Theory of Accounts LECTURE NOTES THE CONCEPTUAL FRAMEWORK OF ACCOUNTING (OLD VERSION) 4. The Conceptual Framework deals with the concepts used in the preparation and presentation of financial statements (FS) 2. The Conceptual Framework is not a PFRS!; it does not define standards for any particular measurement fr disclosure issue. Nothing in the Framework overrides any specific PFRS. In case of conflict, PFRS prevails over the Framework 3. The purpose of the Framework is to: A) Assist FRSC’ in developing GAAP and its review and adoption of existing International Financial Reporting Standards (IFRS) B) Assist preparers of FS in applying PERS C)_ Assist auditers in forming an opinion as to whether FS conforms to GAAP D) Assist users in interpreting the FS E) Provide interested perties with information about PFRS formulation by FRSC 4. The scope of the Conceptual Framework covers the following: A) CAPITAL CONCEPTS: the concept of capital and capital maintenance B) © BIECTIVE: the objective of financial statements ©) QUALITATIVE CHARACTERISITICS: the qualities or attributes that make FS useful to the users. D) ELEMENTS: the definition, recognition and measurement of the elements of FS 5. ‘The objective of FS is to provide information about the financial position’, performance and changes in financiat position of an entity that is useful to a wide range of users in making economic decisions. The FS also shows the results of the stewardship of management ~- the accountability of management for the resources entrusted to it; the management of an entity has the primary responsibilty for the preparation and presentation of FS. ‘The framework 1s concerned with general-purpose financial statements (including consolidated financial statements) of all commercial, industrial and business reporting public or private entities Special purpose financial reports (€.g., prospectuses and computations prepared for taxation purposes) are outside the scope of this Framework. Undertying assumptions on FS praparation and presentation: (1) accrual basis (2) going concern, Users ‘of financial statements: (1) present and potential investors (2) employees and their representative groups (3) lenders (4) suppliers and other trade creditors (5) customers (6) governments and their agencies and (7) the public. 10. The qualitative characteristics of FS: C_> Comparability (comparability is the goal; consistency is the means to achieve the goal) presentaTion {5% Gnacrstandapiity” compliance wth PFRS to make information understandable to Users R > Relevance: predictive value, feedback/confirmatory value; timeliness CONTENT (Primary) { Ry > Reliability: fount representation, substance over form; prudence; neutrality; completeness 11. Constraints on relevant and reliable information: (1) On timeliness: if there is undue delay in the reporting of information, it may lose its relevance (2) On cost-benefit: the benefits derived from Information should exceed the cost of providing it (3) On qualitative characteristics: the aim is to ‘achieve an appropriate balance among the characteristics in order to meet the objective of FS. 412. Information is material if its omission or misstatement could influence economic decisions of users taken on the basis of the financial statements. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if It is to be useful 13. The elements of FS: ‘= On financial position: (1) Assets (2) Liabillties (3) Equity On Performance: (4) income (includes revenue and gains) (5) Expenses (include losses) 14. An item that meets the definition of an element should be recognized if 'A). PROBABLE: It is probable that any future economic benefit associated with the item will flow to ‘or from the entity, and 8) MEASURABLE ne fem has 3, petticoat be measured with reliability. Four different ur S are us ur ren : cost (3) Realizable value (4) Present value iol Fe ceay etnies) sash (2 pent 15, Two capital concepts: 1) Financial concept (most common) and o "i Tey gi goneents, 1) ora concent est conan) and 2) ys concept (ses ure ‘and concepts of profit since it provides the point of reference by which profit is measured, ‘Based on PAS 1. paragraph 7. the term ‘PFRS’ (Philippine Finan {b) Philippine Accounting Standards (PAS). and (c} Interpretations of PAS and PFRS, (See payge 10 for further deta {ASC in the past ssued what was used to be called as “SPAS” (Stalenionts of Financial Accounting Standandoy, SEAS wore previously superseded by PAS. which evcnually evolved into PFRS PERS ic nos the seas a a Oe ee ‘Accepted Accounting Principles) in the Phippines. (See page 10 for further details) «Generally 3 The financial postion of an entity is affected by the economic resources it controls, is fin ancl structure i sofsency. and its capacity to adapt changes inthe environment mn wich the entity operates. nn ® Mauiity and eeu e al Reporting Standards) shall be composed of (a) PERS,—eeE_ THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 2010 (NEW VERSION)* 4, The Conceptual Flamework for Financial Reporting 2010 (a k.a. “IFRS Framework") was approved by the International Accounting Standards Board (TASB) in September 2010 2. The IFRS Framework acresses the following The objectives of financial reporting > The qualitative characteristics of useful financial infor mation’ > The reporting entity’ > The definition, recognition and measurement of the elements from which FS are constructed Concepts of capital and capitai maintenance 3. COST constraint. Financial reporting imposes costs, it is important that benefits of financial reporting should justify those costs. 4, GOING CONCERN assumption “Going concern” presumes that an entity will continue its operation indefinitely or, if that presumption 1s not valid, disclosure and a different basis ot reporting are required. “Accrual basis” js mentioned in the new framework in the section on ‘objectives of financial reporting, PAS 1: PRESENTATION OF FINANCIAL STATEMENTS 1. COMPONENTS OF FINANCIAL STAIEMENTS (FS). A complete set of FS is composed of: A) Statement of financial position (balance sheet) as at the end of the period B) Statement of comprehensive Income! ~ for the period CC) Statement of cash flows ~ for the period D) Statement of changes in equity ~ for the period E) Notes, comprising a summary of significant accounting policies & other explanatory information. F)_ 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 FS, ea Y White was already covered in the May && October 2013 CPA Licensure iminations. the old version of Conceptual therefore imperative to leave an iden of both sersions. particulatly on theve sina Conceptual Framework of 2010 (new vers 9 The mijective of financial reporting is to pros ide 1 anformation about the reporting ennity that 4s sel ind potential unestors, lenders and other creditors in making decisions bow pron lang resources to the Under Conceptual Framework 2010, the quuahiwne characteristic oF lve charactonstics. T Relevance (Ingredients, predictive value, contmatory \ilis) 2. Fauthjul Representauon (Ingredients. completeness. neutrality, freedom fron error) ¥ ENHANCING qualitative charactonsties 1 Comparahiiy 2 Feripiahil 3 imetiness +E ndersterntatiius: NOTE: Material is an entity-specthic aspect of releronce based on the niture and meagnitude, or both. of the items to which information relates in the context ofan individual entity” Financsal report 7 This is new item included in the scope of the Conceptual Framework 2010, the details of which are sil pending ( 6" ‘work-in-process) based on an e\isting exposure draft for the chapter on "Reporting Ents, The tenn “Comprohensive Income” refers to all clinges 1 equity eXcept those resi distribution fo owners. hence. the Statement of Comprehensive Icom 1. Components of profit or inxs ~ these ate incor statement AS. un requirement, (he Hine Reveme contributions from and shall mcinde Wo (21 major catenories expanse teconnts ustially fond in the traditional income ns 10 be presented are: (PAS 1. par. #2) (balance sheet), Examples include (PAS 1. par 7) a ion surplus (PAS 16 and 8) Sponaion (PAS 21) Option | SINGLE STATEMENT es andl jout vent counted for using the equity method IS ol tecognized 1m profit or loss 1 OF he statement of financial position, statement of Brolit OF 1088 as shown in ihe incon © Stakemient plus ofRSA. the Remiew School of Gccomedtoney Page 3 LECTURE NOTES in THEORY of ACCOUNTS n 2 2. HEADINGS AND TITLES. An entity may use other titles for the statements other than those used in PFRS and shail present with equal prominence all of the FS and distinguish them from other information fn the same