Tackling Psa by SGV PDF

Tackling the Issues of PFRS 9 &
10 & PAS 19
Presentation to:
Philippine Institute of Public Accountants
October 21 , 2011
T hese presentation materials are provided to you for your exclusive use and may not be sold
in part or their entirety to any third party. Further, these materials may not be shown, shared
or transferred to any other third party without the express written consent of SGV & Co.
T hese materials should not be used or duplicated in whole or in part for any other
purpose.
2011 SGV & Co. All rights reserved.
Agenda
PFRS 9, Financial Instruments
PFRS 10, Consolidation
Amendments to PAS 19, Employee Benefits
Slide 2 2011 SGV & Co. All rights reserved. Philippine Financial Reporting Standards
PFRS 9, Financial Instruments
IAS 39 Replacement project timeline
Q4 Q2 Q4 Q1 Q4
2009 2010 2010 2011 2011
Phase 1
Classification & m easurement
- Financial assets IFRS
- Financial liabilities ED IFRS
Phase 2 ED Supp Re-

Im pairm ent ED ED
Phase 3 ED IFRS?
Hedge accounting
Classification and measurement
Financial assets
Debt Derivative Equity
No Yes
Business m odel
Held-for-trading?
test?
Yes No
Characteristics No No
Fair value through
of the financial OCI option?
asset test?
Yes Yes
Yes
Fair Value Option
(FVO)?
No
Am ortized Fair value through Fair value

cost profit or loss through OCI
Business model test
The objective of the entitys business model must be to

hold instruments to collect contractual cash flows
Some sales would not contradict that objective.

However, amortised cost may not be appropriate if more
than infrequent sales.
Not an instrument-by-instrument approach
Disclosures required
On derecognition of amortised cost assets, gains or losses are to
be disclosed on the face of the income statement
Additional qualitative disclosures of the reasons for the sale
Characteristics of the financial asset test
Contractual terms of the financial asset give rise, on specified dates,
to cash flows that solely represent principal and interest payments
Interest is consideration for the time value of money and the credit
risk associated with the principal amount outstanding during a
particular period of time.
Examples of features/assets that will not qualify

Inverse floaters
Convertible bonds
Leverage
Equity investments at Fair Value through

OCI
Available for all equity investments that are not held for trading.
Free choice for each investment at initial recognition. Designation
irrevocable thereafter.
Dividends will be recognised in profit or loss, if return on investment.
No recycling of fair value changes to profit or loss on impairment,
disposal or in any other circumstances.
No impairment testing.
No exception from use of fair value for unquoted equities that cannot
be reliably measured, but guidance on when cost may be an
appropriate estimate.
Reclassifications
(between amortized cost and FVPL)
Reclassification will be required when an entity changes its business
model
Prohibited in all other circumstances
Any reclassification is to be accounted for prospectively from the
reclassification date
Which is the first day of the first reporting period following the change in
business model that results in an entity reclassifying financial assets
Reclassification from amortized cost to fair value measure instrument
at fair value on that date; recognize difference between carrying amount
and fair value in a separate line in P/L
Reclassification from fair value to amortized cost fair value of the
instrument on the date of reclassification becomes its new carrying
amount
Detailed disclosures will be required in interim reports and annual
financial statements
Embedded derivatives
Bifurcation of embedded derivatives is eliminated for host

financial assets within the scope of IAS 39
Only one classification approach Do the embedded derivatives
together with the host instrument meet the contractual cash flow
characteristics test?
Yes the hybrid contract (as a whole) qualifies for amortized cost
classification
No the hybrid contract (as a whole) is measured at fair value
Embedded derivatives with non-financial hosts existing

requirements maintained
Financial liabilities
Changes to the Fair Value Option
Maintain IAS 39 guidance, except when Fair Value Option is used:
Record effect of changes in own credit risk in OCI unless it creates
an accounting mismatch (without recycling to p&l)
Other fair value changes in profit or loss
Retain existing rules for bifurcation of derivatives embedded in host

