PFRS 2), income tax (PAS 12, Income taxes), employees benefits (PAS 19, Employee benefits) and indemnification assets. Amortization of goodwill is not permitted. Goodwill is subject to an impairment test annually and when there is an indicator of impairment. The option provided by full PFRS to measure the non-controlling interest using either fair value method or proportionate share method on each transaction may result in a different goodwill amount.

Allocating cost of business

Goodwill

Goodwill (the excess of the cost of the business combination over the acquirers interest in the net fair value of the identifiable assets, liabilities and contingent liabilities) is recognized as an intangible asset at the acquisition date. After initial recognition, the goodwill is measured at cost less accumulated amortization and any accumulated impairment losses. Goodwill is amortized over its useful life, which is presumed to be 10 years if the entity is unable to make a reliable estimate of the useful life.

Negative goodwill

Negative goodwill is recognized in profit Similar to PFRS for SMEs; PFRS 3 or loss immediately after management has (revised) uses the term gain on bargain reassessed the identification and purchase instead of negative goodwill. measurement of identifiable items arising on acquisition and the cost of the business combination. Financial Instruments

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Accounting policy choice Under the PFRS for SMEs an entity shall Not applicable choose to account for all of its financial instruments either: (a) by applying the provisions of both Section 11 and Section 12 in full, or (b) by applying the recognition and measurement provisions of PAS 39 Financial Instruments: Recognition and Measurement and the disclosure requirements of Section 11 and Section 12. If an entity chooses to apply (b) The primary difference between applying (b) and applying full PFRSs are regarding the disclosure requirements. Section 11 includes the great majority of the significance disclosures that are in PFRS 7. However, the PFRS for SMEs includes only some of the risk disclosures that are in PFRS 7. The risk disclosures not explicitly included in the PFRS for SMEs include: disclosures appropriate for financial institutions (who are not eligible to use the PFRS for SMEs), disclosures appropriate for companies whose securities trade in public capital markets (again, ineligible to use the PFRS for SMEs), or in the case of disclosure of fair values for all financial instruments measured at amortized cost, requiring such disclosures would be burdensome for small or medium-sized entities and contrary to the objective of Section 11, which is an amortized cost section for basic financial instruments. If an entity chooses to apply (a) There are many differences between Section 11 and full PFRSs, including the disclosure differences mentioned for (b) above. Other main differences at 9 July 2009 include:

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Classification of Under Section 11, financial instruments financial that meet specified criteria are measured instruments at cost or amortized cost, with an exemption for a few instruments which are measured at fair value through profit or loss. The fair value option, and the available-for-sale and held-to-maturity classifications in PAS 39 are not available. This therefore removes the requirement to assess managements intentions regarding financial instruments and avoids the need for accounting penalties in Section 11 (eg tainting provisions for held-to-maturity assets). Initial recognition Section 11 requires instruments to be measured at transaction price unless the arrangement constitutes a financing transaction, in which case the cash flows from the instrument are discounted. At the end of each reporting period, basic debt instruments are measured at amortized cost using the effective interest method. Commitments to receive a loan are measured at cost less impairment. Investments in non-convertible and nonputtable ordinary shares or preference shares are measured at fair value through profit or loss if fair value can be measured reliably, otherwise at cost less impairment. PAS 39 distinguishes four measurement categories of financial instruments: Financial assets or financial liabilities at fair value through profit or loss. Held-to-maturity investments. Loans and receivables. Available-for-sale financial assets.

Under PAS 39, financial instruments are initially measured at fair value. In practice, the different terminology is unlikely to result in any significant difference in value on initial recognition. Financial instruments classified as held for trading and designated as at fair value through profit or loss are measured at fair value through profit or loss. Held-to-maturity investments and loans and receivables are measured at amortized cost. Financial liabilities other than those at fair value through profit or loss are measured at amortized cost. Available-for-sale investments are measured at fair value with changes in fair value recorded in equity. Investments in equity securities whose fair value cannot be measured reliably are measured at cost less impairment.

Subsequent measurement

Impairment of financial instruments measured at cost or amortized cost

General: At the end of each reporting period, financial assets measured at cost or amortized cost are reviewed for objective evidence of impairment.

Similar to PFRS for SMEs except for the following: Impairment review also needs to be performed for available-for-sale financial assets carried at fair value Impairment losses are recognized in profit through equity.