published document. In addition, the follawing information shall be displayed prominentty ‘A) The name of reporting entity B) Whether the financial statements cover the individual entity or a group of entities C) The date at the end of reporting period or the period covered by the set of financial statements 1B) ‘The presentation currency (as defined in PAS 21) E)_ The level of rounding (also known as “truncation’) used in presenting amounts in the FS 3. GENERAL FEATURES in presenting FS. + FAIR PRESENTATION. Financial statements shall present faitly the financial position, financial performance and cash flows of an entity. The application of PFRS is presumed to result in FS that achieve a fair presentation, FS that comply with PFRS should include in the notes to FS an explicit {and unreserved statement of such compliance.” + GOING CONCERN. An entity shail prepare FS on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. + ACCRUAL BASIS OF ACCOUNTING. An entity shall prepare its FS, except for cash flow information, using the accrual hasss of accountin + MATERIALITY and AGGREGATION. An entity shall present separately each material class of similar items and shall present separately items of dissimilar nature or function unless they are immaterial + OFFSETTING. An entity shall not offset assets and liabilties or income and expenses, uniess offsetting is required or permitted by PFRS. + COMPARATIVE INFORMATION. An entity shall disclose comparative information in respect of the Previous period for all amounts reported in the current period's FS and shall include comparative Information for narrative and descriptive information when it is relevant to an understanding the ‘current period FS, ‘+ FREQUENCY OF REPORTING. An entity shall present a complete set of FS at least annually. When an entity presents FS for a period longer or shorter than one year, an entity shall disclose: (A) the period covered by the FS (B) the reasons tor using a longer or shorter period, and (C) the fact that comparative’ amounts for FS are not entirely comparable: + CONSISTENCY OF PRESENTATION. An entity shall retain the presentation and classification of items in the FS from one period to the next unless (A) itis apparent, following a change in the nature of the entity's operations or a review of its FS, that another presentation or classification would be more appropriate; oF (B) a specific PERS requires a change in presentation, 4, INCOME STATEMENT PRESENTATION. When items of income and expense are material, an entity shalt disclose their nature and amount separately. In addition, an entity shall present an analysis of expenses using a classification based on elther (1) nature of expense method or (2) function of expense! method, whichever provides more reliable and relevant information. 5. EXTRAORDINARY ITEMS, An entity shall not present any income or expense as extraordinary items, in the statement of comprehensive income, or separate income statement (if presented), or in the notes to the financial statements. 6. BALANCE SHEET (BS) PRESENTATION. An entity shall present current and non-current assets, and current and non-current Wapilies, except when a presentation based on liquidity provides more reliable nd relevant information. When’ this exception applies, all assets and liabilities shall be presented broadly in order of liquidity. 7. CURRENT vs. NONCURRENT ASSETS. An entity shall classify an asset as current when: ‘A) The asset 18a cash or cash equivalent (unless restricted for at least 12 monthe after BS date) B) It holds the asset primarily for the purpose of trading C) It expects to realize the asset within 12 months after the reporting period (BS date) ) tt expects or intends to realize or consume it within the entity's normal operating cycle? ‘An entity shall classi all other assets as non-current. 8. CURRENT vs. NONCURRENT LIABILITIES. An entity shall classify a lability as current when: 'A) The lability 1s ue to be settled within 12 months after the reporting period (BS date) B) It holds the liability primarily for the purpose of trading ©) It expects to settle the liability within the entity's normal operating cycle ) The entity does not have an unconditional right to defer settiement of the lability twelve months after the reporting period (BS date). ty for at least ‘An entity shall classify all other liabilities as non-current. Retrospective application ofa change in accounting policy is covered by PAS 8. (Sex page 6 for more details) Inappropriate accounting, policies are not rectified cither by disclosure of the explanatory notes. (PAS I. pa, 18) Accounting policies used or by ‘An entity that uses the function of expense method (aka. “cost of sales’ method) shat! the ature of expenses, cluding ceprecraton and amortization expense and emplines bore ee eer 08 “The operating cycle of an enuity 1 the time between the acquisition of assets for proceseine and rece cae PE OY ccash equivalents. When the entity's normal operating cycle is not clearly identifiable. its ‘dumtion Ht realization im cash or oe omths. (PAS 1, pat. 68) 18 assumed 10 be fwelvecpa ee en, rage % LECTURE NOTES in THEORY of ACCOUNTS “ as » 9 BALANCE SHEET LINE ITEMS. As a minimum requirement, the face of the statement of financial positon shall include line items that present the following amounts ‘A) Property, plant and equipment B) Investment property"™ S} tntangibie assets ‘nancial assets" (excluding amounts shown under E, H and 1 )_Invesunents accounted for using tne equity vethad ” ; logical assets (defined as “living animals or plants” under PAS o me ng animals oF plants” wider PAS 41) H) Trade and other receivables 1. Cash and cash equivalents Total assets held for sale (including assets of disposal groups held for sale under PFRS 5) K) Trade and other payables 7 Sere : 1) Provisions (defined as “habilities of uncertain timing or amount” under PAS 37) M) Financial abilties'® (excluding amounts showa under K and L) N) abilities and assets for current tax 0) Deferred tax tabiities and deferred tax assets, not to be presented as current (PAS 1, par. $6) P) Non-controlling (minority) interest, presented within equity'® Q) Issued capital and reserves attributable to equity holders of the parent 10. FINANCIAL LIABILITIES, An entity classifies its financial habilives. as current wl settled within twelve months after the balance sheet date, even if A) The original term was for a period longer than tweive months, anid 8) An agreement to refinance, or to reschedule payments, on a tong-tern the reporting period (BS date) and before the F5 ete authorized tor issue! 11. EFFECTS OF BREACHES. When an entity breaches @ provision of a long-term loat) agreement on or before the end of reporting period (BS date) with the effect that the liability becomes payable on demand, the liability is classified as current, even if the lendes has agreed not to demand payment as consequence of the breach®® 12. STATEMENT OF CHANGES IN EQUITY (SCE). An entity shall present a SCE showing: ‘A) Total comprehensive income for the period, showing separately the total amounts attributed to owners of the parent and to non-controting (minority) interest 8) For each component of equity, the effects of revospective application/restatement under PAS B. ©) The amount of transactions’ with owners im their capacity as owners, showing Sppatately contributions by and distributions to owners. 1) For each component of equity, a reconciliation of the between the carrying amount at the beginning and the end of the period, disclosing each change separately. 