financial liabilities
Effective date and transition

Retrospective application
Mandatory effective date is January 1, 2013*

Early adoption permitted
Retrospective application is required, by assessing the classification
of financial assets at the initial application date and applying
amortized cost or fair value measurement from the date of initial
recognition
Determination of whether an instrument is held for trading is made
as at the initial application date
It is possible to de-designate or re-designate financial assets at FVPL
using FVO as at the date of initial application and to apply the new
designation retrospectively
*On August 4, 2011, the IASB issued an Exposure Draft proposing to mov e the mandatory
adoption date to January 1, 2015. Comment period is until October 21, 2011.
Transition relief
Comparative figures are required to be restated, but with

some transition relief for early adopters:
Year of adoption 2011 2012 and onwards
Initial application date Beginning of reporting Beginning of reporting

period period
Comparative figures Are permitted, but not Are required to be

required to be restated restated
The Exposure Draft issued on August 4, 2011 did not revise this transition relief.
PFRS 10
Consolidated Financial Statements
Background and objectives
Background
Tension between the control model in IAS 27 and the risks and
rewards approach in SIC-12
Divergent application of IAS 27 and SIC-12 in practice
Global financial crisis put emphasis on the project
Objectives
Develop single control model applicable to all entities
Improve disclosures
Definition of control
PAS 27 PFRS 10
Control is presumed to exist An investor controls an

when the parent owns, directly investee when it is exposed,
or indirectly through or has rights, to variable
subsidiaries, more than half of returns from its involvement
the voting power of an entity with the investee and has the
unless, in exceptional ability to affect those returns
circumstances, it can be through its power over the
clearly demonstrated that such investee
ownership does not constitute
control.
PFRS 10: New definition of control
An investor controls an investee when it is exposed, or has

rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power
over the investee
Control of an investee requires an investor to possess all
three essential elements:
Power over the investee;
Exposure, or rights, to variable returns from its involvement with
the investee; and
Ability to use its power over the investee to affect the amount of
the investors returns
New definition of control

Identifying activities
Activities Power Returns

Assessing returns
Evaluating power
Identify which Determine which Assess whether

activities of the party, if any, has the investor is
investee are power, that is, exposed, or has
considered to be having existing rights, to variable
the relevant rights that give it returns from its
activities, i.e., the current ability involvement with
those that to direct the the investee
significantly affect relevant activities
the investees
returns
Understand purpose and design
Identifying relevant activities
Relevant activities are those that significantly

affect the investees returns
Examples:
Establishing operating, capital and financing policies
Appointing, remunerating, and terminating employment of service
providers or key management personnel
Understand purpose and design of the investee
If two investors direct different relevant activities
Identify which investor can direct the activities that most
significantly affect returns

Example: Identifying relevant activities
Two investors form an investee to develop and market a
medical product
One investor is responsible for developing and obtaining
regulatory approval
Other investor is responsible for manufacturing and marketing
Determine which activity most significantly affects returns
Purpose and design of the investee
Factors that affect profit margin, revenue, etc.
Effect on returns from each decision-makers authority
Investors exposure to variability of returns
Evaluating power
Power is having existing rights that give an

investor the current ability to direct the relevant
activities
Main aspects of power:
Arises from rights
Need not be exercised
Does not arise from protective rights
Can exist even if others participate in directing the relevant
activities (e.g., they have significant influence)
Evidence that an investor directed activities in the past is
an indicator of power, but is not conclusive

Assessing returns
Returns can be only positive, only negative or

positive and negative, but must have the potential
to vary as a result of the investees performance
Examples:
Dividends, distributions of economic benefits, changes in the value
of an investment
Remuneration, fees, residual interests, tax benefits, exposure from
providing support
Synergies, cost savings, economies of scale, scarce resources,
proprietary knowledge
What changed or is more explicit?