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or loss immediately. If the objective Impairment losses on equity evidence reverses in a subsequent period, investments carried at cost and impairment losses are reversed in the available-for-sale equity profit or loss of subsequent periods. Assets measured at cost less impairment: For an instrument measured at cost less impairment, the impairment loss is the difference between the assets carrying amount and the best estimate of the amount that the entity would receive for the asset if it were to be sold. Criteria for hedge accounting In order to apply hedge accounting, management prepares documentation at the inception of the relationship. This documentation clearly identifies the risk being hedged, the hedging instrument, and the hedged item.

The impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

PAS 39 also requires documentation of a hedging relationship at inception. This documentation includes the hedged item and hedging instrument similar to the PFRS for SMEs guidance. PAS 39 also requires an entity to document the risk management objective and strategy for Only certain risks and hedging undertaking the hedge. instruments are permitted, as described in more detail below. PAS 39 allows more risks and portions of hedged items to be designated than In addition, management should expect the SME guidance (see below). PAS 39 the hedging instrument to be highly allows a broader array of hedging effective in offsetting the designated instruments than the SME guidance. hedged risk in order to apply hedge PAS 39 requires management to accounting. document a method of effectiveness testing and to perform a prospective effectiveness test at the inception of the hedge to demonstrate that the relationship will be highly effective during its life. Hedge accounting is permitted for the risk hedged as: An interest rate risk of a debt instrument measured at amortized cost; A foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction; A foreign exchange risk in a net investment in a foreign operation; or A price risk of a commodity. PAS 39 permits three types of hedging relationship: Cash flow hedges. Fair value hedges. Hedges of a net investment in a foreign operation. PAS 39 restricts the risks or portions in a financial instrument that can be hedged based on a principal that those risks or portions must be separately identifiable

Risks for which hedge accounting is permitted

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components of the financial instrument, and changes in the cash flows or fair value of the entire financial instrument arising from changes in the designated risks and portions must be reliably measurable. A broader array of risks is therefore eligible for hedging under PAS 39 (for example, equity price risk and one-sided risks). PAS 39 allows a group of similar items to be designated as a hedged item. Hedging instruments for which hedge accounting is permitted A hedging instrument: Is an interest rate swap, a foreign currency swap, a foreign currency forward exchange contract, or a commodity forward exchange contract. Involves a party external to the reporting entity. Has a notional amount equal to the designated amount of principal or notional amount of the hedged item. Has a specified maturity date no later than the maturity of the hedged item, the expected settlement of the commodity purchase or sale commitment, or the occurrence of the highly probable forecast transaction. Has no pre-payment, early termination or extension features. IAS 39 permits hedging instruments to be: Derivatives that are not net written options. Non-derivative assets or liabilities used as a hedge of foreign currency risk. Management is permitted to separately designate the intrinsic value of an option or the spot component of a forward contract. PAS 39 therefore allows a broader array of hedging instruments to be used (for example, interest rate collars, purchased options and foreign currency borrowings). IAS 39 does not require the notional amount of the hedging instrument to be equal to the hedged item. PAS 39 does not require the hedging instrument to have a maturity corresponding to the hedged item as long as the entity can demonstrate that the hedging instrument would be highly effective. PAS 39 does not restrict pre-payment, early termination or extension features in hedging instruments only where they make the hedging instrument a net written option. However, such features may impact the effectiveness of the

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relationship. PAS 39 allows groups of derivatives or a non-derivative and derivative to be designated as a combined hedging instrument in certain cases. PAS 39 allows a single hedging instrument to be designated as a hedge of multiple risks. Effectiveness testing PFRS for SMEs does not quantitative assessments of effectiveness. require The entity is required to perform hedge quantitative retrospective and prospective effectiveness tests at least once per reporting period. A specific method for testing effectiveness is not defined, but the entity documents its chosen method as part of the hedging documentation.

Hedges of variable interest rate risk, foreign exchange risk, commodity price risk and net investment in a foreign operation

Where an entity designates the hedging relationship and it complies with the conditions above, it recognizes in profit or loss any excess of the fair value of the hedging instrument over the change in the fair value of the expected cash flows (hedge ineffectiveness). The effective part is recognized in other comprehensive income.