13. DIVIDENDS. An entity shalt present either in the statement of changes in equity or in the nokes, the amount of dividends recognized as distributions to owners and the related amount. per share 14. NOTES TO THE FS. The notes are normally presented in the following ordet, which assists users it ‘understanding the FS and comparing them with FS of uther entities: ‘A) statement of compliance with PERS B) A summary of significant accounting policies applied", which shall inch > The measurement bases used in preparing FS. >The other accounting polices used that are relevant to an understanding of the FS ©) Supporting information for items shown on the face of each FS, in the order in which statement and each line item #5 presented. D) Other disclosures, including: Contingent liabilities and unrecognized contractual commitments, 3 Non-financial disclosures (e.g., the entity’s financial risk under PFRS 7) they are due to be SIs IS completed after ‘An investment property is a property (land or building) eld by the owner oF by the lessee under rentals or for capital appreciation oF both. rather thaa for use or sale. (PAS 40) ‘A financial asset is any assct that is cash. an equity insirinent of another entity, a con ‘another financtal asset from another entity. (PAS 32) ‘A financial lability is any Hiability that #6 2 contractual obligation to deliver cash or nother financial nase W another entity. PAS 32) [Non-controlling interests (previously known as miority interest) shali be presented in the consolidailed balance sheet within equity: separately from the parent shareholders’ cquity. (PAS 27, par 27) Ian entity expects, and has the discretion, 19 refinance of roll over an obligation for at Keast Hyelve months alter the balance sheet date under an existing lon facility, it classifies the obligation as nun-carre, even iF A woul otctwse Be ‘due within a shorter period. (PAS 1. par. 73) “The liability ts classified as non-curren if the lender agreed by the balance sheet date to provide a kre [mri eg at feast 12 months afer the balance sheet date. within which the cutity can rectify the breach and dung which the Fewer ‘cannot demand immediate payinemt (PAS 1, par. 75) ‘An entity is required to disclose the jucigmemts that management bas made an the process of appiytny: the etity's ‘accounting policies und that have the most significant effect on the amumis tecogtized in the FS: (PAS 1 pwr 122) In addition. the notes shall contain key assuimpuons concerning the flute and oper kev sone of ewomation that will pose a significant risk of causing a material adyustment 16 the aniount of assets andl abies witha the nest potent 1 ‘uch a case. the notes shall include nature, sous other dctails of sock assets and linbihties (PAR 1, par 128) Finance foase to ert tactual ripht to receive cath orSECTURE NOTES in THEORY of ACCOUNTS: PAS 8: AccounTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS iw n 2s OBJECTIVE, The objective of PAS 8 Js to prescribe the criteria for selecting and changing ACCOUNTING POLICIES,“ changes in ACCOUNTING ESTIMATES and CORRECTION OF ERRORS to enhance relevance, reliabiity and comparabibty of FS of an entity over time as well as with FS of other entities, SELECTION OF ACCOUNTING POLICIES. When a standard specifically applies to a transaction, the accounting policy applied to an affected account shall be determined by applying the standard. In the absence of a standard that applies to a transaction, management shall use its judgment” in developing and applying accounting policy that is relevant and reliable, CONSISTENCY OF ACCOUNTING POLICIES. Once selected, accounting policies must be applied consistently for similar transactions, unless a standard specifically ‘requires otherwise. An entity shall change an accounting policy if the change (1) is required by a standard, or (2) resuits in the FS providing more relevant and reliable financial information. CHANGES IN ACCOUNTING POLICIES. A change in accounting policy that is required by a standard shall be ‘applied in accordance with the transitional provisions therein. If a standard contains no transitional provisions or if an accounting policy is changed voluntarily, the change shail be applied retrospectively (as if the policy had always been applied) as adjustment to the opening balance of each affected component of equity (e.9., retained earnings) for the earliest prior period presented. For purposes of PAS 8, the foliowing are NOT considered as changes in accounting policies: 1. Application of accounting policies for events that differ in substance from those previously occurring. 2. Application of a new accounting policy for transactions that did not occur previously or were immaterial, EXCEPTION to the RULE. When it is impracticable” for an entity to apply a new accounting policy retrospectively (e., it cannot determine the cumulative effect of applying the policy to ali prior periods), the entity applies the new policy prospectively from the start of the earliest period practicable. APPLICATION of NEW STANDARDS. When an entity has not applied a new standard that has been issued but is not yet effective, the entity shall disciose this fact, and the reasonably estimable information relevant to assessing the possible impact that application of the new standard will have on the entity's FS in the period of initial application, CHANGES in ESTIMATES”. The effect of a chenge in an accounting estimate shall be recognized prospectively by including tt 1n the profit or loss dunng the period of the change (if the change affects that period only) or the period of the change and future periods (if the change affects both). EXAMPLES of CHANGES in ESTIMATES, Due to uncertainties inherent in business activities, many items in FS cannot be measured with precision but can only be estimated. Estimation involves judaments based on the latest available, reliable information. Common examples of accounting estimates include: 1. Bad debts and inventory obsolescence 2. Fair valve of financial assets or financial labulties 3. Useful lives of depreciable assets; and 4. Provision for warranty obligations A change in the measurement basis applied is a change in an accounting policy, and is not a change in an accounting estimate. When itis difficult to distinguish a change in an accounting policy from @ change in an accounting estimate, the change is treated as a change in accounting estimate. CORRECTION OF ERRORS."* An entity shall correct material prior period errors retrospectively as an adjustment to the opening balances of retained earnings and affected assets and liabilities. If comparative statements are presented, the FS of prior period shall be restated to reflect the retrospective application of the prior period errors. if the error occurred before the earliest period presented, the opening balances of assets, abilities and equity for the eariiest period presented shail be restated. MATERIALITY”®. In applying the concept of materiality: 1. Accounting policies in the PFRSs need not be applied when the effect of applying them is immaterial. 2, FS do not comply with PFRSs if they contain material errors, whether due to omissions or misstatements. 3. Material prior period errors should be corrected retrospectively in the first set of FS authorized for issue after their discovery. ‘Accounting policies are the specific principle, bases, conven presenting finaneial statements. {In making judgments, management shall refer to the following sources in descending order: 1) The requirements and guidance in standards deating with similar and related issues 2). The definition, recognition criteria and measurement concepts set forth in the Conceptunt Framework In making the judgment. management may also consider the mos recent pronouncements of ether standard-siting bodies {hat use similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices. tothe extent that these do not conflict with PFRS and the Conceptual Framework. ‘Applying a requirement is impracticable when the entity cannot apply it aller making every reasonable effort to do so. ‘A change in accounting estimates results from new information or developments and. hence. are not corrections of errs. The concent of andarental errors been eliminated. Instead PAS # uss and delines term rot prio ero” Prior ox errors are omissions and misstatements in the FS for one oF more perio tre comimitied in prior periods tre chacovered only in the curent perind een ee ‘Omissions or misstatements of items are material, if hey coi decisions of users faken on the bass ofthe judged in the surrounding circumstances. n, rules and practice adopted by an entity in preparing and a . individually or collectively. influence the economic FS, Moteriality depends on the size and nature of the omission of misstatementPFRS 5: NON-CURRENT ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS + NON-CURRENT ASSETS HELD FOR SALE An entity shall classify separately from other assets @ non current avset (or disposal a sale if its carrying amount will be recovered principally through a sale’’ continuing use The following conditions must be met for a non-current asset to be classified as hekd for sake 1, Management 1s committed to a plan to sell the asset or disposal group ‘An actwe program to locate a buyer and complete the plan mist have been initiated The asset must be available for immediate sale The sale is highly probable within one year from the date of classification ag held for sale The asset is being actively marketed for sale at a price that Is reasonable in relation to its fair value Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn. An entity shall measure