Protective rights
De facto control
Potential voting rights
Delegated rights (principal-agency relationships)
Relationships with other parties (de facto agents)
Control of specified assets (silos)
Increased use of judgement
Continuous assessment
Power Protective rights
Protective rights do not give power

When are rights merely protective rights?
Fundamental changes in the activities of an investee
Only apply in exceptional circumstances
Examples of protective rights include the right to:
Restrict an investee from undertaking activities that could
significantly change the credit risk of the investee
Approve an investees capital expenditures (greater than the
amount spent in the ordinary business)
Protective rights do not prevent another investor from
having control
Power Protective rights
Example: Franchises
A franchise agreement often gives the franchisor rights,
which generally:
Are designed to protect the brand
Do not have a significant effect on franchisees returns
Assess whether rights give franchisor power:
Who benefits from activities of franchisee?
What are the relevant activities?
How was the franchisee established and structured?
How does the franchisor support the franchisee?
What is franchisors exposure to variability of returns?
Power Current ability
Does the investor have the current ability to exercise

power?
Rights need to be substantive (i.e., the holder must have the
practical ability to exercise those rights)
Factors to consider whether?
Economic or other barriers exist
Multiple parties have to agree to exercise right
Holders would benefit from exercising the right
Right is currently exercisable
Current does not necessarily mean this instant
Power Majority of voting rights
Majority of voting rights normally gives power to direct the

relevant activities when:
Voting rights are substantive
Voting rights direct the relevant activities
Holder is not an agent of the investor
This might not be the case when:
Other legal requirements, founding documents or other contractual
arrangements restrict the ability to direct the relevant activities
Activities are subject to direction by government, court,
administrator, receiver, liquidator, or regulator
Power De facto control
An investor may have the power with less than half of the
voting rights
Consider facts and circumstances:
Contractual rights arising from other arrangements
Size of the investors holding of voting rights relative to the size
and dispersion of other vote holders
Voting rights (absolute amount)
Voting rights relative to other vote holders
Number of other vote holders that would need to act together
Potential voting rights
Additional facts & circumstances
Voting patterns at previous shareholders meetings
Illustrative Examples
In each of the succeeding examples, assume that, after
understanding the purpose and design of the investee:
Voting rights give an investor the ability to direct activities
that significantly affect the investees returns (i.e., voting
rights give power)
None of the shareholders has arrangements to consult
any of the other shareholders or make collective decisions
Decisions require the approval of a majority of votes cast
at the shareholders meeting
No other facts or circumstances are relevant

Question 1
Fact Pattern: A holds 48%
of voting rights of B; the
52% widely remaining 52% of B is
dispersed widely held by thousands
of shareholders (none of
whom holds more than 1%
of the voting rights).
Question: Does A have
A B power over B?
48%
Answer:
Answer Q1
Fact Pattern: A holds 48%
of voting rights of B; the
52% widely remaining 52% of B is
dispersed widely held by thousands
of shareholders (none of
whom holds more than 1%
of the voting rights).
Question: Does A have
A B power over B?
48%
Answer: A has power

Question 2
Fact Pattern: C holds
45% of the voting
rights of D. The other
55% of D is held by 1% 1% 1% 26% 26%
two shareholders (each
holds 26%), with the
remaining 3% held by
three other
shareholders, each
holding 1% C D
45%
Question: Does C
have power over D?
Answer:
Answer Q2
Fact Pattern: C holds
45% of the voting
rights of D. The other
55% of D is held by 1% 1% 1% 26% 26%
two shareholders (each
holds 26%), with the
remaining 3% held by
three other
shareholders, each
holding 1% C D
45%
Question: Does C
have power over D?
Answer: C does not have power.