Similar to PFRS for SMEs, except that : PAS 39 specifies that the amounts recognized in other comprehensive income are based on cumulative changes in the fair value of the hedging instrument and hedged risk. PAS 39 contains a policy choice relating to the situation where the hedge of a forecast transaction results in recognition of a nonfinancial asset or The amount recognized in other liability. comprehensive income is recognized in profit or loss when the hedged item affects profit or loss or when the hedging relationship ends. Hedge accounting is discontinued when: The hedging instrument expires, is sold or terminated. The hedge no longer meets the criteria for hedge accounting. The entity revokes the designation. The amounts deferred in other comprehensive income on discontinuance of the hedge are recognized in profit or loss as soon as the hedged item is derecognized or as soon as a forecast transaction is no longer expected to take place.

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NON FINANCIAL ASSETS Inventory For cost-benefit reasons, Section 25 Borrowing Costs of the PFRS for SMEs requires such costs to be charged to expense. PAS 23 Borrowing Costs requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (including some inventories) to be capitalized as part of the cost of the asset.

Inventories are subsequently valued at the Same as PFRS for SMEs; however, PAS lower of cost and selling price less costs 2 refers to net realizable value. to complete and sell. Inventories are assessed for impairment at each reporting date. Investment property Initial measurement: The cost of a purchased investment property is its purchase price plus any directly attributable costs such as professional fees for legal services, property transfer taxes and other transaction costs. Borrowing costs are recognized as an expense. Subsequent measurement: Investment property is carried at fair value if its fair value can be measured reliably without undue cost or effort. Otherwise, the cost model is used. Similar to PFRS for SMEs except for borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are required to be capitalized as part of the cost of that asset.

Management may choose as its accounting policy to carry all its investments properties at fair value or at cost. However, when an investment property is held by a lessee under an operating lease, the entity follows the fair value model for all its investment properties. An entity following the cost depreciation-impairment model is required to provide supplemental disclosure of the fair value of its investment property.

Unlike PAS 40, the PFRS for SMEs does not require disclosure of the fair values of investment property measured on a cost basis.

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Transfers: Transfer to or from investment properties applies when the property meets or ceases to meet the definition of an investment property. Full PFRS includes further guidance on the situations when a property can be transferred to or from the investment property category.

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Property, Plant Initial recognition: and Equipment PPE is measured initially at cost. Cost includes: Purchase price. Any directly attributable costs to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The initial estimate of costs of dismantling and removing the item and restoring the site on which it is located. Borrowing costs are recognized as an expense. Full PFRSs permit an option to use the Subsequent measurement: Classes of PPE are carried at cost less revaluation model for the measurement accumulated depreciation and any of property, plant and equipment after impairment losses (cost model). initial recognition. Depreciable amount and depreciation period: The depreciable amount of an asset is allocated over its useful life. The residual value and the useful life of an asset are reviewed if there is an indication of change since the last reporting date and amended if expectation Non-current assets held for sale: A plan to dispose of an asset is an indicator of impairment that triggers the calculation of the assets recoverable amount for the purpose of determining whether the asset is impaired. The depreciable amount of an asset is allocated over its useful life. The residual value and the useful life of an asset are reviewed at least at each annual reporting date and amended if expectations differ from previous estimates. Similar to PFRS for SMEs, except that borrowing costs that are directly attributable to the acquisition, construction or productions of a qualifying asset are required to be capitalized as part of the cost of that asset.

Similar to PFRS for SMEs. In addition, PPE is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Assets held for sale, which are not depreciated, are measured at the lower of its carrying amount and fair value less costs to sell.

Investment

in Accounting policy:

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associate The PFRS for SMEs permits an entity to account for investment in associates in its primary financial statements using three different modelsthe equity method, the cost model and the fair value model. The chosen model is applied to all investments in associates. Full PFRSs require investments in associates to be accounted for using the equity method in an investors primary financial statements.

Full PFRSs does not Amortization of goodwill: Under the equity method, the PFRS for amortization of goodwill. SMEs requires that implicit goodwill be systematically amortization throughout its expected useful life. Investment joint venture in Accounting policy: The PFRS for SMEs permits an entity to choose to account for investments in jointly controlled entities in its primary financial statements using one of three different modelsthe equity method, the cost model and the fair value model. The chosen model is applied to all its investments in jointly controlled entities. Proportionate consolidation method is not applicable.

allow

the

Full PFRSs require investments in jointly controlled entities to be accounted for using the equity method in an investors primary financial statements or proportionate consolidation (an accounting policy choice).