a non-current asset classified as held for sale at the lower of its carrying amount or fair value less costs to sell’®. Non-current assets held for sale shall NOT be deprociated from the date classified as such. An entity shall present a non-current asset classified as held for sale and the assets of @ disposal group classified as held for sale separately from other assets in the balance sheet, The liabilities of a disposal group classified as held for sale shall be presented separately from other abilities tn the balance sheet. Those assets and liabilities shall NOT be offset and presented as a single amount, ‘The major classes of assets and liabilities classified as held for sale shall be separately disclosed either on the face of the baiance sheet or in the notes. An entity shail measure a non-current asset that ceases to be classified as held for sale at the lower of ts. carrying amount’ (before the asset was classified as held for sale) and its recoverable amount” (at the date of subsequent decision not to sell). ‘+ DISCONTINUED OPERATIONS A discontinued operation is a component of an entity” that either has been disposed of, oF 1s classified as: held for sale, and 1. Represents a separate major line of business or geographical area of operations: 2. Is part of a single coordinated plan to dispose a separate major line of business of geographical area of operations, or 3._ Isa subsidiary acquired exclusively with a view to resell (for resale) A component of an entity is classified as discontiqued operation at the date the entity has actually disposed fof the operation or when the operation meets the criteria to be classified a% Held for sale ‘An entity shall disclose a SINGLE amount” on the face of income statement comprising the total of: 1. The post-tax profit or loss of discontinued operations and 2. The post-tax gain or loss recognized: A) On the measurement to ‘fair value less costs to sell’ OR B) On the disposal of the assets constituting the discontinued operations. ip *) as helt for action father than through 26 A group of assets possibly to be disposed of, by sales oF otherwise, tagetter as # gp iW site transaction, and liabilities directly associated with those assets that will be transferved in the taomyaetion, 27 The asset (or disposal group) must be available for immediate sale in ity present candition aunt Me sale must be etl probuble. “Highly probable” means thatthe probability ofthe fine sale i hight tha “inane fkety than ol AN ent shall not classify as held for sale & non-curremt asset (oF disposal toms) that fo he abnbanent 78 f.a non-current asset within the scope of PFRS 5 is part of a disposal proup. the measurement requirments of PERS S apply to the group as a whole, so thatthe group is measured at lower ot ts carry ng AUT an Fatt als feoe eents fo nel ‘The write-down to fair value less cost to sell is treated sa dampen fons 9 The carrying amount is adjusted for depreciation, amortization ar revaluationy that woukl have Deon resgnised hav the asset not been classified as held forsale x0 Recoverable amount is measured as the higher of an asset's fiir value less cast fy well at its Value fv se This is well ‘emphasized in PAS 36 on impairment of assets, 3A component of an entity may be a subsidiary, « major fine of business or peoeaphival segment whnse operatmens and ‘cash flows can be clearly distinguished, operationally and for financial repotiny pnpoes, thn the wat tthe ety 32 {he results of discontinued operations, net of tax, showkd be shown as a sityste anton dn the tinciie Sateitiont separate) from the income from continuing operations. To explain the delay wf thiv sungle-atwunts Whe allan heh disclosed in the notes to the FS: 1. The amount of revenue. expenses and income oF loss atrilutuble to the discontinied eyeration shang the ewHoAt period and the related income tax. 2. Any impairment loss (as the fair value toys cost (0 sell of the net avwts nt the discwntinted operate fowee tha their canying amounts) Ithe varying amount is tower the expected ai nat Poveda tg hoe 3. The termination cost of employees and other costs that are divectly scurved as a testlt A hs sis naianny sg feng ein or loss fram the ata spa the asa and stone of tay a liq staan “Costs to sell” is the incremental costs directly attributable 10 the disposal of ay asset (HF eben BHO, Cevineay HRA ‘costs and income tax expense,PAS 24: RELATED Party DiscLosuRES ‘PURPOSE. Related party relationships are a normal feature of commer Sin enter inte transactions thot unrelated partes would not. Als, Wasactions between veltes neice aay nae be made at the same amounts as between unrelated parties. (e.9., an entity that sells goods to ts parent ‘company at cost might not sell on those terms to another customer). For these reasons, knowledge of related party transactions, outstanding balances and relationships may affect asseasments of an entity's Operations by users of financial statements, Including assessments of the risks and opportunities facing the entity; hence, related party disclosures are necessary. + RELATED PARTY. A party 1s related to an entity if: 'A)_ Directly, oF indirectly through one or more intermediaries, the party: > has the ability to controP*, is controlled by, or is under common contro} with, the entity (this, includes parents, subsidiaries and fellow subsidiaries) > has an interest in the entity that gives it significant influence’® over the entity > has a joint controf® over the entity 8) The party is an associate of the entity ©) The party is a joint venture in which the entity is a venturer D) The party is a member of the key management personnel” of the entity or its parent E) The party is a close family member of any individual referred to in A or D F) The party is an entity that is controlled, jointiy controlled or significantly influenced by any individual referred to In D or E G) The party is @ post-employment benefit plan for the benefit of employees of the entity, or of an entity that is a related party of the entity. + NOT NECESSARILY RELATED PARTIES. Under PAS 24, the following are NOT necessarily related parti ‘A) Two entities simply because they have a common director or other common member of key management personnel. 8) Two venturers simply because they share joint control over a joint venture. ©) Providers of finance, trade unions, public utilities, government department and agencies, simply by Virtue of their normal dealings with an entity. D) A customer, supplier, franchisor, distributor, or general agent with whom an entity transacts a significant volume of business, merely by virtue of the resulting economic dependence. + RELATED PARTY TRANSACTION. A ‘related party transaction is a transfer of resources, services or ‘obligations between related parties, regardless whether a price is charged or not. + CLOSE FAMILY MEMBERS OF AN INDIVIDUAL. Close family members of an individual are those family members who may be expected to influence, oF be influenced by that individual, in their dealings with the entity. They may include: ‘A) The individual's domestic partner and children B) Children of the individual's domestic partner C)_Dependents of the individual or the individual's domestic partner + PARENT & SUBSIDIARIES. Relationships between parents and subsidiaries shall be disclosed irrespective of whether there have been transactions between those related parties. An entity shall disclose the name of the entity's parent and, if different, the ultimate controlling party. | COMPENSATION". An entity shall disclose key management personnel compensation in total and for each of the following categories: 'A) Short-term employee benefits (e.g., wages, social security contributions, paid leaves, bonuses) 8) Post-employment benefits (e.g., pensions, retirement benefits) ©) Other long-term benefits (e.g. long-service leave, long-term disability benefits) 0) Termination benefits €) Equity compensation benefits + RELATED PARTY DISCLOSURES. If there have been transactions between related parties, an entity shall disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for the understanding of the potential effect of the relationship on the FS. At the minimum, disclosures shall include: ‘A)_ The amount of the transactions B) The amount of outstanding balances and > Their terms and conditions, and whether they are secured or unsecured > The nature of settlement consideration, and details of guarantees given or received A) Provisions for bad debts related to the amount of outstanding balances B) Expense recognized in respect of bad debts due from related parties 3 Control’ is the power fo govern the financial and operating policies of an entity $0 as to obtain benefits from its activities (PAS27) i, "Significant influence” is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies. Significant influence may be gained by share ownership, statute or agreement. (PAS 28) “Joint control’ isa contractually agreed sharing of control over an economic activity. (PAS 31) ‘Key management personnel” refer to those persons having authority and responsibitity for planning, directing, and controlling the activities of an entity. directly or indirectly, and include directors (executive or otherwise) ofthe entity. 