Question 3
Fact Pattern: E holds 40%
of the voting rights of F. E
also has a contract to
appoint management of F.
Appointing management is
12 investors at 5% each the relevant activity
(significantly affects
Contract to returns).
appoint mgmt
Question: Does E have
E F power over F?
40%
Answer:
Answer Q3
Fact Pattern: E holds 40%
of the voting rights of F. E
also has a contract to
appoint management of F.
Appointing management is
12 investors at 5% each the relevant activity
(significantly affects
Contract to returns)
appoint mgmt
Question: Does E have
E F power over F?
40%
Answer: E has power

Question 4
Fact Pattern: G holds 45%
of the voting rights of H.
The other 55% of H is
dispersed among 11
shareholders, who each
11 investors at 5% each
hold 5%.
Question: Does G have
power over H?
Answer: G H
45%
Answer Q4
Fact Pattern: G holds 45%
of the voting rights of H.
The other 55% of F is
dispersed among 11
shareholders, who each
hold 5%. 11 investors at 5% each
Question: Does G have

power over H?
Answer: Not conclusive
in determining whether G H
G has power over H. 45%
Consider other relevant
facts and circumstances.

Question 5
Fact Pattern: J holds 35% of the
voting rights of K. 3 other
50% widely shareholders each hold 5% of the
dispersed, half turn voting rights of K. The remaining
up at AGM 5% 5% 5% 50% of the voting rights are held by
numerous other SHs, none
individually holding more than 1%
of the voting rights. 75% of the
voting rights have been
represented in recent AGM
J K meeting. Thus, need 37.5% to
35% have power.
Question: Does J have power over K?
Answer:
Answer Q5
Fact Pattern: J holds 35% of the
voting rights of K. 3 other
50% widely shareholders each hold 5% of the
dispersed, half turn voting rights of K. The remaining
up at AGM 5% 5% 5% 50% of the voting rights are held by
numerous other SHs, none
individually holding more than 1%
of the voting rights. 75% of the
voting rights have been
represented in recent AGM
J K meeting. Thus, need 37.5% to
35% have power.
Question: Does J have power over K?
Answer: J has no power

Question 6
L holds 38% of the voting rights
of M. 3 other SHs each hold 4%
of the voting rights of M. The 50% widely
remaining 50% of the voting dispersed, half
rights are held by numerous turn up at AGM 4% 4% 4%
other SHs, none individually
holding more than 1% of the
voting rights. 75% of the voting
rights have been represented in
recent AGM meeting. Thus,
need 37.5% to have power.
L M
Question: Does L have power
over M? 38%
Answer:
Answer Q6
L holds 38% of the voting rights
of M. 3 other SHs each hold 4%
of the voting rights of M. The 50% widely
remaining 50% of the voting dispersed, half
rights are held by numerous turn up at AGM 4% 4% 4%
other SHs, none individually
holding more than 1% of the
voting rights. 75% of the voting
rights have been represented in
recent AGM meeting. Thus,
need 37.5% to have power.
L M
Question: Does L have power
over M?
38%
Answer: L has power.

Practical issues
How should the exact date at which control is obtained (or lost)
be determined?
How is the exact date at which the other investors became
widely dispersed determined?
How large should an investors interest be relative to other
vote-holders, or how widely dispersed must they be for the
investor to have power?
How relevant are past voting patterns? How far should you look
back?
How will you gather all information?
Past voting patterns
Relationships between other shareholders
Power Potential voting rights
An investor may have the power through holding potential

voting rights
All facts and circumstances must be considered:
Substance of the rights
Exercisability
Barriers
Benefits
Purpose and design
Other involvement the investor has with the investee
Investors apparent expectations, motives and reasons for agreeing
the terms of the instrument

Evaluating whether potential voting rights are substantive
Depends on
Non-
Evaluation facts and Substantive
substantive
circumstances
Deeply-out-of- Out-of-the- At market (fair

Exercise price the-money money
value) or in-the-
money
Holder would Holder has cash

Financial ability to Holder has no
have to raise or financing
exercise financial ability
financing readily available
Exercisable
Currently
Exercise period Not exercisable before decisions
exercisable
need to be made
Example
Investees AGM is in eight months
30 days needed for shareholders to call meeting
Investor holds option to acquire the majority of shares in
the investee that is exercisable in 25 days and is deeply in
the money
Conclusion: Investor with options has power
Existing shareholders are unable to direct relevant activities
because a special meeting cannot be held for 30 days, when
option could have been exercised
Investor holding the option can direct relevant activities, even
before the option is exercisable

Practical issues
When is the exercise/conversion price considered a
barrier?
Could financing be obtained?
When are options deeply out of the money?
What period do you consider?
When are options currently exercisable?
Would the holder benefit from the exercise?
How will you gather information?
Do other shareholders have potential voting rights, barriers, or
incentives that you are unaware of?
Power Delegated rights
Overview
An agent is a party engaged to act on behalf of another
party or parties (the principal(s))
A principal may delegate some or all decision-making
authority to the agent
An agent does not control an investee
All facts and circumstances must be considered
Principal? Agent?