Amortization of goodwill: Under the equity method, the PFRS for Full PFRSs does not SMEs requires that implicit goodwill be amortization of goodwill. systematically amortization throughout its expected useful life.

allow

the

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Intangible other goodwill asset Research and development costs: Research costs are expensed as incurred. than All research and development costs are Development costs are capitalized when recognized as an expense. specific criteria are met.

Measurement after initial recognition: Intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses (cost model).

In addition to the cost model, the revaluation model is an option, in which intangible assets are carried at a revalued amount less any accumulated depreciation and subsequent accumulated impairment losses.

Useful life: The useful life of an intangible asset is considered to be finite. The useful life of an intangible asset that arises from contractual or other legal rights should not exceed the period of the contractual or other legal rights but may be shorter depending on the period over which the asset is expected to be used.

The useful life of an intangible asset is either finite or indefinite. The useful life is regarded as indefinite when, based on analysis of all of the relevant factors; there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows. Similar to PFRS for SMEs with regard to the useful life of an intangible asset that arises from contractual or other legal rights, except that renewal periods may be taken into account if certain criteria are met.

Intangible assets with finite useful life: Intangible assets are amortized on a systematic basis over the useful lives of the intangibles. The useful life of an intangible is presumed to be 10 years if a reliable estimate cannot be made.

Intangible assets with finite useful life (including those that are revalued) are amortized. Amortization is carried out on a systematic basis over the useful lives of the intangibles.

The residual value at the end of their Same as PFRS for SMEs with regard to useful lives is assumed to be zero, unless the residual value of such assets. there is either a commitment by a third party to purchase the asset and/or there is an active market for the asset. The amortization period, method and The amortization period, method and

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residual value are reviewed if there is an residual value are reviewed at least at indication of change since the last each annual reporting period. reporting date. Changes in the amortization period/method are accounted for as a change in estimate.

Intangible assets with indefinite useful These assets are not amortized. life: Not applicable. All intangible assets are The useful life assessment is reviewed at considered to have finite lives. each annual reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment. Change in the useful life assessment from indefinite to finite is an indicator that an asset may be impaired and is accounted for as a change in estimate.

Impairment: Intangible assets are tested for impairment when there is an indication that the asset may be impaired. Existence of impairment indicators is assessed at each reporting date.

Same as PFRS for SMEs. In addition, intangibles with indefinite useful lives are tested for impairment annually irrespective of whether there is an indication of impairment.

Impairment of Non-financial assets:


Scope Assets are subject to an impairment test according to the requirements outlined below, with the following exceptions: Deferred tax assets. Employee benefit assets. Financial assets. Wording similar to PFRS for SMEs. Accounting result likely to be the same. In addition to the assets excluded from the scope of PFRS for SMEs, full PFRS excludes the following assets: Inventories. Deferred acquisition costs

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Investment property carried at fair value. Intangibles arising from contractual Biological assets carried at fair value rights under insurance contracts. less estimated cost to sell Non-current assets classified as held for sale in accordance with PFRS 5. Impairment losses An impairment loss is recognized Same as PFRS for SMEs, unless the immediately in the profit or loss. asset is carried at revalued amount in accordance with another standard. In this case, the impairment loss is treated as a revaluation decrease in accordance with that other standard. Assets (including goodwill) are tested for impairment when there is an indication that the asset may be impaired. The existence of impairment indicators is assessed at each reporting date. The following assets are tested for impairment irrespective of whether there is indication of impairment: Intangible assets with an indefinite useful life or an intangible asset not yet available for use. Goodwill. All other assets: same as PFRS for SMEs. Indicators of impairment External indicators of impairment include a decline in an assets market value, significant adverse changes in technological, market, economic or legal environment and increases in market interest rates. Internal indicators include evidence of obsolescence or physical damage of an asset, changes in the way an asset is used (for example, due to restructuring or discontinued operations) or evidence from internal reporting that the economic performance of an asset is, or will be, worse than expected. Allocation goodwill of Goodwill is allocated to the CGUs that are Goodwill acquired in a business expected to benefit from the synergies of combination is allocated to the CGUs the combination. that are expected to benefit from the synergies of the combination. If such allocation is not possible and the reporting entity has not integrated the PAS 36 includes comprehensive acquired business, the acquired entity is guidance on how to allocate goodwill measured as a whole when testing under several circumstances. goodwill impairment. If such allocation is not possible and the acquired business is Goodwill is tested for impairment at the Same as PFRS for SMEs. An additional indicator exists when the entitys net asset value is above its market capitalization.