38 ‘Compensation’ includes all employee benefits, which include all forms of consideration paid, payable or provided by the entity, or on behalf of the entity, in exchange for services rendered to the entity, (PAS 19) 35 36 7 mm 827LECTURE NOTES in THEORY of ACCOUNTS + EXAMPLES OF RELATED PARTY TRANSACTIONS REQUIRING DISCLOSURES. ‘The following are exampies of transactions that are disclosed if they are made with a related party: ‘A) Purchases or sales of goods (finished or unfinished) 8) Purchases or sales of property and other assets ©) Rendering or receiving of services, D) Leases £) Transfers of research and development F) Transfers of license agreements G) Transfers under finance arrangements (including loans and equity contributions in cash or in kind) H) Provision of guarantees or collateral 1) Settlement of abilities on behaif of the entity or by the entity on behalf of another party Items of similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the FS of the entity. PAS 10: EVENTS AFTER THE BALANCE SHEET DATE (EVENTS AFTER THE REPORTING PERIOD) + EVENTS AFTER THE BALANCE SHEET DATE are favorable and unfavorable events that occur between the balance sheet date and the date when the FS are authorized for issue, FS shall disclose the date when the FS were authorized for issue, and who gave that authorization", . ‘+ ADJUSTING EVENTS after the balance sheet date (i.e., those that provide evidence of conditions that existed at the balance sheet date) should be recognized in the FS. Examples are (among others) @) Resolution or settlement after BS date ofa court case that confirms that the entity had a present obligation at the BS date. b) Bankruptcy of a customer that occurs after BS date, confirming that a loss existed at the BS date on a trade recewable ©) Sale of inventories after the BS date that may give evidence on net realizable value (NRV) at the BS date. 4) Determination after the BS date of the cost of assets purchased, or the proceeds from assets sold, before the BS date. ) Determination after the BS date of the profit sharing or borus payment if the enterprise had the present obligation at the BS date to make such payment. f)__ The discovery of fraud or errors that show the FS are incorrect. ‘An entity shall adjust amounts recognized in ts FS to reflect adjusting cvents after the BS date. If an entity receives. information after the 8S date about conditions that existed at the BS date, it shall update disclosures that relate to those conditions, in the light of the new information + NON-ADJUSTING EVENTS" after the balance sheet date (1.e., those that are indicative of conditions that arose after the balance sheet date) are not recognized but aré disclosed in the notes to the FS. Examples are (among others): = 2) Major business combination or disposing of a major subsidiary after the BS date b) Announcement of a plan to discontinue an operation ©) Major purchase and disposal of assets, or expropriation of major assets by government. 18) Destruction of major production plant by a fire after the BS date. ‘e) Announcement of a major restructuring” A) Major ordinary share transactions and potential ordinary share transactions after BS date. @) Abnormally large changes after the BS date in asset prices or foreign exchange rates. hh) Changes in tax rates or tax laws enacted or announced after the BS date. i) Entenng into significant commitments or contingent liabilities, for example, by Issuing guarantees, 3) Commencing major litigation arising solely from events the occurred after the BS date, k) Decline in market vaiue of investments between the BS date and the date when the FS are authorized for issue. «DIVIDENDS. Dividends on equity shares declared after the balance sheet dete should not be recognized as & liability at the balance sheet date. Such dividends are disciosed in the notes to the FS (e., 2 non-adjusting subsequent event). + GOING CONCERN, Deterioration in operating results and financial position after the balance sheet date may indicate a need to consider whether the going concer is still appropriate; an entity should not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the entity or cease trading, or that it has no realistic alternative but to do so. This is previously called as “subsequent events’, Subsequent events, as defined previously, the BS date until the dae of FS (ssuance 42 If the entity's owners (or other parties) have the power to amend the FS after issue, the entity shal! disclose this fact. The process involved in authorizing the FS for issue will vary depending upon the mianayement structure, statutory Fequirements and procedures followed in preparing and finalizing the 41 _Aneentity shal disclose the following fer each material cateyory of non-adjusting event after the BS dat: a The nature of the event + Anestimate of its financial effect, or a statement that such an estimate cannot be made. 24 resiructuring is @ program, planned and controlied by management, that materially. changes business undertaken by an enterprise or the manner in which that business is conducted. (PAS 37) © events that happened after either the scope of gm 827PAS 37: Provisions, CONTINGENT LIABILITIES & CONTINGENT Assets PROVISIONS are labilties of uncertain timing or amount. A provision should be recogmzed when: = An entity has a present obligation (legal or constructive) ae a result of a past event, ~ It is probable that an outflow of resources embodying economic henefts will be required to Settle the obligation, and ° ~The amount of obligation can be measured reliably Provisions should not be recognized for future operating losses. If an enterprise has a contract that is onerous"”, the present obligation under the contract should be recognized as a provision. An OBLIGATION EVENT is an event that creates a legal or constructive obligation that results in an entity having no reaiistic alternative but to settle the obligation created by the event. A LEGAL OBLIGATION 1s an obligation that is derived from a contract, legislation, or other operation of law. A CONSTRUCTIVE OBLIGATION is an obligation that derives from an enterprise's actions where: A) The enterprise has indicated to other parties that it will accept certain responsibilities, and 8) The enterprise has created a valid expectation on the part of other parties that it will discharge certain responsibilities 5. A CONTINGENT LIABILITY 15 either: A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence oF non-occurrence of one or more uncertain future events not wholly within the control of the entity, OR A present obligation that arises from past events but is not recognized because it 1s not probable that an outflow of resources embodying economic benefits will be required to settle obligation or the amount of the obligation cannot be measured with sufficient reliability. Hence, an enterprise should not recognize a contingent tiability on the face of FS. A contingent liability 's required to be disclosed in the notes to the FS, unless the possibility of an outflow of economic benefits 1s remote. ©. A CONTINGENT ASSET is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the contro! of the entity. Hence, an enterprise should not recognize 4 contingent asset. A contingent asset is required to be disclosed in the notes to the FS, where an inflow of economic benefits is probable. However, when the realization of income is virtually certain, then the related asset is not a contingent asset and is therefore recognized Consider the follo 19: (assuming the amounts can be measured reliably) {Probability (20) | CONTINGENT LIABILITY | ~ CONTINGENT ASSET] [ PROBABLE | “More than S0%. | Recognize (a5 Provision) | Disclose (in the Notes) | remote |~Zess than 5% No requirement | No requirement 7. MESUREMENT of PROVISION. The amount recognized as a provision should be the BEST ESTIMATE of the expenditure required to settle the present obligation at the balance sheet date, taking inte aereuce the risks and uncertainties