Scope of decision-making
Range of activities that are permitted by the decision-
making agreement or by law
Whether relevant activities have been delegated
Discretion that the decision-maker has when making
decisions about those activities
Level of involvement that the decision-maker had in
determining the scope of its authority
Opportunity and incentive to gain power
Purpose and design
Risks to which the investee was designed to be exposed
Risks investee was designed to pass on to investors
Rights held by other parties
Number of parties holding Indicator that a
remov al right decision-maker is
Alw ays an agent

One party
Generally an agent
A small number of parties or an
independent board
A principal
Many people

Evaluating whether removal rights are substantive
Non-substantive
Substantive right
right
Exercisable only for Exercisable without

cause cause
Significant financial Insignificant financial

penalty to exercise penalty to exercise
Skills held by decision- Several other parties

could fulfill role of
maker are unique
decision-maker
Not currently
exercisable Currently exercisable
Principal Agent
Decision-maker
Remuneration
No
Is the remuneration of the decision maker
commensurate with the services provided?
Yes
Does the remuneration include only terms,

conditions or amounts that are customarily No
present in arrangements for similar services and Decision-maker
level of skills negotiated on an arms length is a principal
basis?
Yes
Does the magnitude of, and variability of the

remuneration relative to the returns expected No
from the activities of the investee, together with
the other factors, indicate that the decision-maker
is an agent?
Yes
Decision-maker is an agent

Exposure to variability through other interests
Are any interests held by related

parties? Parent
Greater the magnitude of, and
Investors
variability associated with, its
economic interests, more likely it
is a principal
Fund Delegated
Does exposure differ from other manager 80%
investors? Delegated
Expected returns vs. maximum 80%
exposure Direct
20%
Fund
Examples
Exam ple 1 Exam ple 2 Exam ple 3
Scope Broad Broad Broad
Bank
discretion discretion discretion
Rights held by Simple Simple Independent

others majority, for majority, for board, for any Direct
Inv est
cause cause reason
Remuneration 1% of NAV 1% of NAV 1% of NAV Asset Delegated

Mgr rights
20% of profits 20% of profits 20% of profits
if hurdle rate if hurdle rate if hurdle rate
Delegated
rights
Other 2% direct 20% direct 20% direct

interests interest interest interest Fund
Conclusion Agent Principal Agent
Relationships with other parties

De facto agents
Consider whether the investor has the ability to direct other
parties (i.e., de facto agents) to act on its behalf?
Examples:
Related parties (PAS 24)
A party that cannot finance its operations without subordinated
financial support from the investor
A party with same Board or key management personnel
Rights and returns of de facto agents are considered
together with investors own, when evaluating control
Control of specified assets
If an investor has control of specified assets of an

investee, it treats that portion (silo) of the investee as a
separate entity if all apply
Specified assets are the only source of payment for specified
liabilities/other interests in the investee
Parties other than those with the specified liabilities do not have
rights or obligations related to the specified assets or to residual
cash flows from those assets
None of the returns from the specified assets can be used by the
remaining investee
None of the liabilities of the deemed separate entity are payable
from the assets of the remaining investee
In other words, is there a ring-fence?
Continuous assessment
Reassess if facts and circumstances suggest change to

one of criteria of control
Examples:
Changes to how activities are directed
Changes in exposure to variable returns
Market conditions change:
If affect one of control criteria re-evaluate control
If do not affect one of control criteria no re-evaluation
Business impact
Gather information
Changes to the entities being consolidated
Additional procedures required to assess control on a
continuous basis
Compliance with bank covenants and regulatory
requirements
Structuring mergers and acquisitions/transactions and
arrangements
Transition
Effective for annual periods beginning on or after