Annual assessment of indicators

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integrated, the entire group is considered lowest level at which it is monitored by when testing goodwill impairment. management. CGUs may be grouped for testing, but the grouping cannot be Note: integrated means that the acquired higher than an operating segment as business has been restructured or defined in PFRS 8 (before aggregation). dissolved into the reporting entity or other subsidiaries Reversal impairment of At each reporting date after recognition of the impairment loss, an entity assesses whether there is any indication that an impairment loss may have decreased or may no longer exist. The impairment loss is reversed if the recoverable amount of an asset (CGU) exceeds its carrying amount. The amount of the reversal is subject to certain limitations. Goodwill reversed. impairment can never be Similar to PFRS for SMEs; however, includes more detailed guidance and distinction of reversal of impairment for an individual asset, a CGU and goodwill.

Non financial liabilities and equity Leases Operating lease: When the payments to the lessor are structured to increase in line with expected general inflation (based on published indexes or statistics) to compensate for the lessors expected inflationary cost increases the PFRS for SMEs does not require a lessee or lessor to recognize lease payments under operating leases on a straight-line basis. Similar to PFRS for SMEs, except for the expected inflation adjustments which is not part of the exception to use straight line basis.

Provisions and Scope of the standard: Contingencies The section on provisions does not apply to provisions that arise from: Leases. Construction contracts. Employee benefits obligations. Income taxes. Revenue

Similar to PFRS for SMEs; however, includes additional scope exclusions such as executory contracts.

Recognition: The revenue section captures all Same as PFRS for SMEs; however revenue transactions within one of four includes a separate standard broad categories: construction contracts. Sale of goods. Rendering of services.

for

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Use by others of an entitys assets (yielding interest, royalties, etc). Construction contracts. Revenue recognition criteria for each of these categories include the probability that the economic benefits associated with the transaction will flow to the entity and that the revenue and costs can be measured reliably. Additional recognition criteria apply within each broad category. The principles laid out within each of the categories are generally to be applied without significant further requirements and/or exceptions. Government grants Scope: In the PFRS for SMEs, Section 24 applies In full PFRSs, PAS 41 specifies to all government grants. requirements for government grants that are related to a biological asset measured at fair value less costs to sell and PAS 20 applies to all other government grants.

Recognition and measurement: Under Section 24, a government grant is not recognized until the conditions are actually satisfied.

PAS 20 requires that government grants should not be recognized until there is reasonable assurance that the entity will comply with the conditions attaching to them and the grants will be received. PAS 20 requires government grants to be recognized as income over the periods necessary to match them with the related costs for which they are intended to compensate, on a systematic basis. Under PAS 20, an entity that receives a non-monetary grant is permitted to measure both the asset and the grant either at a nominal amount (often zero) or at the fair value of the non-monetary asset.

Section 24 does not allow an entity to match the grant with the expenses for which it is intended to compensate or the cost of the asset that it is used to finance.

Non monetary Grant: Under Section 24 all government grants, including non-monetary government grants, must be measured at the fair value of the asset received or receivable. Section 24 does not contain any requirements for the measurement and recognition of the related asset and hence that asset should be accounted for under the applicable section of the IFRS for SMEs.

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Presentation: The PFRS for SMEs does not specify any methods for the presentation of government grants. However deducting a government grant in arriving at the carrying amount of the related asset in the statement of financial position (one of the options under PAS 20) would not be consistent with the requirements in other sections of the PFRS for SMEs for accounting for those assets. In any case, the PFRS for SMEs requires disclosure of how government grants are presented in financial statements. PAS 20 has specific requirements for the presentation of government grants. PAS 20 permits two methods for the presentation of government grants related to assets in the statement of financial positioneither setting up a government grant as deferred income or deducting the government grant in arriving at the carrying amount of the related asset. PAS 20 also permits two methods for the presentation of government grants related to income in the statement of comprehensive incomeeither separately (or under a general heading such as other income) or deducted in reporting the related expense.

Borrowing Cost

All borrowing costs are expensed.

PAS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalized as part of the cost of the asset. Similar to PFRS for SMEs; except that the return on plan assets is split between the expected return and an actuarial gain/loss.

Employee Components of the cost of a defined benefits- defined benefit plans: benefit plan Defined benefit plan expense includes: Current-service cost. Interest cost. The actual return on plan assets. Actuarial gains and losses (on liabilities) arising in the period The effect of a new plan or changes to an existing plan during the period. The effect of any curtailments or settlements. Actuarial Valuation Method: For cost-benefit reasons, the PFRS for SMEs provides for some measurement simplifications that retain the basic PAS 19 principles but reduce the need for SMEs to engage external specialists.