surrounding the circumstances that relate to the provision, + Where the provision being measured involves a jarge population ‘of items, the obligation ie estimated by weighing all possible outcomes by their associated probabilities, This cratictced method of estimation is known as the EXPECTED VALUE + Where there is a continuous renge of possible outcomes, and each poi in s likely as any other, the MID-POINT of the range 1s used Patri itn ERT poh tah + Where the effect of the time value of money is material, the amount of a provision should be the PRESENT VALUE of the expenditures expected to be required to settle the obligation & 8. REIMBURSEMENT, Where some or all ofthe expenditures required in setting a provisions onected to be reimbursed by another party, the reimbursoment should be recognized as a separate seat ores te virtually certain that reimbursement wil be received if the entity settles an obligation the wero te Fecognized for the reimbursement should not exceed the amount of the proven in the weet statement, the expense relating to a provision may be presented met of the amount reeacneed ore reimbursement 9. RESTRUCTURING". A provision for restructuring costs 1s reeognized only when the general criteria for a provision are met (see item no. 1). A restructuring provision shovid not he Seevereted wath fongoing activites of the enterprise and should not include costs, sueh as retrarane’ a setting continuing staff, marketing oF investment in new systems and distribution networks exceed the 1s under the cont isks he discount rate shout ap sessments of the time alc of money and the specitfc 10 the Fiability, ‘The discount rate should not reRect risks for which future cash flom eatimates hare been adjusted. (PAS 37. par 47) a cestrcturing. «program, planned and controlled by management, that materially changes either the seope of a Ai jeraken by an enterptive or the manner in which that business is condoered business:EXCERPTS ON PHILIPPINE ACCOUNTANCY ACT OF 2004's IMPLEMENTING RULES AND REGULATIONS (IRR) + NISTORICAL BACKGROUND Repubitc Act No. 9298 or otherwise known a5 The Philonine Accountancy Act of 2004 repeals Presidential Decree No. 692 or otherwise known as The te De e Revised Accountancy Law. The new Act was passed durng the Zi fegular session of the 12" Philippine Congress from the consolidation of Senate Bill No: 2748 (passed 6 February 2004) and House Bill No. 6678 (passed 7 February 2004), Former President Giorla Arroyo signed and approved it on 13 May 2004, the day the consolidated bil becarne o low + RATIONALE The Philippine Accountancy Act provides for the set of mules governing the practice of accountancy in the Philippines. The Professional Regulatory Board of Accountancy (BoA), one of the professional boards under the Professional Regulation Commission (PRC), is mandated by the Act to promulgate rules pertaining to “the supervision, control and regulation of the practice of accountancy in the Philippines.” In November 2004, BoA issued and approved a set of rules and regulations implementing RA'9298, now known as Implementing Rules and Regulations (IRR). + FINANCTAL REPORTING STANDARDS COUNCIL Within 90 days from the effectivity of the IRR for the Philippine Accountancy Act of 2004, the Financial Reporting Standards Council (FRSC) shall be created. The FRSC replaces the ASC and evaluates the TAS and [ERS that shall be adopted in the Philippines. Other than the chairman®, the FRSC shall be composed 9f 14 members representing the following organizations Professional Reguiatory Board of Accountancy (BoA) 1 member Secunities and Fxchange Commission (SEC) 1 member Bangko Sentral ng Pilipinas (BSP) 1 member Bureau of Internal Revenue (BIR) 1 member A major organization composed of FS preparers and users, 1 member Commission on Audit (CoA) 1 member Accredited Professional Organization (APO) & members* * The 8 representatives from Accredites! Professional Organization (APO) shall be equally divided among the accounting sectors: public practice (2 members), commerce and industry (2 members), education: (2 members), government (2 members). At present, BoA recognizes 'PICPA' as the accredited professional ‘organization (APO) of CPAS in the Philippines + ACCOUNTING STANDARDS COUNCIL (ASC) The ASC was the ‘author’ of what used to be known as SFAS (Statements of Financial Accounting Standards). Formed to establish the generally accepted accounting principles in the Philippines, the ASC had. performed its function since November 1981 until tt was replaced by the Financial Reporting Standards: Council, pursuant to the IRR of the new accountancy law. ASC was camposed of eight members, nominated by the following organizations: Philippine Institute of Certified Public Accountants 4 members Securities and Exchange Commission 1 member Bangko Sentral ng Pinpinas 1 member Board of Accountancy 1 member " Financial Executives Institute of the Philippines 1 member In 1997, the ASC made a dectsion to harmonize accounting standards in the Philppines with International Accounting Standards (IAS), which later evolved into Intemational Financial Reporting standards (IFRS)*” Consequently, IFRS becomes the basis of the Philippine Financial Reporting Standards (PFRS)**. + PHILIPPINE INTERPRETATIONS COMMITTEE (PIC) b The FRSC formed the Philippine Interpretations Committee (PIC) im August 2006 to assist the FRSC standards in establishing and improving financial reporting standards in the Philippines, The role ot the PIC {5 principally to issue implementation guidance on PFRSs, The PIC members are appeinted by the TREC ord include accountants in public practice, the academe and requlatory bodies and users of financial statements, “The FRSC Chairman, who had been ot presently senior account be appointed by the PRC upon the recommendation of BoA in coordination with PICPA as the accredited professional ‘organizations. ‘The Chairman and members oF FRSC shall have aterm of vhree (3) years eenewable for another term IWRSs ate standards issued by the Intemational Accounting Standards Hoacd (ASB: the IASB replaced the Intemational in any scope of accounting practice, shall Accounting Standards Committee (IASC) in 2001 “Based on paragraph 7 of PAS 1. the (enn “PERS” shall be composed of (a) PERS (b) Philippine Accounting Standards (cd Interpretations. PFRS sets out the recagnition, measnrement. presentation and diselosure: requirements dealing. with transactions and evens thit are important in normally involves the folowing: (2) Consideration of the pronouncement of IASB (0) Formation of ask Foree, when deemed necessary. ta xive advice to FRSC (©) Issuing for comment an exposite craft approved by at Kast ciuht (R) FRSC members: coinment period wll be at least 0 days, unless shorter period (not less tan 30 days) is considered appropriate by | RSC (8) Consideration of all comments received within the comment perind ah when appropriate. preparing. the comment Fete tothe IASB {e), Approval of 1 sand by af ust eight (8) ofthe FRSC members cra purpose T'S. A PFRS is developed through a die process thatPAS 34: Interim Reportina # ENTITIES COVERED NY INTERIM REPORTING STANDARDS, 10 Certain companies required by Sacunties and Exchange Commission (SEE) & the Mulipuine Stark Ese hange (PSE) to publish interim FS", 2. Cental companies that + IVTPHIMEFIWANCIAL HE PORT Ay intern fina Teport Means a financial report containing either a cumplete get at PS at a ket ot (hintensed £5 far att loterim period, As a ininintuns requirement, an interim fiat lal repart shud Wye hade the following components; Condensed balance sheet Condensed income statement Condensed statement shawing either changes in equity oF comprehensive Ine Contonsml cash flow statement Selected explanatory notes Fasc and diluted earnings per share should be presen condensed, for an tnterim period. # SELECTED EXPLANATORY NOTES", eMterise should include the following information, as a minimum, in the notes to ite interim FS, iF material and if not disclosed elsewhere in the interim financial report JA statement that the same accounting policies. and methods of commputatin are Fallawad in Fhe Interim 15 aw compared with the most recent annual FS or, I thosh policies of mietlinds have hee «Inanged, & description of the nature and etfect of the change 2. Explanatory comments about the season ality oF cyclicality of interim operations: 3. The nature and amount of items affecting assets, liabililies, equity, net income oF cash flows that are unusual because of their nature, size or incidence 4. The nature and amount of changes in estimates of amounts reported in pring interin periods. Of the Current financial year oF changes in the estimates of aniounts reported in prigt financtal yea IF Uhake Changes have a material effect in the current interim period $8. Isauances, repurchase and repayments of debt and equity securities 6. Dividend paid (aggregate oF per share) separately for ordinary shares and alter shies 7. Segment revenue and segment result for business segments or geographical seyinents, Whichever Is the primary basis of segment reporting 8, Material events subsequent to the end of the interim period that have not been reflected i the FN fer the interim period 9% The effect of changes in composition of the enterprise during the interim perind, Including business Combinations, acquisition oF disposal of subsidiaries and long-term investients, restr liga, and dixcontinued operations. 