January 1, 2013
Retrospective application
As if it was always consolidated (since the date of gaining control)
If not practicable to apply retrospectively, consolidate as of earliest
date where practicable, which may be current period
Interaction between PFRS 10, PFRS 11,
PFRS 12 and PAS 28
Does the investor
control an entity by
itself?
Yes No
Consolidation in Does the joint venture

accordance with have joint control over
IFRS 10 an arrangement?
Disclosures in Yes No
accordance with
IFRS 12
Classify j oint Does the inv estor hav e

arrangement in significant influence
Joint accordance with IFRS 11 ov er an entity?
Yes
operation Joint No No
venture
Account for assets, Account for interest

Financial Other
liabilities, revenue and under the equity
Instrument IFRS
expenses method
Disclosures in Disclosures in Disclosures in

accordance with IFRS 12 accordance with accordance with IFRS 12
and other relev ant IFRS IFRS 12 and other relev ant IFRS
Amended PAS 19,

Employee Benefits
What has Changed?
Highlights of Basic Differences
Pension accounting
Removal of corridor
Change in the component of net defined benefit liability or asset
Net interest on defined benefit liability (asset)
Immediate recognition of past service cost
Other recognition and measurement changes
Disclosures
Removal of corridor
Corridor mechanism abolished

All changes in the value of long-term employee benefit
plans will be recognized as they occur.
Those movements are recorded as follows:
Prior to am endm ent As am ended
Service cost Profit & Loss (P&L) P&L
Finance cost (credit) P&L P&L

Remeasurements Corridor P&L Full OCI
Full P&L
Full OCI
Removal of corridor: Impact to presentation
Recognized in period
Employment expense
Service cost
(profit or loss)
Post-employment Net interest income Finance cost (profit

benefits (expense) or loss)
Other comprehensive
Remeasurement
income
Note:
IAS 19 does not specify how an entity should present service cost and net
interest on the net interest income (expense). An entity presents those
components in accordance with IAS 1.
Recognition of net interest
Current PAS 19 Amended PAS 19
Interest cost - Interest cost is Net interest the interest expense on

computed by multiplying the the net defined benefit liability or
discount rate as determined at the interest income on the net defined
start of the period by the present benefit asset
value of the defined benefit
obligation throughout that period Interest rate should be the discount rate
used to measure the obligation.
Expected return on plan asset -
expected return on plan assets is
based on market expectations, at (Effectively, fund asset will now
the beginning of the period, for produce a credit to income b ased on
returns over the entire life of the b ond yields irrespective of actual
related obligation. composition of assets held.)
Component of net defined benefit liability or
asset Illustration of the new components
Net defined benefi t Net defi ned benefit
l iabil ity at the s tart Net i nterest li abili ty at the end of
of the year Servic e cost expens e Remeasurem ents the year
300 40 15 -35 320
Rem easurement Plan A ssets

Ac tual return Interest i ncome 15 750
50
P lan assets
35
700
Pl an As sets
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Defined benefi t obl igations
1000 (DBO)
1070
Servic e cost
DB O
40 Interest expense
50
Remeasurem ents
20 DBO
* Discount rate is assumed to be 5%
Immediate recognition of past service cost
Past service cost will be expensed when the plan amendment

occurs whether or not they are vested.
Definition of past service cost was revised to include curtailment.