PAS 19 requires that a defined benefit obligation should always be measured using the projected unit credit actuarial method.

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Accordingly, if information based on the projected unit credit method is not available and cannot be obtained without undue cost or effort, SMEs must apply an approach that is based on PAS 19 but does not consider future salary progression, future service or possible mortality during an employees period of service. This approach still takes into account life expectancy of employees after retirement age. The resulting defined benefit pension obligation reflects both vested and unvested benefits. Actuarial gains and losses: Actuarial gains and losses on liabilities are recognized in full in profit or loss or in other comprehensive income (without recycling) in the period in which they occur. (corridor approach is not applicable) Actuarial gains and losses arise on both assets and liabilities. They may be recognized immediately (either in profit or loss or in other comprehensive income) or amortized into profit or loss over a period not exceeding the expected remaining working lives of participating employees(corridor approach). At a minimum, any cumulative unrecognized net gain/loss in excess of 10% of the greater of the defined benefit obligation or the fair value of plan assets at the beginning of the year is amortized over expected remaining working lives (the corridor method) each year. A policy of recognizing actuarial gains and losses in full in the period in which they occur can be adopted and recognition may be in other comprehensive income. Amounts recognized in the other comprehensive income are not subsequently recognized in profit or loss.

Past-service costs:

PAS 19 requires an entity to recognize

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In accordance with the PFRS for SMEs an unvested past service cost as an expense entity is required to recognize past service on a straight-line basis over the average costs as an expense in measuring profit or period until the benefits become vested. loss of the period of the change (ie immediately). Curtailments and settlements: Gains and losses on the curtailment or settlement of a defined benefit plan are recognized in profit or loss when the curtailment or settlement occurs. Similar to PFRS for SMEs. However, full PFRS includes more detailed guidance in clarifying the term curtailment and settlement. Full PFRS also requires the acceleration of related unrecognized gains/losses.

Defined benefit liability: The DB liability is the net total of: The present value of the DB obligation at the end of the reporting period; Less the fair value at the reporting date of plan assets (if any) out of which the obligations are to be settled directly.

The DB liability is the net total of: The present value of the DB obligation at the end of the reporting period; Plus any actuarial gains (less any actuarial losses) not recognized due to the corridor method; Minus any unrecognized past service costs; Minus the fair value at the reporting date of plan assets (if any) out of which the obligations are to be settled directly.

Expected return on plan assets: No distinction between expected and actual return on plan assets. All changes in the fair value of plan assets are recorded in profit or loss.

The expected return on plan assets is based on market expectations at the beginning of the period for returns over the entire life of the related obligation. It reflects changes in the fair value of plan assets as a result of actual contributions and benefits paid. The difference between actual and expected returns on plan assets is an actuarial gain or loss. Similar to PFRS for SMEs; however, if the contributions to a DC plan do not fall due wholly within 12 months after the end of the period, the future contributions are discounted.

Measurement of The contribution payable for a period by defined the employer to the fund is recognized as contribution plan a liability for a DC plan after deducting any amount already paid.

Share based payments

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Measurement equity settled Share-based transactions Transactions in respect of goods or services received from non-employees are measured at fair value of the goods or services received. If the entity cannot estimate reliably these fair values, the transactions are measured at the fair value of the equity instruments granted, ignoring any service or non-market vesting conditions. Transactions with employees are measured at the fair value of the instruments granted, ignoring any service or non-market vesting conditions. A threetier hierarchy is applied when measuring the fair value of the equity instruments: 1. Use of observable market prices. 2. Use of specific observable market data, such as a recent transaction in the entitys shares or a recent independent fair valuation of the entity. 3. Use of a generally accepted valuation technique that uses market data to the greatest extent practicable (directors use their judgment to apply the most appropriate valuation method to determine the fair value of the entitys shares). A corresponding increase in equity is recognized. Transactions are measured at fair value of the goods or services received. If the entity cannot estimate reliably these fair values, which is deemed always to be the case for transactions with employees, the transactions are measured at the fair value of the equity instruments granted; ignoring any service or non-market vesting conditions or reload features.