10. Changes in contingent liabilities oF contingent assets since the last annual WS date, + PERIODS for which INTERIM FS are REQUIRED to be PRESENTED. Interim reports should include interin: FS for periods as follows: 1, Balance sheet as of the end of the current interim period and a comparative BS as af the end at the immediately preceding financial year. 2. Income statements for the current interim period and cumulatively for the Furrent finane tal year to date, with comparative income statements for the comparable Interim periods. {current aul oor ton date) of the immediately preceding financial year 3. Statement showing changes in equity cumulatively for the current financial year ta date, with comparative statement for the comparable year-to-date period of the immediately presceling Tears wa year 4. Gash flow statement cumulatively for the current financial year to date, with & comparative statement for the comparable year-to-date period ofthe imniediately prevediny fina lal yoor ect Lo publish an intertia financial report vaene 1d on the face of an Income stalement, complete or ‘he SEC ana! PSF require companies covered by the reportarial require {ivrim finan reports within 45 dave ater the end ofeach ofthe tvs th covered by the Kuley on Conimercial Papers and Financinye Act tf yearend ‘An interim pried is 0 financial reporting period shorter than a full Financial year tnicriny Roan) veponts may Ne [presented monthly, quurterly or semiannually ‘oF kinds of disclosures as required by PAS 34. par 17 areas follows {@) write-down oF inventories to net eealizable value and the reversal of of PPE and provision forthe Boats of restr ‘ad disposals of items oF PP 5 For the purchase oF PPE: (1) ution settlements (x) corrections of fundamental erors in previously reported Financia! data (1) any deb dealt oF breach of @ debt covenant that has not been corretel subsets (i). related party transac of Revised Seewition Avt Wy fie qunntorly © quunters, Alva, th SEC sales cosipanion © quarterly fiancial reparts within 48 yay all & 0 “ ira write-duwn angibles and the reveal of sacl ae impair towsPERS 8: OPERATING SEGMENTS 3 s 8s RATIONALE An entity shall disclose information to enables users of FS to evaluate the nature and financial effects of the usiness activities in which it engages and the economic environments in which it operates, ENTITIES COVERED BY OPERATING SEGMENT STANDARDS, 1. Entities whowe equity or debt securities are publily traded 2. Entitios that ate in the process of issuing equity or debt wecunties in public securities rnarket In the cave of group of companies (4e., parent and subsidiaries), PFRS 8 applies to the consolidated financial stataments of the group only. OPERATING SEGMENTS, An operating Segment is a component of an entity A) That engages in business activities from which it may earn revenues and incur expenses (Including gvenwes and expenses relating to transactions with ether components of the sare entity). 8) Whose operating results are regularly reviewed by the entity's chief operating decision rnaker™ to make decisions about resources to be allocated to the segment and assess its perform ©) For which discrete financial information Is available, REPORTABLE SEGMENTS, An entity shall report separately information about an operating segment that meets any of the following Quantitative thresholds: A) Its reported revenue, including both sales to external customers and intersegment Salas or transfers, is 10% oF more of the combined revenue, intemal and external, of all operating seginents 8) The absolute amount of its reported profit oF loss is. 10% oF more of the greater, In absolute amount, of (2) combined reported profit of all operating segments that did not report a loss and (2) combined eported loss of all operating segments that reported a loss. C)_ Its assets are 109% oF more of the combined assets of all operating segments, If the tatal external revenue reported by operating segments is less than 75% of the entity's revenue, additional operating segments should be identified as reportable segments, even if they do not moet the 10% thresholds, until at least 75% of entity's revenue is included in reportable segments. AGGREGATION OF OPERATING SEGMENTS. ‘Two or more operating segments may be aggregated Into a single operating ceament If the seaments have similar economic characteristics. and are similar in each of the following respects: A) the nature of the Products and services, 8) the nature of the production processes, C) the type or class of customer for thelr Products and services, 0) the metiiods used to distribute thelr products of provide their services, E) and if applicable, the nature of regulatory environment, for example, banking, insurance or public utilities, DISCLOSURE OF OPERATING SEGMENT INFORMATION {An entity shail disclose the following for each period for which an income statement is presented: A) General information’? about the operating segment. 8) Information about segment profit or loss, segment assets®® and segment liabilities. ©) Reconcihations of the totals of segment revenue, segment profit or loss, segment assets, segment habihties and other material segment items to corresponding entity amounts, ENTITY-WIDE DISCLOSURES Entity-wide disclosures are additional information that is required to be disclosed by all entities if such information is not provided a6 part of the reportable segment information. An entity. shall. report information about: 1) products and services, 2) geographical areas and 3) MAJOR CUSTOMERS The chief operating decision maker id fanetion, not necessarily a manager with a specitic title, ‘hut funtion is to allocate resources to and assess the performance ofthe operating segments of an entity, (PERS & par?) shal disclose the following general information about an operating segment: (PERS &, pur, 2) vsed to Klett the reportable segments, incloing the bss oF organization, (ey. wether Management ae the entity around differene es, Reographical areas, regulatory environment, Haan of factors, and whether operating segments have Been meget) 2. Types of products and services from which each reporiable seument deries te reveave, An entity shall dsclose the following if included inthe measure of profit ur ons (PERS, par 29) (a) Revemes fom external customers and tansactions with other epetating segments of ace (b) Interest revenue and interest expense ee ye nea ae ty (6), Depreciation and (a) Materia it (€) Interest in profit or foxs of associates and joint vent (D) Income wx expense ‘An eniity shall disclose the following about each reportable segment ifthe speci Ot segnet ans review by cit operating ater (PRG pra) ETE! MMH oe Lela a he anne {a) The anions oF investments in associates and joint venture aceoanted for (b) The amounts of additions to non-current assets other than finance benefit ansetw und rights ariving underinsurance contracts, I€ revenue from transactions with single external customer amount (0 10% oF more of ai entity's reven sl encloe Ot at aan of revenues rom each major comet an heey ate oor ey revenues, The eoity need mor disclose the identity of a major customer or the aname of reports from that custonver or nt OF revenues that cnet segMieHt toneash items other than depreciation and amortization lure accounted for by the equity method by the equity methort, and struments, deferred tnx aasets, PORL-eMpaynnentPAS 41: AGRICULTURE + SCOPE, PAS 41 applies to the following items, when they relate to agricultural activity: See 9 y to agricultural activity: 2. Agricultural produce® at the point of harvest’? 