Past service cost is the change in the present Past service cost is the change in the present
value of the defined benefit obligation for value of defined benefit obligation for
employee service in prior periods, resulting in employee service in prior periods, resulting
the current period from the introduction of, or from a plan amendment (introduction or
changes to, post-employment benefits or withdrawal of, or changes to, a defined benefit
other long-term employee benefits. plan) or a curtailment.
Distinction between past service cost and curtailments was

necessary prior to amendment because curtailments were
recognized immediately, but unvested service cost was recognized
over the vesting period.
Example: Accounting for PSC under current
and amended PAS 19
Background:
Greens plan provides a pension of 2 percent of final salary for each year of
service. The benefits become vested after five years of service. On
January 1, 20X1 for which statements are being prepared, Green improved the
pension to 2.5 percent of final salary for each year of service retroactive to each
employees starting date with the company. At the date of the improvement, the
present value of the additional benefits for service up to January 1, 20X1 (the
date of the plan change) is as follows:
Employees with more than five years service

at the date of the plan change Php500K
Employees with less than five years service at the

date of the plan change (average period until
vesting: two years) Php400K

and amended PAS 19
Question:
What amount of past service cost will be recognized as part of pension
expense in 20X1?
Computation: Current PAS 19
If vested, 100% of the present value of

additional benefit Php500
If not vested, expensed on straight-line basis
over the average vesting period (Php400 /
2years) 200
Past service cost recognized in 20X1 Php700
and amended PAS 19
Question:
What amount of past service cost will be recognized as part of pension
expense in 20X1?
Computation: Amended PAS 19
A past service cost of Php900,000 should be recognized and

charged in the statement of income immediately.
Change in the basis of distinction between

short-term and long-term
Medium- and long-term remuneration plans are recognized and
measured in the same way as pensions but all movements in
previous estimates (i.e., remeasurements) will be recorded in
profit and loss.
The distinction between long-term and short-term benefits will
be changed to be based on when an employee is expected
to receive the benefit rather than when the employee
becomes entitled to it.
Example: If paid holiday may be taken at any time, but is expected
to be rolled up for a number of years and taken as a sabbatical, it
would be accounted for as a long-term benefit.
Recognition of termination benefits

An entity shall recognize termination An entity shall recognize a liability or
benefits as a liability or expense when, expense for termination benefits at the
and only when, the entity is earlier of the following dates:
demonstrably committed to do either When the entity can no longer
of the following: withdraw the offer of those benefits
Terminate the employment of an When the entity recognizes costs
employee or group of employees for a restructuring that is within the
before the normal retirement date scope of PAS 37 and involves the
Provide termination benefits as a payment of termination benefits
result of an offer made to
encourage voluntary redundancy
Example: Accounting for Termination

Benefits under current and amended PAS 19
Fact Pattern
Management is committed to close a factory in 10 months and, at that time,
will terminate the employment of all of the remaining employees at the factory.
Management needs the expertise of the employees at the factory to complete
existing contracts and announces the following plan. Each employee that
renders service until the closure of the factory will receive, on the termination
date, a cash payment of Php50,000. Employees leaving before closure of the
factory will receive Php20,000. There are 150 employees at the factory.
Management expects 50 employees to leave before closure. The total
expected cash outflows under the plan are Php6,000,000 [(50 employees
P20,000) + (100 employees Php50,000)].
Question
How much termination benefits liability would the company recognize? Under
current PAS 19? Under Amended PAS 19?
Example: Accounting for Termination
Benefits under current and amended PAS 19
Termination benefit of Separate (a) Termination Benefits and (b) Benefits
Php6,000,000 when provided in exchange for services
the closure and terms (a) Termination Benefits:
are announced
Liability of Php3,000,000 (calculated as 150
employees x Php20,000) is recognized at the
earlier of when the plan of termination is
communicated to the employees and when the
entity recognizes the restructuring costs
associated with the closure of the factory
(b) Benefits provided in exchange for services:
Php300,000 recognized in P&L for each month
during the service period of 10 months (calculated
as 100 employees x Php30,000 divided by 10
months)
Disclosures
Disclosures required by the amended PAS 19 will make it

easier for users to assess matters such as:
Characteristics of a companys defined benefit plans
The amounts recognized in the financial statements
Risk arising from defined benefit plans, including sensitivity
analysis
Participation in multi-employer plans
Disclosures
Characteristics of defined benefit plans
The disclosure about the characteristics arising from defined