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Income taxes A valuation allowance is recognized so that the net carrying amount of the deferred tax asset equals the highest amount that is more likely than not to be recovered. The net carrying amount of deferred tax asset is likely to be the same between full IFRS and PFRS for SMEs. The concept of valuation allowance is not applicable. Instead, a deferred tax asset is only recognized to the extent that it is probable that there will be sufficient future taxable profit to enable recovery of the deferred tax asset. The net carrying amount of deferred tax asset is likely to be the same, but full PFRS does not request the disclosure of a valuation allowance. There is no specific guidance on uncertain tax positions. In practice, management will record the liability measured as either a single best estimate or a weighted average probability of the possible outcomes, if the likelihood is greater than 50%.

Management recognizes the effect of the possible outcomes of a review by the tax authorities. It should be measured using the probability-weighted average amount of all the possible outcomes. There is no probable recognition threshold. Review of deferred tax assets: The net carrying amount of the deferred tax asset is reviewed at each reporting date; the valuation allowance is adjusted to reflect the current assessment of future taxable profits.

Similar to PFRS for SMEs. The carrying amount of the deferred tax asset is reviewed at each reporting date and is reduced when it is no longer probable that sufficient taxable profit will be available to allow recovery of the deferred tax asset. This reduction is reversed when subsequently it becomes probable that sufficient taxable profit will be available. Net carrying amount of deferred tax asset likely to be the same. Same as PFRS for SMEs, except that exchange differences on a monetary item that forms part of a net investment in a foreign operation are reclassified from equity to profit or loss on disposal of the foreign operation.

Foreign currencies

Recognition of exchange differences: Exchange differences on monetary items are recognized in profit or loss for the period except for those differences arising on a monetary item that forms part of an entitys net investment in a foreign entity (subject to strict criteria of what qualifies as net investment). In the consolidated financial statements, such exchange differences are recognized as a separate component in equity. Recycling through profit or loss of any cumulative exchange differences that were previously recognized in equity

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on disposal of a foreign operation is not permitted. Translation to the presentation currency: The assets and liabilities are translated at the closing rate at the date of the statement of financial position; income and expenses are translated using the exchange rates at the dates of the transactions (average rates may be used if they do not fluctuate significantly). All resulting exchange differences are recognized in other comprehensive income. Entities in the group may have different functional currencies. When preparing consolidated financial statements, the financial statements of all entities are translated into the reporting entitys presentation currency

Similar to PFRS for SMEs, except that cumulative translation differences on foreign operations initially recognized in equity are recycled to profit or loss upon disposal of the foreign operation.

Specialized activities
Agriculture Recognition and measurement: An entity involved in agricultural activity measures biological assets at fair value less cost to sell where such fair value is readily determinable without undue cost or effort. Where fair value is not used, the entity measures such assets at cost less any accumulated depreciation and any accumulated impairment losses. Similar to PFRS for SMEs; however, exemption from measurement at fair value is only allowed if the fair value cannot be measured reliably. This is the case for biological assets for which market-determined prices or values are not available and for which alternative estimates of fair value are determined to be clearly unreliable.

The agricultural produce harvested from biological assets is measured at fair value In such cases, biological assets are less estimated costs to sell at the point of measured at cost. harvest. Gains or losses on initial recognition and from change in fair value are recognized in profit or loss of the period. Extractive industries Exploration and evaluation assets are Recognition And measurement: An entity that is engaged in an extractive measured at cost. An entity may develop industry recognizes exploration a policy to determine which

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expenditure on the acquisition or expenditures are recognized as development of tangible/intangible assets exploration and evaluation assets. Full by applying Sections 17 and 18. PFRS restricts recognition of certain types of expenditures as an asset.

Discontinued operations and assets held for sale


Discontinued operations Presentation Amounts for discontinued operations are Discontinued operations are presented required and identified in the statement of separately in the comprehensive income comprehensive income. and the statement of cash flows. There are additional disclosure requirements in relation to discontinued operations. Not covered. The decision to sell an asset or plans to discontinue the operation to which an asset belongs are considered an impairment indicator. A non-current asset (or disposal group) is classified as held for sale if its carrying amount is recovered principally through a sale transaction rather than through continuing use. This is the case when the asset (or disposal group) is available for immediate sale in its present condition, its sale is highly probable and the sale is expected to be completed within one year from the date of classification. Assets (or disposal group) classified for sale are: Carried at the lower of the carrying amount and fair value less costs to sell. Not depreciated or amortized. Presented separately in the statement of financial position.

Non-current assets held for sale