3. Government grants® related to a biological asset PAS 41 does not apply to: > Land related to agricultural activity, which is covered by PAS 16 (Property, Plant and Equipment) and PAS 40 (Investment Property). Intangible assets related to agricultural activity, which are covered by PAS 38 (Intangible Assets). PAS 41 applies to agricultural produce only at the point of harvest. Thereafter, PAS 2 Inventories or another standard shall be applied; PAS 41 does not deal with the processing of agricultural produce after harvest. While processing may be a logical and natural extension of agricultural activity, and the events taking place may bear some similarity to biological transformation, processing of agricultural produce is not within the definition of agricultural activity in PAS 41. + EXAMPLES. Biological assets | Agricultural produce | __ Products that are the result of Sheep “Woe! a 2 plantation forest_| Logs (Felled trees) —__Cotton “Harvested cane Mill “Carcass Sousages, cured hams ‘Leaf Tea, cured tobacco Grapes Wine Picked fruit Processed fruit + RECOGNITION CRITERIA, ‘An entity shall recognize a biological asset or agricultural produce when: A) The entity controls the asset as a result of past events; 8) Itis probable thet future economic benefits associated with the asset will low to the entity; and €) The fair value or cost of the asset can be measured reliably. + MEASUREMENT BASIS. A BIOLOGICAL ASSET shall be measured on initial recognition and at each balance sheet date (reporting period) at fair value™ less costs to sell.°? AGRICULTURAL PRODUCE harvested from an entity's biological assets shall be measured at the point of harvest at its fair value less estimated costs to sell, Any gain or toss! on the initial recognition of biological assets at fair value less costs to sell and any changes in the fair value less costs to sell of biological assets during the reporting period are included 1m profit or loss for the period. All costs related to biological assets that are measured at fait value are recognized in profit or loss when incurred, except for those costs incurred to purchase biological ascete, ‘Any gain on the initial recognition of agricultural produce at fair value less costs to sell will be included | in tthe profit or loss for the period to which it relates, Biological assets are living animals and plants Agricultural produce isthe harvested product of the entity's biological assets. ‘Harvest isthe detachment of produce from a biological asset or the cessation ofa biological asses life processes Government grants are asistance by govemment inthe form of transfers of resources to an entity in return for past or Fuure compliance with certain condition relating tothe operating activities ofthe entity. PAS 20) Agricultural activity is the management by an entity of the biological transformation agricultural produce, or into additional biological assets (Examples of agricultural neti perennial cropping, cultivating orchards and plantation, floricultre, {ransformation relates t0 the processes of growth, degeneration, produ: Aualitative or quantitative nature of a biological asset, FFair value is the amount for which an asset could be exchanged, ora li pprtes in an arm’s length transaction, Costs 1o sel! are the incremental costs directly attributable 10 the disposal of an asset; and dealers, levies by regulatory agencies and commodity exchanges, and transfer financing charges, transport and other costs necessary to get assets toa market, A foss may arise on initia) recognition ofa purchased biological asset as their fae value less estimated point-of-sale costs are likely to be less than the purchase price plus any transaction and transportation cosls: a gui may are vn inne recognition ofa biological asset, such as when a calfis born. (PAS 41. par 27h gees o Of biological assets for sale, into ity are raising Tivestock, annual oF aquaculture, including fish farming); biological ction, and procreation that can cause changes in lity settled, between knowledgeable, willing, ‘examples are commissions to brokers. taxes and duties; costs to sell exclude+ GUIDELINES INV DETERMINING FAIR VALUE » In deciding on the fair value for a biological asset or agricultural produce, it is possible to group together items in accordance with, for example, their age or quality. Entities often contract to sell their biological assets or produce at 2 future date. These contract prices do not necessarily represent fair value. The fair value of a biological asset or agricultural produce Is not necessarily adjusted because of the existence of a contract. If an active market™ exists for a biological asset or an agricuitural produce, the quoted price in that market 1s the appropriate basis for determining the fair value of that asset If an entity has access to different active markets, the entity uses the most relevant one. > Ifan active market does not exist, then the following methods can be used to determine fair value: ‘A) The most recent market transaction price 8) Market prices for similar assets with adjustment to reflect differences; and ©) Any sector benchmark such as the value of cattle per kilogram or value of a farmland per hectare. In some cases, market prices or values may not be available for an asset in its present condition. In these cases, the entity can use the present vaiue of the expected net cash flow from the asset discounted at a current market pretax rate > In some cases, costs may be an indicator of fair value, especially where little biological transformation thas taken place or the impact of biological transformation on the price is not expected to be significant. » + ABSENCE OF FAIR VALUE. There is @ presumption that fair value can be measured reliably for a biological asset However, this presumption can be rebutted for a biological asset that, when first recognized, does not have a quoted market price in an active market and for which other valuation methods are clearly inappropriate and unreliable. In this case, the biological asset shall be measured at its costs /ess any accumulated depreciation and impairment losses”. Unlike a biological asset, agriculture produce is always assumed to have a measurable fait value. + CHANGES IN FAIR VALUE The fair value less costs to sell of a biological asset can change due to both: 1) PHYSICAL changes, and 2) PRICE changes in the market. An entity 1s encouraged (but not required) to have a separate disclosure of physical and price changes that is useful in appraising current period performance and future prospect, particularly when there is a Production cycle of more than one year. Biological transformation results in a number of types of physical change -- growth, degeneration, production, and procreation, each of which 1s observable and measurable. Each of those physical changes has a direct relationship to future economic benefits. A change in fair value of a biological asset due to harvesting Is also physical change. ‘Agricultural activity is often exposed to climatic, disease and other natural risks. If an event occurs and ives rise to 9 material item of income or expense, the nature and amount of that item are disclosed in accordance with PAS 1 Presentation of Financal Statements. Examples of such an event include an outbreak ofa virulent disease, a flood, a severe drought or frost, and a plague of insects. | GOVERNMENT GRANTS. ‘An unconditional government grant related to @ biological asset measured at its fair value less costs to sell shall be recognized as income when the government grant becomes receivable. If @ government grant related to a biological asset measured at its fair value less costs to sell is conditional, including where a government grant requires an entity not to engage in specified agricultural activity, an ‘entity shall recognize the government grant as income when the conditions attaching to the government grant are met If 2 government grant related to biological asset measured at its cost less any accumulated depreciation Aa Sopairment losses, then PAS 20 (Accounting for Government Grants and’ Disclosure of Gewernment Assistance) 1s applied. 65 An active market is a market where all the folkowing conditions exist fa) The item traded within the market are hormogencous; b) Willing buyers and sellers can normally be found at any time: and ©) Prices are available to the public. Ifa noncurrent biological wsset meets the eriteria {0 be classified us held for sale or is included in a disposal. group in accordance with PERS 5, then itis presumed thatthe fair value can be measured reliably. (PAS 41, par 30) In determining cast. accumulated depreciation and accumulated impairment losses, an entity considers PAS 2 Inventories, PAS 16 Property, Plant & Equipment and PAS 36 Impairment of Assets (PAS 41, par. 33) ° Sy 827.