benefit plans are based on those in the current PAS 19 with the
following changes:
Additional information about exposure to risk
Not requiring an entity to distinguish between plan
amendments, curtailments and settlements if they occur
together
Disclosures
Amounts recognized in the financial statements
The disclosure about the amounts recognized in the financial

statements are based on those in the current PAS 19 with the
following changes:
Distinguishing between actuarial gains and losses arising from
demographic and financial assumptions
Stating a principle for the disaggregation of plan assets rather
than listing the categories required
Stating a principle for the disclosure of significant actuarial
assumptions rather than listing the assumptions required to be
disclosed
Disclosures
Risk arising from defined benefit plans
The amendments made to PAS 19 improve the required

disclosure about the amount, timing and uncertainty of future cash
flows in the following respects:
Information about asset-liability matching strategies
Sensitivity analysis How the effect of reasonably possible
changes to significant actuarial assumptions affect the defined
benefit obligation
Information about the funding and duration of the liability
Transition provision and effective date
An entity shall apply this Standard for annual periods

beginning on or after 1 January 2013.
Earlier application is permitted. If an entity applies this

Standard for an earlier period, it shall disclose that fact.
Transition provision and effective date
An entity shall apply this Standard retrospectively, except that:

An entity need not adjust the carrying amount of the assets
outside the scope of this Standard for changes in employee
benefit costs that were included in the carrying amount before
the date of initial application. The initial application is the
beginning of the earliest period presented in the first financial
statements in which the entity adopts this Standard.
In financial statements for periods beginning before
1 January 2014, an entity need not present comparative
information for the disclosures required by paragraph 145
about the sensitivity of the defined benefit obligation.
Business impact
The removal of corridor approach will introduce a great deal

more volatility in net assets, with potential consequences for
debt covenant ratios and other target ratios.
Companies currently recognizing actuarial variances in full
within OCI may record lower profit since expected return on
plan assets will be based on discount rate.
There is little impact on data systems, except on entities
affected by the new requirements for distinguishing short-term
and long-term benefits.

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Tackling the Issues of PFRS 9 &

2011 SGV & Co. All rights reserved.

IAS 39 Replacement project timeline

Phase 2 ED Supp Re-

Am ortized Fair value through Fair value

Business model test

The objective of the entitys business model must be to

Some sales would not contradict that objective.

Not an instrument-by-instrument approach

Examples of features/assets that will not qualify

Equity investments at Fair Value through

Bifurcation of embedded derivatives is eliminated for host

Embedded derivatives with non-financial hosts existing

Retain existing rules for bifurcation of derivatives embedded in host

Effective date and transition

Mandatory effective date is January 1, 2013*

Comparative figures are required to be restated, but with

Year of adoption 2011 2012 and onwards

Initial application date Beginning of reporting Beginning of reporting

Comparative figures Are permitted, but not Are required to be

Control is presumed to exist An investor controls an

An investor controls an investee when it is exposed, or has

New definition of control

Activities Power Returns

Identify which Determine which Assess whether

Understand purpose and design

Relevant activities are those that significantly

New definition of control

Power is having existing rights that give an

New definition of control

Returns can be only positive, only negative or

What changed or is more explicit?

Power Protective rights

Protective rights do not give power

Power Current ability

Does the investor have the current ability to exercise

Majority of voting rights normally gives power to direct the

Power De facto control

Power De facto control

Power De facto control

Power De facto control

Power De facto control

Question: Does G have

Power De facto control

Question: Does J have power over K?

Question: Does J have power over K?

Answer: J has no power

Power De facto control

Answer: L has power.

Power De facto control

An investor may have the power through holding potential

Power Potential voting rights

Deeply-out-of- Out-of-the- At market (fair

Holder would Holder has cash

Power Potential voting rights

Power Delegated rights

Alw ays an agent

Power Delegated rights

Exercisable only for Exercisable without

Significant financial Insignificant financial

Skills held by decision- Several other parties

Does the remuneration include only terms,

Does the magnitude of, and variability of the